Will a Major Wave of Savings Bank M&A Open Amid 'PF Insolvency and Prolonged High Interest Rates'?

Capital Region Savings Banks, Good BIS Ratios but Up for Sale
Rapid Restructuring and Revival of Financial Holding Role Possible
"If a Big One Fails... No Consideration for Deregulation"

Amid ongoing difficulties in the savings bank sector due to restructuring in the real estate project financing (PF) market and prolonged high interest rate trends, financial authorities are exploring additional regulatory relaxations to promote mergers and acquisitions (M&A). In particular, as the authorities focus on preventing the spread of liquidity risks within the financial sector, there is speculation that the role of major financial holding companies may reemerge.

According to the financial sector on the 4th, financial authorities are considering allowing M&A even if the Basel International Settlement Bank (BIS) capital adequacy ratio of metropolitan area savings banks is higher than the Financial Supervisory Service's internal management standard (10-11%). This means that M&A could be possible before metropolitan area savings banks become insolvent.

Currently, when a major shareholder of a non-metropolitan savings bank acquires a metropolitan savings bank through M&A, the number of business districts after acquisition must be two or fewer. However, if the metropolitan savings bank subject to restructuring due to insolvency is the acquisition target, exceptions are made to the business district restriction. The business districts of savings banks are divided into six areas: two metropolitan areas (Seoul, Incheon·Gyeonggi) and four non-metropolitan areas (Busan·Ulsan·Gyeongnam, Daegu·Gyeongbuk·Gangwon, Gwangju·Jeolla·Jeju, Daejeon·Sejong·Chungcheong).

The Financial Supervisory Service is discussing expanding the application of exceptions to metropolitan savings banks that have good capital adequacy but may deteriorate in soundness in the future. It is expected that metropolitan savings banks with BIS ratios close to insolvency concerns will be targeted. As of the end of last year, metropolitan savings banks close to the financial authorities' recommended BIS ratio include Pepper (11%), JT (11.4%), and OSB Savings Bank (11.6%), which are considered candidates for regulatory relaxation.

There is also an opinion that savings bank M&A should mainly be conducted by financial holding company affiliates. A Financial Supervisory Service official said, “If a savings bank has a strong backing from a financial holding company, it will increase the proportion of loans to ordinary citizens instead of high-risk loans such as real estate PF, and generate profits through a low-margin, high-volume business model.” He added, “It is also an opportunity for financial holding companies to diversify their portfolios. Financial holding companies that need immediate results may acquire large metropolitan companies.”

In fact, savings banks actively handling household loans were mostly those under financially strong financial holding companies. As of the end of the first quarter this year, Shinhan Savings Bank's household loan ratio was 77.2%, and KB Savings Bank's household loans accounted for 74.5% of total credit balance. In contrast, the average household loan ratio of 79 savings banks nationwide was only 38%. The household loan ratios of the industry’s top two, SBI and OK Savings Banks, were 52.9% and 46.8%, respectively.

The financial authorities have pulled out the regulatory relaxation card because the need for restructuring in the savings bank industry has increased. Delinquency rates soared due to prolonged high interest rates and real estate PF defaults, and performance deteriorated as large provisions were accumulated in preparation. According to the Korea Federation of Savings Banks, the savings bank industry posted a net loss of 154.3 billion won in the first quarter of this year, with a delinquency rate of 8.8%. This is close to the delinquency rate (9.2%) at the end of 2015, when the aftermath of the past savings bank crisis continued.

Nevertheless, savings bank M&A remains sluggish. Although the Financial Services Commission relaxed M&A regulations once in July last year with the revision of the 'Approval Criteria for Changes in Major Shareholders and Mergers of Savings Banks,' no M&A deals have been completed so far. This is because the benefits of M&A are considered to be tailored to non-metropolitan savings banks. According to the revision, regulatory relaxation for metropolitan savings banks is only applicable when the BIS ratio falls below 7%, making them subject to prompt corrective action.

The savings bank industry generally welcomes the regulatory relaxation. An industry insider said, “It is positive in that it makes the savings banks' own restructuring easier.” He added, “Since financial holding companies have relatively strong capabilities in internal control and risk management, it would be better for financial holding companies rather than private equity funds or foreign firms to be major shareholders.” He also mentioned, “They have stable ownership and the advantage of being able to establish mid- to long-term management strategies.” Another insider said, “M&A could lead to external growth,” but also noted, “Having experienced savings bank M&A in the early to mid-2010s, the process of mixing members from different organizations can be a minus rather than a synergy.”

Some voices caution that the expansion of savings banks due to regulatory relaxation should be approached carefully. Solomon Savings Bank rose to the top of the industry by consecutively acquiring savings banks in Busan, Gyeonggi, and Honam regions such as Gold Savings Bank in 2002, Hanmaeum Savings Bank in 2005, Nara Savings Bank in 2006, and Hanjin Savings Bank in 2007, but eventually went bankrupt in 2013 amid the savings bank insolvency crisis.

On the 29th of last month, Kim Ju-hyun, chairman of the Financial Services Commission, met with reporters after a loan refinancing service meeting held at Front One in Mapo, Seoul, and said, “The impact of a small (savings bank) failure and a large institution failure is different. We are looking at savings bank M&A from this perspective.” He added, “If necessary, we can consider (regulatory relaxation), but we have not thought about it at this stage.”