“Even after a 300 billion won capital increase”... KB Real Estate Trust’s net substandard-or-below assets equal 123% of equity [fn Market Watch]

[Financial News] KB Real Estate Trust moved to bolster its capital by 300 billion won, but its exposure to real estate project financing (PF) continues to pose a significant strain on its financial soundness. Net substandard-or-below assets—substandard-or-below assets after deducting loan loss provisions—reached 123% of equity. In other words, assets at risk of impairment remaining after provisions still exceed equity. KB Real Estate Trust has effectively halted new responsible-completion projects and is focusing management efforts on recovering trust account advances from existing projects and selling assets.
According to NICE Investors Service and other sources on the 7th, KB Real Estate Trust’s ratio of net substandard-or-below assets to equity stood at 123.0% at the end of June.
Net substandard-or-below assets are the amount remaining after deducting provisions already set aside from assets classified as substandard or below under asset-quality standards. This means the amount of risky assets left after the first line of loss absorption through provisions is 23% greater than equity. However, the actual amount of losses could differ, as recovery remains possible depending on collateral values and the normalization of project sites.
KB Real Estate Trust has equity of 383.6 billion won. Trust account advances extended to trust projects totaled 1.2469 trillion won, the highest among the 13 firms surveyed. Although it had set aside 487.8 billion won in provisions, net trust account advances stood at 759.1 billion won, or 197.9% of equity.
Watchlist-or-worse assets accounted for 84.9% of trust account advances, while substandard-or-worse assets made up 73.7%. As PF-related loan loss expenses and provisions for liabilities weighed on earnings, the company posted a net loss of 153.1 billion won in the first half, and its return on equity (ROE) fell to -78.8%.
In June, KB Financial Group Inc. invested 300 billion won in KB Real Estate Trust to bolster its capital. However, as 150 billion won worth of hybrid capital securities held by KB Financial Group were repaid around the same time, the actual net inflow of additional funds was limited to about 150 billion won.
KB Real Estate Trust is focusing on recovering funds from existing PF projects and reducing its financial burden rather than expanding into new business. It is selling troubled assets and managing projects with weak business prospects as exit candidates, while effectively halting new orders for responsible-completion-type managed land trusts since 2022.
A financial investment industry official assessed that “with new business in responsible-completion-type land trusts effectively restricted and the number of projects under construction falling, any further deterioration in financial soundness is likely to be more limited than in the past.” The official added, “However, if further declines in the value of existing trust assets and delays in their disposal slow the recovery of trust account advances, it could take considerable time to ease the current heavy financial burden.”

[email protected] Kim Hyun-jung Reporter