Savings Banks' Stability and Soundness on 'Red Alert'... Authorities Urge "Increase Capital"

Unstable Savings Banks Must Submit BIS Ratio Management Plans
Management Improvement Recommendations Expected for Savings Banks with Poor Soundness
Inspections May Expand if Stability and Soundness Deteriorate

Financial authorities are accelerating measures to improve the management stability and asset soundness of savings banks. They plan to require capital increase and risk-weighted asset reduction plans from savings banks whose Bank for International Settlements (BIS) capital adequacy ratios fall below the recommended standards, while imposing prompt corrective actions, a mandatory management improvement measure, on some savings banks with inadequate soundness indicators.

According to the financial sector on the 3rd, the Financial Supervisory Service (FSS) recently requested capital procurement plans from four savings banks?Sangsangin, Sangsangin Plus, Baro, and Raon Savings Banks?whose BIS ratios fell below the recommended standards. This is interpreted as part of a plan to continuously enhance loss absorption capacity through additional provisioning and capital expansion amid persistent domestic and international economic uncertainties.

The FSS can guide management improvements if a savings bank's BIS ratio falls below 7-8%. Savings banks with assets under 1 trillion KRW must maintain a BIS ratio of at least 7%, and those with assets over 1 trillion KRW must maintain at least 8%. The FSS adds 3 percentage points to these thresholds to set recommended standards (10%, 11%), and requires savings banks falling below these recommended standards to submit capital procurement plans including capital expansion measures, paid-in capital increase plans, and financial structure management.

As of the end of June, the BIS ratios of Sangsangin, Sangsangin Plus, and Baro Savings Banks, each with assets over 1 trillion KRW, were 10.45%, 9.72%, and 10.67%, respectively, all below the recommended standard of 11%. Raon Savings Bank, with assets under 1 trillion KRW, had a BIS ratio of 9.01%, also below the recommended standard of 10%.

An FSS official explained, “No savings bank has yet fallen below the statutory BIS ratio, but we have taken preemptive guidance for those below the recommended standards,” adding, “We are receiving BIS ratio management plans such as paid-in capital increases and risk-weighted asset reductions from the relevant savings banks.”

The FSS is also inspecting the asset soundness of savings banks. Among savings banks with high delinquency rates and non-performing loan ratios, three were subject to management status evaluations in June, and four were evaluated at the end of last month. These include not only local small- and medium-sized savings banks but also those in the metropolitan area.

Management status evaluation is a supervisory procedure conducted on financial institutions whose soundness indicators fall below a certain level. The evaluation results classify each item?asset soundness, capital adequacy, and management capability?into five grades from Grade 1 (excellent) to Grade 5 (risky). If asset soundness and capital adequacy are rated Grade 4 (vulnerable) or below, prompt corrective actions may be imposed.

Compiling the management performance disclosures of 79 savings banks nationwide, 31 banks were found to have delinquency rates exceeding 10%. The top were Anguk (19.82%), Solbrain (16.4%), S&T (15.51%), Youngjin (14.92%), and Dongyang (14.91%). Eight savings banks had non-performing loan ratios exceeding 20%, led by Solbrain (43.11%), Anguk (31.02%), Daebaek (24.16%), S&T (24.1%), Daeah (23.65%), and Oseong (22.2%).

Within the financial sector, it is anticipated that management improvement recommendations will be issued as prompt corrective actions. The FSS can take management improvement recommendations, demands, or orders depending on the severity of insolvency. If a recommendation is issued, disposal of non-performing assets or capital increase is necessary. A demand requires branch closures or subsidiary restructuring, and an order mandates business suspension or mergers and acquisitions (M&A).

A senior official from the Korea Federation of Savings Banks said at a press briefing on the 30th of last month, “The expected measure now is a (management improvement) recommendation,” adding, “Under current law, it is at a level where disposal of non-performing assets or capital increase can be (demanded).” He further stated, “If financial authorities accept the management improvement plan, prompt corrective actions may not be triggered, and the savings banks may voluntarily improve.”

An FSS official said, “It is not easy for prompt corrective actions to immediately escalate to orders.” Park Sang-won, Deputy Director of the FSS’s Small Finance Division, also mentioned at a savings bank performance briefing on the 28th of last month, “Artificial measures such as M&A related to restructuring are unlikely to occur.”

Oh Hwa-kyung, Chairman of the Korea Federation of Savings Banks, is explaining the savings banks' performance for the first half of this year at a press briefing for reporters on the 30th of last month.
[Image provided by Korea Federation of Savings Banks]

If the management stability and asset soundness of savings banks deteriorate in the second half of this year, FSS inspections may expand. A financial sector official explained, “If the savings bank industry continues to post net losses, retained earnings will be reduced, decreasing capital,” adding, “Savings banks have been disposing of non-performing loans to reduce delinquent amounts, but if losses exceeding previously accumulated loan loss provisions occur, disposal losses will also reduce capital.”

According to the Korea Federation of Savings Banks, 79 savings banks nationwide posted a net loss of 599.9 billion KRW last year and a net loss of 380.4 billion KRW in the first half of this year. In this situation, the real estate project financing (PF) sites at risk of default (D rating) that the savings bank industry must quickly promote auction and public sale for amount to 3.2 trillion KRW, which accounts for about 20% of all projects.

Soundness indicators also slightly worsened in the second half of the year. Lee Kyung-yeon, head of the Korea Federation of Savings Banks, stated at a briefing on the 30th of last month, “In July and August, delinquency rates slightly increased in personal business loans and PF corporate loans where debt repayment capacity has deteriorated.”