Soured construction loans threaten banks

Five major banks see overdue project finance loans hit W3.3tr


Troubled soured loans issued to the construction sector, which have already dealt serious blows to some savings banks, may also threaten the financial soundness of commercial banks.

Savings banks saw defaults on their troubled construction-related financing loans ―known as PF loans ― sharply driven up by the property market slump that started during the 2008 global financial crisis.

While financial regulators called for major financial groups to absorb the toxic PF loans held by the secondary banking sector, it has been found that several commercial banks are also having difficulty recouping PF loans.

The Financial Supervisory Service found that five major commercial banks were holding overdue PF loans ― which have been in arrears for more than three months ― totaling about 3.3 trillion won ($2.9 billion).

Woori Bank topped the list with 1.9 trillion won in overdue PF loans, followed by Kookmin Bank with 762 billion won, Korea Exchange Bank with 305 billion won, Hana Bank with 263 billion won and Shinhan Bank with 204 billion won.

Their total PF loans including the soured lending reached 23 trillion won in March, which could become a time-bomb threatening to seriously undermine the financial market.

The nation’s top two banks ― Woori and Kookmin ― have issued 6.7 trillion and 6.2 trillion won in PF loans, respectively.

The PF loans issued by Shinhan, Korea Exchange and Hana totaled 4.1 trillion, 3.4 trillion and 2.5 trillion won.

Several of the major banks have allegedly suffered huge losses due to soured PF loans, and a group of bank staffers has been investigated by the prosecution for issuing illegitimate loans and taking kickbacks.

The group includes one bank’s two former deputy CEOs in charge of loan business and trust business.

The two executives resigned before the bank referred them and several staffers to Seoul Prosecutors’ Office in December, industry sources said.

One banker is suspected of taking 2.86 billion won in bribes in 2008 in exchange for offering the PF loans for a construction company.

The prosecution and police’s ongoing investigation into the allegations started last July. The Police took two bank employees into custody for engaging in irregular loans in November and has now widened its probe.

The PF loan woes are also affecting provincial banks. Kyongnam Bank and Kwangju Bank saw their overdue PF loans reach 145 billion and 120 billion won at the end of March.

Market observers are now looking toward the scheduled meeting between FSS Governor Kwon Hyouk-se and 13 chiefs of commercial and provincial banks, slated for Tuesday morning.

Regulators and bank CEOs are expected to discuss details on setting up a bad bank which would specialize in disposing of toxic assets held by financial companies, including savings banks.

“One issue is whether they comment on the overdue loans held by commercial banks,” one local banker said.

By Kim Yon-se (kys@heraldcorp.com)