By Yoon Ja-young
Financial holding firms with big banks are facing increasing pressure to take over Samwha Mutual Savings Bank, which had its operations suspended by the financial regulator for failing to meet capital requirements.
More troubled savings banks are expected to be put up for sale in the merger and acquisition (M&A) market, as the regulator is scheduled to turn up pressure on negligent owners. Starting in February, screening the savings banks’ qualifications will be conducted every two to three years, meaning that the restructuring of the field will begin in earnest from that time.
According to the Korea Deposit Insurance Corp., it is soon to choose a lead manager for the sale of Samwha. An announcement of the bidding will be made as early as this week. If things go smoothly, the buyer for the bank will be determined around the middle of next month.
The quick move is based on the decision that a delayed restructuring on savings banks may hamper the whole financial industry from recovering from the global financial crisis.
Troubled savings banks have already received 17.3 trillion won in public funds since 1997 when the country suffered the Asian financial crisis. The government spent 2.5 trillion won restructuring fund last year to buy bad loans related to real estate project financing, and it has set aside 3.5 trillion won this year.
The banks received 4.5 trillion won from KDIC, which is four times more than the insurance money they paid. It means other insurance premiums had to make up for the loss.
Financial holding companies recently showed their intention to take over savings banks, following Financial Services Commission Chairman Kim Seok-dong’s suggestion. The market is hence watching whether Samwha could be the first to be acquired by banks.
Woori has been especially positive about acquiring mutual savings banks. Woori Financial Group Chairman Lee Pal-seung had recently said that it would take over one or two, at least, and the bank has been looking for candidates among 61 savings banks that signed a memorandum of understanding for stabilization with the financial regulator.
The stock market reacted negatively at first, with Woori losing 2.9 percent in the stock market following Lee’s comment with Hana, Shinhan and KB also shedding between 1 to 3 percent.
However, it becomes a different story when the government intervenes.
“The regulator plans to require mutual savings banks to come up with solutions first, such as a capital increase by major shareholders or the sale of assets,” said Lee Su-jung, a credit analyst at SK Securities.
“When considering that M&A will come only after completion of the restructuring led by the government, and that the buyer will get a put back option, the risk isn’t big,” she said.
The KDIC is also planning better terms for the buyer than before. Samwha will be sold through a purchase & assumption (P&A) instead of an M&A. The buyer will take over assets and liabilities, but bad loans will not be taken over.
Samwha’s position as one of the top 20 players in the industry and location in Seoul could add to the attraction.
Financial holding companies are watching carefully, waiting for concrete terms of the sale. It depends on how much the government will make up for the loss.
On the other hand, the government is strengthening regulation on major shareholders of savings banks. It is scheduled to start the regular qualification screening on the major shareholders from July, which will be done every one to two years. Currently, the screening comes only when the bank is set up or up for sale.
If the shareholders fail to pass the screening, they will be given six months to meet the conditions. If they fail then, they will be forced to sell stocks that exceed 10 percent of the stake.
Savings banks grew fast mostly upon project financing loans when the real estate market was booming, but they rapidly deteriorated following collapse of the bubble.