Savings Bank Mid-Term Loans Face Massive Defaults, Delinquency Soars

Savings banks in South Korea are grappling with a substantial crisis as 30-35% of their mid-term loan payments are now considered in default. This widespread issue stems from the prolonged slump in the real estate market, which has triggered a wave of contract cancellations and construction stoppages, particularly for officetels and lifestyle facilities.

The situation has created an urgent need for savings banks to recover these mid-term payments, which are effectively functioning as unsecured loans. According to Korea Ratings, eight savings banks, including those affiliated with major banking groups and independent entities, held approximately 1.1 trillion won in mid-term loans as of the end of last year. The profitability of these banks has been severely impacted, with a nearly 60% drop in net profit compared to the previous year, and bank-affiliated institutions reporting a significant deficit.

For savings banks affiliated with banking groups, 21.5% of their mid-term loan portfolio is entangled in disputes and lawsuits. Consequently, the rate of non-performing loans (NPLs) for these mid-term loans has surged to an average of 34.6%, with delinquency rates reaching 27.5% by the end of last year. This represents a dramatic increase from just two years prior, when NPLs stood at 2.1% and delinquency rates at 2.8%.

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As the real estate market slump has prolonged, some mid-term loan projects have seen market prices fall below sale prices or construction halts increase, leading to disputes such as collective cancellation of sales contracts and debt-related lawsuits by purchasers.

These mid-term loans, typically issued as collective loans, often target non-residential properties like officetels, lifestyle facilities, and commercial buildings in Seoul, Gyeonggi, Incheon, and other regions. Although classified as 'other secured loans' on financial statements, they lack guarantees from institutions like the Housing & Communities Guarantee Corporation (HUG) and cannot be secured by collateral, making them essentially unsecured credit. The lending decisions were based more on the project's viability and the developer's guarantee rather than the borrower's creditworthiness.

Korea Ratings noted that the prolonged real estate downturn has led to situations where property values fall below sale prices or construction is halted, prompting buyers to cancel contracts and initiate legal disputes. This has resulted in a large portion of these loans being reclassified as 'doubtful' or 'loss' assets. Despite some banks attempting to classify these problematic loans as 'normal' or 'precautionary,' Korea Ratings warns of further deterioration in asset quality.

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Considering the recent national average auction winning rate for officetels (63%), the possibility of losses on the principal of the loans is increasing.