[Crisis of Savings Banks, Solution is Expansion]② Need to Improve Structure through M&A Activation... Solution to Profitability and Soundness Complex Crisis

Strengthening Capital Through Enlargement Is Key to Improving Market Soundness
Industry Calls for Easing M&A Business Area Restrictions
Attention on Whether March FSC Plan Will Include Competitiveness Measures

Experts emphasize the need for a merger and acquisition (M&A) strategy to revive the savings bank industry, which is struggling to improve profitability and soundness. Since these banks primarily serve middle- and low-credit borrowers who find it difficult to obtain loans from commercial banks, it is challenging to increase assets. Therefore, it is necessary to strengthen financial capacity and growth momentum through enlargement via M&A. By enhancing capital strength through M&A-driven enlargement, not only can soundness be improved, but the overall credibility of the savings bank sector will rise, creating a virtuous cycle that expands the business foundation.

Activating M&A Improves Profitability and Soundness in the Savings Bank Sector

According to the savings bank industry on the 10th, OK Financial Group, which owns the second-largest player OK Savings Bank, is currently negotiating the price to acquire Sangsangin Savings Bank. As of the third quarter of last year, OK Savings Bank ranked second in the industry with assets of KRW 13.7843 trillion. If it acquires Sangsangin Savings Bank, it can reduce profitability and soundness risks. In particular, OK Savings Bank’s assets would increase to KRW 16.542 trillion, making it the industry leader and securing business rights in the Gyeonggi and Incheon regions, thereby strengthening growth momentum.

Since Sangsangin Savings Bank, with assets of KRW 2.7577 trillion, could cause significant ripple effects in the industry if it becomes insolvent, M&A is seen as an alternative to securing market soundness, while the acquiring company can simultaneously secure growth momentum, according to experts.

Financial authorities believe that activating M&A is necessary to improve the structural health of the savings bank market. The authorities have maintained a strict policy stance to quickly resolve insolvent savings banks. They have demanded management improvements and timely corrective actions for savings banks showing signs of insolvency, while encouraging soundness enhancement through M&A and restructuring. They view that when large companies merge with insolvent small companies, it helps resolve soundness risks across the entire sector.

An industry insider explained, "In the case of Sangsangin Financial Group, the major shareholder’s eligibility issue was raised, but since Sangsangin Savings Bank is large and influential in the market, leaving it as is was judged to be a risk, so a forced sale order cannot be ruled out. There was a sentiment that a sound financial group should acquire it to strengthen the market."

Authorities Are Conservative... Industry Calls for Easing M&A Regulations in the Capital Region

The industry complains that regulations are still too strict to activate M&A. While the authorities somewhat allow M&A for savings banks outside the capital region, they still strictly regulate those within the capital region.

The authorities divide the savings bank business areas into six zones: two in the capital region (① Seoul, ② Incheon·Gyeonggi) and four outside the capital region (③ Busan·Ulsan·Gyeongnam, ④ Daegu·Gyeongbuk·Gangwon, ⑤ Gwangju·Jeolla·Jeju, ⑥ Daejeon·Sejong·Chungcheong). Unlike M&A within the business area, M&A outside the business area is strictly regulated to ensure the savings banks fulfill their original role of providing financial services to local low-income populations.

In July 2023, the Financial Services Commission announced the 'Revision Plan for Approval Criteria on Mutual Savings Bank Mergers' to encourage M&A activation. Expectations were high that M&A success cases would increase significantly after the announcement, but only one M&A deal has been completed since then: Hanwha Life’s 100% acquisition of Hanwha Savings Bank shares in September last year.

The industry interprets the lack of increased M&A activity as due to the continued strict regulations in the capital region. At that time, the Financial Services Commission relaxed regulations to allow mergers of up to four savings banks outside the business area in non-capital regions but remained strict in the capital region. Except for cases involving mergers with savings banks at risk of insolvency, M&A among capital region savings banks was prohibited.

The industry is paying close attention to whether the Financial Services Commission’s upcoming savings bank competitiveness enhancement plan, expected to be announced by the end of this month, will include provisions to expand M&A business areas to include the capital region. There is also interest in whether the plan will include lowering the mandatory ratio of loans to individuals and small businesses within the business area from 40% to 30% of total savings bank loans.

Experts advise that to strengthen the soundness of the savings bank market, restrictions on M&A business areas, including the capital region, should be eased.

Professor Kim Dae-jong of the Department of Business Administration at Sejong University said, "If savings banks actively pursue M&A to become larger, it will help resolve chronic soundness issues and strengthen momentum in the mid to long term."