Bad property loans straining banks

By Kang Seung-woo

Soured construction loans are continuing to deteriorate the fiscal soundness of banks, according to their first-quarter business figures, the country’s financial watchdog said Friday.

According to the latest figures from the Financial Supervisory Service (FSS), average non-performing project financing (PF) loan ratios of 18 local primary banks reached 18.35 percent in the first quarter of 2011, up from 16.44 percent three months earlier, while their average default rate was tallied at 5.3 percent in the cited period, compared with 4.25 percent recorded in the previous quarter. The numbers also compare with 3.41 and 2.90 percent, respectively, recorded at the end of March in 2010.

The average non-performing loan rate, a barometer of asset soundness, notches loans that have been in default for more than three months.

In terms of the value, the banks saw their PF loans increase.

The property-linked bad loans stood at 6.7 trillion won ($6.17 billion) in the January-to-March period, up from 6.4 trillion won three months earlier, while the amount in arrears rose from 1.6 trillion won to 1.9 trillion won during the same time span.

PF is the financing of long-term projects, usually real estate development such as the building of apartments or shopping centers, in which debts are paid back from profits generated by the projects.

Among the top 18 lenders, Industrial Bank of Korea (IBK) posted the highest bad construction loan ratio of 35.35 percent, followed by Woori Bank and the National Federation of Fisheries Cooperatives (Suhyup), which registered 32.52 and 26.54 percent, respectively.

Major commercial banks remained at the 10 percent level ― Kookmin at 14.25 percent, Shinhan at 11.75 percent and Hana at 11.05 percent.

The FSS said that a few local building companies ― World Construction, Chin Hung International and LIG Engineering and Construction ― applied for restructuring and the applications resulted in pushing up the non-performing loan ratio and the default rate in PF.

It, however, is a silver lining that banks’ PF loan balance contracted thanks to their strong risk management against the sluggish housing market.

The total amount in PF loans stood at 36.5 trillion won as of the end of March, down from 38.7 trillion won as of end of2010, the FSS said. The loans accounted for 3 percent of the banks' combined lending.

Banks are facing industry-wide turmoil as growing defaults on their PF loans are feared to impair their asset quality and hurt profitability.

“A prolonged real estate market slump and builders' debt restructuring are likely to further increase bad loans,” the FSS said.

In a bid to clear massive soured loans, the bank industry is moving to establish a bad bank wipe out the distressed assets off their balance sheets.