Construction Guarantee’s focus on public projects mitigates economic risks

CG's regulatory capital ratio improved to 225% in 2023.

Fitch Ratings said South Korea's Construction Guarantee (CG) was seen to have a solid capitalisation, moderate company profile, and significant state support.  

CG's regulatory capital ratio improved to 225% in 2023, up from 208% in 2022, remaining well above the 100% regulatory minimum. 

This improvement stemmed from changes in the calculation method for subcontractor payment guarantees. Shareholders' capital, largely contributed by its members, remained stable at $4.9b (KRW6.8t) in 2023. 

Fitch does not anticipate material changes to CG's capital strength despite uncertainties in the construction sector, which is grappling with high interest rates and inflation.  

Profitability pressures are expected to persist, with Fitch forecasting elevated combined ratios of 125.6% in 2023, up from 68.2% in 2022, due to higher guarantee claims. Return on equity declined to 1.2% in 2023 from 1.7% in the previous year. 

However, investment returns and indirect government support may help stabilise performance, with profitability expected to normalise from 2025 as interest rates potentially decline and the government increases infrastructure spending.  

CG’s business remains concentrated in South Korea’s domestic construction industry, a sector sensitive to economic volatility. 

Although its exposure to public construction projects, which have low default risks, provides some stability, the cyclical nature of its guarantee business presents ongoing challenges. Fitch notes that CG has taken a cautious approach to international expansion, which remains small relative to its overall exposure.  

CG’s rating benefits from its close ties to the South Korean government, with Fitch assigning the company a rating one notch above its standalone credit profile due to the high likelihood of state support during financial stress. 

The company’s operations are heavily influenced by the Ministry of Land, Infrastructure and Transport, which regulates and supervises its activities under the Korea Construction Financial Cooperative Law.  

Whilst CG faces profitability and risk concentration challenges, its strong capitalisation, robust government backing, and focus on public construction projects position it to navigate uncertainties in the sector.