Major Savings Banks Also 'Shaken'... Joint Inspection by FSC and KDIC Begins

Financial Supervisory Service and Korea Deposit Insurance Corporation Target Troubled Savings Banks
BIS Ratios Falling Even Among Large Metropolitan Firms
Net Losses and Non-Performing Loans... Multiple Factors Worsening Stability

The Financial Supervisory Service (FSS) and the Korea Deposit Insurance Corporation (KDIC) are jointly inspecting large savings banks in the Seoul metropolitan area to enhance crisis response capabilities. This move is seen as part of a plan to continuously strengthen loss absorption capacity amid growing concerns that the savings banks' Basel International Settlement Bank (BIS) capital adequacy ratios may fall below recommended standards amid ongoing domestic and international economic uncertainties.

According to financial authorities on the 5th, the FSS and KDIC have begun joint inspections targeting large savings banks in the metropolitan area. This is interpreted as a preemptive management measure for savings banks at risk of insolvency after some large metropolitan banks recently reported BIS ratios below the recommended standards.

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%, while those with assets over 1 trillion KRW must maintain at least 8%. The FSS sets recommended standards by adding 3 percentage points to these thresholds (10% and 11%, respectively) and requires savings banks whose BIS ratios fall below these recommended levels to submit capital procurement plans, including capital increase measures, paid-in capital increase plans, and financial structure management.

Under the Depositor Protection Act and its enforcement decree, the KDIC can conduct independent investigations if a savings bank with assets over 1 trillion KRW sees its BIS ratio fall below 10%. Considering the trend and extent of the BIS ratio decline, the KDIC may, after consulting with the FSS, independently investigate criteria for insolvency or depositor protection measures for the savings bank.

The joint inspections by the two institutions are interpreted as a response to the increase in insolvent savings banks following the first half financial statements disclosure earlier this year and again in July and August. As the monthly net losses of the savings bank industry continue, retained earnings are depleted, raising concerns about a decrease in capital adequacy. If losses exceeding previously accumulated loan loss provisions occur during the disposal of non-performing loans to manage delinquency rates, disposal losses will arise, further deteriorating management stability.

In fact, various factors that could worsen the BIS ratios are present in large metropolitan savings banks. The top 10 savings banks by asset size (SBI, OK, Korea Investment, Welcome, Accuon, Daol, Pepper, Shinhan, Hana, and Sangsangin) recorded a net loss of 75.1 billion KRW in the first half of this year. The scale of losses for these savings banks expanded about sevenfold compared to the same period last year. The amount of non-performing loans (classified as substandard or below) generated by the top 10 banks totaled 5.486 trillion KRW, a 54.8% increase compared to the same period last year.

A representative from the savings bank industry explained, “Losses increased due to additional provisions set aside following the strengthening of real estate project financing (PF) feasibility evaluation standards. As domestic and international uncertainties have grown, borrowers’ debt repayment abilities have deteriorated, and with the improved real estate PF feasibility evaluation, new insolvencies have occurred, leading to an increase in non-performing loans in the savings bank industry.”

Oh Hwa-kyung, Chairman of the Korea Federation of Savings Banks, is explaining the performance of savings banks in 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]

As concerns about insolvency in the savings bank industry grow, inspections by the FSS and KDIC are likely to expand in the second half of this year. Oh Hwa-kyung, chairman of the Korea Federation of Savings Banks, said at a press briefing on the 30th of last month, “The timing of profitability improvement depends on the speed and volume of the disposal of insolvent business sites. Based on current expectations, it will be difficult to escape deficits for the next year. Deficits may continue until the end of this year or the first half of next year at the earliest.”

Earlier, the FSS requested capital procurement plans, including paid-in capital increases and risk-weighted asset reductions, from four savings banks?Sangsangin, Sangsangin Plus, Baro, and Raon Savings Banks?that fell below the recommended BIS ratio standards. Among savings banks with high delinquency and non-performing loan ratios, the FSS conducted management evaluations on three banks in June and on four banks at the end of last month. These included not only small and medium-sized regional savings banks but also metropolitan savings banks. Management evaluations are supervisory procedures conducted on financial institutions whose soundness indicators fall below a certain level.