As the volume of bad loans in Korea's banking sector nears 17 trillion won, the market for selling them as nonperforming loans (NPLs) is expanding quickly. NPL investment firms are improving their earnings, but some note that if the economic slowdown drags on, disposing of collateral and recovering claims could be delayed, hurting profitability.
According to the Bank of Korea on the 27th, as of the end of March this year, bad loans at domestic banks (loans in arrears for three months or more and deemed uncollectible) totaled 17.7 trillion won. That is the largest since the end of March 2019 (18.5 trillion won). Bad loans had fallen to 9.7 trillion won at the end of September 2022, then turned upward.
Banks are opting to dispose of bad loans by selling them to NPL investment firms rather than recovering them directly. The banking sector's bad-loan disposal came to 22.3 trillion won last year, with sales accounting for the largest share at 36.7%. Annual NPL sales by banks surged from the 2 trillion-won range in 2022 to the 8 trillion-won range last year, hitting a record high.
The more bad loans are sold, the more new opportunities arise for NPL investment firms. They buy bad loans from banks at discounted prices and then recover the claims through measures such as disposing of collateral to generate revenue, and when supply increases, purchase prices tend to fall.
Combined net profit in the first quarter of this year for the top three NPL players—UAMCO, Daishin F&I and Hana F&I—was 68.7 billion won, up 23.8% from a year earlier. Net profit rose 52.5% at UAMCO and 49.7% at Daishin F&I. Hana F&I's net profit fell 39.9% due to base effects from one-off gains last year and losses related to financial assets.
However, if the economic slowdown dampens factory and retail property transactions and delays collateral disposals and claim recoveries, financing expense burdens could rise. In fact, the average leverage ratio (total assets ÷ equity) of five major NPL investment firms increased from 2.6 times in 2022 to 4.5 times at the end of September last year. NPL investment firms generally keep leverage below five times, and while they have expanded by buying bad loans, some say their borrowing burden is not insignificant.
A financial industry official said, "As banks have recently increased their sales of bad loans, investment opportunities for NPL firms are also expanding," adding, "However, if the economic slump persists, longer recovery periods could affect profitability."