Korean financial companies face potential losses amid languishing U.S. commercial property market

Bank A’s global alternative investment official is grappling with concerns as commercial property prices in the U.S. take a steep dive. Despite securing senior debt to Manhattan properties, the bank faces potential significant losses due to the plummeting market. Negotiations with a U.S. fund focused on non-performing assets have yet to result in a decision to sell due to lower-than-expected prices. Bank A holds over 1 trillion won in U.S. property investments. Senior debt, typically used for overseas property acquisitions with a loan-to-value (LTV) ratio of 60 percent, signals trouble when losses occur, indicating property price declines exceeding 60 percent. Bank A, heavily invested in the U.S. property market, faces this risk with over 1 trillion won in investments, including senior debt.

Korea’s four major financial groups have seen an unprecedented 71.4 percent increase in loss provision, reaching 8.99 trillion won, up from 2022’s 5.21 trillion won. Preemptive measures are being taken to counter the decline of the global property market.

The investment industry predicted domestic financial institutions would need to accumulate more loss provisions this year, considering the downward trend in overseas real estate prices, including in the United States. As of the end of June last year, domestic financial companies' overseas commercial real estate investments amounted to 55.8 trillion won, of which 14.1 trillion won, or 25%, will expire this year. Industry experts say that large-scale losses are inevitable when the real estate market is currently frozen.

While losses may not impact the entire financial system due to the equity capital of banks and insurance companies, there are concerns that small and medium-sized securities firms and lending companies with limited cash may face survival risks.