Behind the deteriorating property loan portfolios at South Korea's savings banks lie a regional real estate market that has yet to recover and rising interest rates. Financial firms are moving faster to wind down troubled project finance sites, but analysts say the remaining exposures — concentrated in provincial and non-residential projects with weak viability — are getting worse.
Three savings banks had property-related loan delinquency rates above 30% as of the end of June, according to financial industry sources on the 1st: KB Savings Bank, Sangsangin Savings Bank and Daemyung Savings Bank. At KB Savings Bank, 74.47 billion won of its 212.5 billion won in property-related loans was in arrears, for a delinquency rate of about 35.1%. That is nearly double the 18.3% recorded at the end of last year, a jump over just six months.
A KB Savings Bank official said the increase reflected timing rather than fresh deterioration. "It is less that large new losses emerged, and more that the disposal of existing non-performing loans, which had been scheduled for the first half, was pushed into the second half," the official said.
At Sangsangin Savings Bank, which has struggled to find a buyer in a recent sale attempt, 105.7 billion won of 342.9 billion won in property-related loans was delinquent, a rate of 30.83%. That is slightly lower than the 31.48% at the end of last year but still elevated. Daemyung Savings Bank had 43.2 billion won in total outstanding loans and 13 billion won in arrears — small in absolute terms, but a delinquency rate of 30.07%.
Several other lenders posted rates above 20%. Sangsangin Plus Savings Bank stood at 27.86%, Raon Savings Bank at 27.75%, Samho Savings Bank at 20.63% and SBI Savings Bank at 20.05%. The number of savings banks with delinquency rates of 10% or higher rose to 40 at the end of June from 35 at the end of last year. At 17 savings banks, delinquent balances increased even though total property-related loan balances shrank from the end of last year.
Savings banks carry a heavier burden than other lenders because bridge loans — early-stage financing — make up a larger share of their books. Developers buy land with bridge loans, which are short-term and carry high rates, then use the land as collateral to borrow main project finance funds and repay the bridge debt. If the shift to main project finance is delayed, or if units at a site go unsold, the risk of default builds quickly. One savings bank official said the structure worsens over time. "As project timelines stretch out, bridge loans sometimes get rolled over several times, and rates typically rise with each extension, so viability deteriorates the longer it goes on," the official said.
Underlying the bad loans is a prolonged slump in the regional property market. Projects are taking longer, and units are failing to sell even after completion, making it harder for lenders to recover their money. Of 68,217 unsold homes nationwide at the end of July, 48,758 units, or 71%, were outside the greater Seoul area, according to the Ministry of Land, Infrastructure and Transport. The concentration was starker for the hardest-to-sell inventory: of 29,152 homes still unsold after construction was finished, 24,708 units, or 85%, were in provincial regions.
Industry officials say that while savings banks are accelerating the cleanup of troubled project finance sites to shore up asset quality, the distress at the weak sites that remain is deepening. Project finance exposure across the financial sector stood at 169.8 trillion won at the end of March, down 4.5 trillion won from the end of last year. Over the same period, however, loans classified as "caution" or "at risk of default" in viability assessments rose by 1.7 trillion won, to 16.4 trillion won from 14.7 trillion won. "There is almost no new money flowing into the property market, so existing arrears are not being worked out easily," one savings bank official said.
That has prompted calls for measures tailored to conditions in regional property markets. Kim Dae-jong, a professor of business administration at Sejong University, said housing demand and transactions outside the capital region are weaker, leaving many projects with poor viability. "With demand and turnover weaker than in the greater Seoul area, there are many sites in the provinces where the economics do not work, and as sales are delayed, the funding burden on developers and builders is growing," the professor said. "Rather than uniform support, we need tax and financial support matched to demand in each region, alongside measures such as public purchases of unsold homes or converting them into rental housing."
