Summer storm — delayed attack of PF woes

2-month stress tests likely to conclude that more savings banks need to be overhauled

By Kang Seung-woo

The financial malaise created by troubled savings banks has hit the local financial market hard, renewing fears that the nation might experience further economic woes in the near future.

It still remains to be seen whether it is the harbinger of another financial storm that will travel across the industry.

Observers say that the savings bank fiasco may shake the economy, if the current situation concerning the secondary lenders continues.

Amid a prolonged property market slump, massive defaults by builders and property developers have led to a pileup of soured loans at savings banks, damaging their ability to cope with withdrawal demands.

As a result, the Financial Services Commission (FSC) ordered eight savings banks including the sector’s giant Busan Savings Bank to stop doing business in January and February due to liquidity shortages.

In addition, their preliminary financial reports, expected to be issued in August, are likely to show that more savings banks than expected may turn out to be in trouble.

“There is ongoing speculation that four more savings banks will have their operations’ suspended, but after the financial reports are released, more lenders are likely to fail to meet the government’s standards due to capital erosion,” said a Seoul-based economist, who declined to be identified.

“If it is found that the secondary banking sector’s status is worsening, other financial institutions including commercial banks will be able to face pressure to retrieve their loans earlier than scheduled, which could eventually shake up the domestic financial market.”

“The hot topic in the industry is how many savings banks will be able to survive, as non-performing project financing (PF) loans by the prolonged housing market decline are growing and they are taking a toll on consumer confidence,” said Rep. Bae Young-sik of the governing Grand National Party (GNP) during a National Assembly session. “Without drastic steps, there may be another Busan Savings Bank failure but of bigger proportions.”

Critics say that deteriorating PF loans can push a large number of lenders’ Bank for International Settlement (BIS) capital adequacy ratio below the government’s recommendation of 5 percent.

PF loans, which have played a role in crippling savings banks, stood at 12.2 trillion won as of the end of 2010, with their delinquency ratios reaching 25.1 percent, much higher than commercial banks’ 4.62 percent.

Under the current conditions, it will be inevitable that more savings banks be ordered to stop doing business.

According to the FSC, the delinquency rate of property-linked loans stood at 20.4 percent as of the end of the first quarter this year, up from 18 percent late last year.

In addition, among 25 savings banks which issued subordinated bonds or were listed on the stock market, six ranking in the top 10 by assets posted their PF default rates at above 20 percent, with two remaining at 10 percent.

Their construction loans accounted for 10 to 20 percent of total lending.

“As the sluggish domestic housing market has yet to see signs of recovery, it is unavoidable that property-linked loans, including those for PF, will sour,” said Lee Chang-seon, managing director of the financial research department at the LG Economic Research Institute.

Amid growing concerns over troubled savings banks, the government came up with measures to restructure the troubled industry in the second half.

The FSC, the nation’s financial regulator, launched Monday a two-month inspection of 85 savings banks out of a total of 98 entities currently operating here and it will concentrate on their capital adequacy ratios stipulated by the BIS standards.

The remaining 13 banks either have already gone through inspections this year or are owned by state-run players.

According to the FSC, savings banks with a BIS ratio of more than 5 percent would be fine, while those between 1 and 5 percent would be recommended to draw up a set of steps to raise their BIS ratio to 5 percent in six to 12 months.

Lenders with BIO ratios of less than 1 percent will be requested to submit plans for normalization.

As part of the inspection, the FSC formed 20 teams comprising 338 specialists including 182 from the Financial Supervisory Service (FSS) and 60 from the Korea Deposit Insurance Corp. (KDIC) to look into the financial soundness of the savings banks.

A week later, the FSC said that it has told the 85 banks to raise their capital adequacy ratio to 8 percent that it sees as financially healthy.

However, the financial authorities’ measures against the troubled savings banks are raising questions over whether they will be able to pay dividends.

“As the government’s steps to tackle soaring household debt came short of expectations due to political and economical issues, it is doubtful if it can take strict action to solve the savings bank problem,” said professor Kim Sang-jo at Hansung University.

He also said that a few factors, including the government’s concerns over the possible collapse of the financial market, savings banks’ political connections and political influence ahead of the general election scheduled for next year, might weaken the financial authorities’ plans.

Market watchers are worried that the FSS’ move could come to a standstill, just like the FSS’ reform plan.

In June, the government organized the civilian-government task force led by the Prime Minister's Office (PMO) to reform the FSS, which drew criticism for its lackluster oversight of troubled savings banks and corruption by its officials.