Anna Jiwon Park has been covering the politics at The Korea Times since the summer of 2024, when she joined the press pool for the Office of the President in Korea. Prior to that, she spent about five years reporting extensively on financial markets, regulatory authorities and the financial industry. She joined The Korea Times in 2019 after spending eight years as a broadcast journalist at Arirang TV, Korea’s leading global broadcaster, covering politics, defense and culture.
M&As among savings banks expected to rise amid real estate PF crisis
A savings bank in Seoul / Yonhap
By Anna J. Park
Mergers and acquisitions (M&As) are expected to increase in the savings bank sector later this year, as some small lenders, whose financial status has been exacerbated by a real estate project financing (PF) crisis gripping Korea, are likely to be put up for sale.
According to the financial industry on Sunday, savings banks currently suffer from the heaviest exposure to the real estate PF risks, compared to other financial institutions like capital financing companies or securities firms. Savings banks' proportion of real estate PF transactions relative to their total assets stood at 16.5 percent, higher than the capital sector's 10.9 percent and 4.1 percent for the securities sector.
Furthermore, savings banks, in particular, hold a higher proportion of bridge loans. These are a type of short-term financing arrangement typically used at the beginning of a construction development project, involving high-interest rates and consequently considered riskier than other types of loans, compared to other financial sectors.
Sixteen savings banks that are subject to credit ratings by NICE Investors Service, a major credit rating agency in Korea, are estimated to have an average of 55 percent of their real estate Project Finance (PF) exposures in the form of bridge loans. In contrast, capital firms and securities firms hold only 35 percent and 27 percent of their real estate PF exposures in the form of bridge loans, respectively.
This means that the savings bank sector will be hit much harder than other financial sectors by the decrease in construction projects throuought this year, as they might not be able to refinance some of their current bridge loans to other types of lower-interest and longer-term debt.
Against this backdrop, financial authorities are actively encouraging local savings banks to bolster their financial soundness levels. The Financial Services Commission (FSC), the country's top financial regulator, urged the savings banks and mutual finance institutions late last week to accumulate additional reserves within the scope of the BIS (Bank for International Settlements) capital adequancy ratio.
Financial authorities have also mandated the savings banking sector to allocate additional reserves for real estate-backed loans, with the goal of mitigating risks associated with the high proportion of bridge loans. The classification of land-backed loans as real estate Project Finance (PF) from the beginning of this year has heightened pressure on the financial soundness of savings banks to maintain compliance with the BIS capital adequacy ratio.
Cash-strapped savings banks to go up for sale
Given the savings banking sector's increased burdens to maintain their financial stability amid the real estate PF crisis, the major stakeholders of some savings banks experiencing financial difficulties are expected to give up their ownership and put them on the M&A market.
This is because when a savings bank's BIS capital adequacy ratio drops below eight percent, financial authorities may implement corrective measures to enhance management, and, as part of market self-regulation, there could be an increase in M&A activities.
However, some industry watchers think it might take more time for M&As in the savings bank sector to become visible.
"Major financial groups — KB, Shinhan, Hana and Woori — all have savings banks in their portfolio. That means savings banks are considered attractive assets for financial groups that wish to make a leap to become a comprehensive financial holding company. But given the current unfavorable business conditions of the sector, such as a rise in delinquency rates, the timing of M&As doesn't seem to be right," a savings bank industry source said.
Currently, Sangsangin, HB, Acuon, and OSB savings banks are looking for new owners, but they have yet to find interested suitors. This imbalance in the M&A market will continue until the first half of this year.
"Yet, future M&A activities in the savings bank sector could be stimulated. Unlike commercial banks, savings banks have a higher proportion of fixed-rate loans in their loan portfolios, and if interest rates decline, their interest rate spreads will widen, making them more attractive in the M&A market," the official explained.