Savings banks' future depends on parent company backing as delinquencies soar

Suffering from soaring delinquency rates on real estate project financing (PF), savings banks are facing varied futures depending on the support capacities of their parent companies, according to experts.

According to the Korea Federation of Savings Banks (KFSB), Tuesday, the average delinquency rate for real estate PF among the top 20 savings banks by asset size rose to 11.05 percent in the first quarter of 2024. This marks an increase of 6.65 percentage points compared to the same period last year.

Notably, the number of savings banks with a PF delinquency rate exceeding 10 percent has surged from 1 in the first quarter of 2023 to 10 in 2024.

Such a trend has led many savings banks, regardless of their size, to see their Bank for International Settlements (BIS) capital adequacy ratios fall below the levels recommended by financial authorities.

It is recommended that savings banks with assets over 1 trillion won ($726 million) maintain a BIS ratio of 11 percent, while those with assets below 1 trillion won should maintain a ratio of 10 percent.

Savings banks with financially strong parent companies are raising capital to improve their BIS ratios.

On Monday, Woori Financial Group decided to increase the capital of Woori Savings Bank by 100 billion won, following the example of other major savings banks' recapitalization this year.

In contrast, savings banks that struggle to raise capital are more likely to enter the M&A market, fueled by the recent consideration, by financial authorities, to ease regulations further.

Currently, M&As are only permitted for metropolitan area savings banks whose BIS ratio has fallen below 10-11 percent. This standard could be relaxed to facilitate more active M&As, according to market insiders.

"Financial authorities already eased M&A regulations once last July, but not a single M&A has been signed. And the industry outlook is only getting weaker," an industry source said, explaining the rationale behind the decision. "If financial holdings groups acquire large-sized savings banks before insolvency, it would be a great opportunity to diversify their portfolio immediately."

The industry is pushing for independent measures.

The KFSB has decided to sell 136 billion won worth of delinquent personal credit and business loans to a specialized non-performing loan investment company by the end of this month. A total of 18 savings banks will participate in this sale, with the results to be reflected in second quarter performance this year.

"Saving banks with major shareholders that are unable to raise capital may suspend operations or be sold," said Rena Kwok, a credit analyst at Bloomberg Intelligence. "Credit differentiation among savings banks will grow into the second half of 2024, benefiting savings banks under major banking groups given timely group support if needed, as well as blue-chip savings banks with stronger loss-absorption capacity to withstand the stress."