Capital firms pressured to set aside loss reserves
Capital firms that offer a diverse range of credit financing services are facing increased pressure to set aside reserves following recent directives from financial authorities urging the financial institutions to be fully prepared for a potential real estate project financing (PF) crisis. The increased sizes of loan-loss reserves could translate into deteriorating profitability.
Reserves, earmarked in anticipation of potential losses from unrecovered bonds, are calculated as a cost to firms. The augmented requirement for reserves has a direct and adverse impact on the profitability of financial companies, as it increases the associated costs.
According to financial industry sources on Thursday, the Financial Supervisory Service (FSS) plans to conduct a thorough review of financial institutions later this month to determine if they have set aside an adequate amount of reserves to cushion the impact of soured non-performing real estate project financing loans.
In fact, the FSS already asked the executives of savings banks, mutual finance companies and capital firms, in particular, at the end of last month, to set aside additional reserves for bridge loans, which cannot undergo further refinancing and are expected to incur a 100 percent loss. The move by the FSS is intended to enhance the overall loss-absorption capacity of those financial firms, given their generally higher exposure to risky real estate-related loans compared to other sectors in the financial industry.
Among capital firms whose real estate assets, including real estate PF and real estate mortgage loans, exceed 15 percent of total operating assets, OK Capital, Shinhan Capital, and Korea Investment Capital were found to have a higher proportion of bridge loans than their peers as of the end of September last year.
Korea Investors Service, a credit rating agency, has reported that approximately 72 percent of real estate assets held by OK Capital are in the form of bridge loans. This situation raises concerns for the firm, as it faces the potential for delayed asset recovery in the event of a downturn in the real estate market, along with an increased burden in managing liquidity.
Shinhan Capital has about 54 percent of its real estate assets in the form of bridge loans, while the ratio is 42.1 percent for Korea Investment Capital as of September last year.
Meanwhile, Financial Supervisory Service (FSS) Governor Lee Bokhyun once again stressed the importance of risk management on real estate PF measures to induce a soft landing of the mounting crisis.