Financial Authorities Increase Pressure on Savings Banks 'Enduring' Real Estate PF

Financial Supervisory Service Considers Measures to Prevent 'Tricky' PF Fund Sales
Actions Taken to Quickly Liquidate Non-Business Real Estate
Capital Companies Also Required to Maintain Single-Digit Delinquency Rates

As high interest rates persist and the fallout from real estate project financing (PF) defaults continues, warning signs have been raised over the soundness of secondary financial institutions such as savings banks and capital companies. Financial authorities are steadily increasing pressure for management improvement. They have issued administrative guidance to prevent so-called ‘trick’ sales through normalization funds self-established by savings banks and to swiftly dispose of non-operational real estate to improve asset soundness. Additionally, they plan to designate savings banks at risk of insolvency for frequent management evaluations.

According to banking and savings bank industry sources on the 27th, the Financial Supervisory Service (FSS) is considering mandating that more than half of the third PF normalization fund for the savings bank sector be raised from external capital. Previously, it was reported that major savings banks holding non-performing loans (NPLs) contributed about 80% of the total funds to the first and second PF normalization funds they established, which sparked controversy as it did not align with the original intent.

The FSS particularly focused on criticism that the first and second PF normalization funds were merely tools for inflating performance. Savings banks have been selling distressed projects to the industry-established funds at discounts of 10-20%. While distressed assets sold through auctions or public sales are disposed of at low prices, sales to their own PF funds fetch relatively higher prices and allow for the reversal of loan loss provisions. This is understood to be the rationale behind the practice. Consequently, some have pointed out that the contributing savings banks used funds exceeding 500 billion KRW to distort profitability and soundness.

Furthermore, administrative guidance has been issued to curb savings banks from acquiring collateral real estate amid the real estate market downturn. The FSS has prohibited acquiring collateral real estate at prices excessively higher than auction appraisals and mandated the prompt quarterly public sale of acquired non-operational real estate. This is because recovering loan claims through collateral real estate reduces the burden of provisioning, and acquiring at prices above appraisals could be exploited to conceal loan losses.

FSS Governor Lee Bok-hyun’s recent strong criticism of the savings bank sector is in line with this context. On the 25th, during an appearance on KBS’s ‘Sunday Diagnosis Live,’ Governor Lee emphasized that the savings bank sector’s reluctance to set aside loan loss provisions reflects a ‘wait-and-see’ approach expecting real estate price increases, stating, “To put it harshly, it is a form of accounting fraud, and the FSS will encourage sales.”

The FSS is expected to place greater emphasis on encouraging the swift disposal of distressed projects through auctions, public sales, and write-offs. A source from the savings bank industry said, “The FSS seems to believe that resolving NPLs through PF normalization funds is undesirable and that NPLs should be handled via auctions, public sales, or write-offs.”

Recent management evaluations by the FSS are also seen as part of the pressure on savings banks. The FSS will conduct management evaluations on four savings banks this month. These banks reportedly recorded double-digit delinquency and non-performing loan ratios in both the first and second quarters. A senior FSS official explained, “Although the delinquency rate in the savings bank sector slightly improved by the end of the second quarter, many indicators remain poor,” justifying the urgent inspection.

Management evaluations are supervisory procedures conducted on financial institutions whose soundness indicators fall below certain thresholds. The results are categorized into five grades from 1 (excellent) to 5 (risky) across items such as capital adequacy, asset soundness, and management capability. If asset soundness and capital adequacy are rated 4 (vulnerable) or lower, prompt corrective actions may be imposed. Such measures require the institution to dispose of distressed assets through auctions, public sales, or write-offs, or to increase capital.

Moreover, financial authorities have also pressured capital companies to improve asset soundness following savings banks. From the 12th to the 14th, the FSS conducted on-site inspections focusing on about ten small- and medium-sized capital companies, demanding that they reduce delinquency rates by year-end through auctions, public sales, and write-offs. Some capital companies with double-digit delinquency rates were required to submit detailed plans to lower their delinquency rates below 10%. As of the end of March, one in five capital companies recorded delinquency rates exceeding 10%.

Meanwhile, financial authorities plan to finalize restructuring and auction/public sale plans for real estate PF projects by the end of this month. The financial sector anticipates that auction and public sale procedures for distressed projects will begin in earnest as early as next month. In its ‘Key Monitoring Points for the Second Half’ report last month, NICE Credit Rating analyzed that “if the new real estate PF project viability evaluation criteria by financial authorities are applied in the second half, many real estate PF projects will be recognized as distressed.”