Rising U.S. Treasury yields are pushing up market interest rates in South Korea, raising concern that high-rate risks will first hit the weakest links — vulnerable borrowers and real estate project financing (PF). Non-bank financial firms, including insurers, savings banks, credit card companies and capital firms, are also exposed to a range of risks from the sharp rise in rates.
Five-year fixed-to-floating mortgage rates at South Korea's five largest commercial banks — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup — ranged from 4.89% to 7.29%, financial industry sources said on the 15th. That is 0.12 to 0.17 percentage points higher at both ends of the range than on Aug. 27 (4.72% to 7.17%), when the Bank of Korea raised its base rate. With the yield on five-year financial debentures, the benchmark for such mortgages, hitting a yearly high of 4.578% on the 11th, some expect the upper end to exceed 8%.
The Cost of Funds Index (COFIX), the benchmark for floating-rate mortgages at banks, came in at 3.18% for new loans extended in August, unchanged from the previous month. But the balance-based COFIX rose 0.05 percentage points from a month earlier to 3.05%, extending the upward trend in rates.
Risks from troubled PF loans have also grown. Korea Investors Service recently reassessed 50 trillion won ($36 billion) worth of PF projects held by domestic securities and capital firms and found that long-uncollected PF loans totaled 13.1 trillion won, or 26% of the total. Most are high-risk projects sensitive to shifts in market conditions. PF loans had been expected to be worked out once the market recovered, but the chances of normalization have diminished as rates climb.
Insurers' Korean Insurance Capital Standard (K-ICS) ratios could also deteriorate. Of the 32 domestic life and non-life insurers that had completed management disclosures as of the end of June this year, 22 projected that their K-ICS ratios would fall if rates rose by 0.50 percentage point.
Credit card and capital firms that have increased short-term funding are also vulnerable to rising rates. "Capital firms will face mounting negative effects from high market rates and further increases in the base rate," said Park Jong-il, a senior researcher at NICE Investors Service. "We plan to reflect the impact of rates and the slowdown in the property market in future credit ratings."
