By Kang Seung-woo
The next couple of months will be crucial for the future of troubled savings banks.
One problem after another has beset the sector and jeopardized the entire financial industry. But there is little guarantee that all the problems have been exposed. Chances are that there may be more and, if this proves true, it is likely that they will surface by August. The impact may renew the sense of crisis within the financial sector, depending on the seriousness of any problems that are uncovered.
The fiscal year of 2010 for savings banks is from July 2010 to June 2011 and their preliminary financial reports are expected to be issued in August.
Market watchers say that several business suspensions of savings banks may occur with the current situation not in favor of the secondary lenders.
“In the first half of this year, when the Financial Services Commission (FSC) ordered eight savings banks to shut their doors, FSC Chairman Kim Seok-dong said that there would be no more suspensions in the first half. In other words, he means that the FSC will do so in the latter part of the year,” said Lee Chang-seon, managing director of the financial research department at the LG Economic Research Institute.
“Currently, the FSC and the Financial Supervisory Service (FSS) are carrying out stress tests on 486 property projects financed by 89 local savings banks in order to screen out potential loan losses, so it will be inevitable to see a few more savings banks being ordered to stop doing business.”
But he said that the number of savings banks likely to be suspended will be fewer than that of the first half in that the FSS has already weeded out a large number of troubled banks.
The economist said creeping default rates on project financing (PF) loans, possible bank runs and tightened investigations into savings banks by the financial authorities will certainly have adverse effects on the industry in the latter part of this year.
PF loans, which have played a damning 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 in comparison to commercial banks’ 4.62 percent.
And the situation keeps getting worse as 2011 progresses.
Among 25 savings banks which issued subordinated bonds or were listed on the stock market, six ranking in the top 10 by asset posted their PF default rates at above the 20 percent mark, with two remaining at the 10 percent level.
Their construction loans accounted for 10-20 percent of total lending.
“Anything higher than 20 percent in PF defaults is definitely high,” said an official of the FSS.
“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,” Lee said.
After the suspension of eight troubled savings banks earlier this year, customers have withdrawn their money and deposited it into more stable commercial banks.
In June 2010, the total amount deposited in savings banks was 76.4 trillion won, but this fell to 64.4 trillion won in March this year.
In addition, a recent corruption scandal involving the suspended Busan Mutual Savings Bank, the nation’s largest secondary bank by asset, is fueling concerns as it is contributing to discredit the entire sector, sending customers scrambling to commercial banks.
The prosecution has been widening its probe into Busan Mutual after it was found to have engaged in extending illegal loans to major shareholders and committing other financial irregularities costing 7 trillion won, leading its chairman, Park Yeon-ho, to be prosecuted.
To make the situation even worse, a total of 41 billion won was drawn out from its five branches in Seoul when the prosecution launched an investigation into the Prime Savings Bank Wednesday following an FSS complaint earlier this year against the bank’s largest shareholders for possible illegal loans.
In the wake of the mass withdrawals, savings banks increased their interest rate to 5 percent after the series of business suspensions in order to keep clients, but had to cut it back to below 5 percent.
“Savings banks could not keep up with the high interest rate while their businesses were going south,” said an official of the Korea Federation of Savings Banks.
“If probes into savings banks continue digging up irregularities, there is certain to be more bank runs,” said Lee.
Tightened auditing of savings banks could also push them over the edge.
Due to the apparent failure to properly audit the savings banks, local accounting firms have put themselves under fire and they are determined to get tougher on the secondary lenders.
After going through the financial audits, banks will be under scrutiny again by the FSS.
In addition, the FSC chairman has said that the financial regulator will regularly conduct strict eligibility tests on major shareholders from the second half of this year in order to stamp out unqualified ownership.
The FSC plans to conduct eligibility tests on 294 major shareholders of 67 local savings banks in order to check into potential misconduct.
Meanwhile, the financial authorities are seeking ways to ensure savings banks make a soft landing.
The FSC said that it plans to stretch the rollover period of soured PF loans from three years to five in the second half of this year and it will postpone the application of the Korea-International Financial Reporting Standards (K-IFRS) on listed savings banks until 2016 in a bid to ease their burden to once more build up reserves.
On Tuesday, the FSS told 97 savings banks to increase liquidity to prepare for possible bank runs.