FSS calls for securities firms to boost financials on weak property market

Financial Supervisory Service (FSS) flag [Photo by Lee Seung-hwan]

Korea’s financial supervisor called for liquidity and soundness management from securities firms on Thursday, out of concern over potential risks that may arise from their real estate exposures as the downturn persists.

“Though the real estate risks at securities firms are at a manageable level for now, there are concerns about additional non-performing assets in case the real estate downturn prolongs,” said Deputy Governor Hwang Seon-oh of the Financial Supervisory Service (FSS) during a meeting with chief risk officers at 10 securities firms, in particular asking for enhanced soundness in relation to the firms’ real estate project financing (PF).

According to data from Representative Yun Chang-hyun of the People Power Party, the delinquency rate of real estate PF loans stood at 15.88 percent as of the end of the first quarter. The rate has been on a sharp rise, reaching 10.38 percent at the end-2022, compared to 3.71 percent at the end of 2021.

The FSS plans to encourage the prompt liquidation of uncollectible bonds aimed at swift improvement in soundness. “Non-performing bonds that have been classified as estimated losses based on internal assessments will have to be written off, while PF loans at risk of insolvency will also have to be resolved in a timely manner through external sales or restructuring,” the deputy governor explained.

Bracing for a prolonged real estate downturn, the financial watchdog also requested that securities firms ensure they have the capacity to handle losses, emphasizing the need for sufficient allowances for bridge loans with uncertain progress due to loan extensions or delays in construction permits.

Regarding overseas real estate investment, the FSS asked for regular assessment and swift recording of any signs of losses on the book given the scale of the investment and considering subordinated loans that are frequent in those investments.

According to data from Representative Oh Gi-hyoung of the Democratic Party of Korea, the overdue balance of non-divested overseas alternative investments of domestic securities firms amounted to 5.94 trillion won ($4.65 billion) at the end of last year.

Domestic securities firms have enjoyed fee income from the sale of overseas real estate properties that they bought when interest rates were lower for domestic institutional investors. This investment pattern was considered a stable option during the real estate boom. However, as interest rates have risen and real estate values declined, the real estate property assets could potentially pose risks to estatethe firms’ financial soundness if the real properties are not sold and their value falls.

Meanwhile, financial authorities plan to introduce measures to prevent unfair trading practices using convertible bonds. “There have been reports of unfair trading practices to expand stakes and enjoy improper gains by taking advantage of convertible bonds. The authorities will respond to those practices with all efforts from relevant authorities,” said Kim So-young, vice chairman of the Financial Services Commission on Thursday during a conference that took place at the Korea Exchange.