[Geuman Report] "Due to PF Loan Defaults... Some Savings Banks' Loss Absorption Capacity Weakens"

Some Savings Banks with High PF Loan Ratios Show Declining Capital Ratios
"Savings Banks with Weakened Profit Bases... Concerns Over Rising Financial Risks"
Bank of Korea Financial Stability Report

It has been revealed that the loss absorption capacity of some savings banks with a high proportion of PF loans has weakened due to project financing (PF) loan defaults.

According to the Bank of Korea's Financial Stability Report on the 24th, the average capital adequacy ratio (capital/risk-weighted assets) of the savings bank sector stood at 15.2% as of the end of the third quarter, exceeding the supervisory standard (7%). However, some savings banks showed a declining trend in their capital ratios compared to the end of 2022 due to PF loan defaults and other factors. The capital adequacy ratio of these savings banks fell from 13.2% in the fourth quarter of 2022 to 12.4% in the third quarter of this year. It was analyzed that the proportion of PF loans was relatively higher compared to other savings banks, resulting in a more severe deterioration in asset soundness and profitability than other savings banks.

The savings bank sector has weakened its profit base by actively reducing assets in response to the decline in capital ratios. As of the end of the third quarter, the capital of savings banks remained at 15.5 trillion won, the same level as at the end of 2022 (15.5 trillion won). However, risk-weighted assets decreased by 15.8 trillion won to 102.1 trillion won at the end of the third quarter compared to 117.9 trillion won at the end of 2022, which increased the capital ratio. This was because savings banks strengthened their lending stance to respond to the decline in capital ratios, suppressed new loans, and actively reduced assets by selling non-performing loans.

There are concerns that attention should be paid to savings banks with weakened profit bases. As the asset size of savings banks has shrunk, if financial conditions ease in the future to overcome long-term management performance challenges, excessive profit-seeking behavior could increase potential risks to the financial system.

Currently, the liquidity response capability of the savings bank sector is analyzed to be at a good level. Although the liquidity ratio of savings banks shows considerable fluctuations in liquid liabilities, liquid assets are maintained above a certain level, exceeding supervisory standards. The sector's own liquidity holdings stood at 13.2% in the third quarter, maintaining above 10% of deposits (the Central Association's recommendation). Even for some savings banks that showed a declining capital ratio due to PF loan defaults, the liquidity ratio was a healthy 16.3% in the third quarter.

However, there are concerns that liquidity risks may increase depending on the characteristics of savings bank deposits. The proportion of revolving time deposits, where principal and interest are automatically reinvested annually, has steadily increased since the end of 2022 and reached 25.1% as of the end of the third quarter. The proportion of non-face-to-face deposits, which are easy to withdraw, was also high at 33.9% at the end of the third quarter. Considering the characteristics of these deposits, there is concern that the scale of deposit withdrawals in emergencies could be greater than in the past.

As deposit interest rates rise in the banking sector, the balance of savings and fixed deposits is increasing. The secondary financial sector is also consecutively raising fixed deposit interest rates. The photo shows Welcome Savings Bank in Jung-gu, Seoul. Photo by Jinhyung Kang aymsdream@