"Stable Banks and Insurance... Potential Credit Risk in Savings Banks"
Common Outlook: Deterioration in Soundness and Profitability Due to PF Defaults
Profitability Recovery Uncertain Even with Active Disposal of Non-performing Projects
Authorities Plan to Promote M&A Activation After Improving Soundness
As uncertainties expand due to prolonged high interest rates, delayed domestic economic recovery, and restructuring of real estate project financing (PF), the temperature gap among financial sectors is expected to widen further. In particular, the concerns of the savings bank industry, which is suffering from deteriorating soundness such as a sharp rise in delinquency rates, are deepening, and issues such as mergers and acquisitions (M&A) are expected to come to the forefront in line with the financial authorities' strong will for restructuring.
According to the financial sector on the 2nd, NICE Credit Rating assessed that the credit rating outlook for the financial industry in the second half of the year shows both stable and negative prospects. While sectors such as banks, insurance companies, and card companies are stable, sectors such as savings banks, securities firms, installment leasing, and real estate trusts are expected to have a negative direction. This is because sectors like securities and savings banks are likely to face increased credit risk due to the realization of potential insolvency following the acceleration of real estate PF restructuring.
As a result, credit ratings and rating outlooks diverged significantly. The sectors with upgraded credit ratings and outlooks included one life insurance company and one credit card company. The sectors with downgraded ratings included eight savings banks, three securities firms, one installment leasing company, one real estate trust, one bank, and one life insurance company.
In particular, half of the major savings banks had their credit ratings and outlooks downgraded. NICE Credit Rating downgraded the long-term credit rating outlooks of KB, Daeshin, Kiwoom, Goryeo, Daol, and Aequon Savings Banks from Stable to Negative. Subsequently, OSB and Pepper Savings Banks had their long-term credit ratings downgraded to BBB-/Negative and BBB-/Stable, respectively. This reflects the deterioration in soundness and profitability.
Following the savings banks that turned to a deficit last year for the first time in nine years, the situation for real estate trusts is also challenging. As the risk of responsibility-completion type managed land trusts grows, real estate trusts, like savings banks, generally recorded deficits.
Lee Hyuk-jun, head of NICE Credit Rating, stated, "According to the policy direction announced by the financial authorities in May for the orderly soft landing of real estate PF, the burden of provisioning for real estate PF is expected to increase from the second quarter onward, making profitability deterioration inevitable for sectors such as securities and savings banks." He added, "Although banks and life insurance companies experienced base effects and one-time losses related to equity-linked securities (ELS), their absolute profitability remains at an excellent level."
The Biggest Burden in the Second Half: Savings Banks... 'Dark Clouds' Over Soundness and Profitability
Concerns over savings banks have persisted throughout this year. Sixteen savings banks have had their credit ratings or rating outlooks downgraded since the beginning of the year. Among the approximately 30 domestic savings banks rated by major credit rating agencies including NICE Credit Rating, Korea Ratings, and Korea Investors Service, more than half have seen their creditworthiness decline. Even large companies have not escaped credit rating drops. Korea Ratings downgraded the credit ratings of the industry's second-largest OK Savings Bank and fourth-largest Welcome Savings Bank from BBB+/Negative to BBB/Stable.
Major credit rating agencies have consistently forecasted that the soundness and profitability of savings banks will worsen further due to bad loans in real estate PF. Kim Tae-hyun, head of Korea Ratings, explained, "According to the PF project evaluation criteria issued by the financial authorities, more projects are classified as non-performing loans or worse. This will be reflected from the first half financial statements this year." He added, "Along with deteriorating soundness, additional bad debt expenses will occur, worsening profitability." He further analyzed, "Personal credit loan delinquencies have not returned to a downward trend, and high interest rates continue, so both soundness and profitability could deteriorate."
Especially, even if distressed projects are actively sold off under strengthened PF evaluation criteria, it is viewed that while soundness may be barely maintained, profitability recovery remains elusive. NICE Credit Rating predicted that if PF project restructuring and liquidation proceed, loss recognition costs will increase in many projects, exceeding the already provisioned bad debt reserves. A Financial Supervisory Service official also explained, "While selling off non-performing loans improves soundness, losses may be relatively larger due to disposal losses."
Artificial Respiration Through Savings Bank M&A? ... Prioritizing Disposal of Non-Performing Assets
The financial authorities plan to accelerate improvements in savings bank soundness through provisioning and non-performing loan sales, and from the second half of the year, actively promote M&A among financial sectors. The plan is to reduce non-performing assets as much as possible even if profitability is relatively low, then ease M&A regulations to allow large financial institutions such as commercial banks to acquire them.
This time, there is also a will to avoid repeating the purchase and assumption (P&A) sale method used during the past savings bank crisis. P&A is a method where assets and liabilities are selectively acquired, allowing the acquirer to exclude some non-performing assets and subordinated bonds. During the previous sales led by the Deposit Insurance Corporation, non-performing loans, deposits exceeding 50 million KRW, subordinated bonds, and other non-performing assets from savings banks designated as insolvent financial institutions were transferred to the bankruptcy estate, while only sound assets were sold to financial holding companies and competing savings banks.
A financial sector official said, "The reason the authorities have pressured to provision even for relatively safe assets through various regulations is because of the growing need for market restructuring." He added, "To avoid shocks to the market through liquidation or bankruptcy, activating M&A is urgent."
Additionally, the financial authorities are considering allowing M&A even if the BIS (Bank for International Settlements) capital adequacy ratio of metropolitan area savings banks is higher than the Financial Supervisory Service's internal management standard (10-11%). This means M&A could be possible before metropolitan savings banks become insolvent.
Previously, the Financial Services Commission relaxed M&A regulations once in July last year by revising the 'Approval Criteria for Major Shareholder Changes and Mergers of Savings Banks,' but M&A activity has remained sluggish. This is because the benefits of M&A were seen as tailored to non-metropolitan savings banks. According to the revision, metropolitan savings banks can only benefit from eased regulations if their BIS ratio falls below 7% and they are subject to prompt corrective action.
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