Seoul, South Korea – South Korean savings banks and capital companies are expected to face another challenging year in 2025, primarily due to the lingering effects of real estate project financing (PF) defaults. The increasing need for loan loss provisioning and risk management will be crucial in determining their overall performance this year.

According to Korea Ratings, both industries face an "unfavorable" industry outlook and a "negative" credit outlook for 2025. The continued impact of PF defaults, coupled with a domestic economic downturn and the subsequent deterioration of loan asset quality, are cited as the primary reasons for this pessimistic outlook.

Savings banks, in particular, are grappling with a multitude of challenges. These include a sustained decline in asset quality due to the real estate market slump, an elevated risk of non-performing loans in household credit and self-employed loans amid the economic slowdown, and the increasing likelihood of defaults in PF assets and non-residential real estate loans in non-metropolitan areas. Additionally, the implementation of stress DSR (Debt Service Ratio) regulations is expected to limit business expansion.

"While the non-performing nature of many PF projects was recognized last year, the risk of defaults is likely to persist given the unfavorable real estate market conditions," said Jung Ho-jun, a researcher at Korea Ratings. "Despite interest rate cuts, the risk of non-performing loans in household credit and self-employed loans remains high due to the economic downturn."

Jung further emphasized that a full recovery in savings banks' profitability hinges on a reduction in loan loss provisions. However, given the high level of risk exposure and the need for additional provisions this year, a complete recovery is unlikely to occur in the short term.

Capital companies are also anticipating a tough year. Although lower interest rates typically benefit capital companies that rely on bond issuance for funding, the full impact of these rate cuts has yet to be realized. Moreover, the need to dispose of non-performing PF projects remains a significant burden. Continued weakness in the real estate market and delays in the disposal process could further erode asset quality and increase loan loss provisions.

"While the effects of lower funding costs will be reflected in the long term, the spread for A-rated and below capital companies remains high," said Jeon Se-wan, a senior researcher at Korea Ratings. "Companies with exposure to PF defaults should continue to closely monitor their funding stability."

To enhance their competitiveness, these companies are expected to focus on diversifying their revenue sources. "PF-related interest income has traditionally been a major revenue source for capital companies," said Jeon. "However, with the weakening real estate market, the contribution of interest income is gradually declining. As a result, there is a growing preference for new business areas such as non-real estate corporate loans, mezzanine financing, and non-performing loan investments."