- Published 2026.10.28 15:35
Profit growth stalls as real estate slump delays collateral recovery
Rising market rates and heavier debt inflate funding costs
Leverage management to drive performance divergence
Normally, when the economy sours and non-performing loans (NPLs) pile up, NPL investors that buy them at bargain prices and collect on them enjoy a boom. But lately, contrary to market expectations, their profitability is deteriorating. The market is flooded with assets for sale, yet the commercial real estate slump has made collateral hard to dispose of, while funding rates have climbed and interest costs have soared.
According to a special report released by NICE Credit Rating on Oct. 28, Korean banks' NPL balance surged from 10.1 trillion won (about $7.5 billion) at the end of 2022 to 18.9 trillion won (about $14 billion) at the end of June. Unlike past NPLs centered on large corporations, the prolonged economic slowdown and high interest rates have driven delinquency rates sharply higher across SMEs and households. In response, banks have stepped up NPL cleanups through write-offs and sales to manage asset soundness, and the NPL sales market has grown accordingly.
Despite this supply expansion, the mood is grim at the five specialized NPL investors that control more than 70% of the market—Yonhap Asset Management, Daishin F&I, Hana F&I, Kiwoom F&I, and Woori Financial F&I. Their combined NPL-related profit surged from 148.5 billion won (about $110 million) in 2023 to 250.8 billion won (about $185 million) in 2025. But in the first half of this year, the five firms' combined net profit and related profit both fell from a year earlier, signaling deteriorating profitability.
The biggest reason for the stalled profit growth is the worsening recovery environment. NPL income is largely divided into interest income from purchased assets and recovery income from collateral disposal. As NPLs flooded in, the purchase rate (winning bid amount relative to outstanding principal) for these specialized firms fell from 87.2% in 2023 to 67.7% in the second quarter. Normally, lower purchase prices widen recovery margins, but the current decline merely reflects the market's conservative markdown of asset values and has not translated into real profitability gains.
In particular, the rising share of commercial real estate—relatively vulnerable to vacancies and falling rents—among collateral sold by banks has been a critical blow. As the property slump drags on, auction sale prices for commercial real estate have fallen, and cases of failing to liquidate assets on time have multiplied. Indeed, the three-year cumulative recovery rate for specialized NPL investors is showing a clear downtrend from the past. As recovery delay concerns grow, the five firms' ratio of provisions to NPL assets also jumped from 0.30% in 2023 to 0.73% in 2025.
On the cost side, rising market rates have been a drag. NPL investors mostly raise large sums through corporate bonds or borrowings when purchasing assets. Thus, higher funding rates immediately increase interest expense burdens. The weighted average corporate bond issuance rate for these specialized firms jumped from 2.97% in the second half of 2025 to 4.75% in the third quarter of this year.
To make matters worse, aggressive investments since 2023 have snowballed industry-wide debt. With larger debt piles, even small rate increases now produce far bigger jumps in interest costs than before. In fact, the change in profit or loss from a 1.00 percentage point (100 bp) rate increase reached 12.3 billion won (about $9.1 million) in 2025 for the four firms that submitted disclosures. Moreover, bond maturities that stood at 1 trillion won (about $738 million) in 2025 and 2 trillion won (about $1.5 billion) this year are set to swell to 2.5 trillion won (about $1.8 billion) in 2027 and 2.9 trillion won (about $2.1 billion) in 2028, adding further refinancing interest pressure.
Experts expect the downward pressure on NPL industry profitability to persist for the time being amid the prolonged downturn. Still, individual firms' fates will diverge sharply depending on their capital buffers and rate hedging ability. Companies whose leverage ratios (total assets to equity) have spiked from aggressive investments will be weighed down by interest burdens and forced to slow new asset acquisitions. The industry average leverage ratio rose sharply from 2.6 times in 2022 to 4.7 times at the end of June.
On the other hand, firms that selectively bought quality assets with smooth recoveries or proactively raised capital through parent company rights offerings can gain a relative edge. With stable leverage management, they have the capacity to snap up a wide range of quality assets at lower purchase rates. Once the market shock subsides and the real estate cycle turns, the NPLs they accumulated at low prices are expected to generate massive recovery margins, becoming the decisive watershed that separates winners from losers.
(Dollar figures are approximate, converted automatically at 1,000 won = $0.738, the rate on Nov. 9, 2026.)
※ This article is an AI translation of the Korean original published by Korea Credit News; it was checked by automated quality guards and published by the English edition desk.
