After 6 Years, Savings Banks Face 'Prompt Corrective Action'... Authorities Focus on Blocking Negative Factors "Different from the Past" (Comprehensive)

Financial Services Commission Issues 'Management Improvement Recommendation' to Anguk and Raon Savings Banks... Lowest Level of Measures
Deterioration in Soundness Due to Real Estate PF Restructuring... Six Months to Implement Soundness Enhancement
Measures Required Such as Disposal of Non-Performing Assets and Capital Increase
FSC Distances Itself from 2011 Savings Bank Crisis
Possibility of Additional Prompt Corrective Actions Next Year... Political Instability Amid Real Estate PF Restructuring

The Financial Services Commission decided to impose a 'management improvement recommendation' on Anguk Savings Bank and Raon Savings Bank, whose soundness indicators deteriorated during the restructuring process of real estate project financing (PF). At the same time, it actively emphasized that this measure differs from the 2011 savings bank crisis, which led to business suspension and shocked the market. This move is interpreted as a preemptive step to block the adverse effects on the financial market, which has become more uncertain due to the emergency martial law situation and impeachment political turmoil.

On the 24th, the Financial Services Commission held its last regular meeting of the year and decided to impose the lowest level of measures, the management improvement recommendation, among management improvement recommendations, management improvement demands, and management improvement orders on the two savings banks. They must improve soundness by disposing of non-performing assets, increasing capital, and restricting dividend payments, classified as asset soundness grade 4 (vulnerable). However, their operations will continue normally during the six-month implementation period.

As of the end of the third quarter, the delinquency rates of Raon Savings Bank and Anguk Savings Bank were 19.4% and 15.8%, respectively, and their non-performing loan ratios were 24.8% and 16.3%, far exceeding the industry average. Their Basel International Banking (BIS) ratios were 13.2% and 10.9%, respectively, exceeding the regulatory ratio of 7%. The average delinquency rate in the savings bank sector was 8.7%, and the non-performing loan ratio was 11.2%.

In particular, the delinquency rate for real estate sector loans reached 28.6% for Anguk Savings Bank and 21.96% for Raon Savings Bank. Savings banks are allowed to lend only up to half of their total loans to real estate-related loans. As of the end of the third quarter, Anguk Savings Bank had 104.7 billion KRW out of 217.6 billion KRW, and Raon Savings Bank had 44.3 billion KRW out of 83.9 billion KRW in real estate loans, creating a structure where delinquency rates inevitably rose.

Since this is the first timely corrective action against savings banks in six years since January 2018, the Financial Services Commission focused on explaining the nature and background of this measure in detail to prevent market shocks. It particularly emphasized that the situation differs from the 2011 savings bank crisis, which began with Busan Savings Bank and led to the suspension of operations of major savings banks nationwide.

During the past savings bank crisis, adverse factors such as moral hazard of major shareholders, large-scale non-performing loans, and a downturn in the real estate market occurred simultaneously. Eventually, major savings banks nationwide failed to raise additional capital, leading to business suspension and restructuring through contract transfers.

Accordingly, the Financial Services Commission stated that the current management improvement recommendation is due to a temporary deterioration in soundness indicators during the normalization of real estate PF and asserted, "The loss absorption capacity, asset soundness level, and crisis response capability of the savings bank sector now are qualitatively different from those during the past savings bank crisis."

It also announced plans to terminate this measure through a resolution during the implementation period if soundness is deemed sufficiently improved. The Financial Services Commission emphasized, "The savings bank sector is strengthening soundness management through the cleanup of non-performing loans within the framework of a soft landing for real estate PF," and "The impact of this measure on the financial market will be extremely limited."

However, some expect that the Financial Supervisory Service's current measures may extend beyond Anguk Savings Bank and Raon Savings Bank to include more institutions. As of the end of June, the Financial Supervisory Service reviewed the management status of four savings banks, and by the end of September, one to two more, totaling up to nine savings banks this year. Other savings banks may also face timely corrective actions if they fail to improve soundness promptly.

A savings bank industry official said, "Since the financial authorities have been conducting frequent inspections and strengthening monitoring throughout the year, the overall impact on the sector is expected to be limited," but added, "The financial market environment next year remains challenging and unpredictable."

Meanwhile, Anguk Savings Bank and Raon Savings Bank, which received the management improvement recommendation on this day, are implementing plans to improve soundness. Anguk Savings Bank has disposed of 50 billion KRW in non-performing loans and is reportedly planning a paid-in capital increase on the 26th. Raon Savings Bank sold non-performing loans worth 20 billion KRW.