[Geuman Report] "Savings Bank Loan Delinquency Rate 8.8%... Non-performing Assets Must Be Sold"

Bank of Korea Financial Stability Report
8.8% Delinquency Rate on Savings Bank Loans in Q1 This Year
Need to Improve Asset Soundness Through Disposal of Non-Performing Assets

As the delinquency rate on loans from savings banks continues to rise, an analysis has emerged suggesting that non-performing assets must be sold off to prevent further deterioration in asset soundness.

According to the "June Financial Stability Report" released by the Bank of Korea on the 26th, the delinquency rate on loans from non-bank deposit-taking institutions has been on an upward trend since 2022. At the end of the first quarter of this year, the delinquency rate for savings banks was 8.8%, while that for mutual finance institutions was 5.1%, both steadily increasing. In particular, the delinquency rate of savings banks has risen more sharply than that of mutual finance institutions. The new delinquency rate also showed a similar trend to the overall delinquency rate.

Looking at the delinquency rates on corporate loans, both savings banks and mutual finance institutions saw an expansion in the upward trend across all industries. Especially, due to non-performing real estate project financing (PF), the construction and real estate sectors surged sharply in the first quarter of this year, and the wholesale/retail and accommodation/food service sectors also recorded high increases. In terms of delinquency rates by collateral type for household loans, savings banks recorded 5.25%, mainly centered on unsecured loans. Mutual finance institutions also saw increases across all collateral types, reaching 1.94%.

The Bank of Korea analyzed that even if the asset soundness of non-bank deposit-taking institutions deteriorates sharply further, the loss absorption capacity of each sector would remain at a satisfactory level. Assuming that all non-performing loans in each sector become estimated losses (loans that are virtually unrecoverable), the average capital ratios of each sector were found to exceed their respective supervisory standards: savings banks at 11.6%, Nonghyup, Suhyup, and Forestry Cooperatives at 7.6%, Saemaeul Geumgo at 6.1%, and credit unions at 4.6%.

However, it was pointed out that to improve asset soundness, the ratio of sales and write-offs of non-performing loans needs to be increased. In fact, the sales and write-off performance of non-bank deposit-taking institutions was analyzed to be weaker compared to banks. The sales and write-offs by non-bank deposit-taking institutions accounted for 19.2% of total non-performing assets last year, which is significantly lower than the 42.3% recorded by banks. Although the amount of sales and write-offs increased compared to the previous year, the scale of non-performing loans grew even more, resulting in a decline in the sales and write-off ratio compared to 20.9% in 2022.

If the sales and write-off ratios of savings banks and mutual finance institutions increase, asset soundness is expected to improve. Assuming that the sales and write-off ratio of savings banks and mutual finance institutions in 2023 reaches the bank level of 42.3%, the ratio of non-performing loans in each sector would be 1.6 percentage points and 2.1 percentage points lower, respectively, than the actual levels. In particular, if some recovery of profits is achieved through the sale of non-performing assets, capital ratios would rise, and the loss absorption capacity would also improve.

A Bank of Korea official stated, "Although the asset soundness of non-bank deposit-taking institutions is rapidly deteriorating, the overall loss absorption capacity of the sectors is considered sufficient to cope even in exceptional situations where all non-performing loans become estimated losses," but added, "Since the rapid increase in non-performing assets could trigger market anxiety and liquidity events, it is necessary to focus more on efficiently managing non-performing assets to improve financial institutions' financial soundness indicators and strengthen loss absorption capacity."