[Saving Banks in Crisis, the Solution is Expansion] ① Passive in Real Estate PF Cleanup... Delinquency Accumulates and Risk of Insolvency Spreads

Delinquencies Piling Up in Savings Banks... Default Risk Increasing
Savings Banks Passive in Cleaning Up Defaulted PF Projects... Managing Risk by Tightening Loans to Medium- and Low-Credit Borrowers
Authorities Begin Weeding Out Insolvent Savings Banks... Additional 'Prompt Corrective Actions' Expected This Month

The savings bank industry is facing a growing risk of real estate project financing (PF) defaults. The industry is passively waiting for the real estate market to revive due to interest rate cuts, resulting in an increase in the scale of delinquencies as they are reluctant to clean up defaulted PF projects. Financial authorities have begun a selection process to identify and induce the cleanup of insolvent savings banks.

Delinquencies piling up in savings banks... Default risk increasing

According to statistics from the Financial Supervisory Service on the 10th, the average delinquency rate of 79 domestic savings banks steadily rose from 2.5% at the end of 2021 to 8.73% as of the third quarter of last year.

The amount of delinquent loans is also rapidly increasing. As of the end of January, the delinquent loan amount in the savings bank sector was 9.1 trillion KRW, up 9.6% compared to 8.3 trillion KRW at the end of last year. Compared to 2.5 trillion KRW at the end of 2021, it surged by approximately 264% in about three years. This is the fastest growth rate among the secondary financial sectors.

The growing scale of delinquencies in savings banks is due to troubled real estate PF loans holding them back. The delinquency rate of real estate PF loans in savings banks increased from 6.96% at the end of 2023 to 9.39% in the third quarter of last year. The outstanding balance of real estate PF loans held by savings banks was 15.4 trillion KRW as of the third quarter of last year. Although this amount is not large compared to the entire financial sector (151.4 trillion KRW), the risk of default is higher due to the large proportion of bridge loans, land-secured loans, and projects involving small and medium-sized construction companies. Among the PF loans held by savings banks, the ratio of non-performing loans classified as fixed or below due to delinquencies exceeding three months reached 29.2% (4.4968 trillion KRW) as of the third quarter of last year.

Savings banks passive in cleaning up defaulted PF... Managing risk by tightening loans to medium- and low-credit borrowers

Savings banks should secure soundness by selling off troubled real estate PF projects, but they are passive in cleanup. As of the 28th of last month, 369 PF projects in the financial sector were disclosed on an information disclosure platform sharing the status of real estate PF auctions and court auctions. The exposure amount is about 6.3 trillion KRW. Among these, savings banks hold 128 projects (35%), but 40 of them have not even started bidding. This is because savings banks are reluctant to lower the bid price ratio. Even among those that started bidding, some set the minimum bid price higher than the market price, effectively making sales difficult.

Savings banks prefer to sell real estate PF-related bonds at a proper price when the real estate market recovers rather than selling them at a low price immediately. A savings bank official said, "The Bank of Korea lowered the base rate twice in the fourth quarter of last year and has announced several additional cuts this year, creating an atmosphere of waiting a bit longer," adding, "It's not that they hesitate to auction but are waiting for a definite buyer to appear."

Some savings banks are adopting delay strategies and coping with the burden of rising delinquency rates by reducing loans to medium- and low-credit borrowers or small unsecured loans. According to statistics from the Korea Federation of Savings Banks, among 32 savings banks that handled medium-interest unsecured loans in the fourth quarter of last year, only seven extended loans to borrowers with credit scores below 400. The loan amount per transaction was also minimal. As of the end of September last year, the outstanding balance of small unsecured loans in the savings bank sector was 1.1397 trillion KRW, down 1% (110 billion KRW) compared to the same period the previous year. The outstanding balance of small unsecured loans had been increasing year-on-year until the first half of last year but turned to a decline in the second half. If low-credit borrowers cannot borrow from savings banks, they often turn to loan sharks or illegal private loans, which negatively impacts the low-income economy.

Authorities begin weeding out insolvent savings banks... Additional 'Prompt Corrective Actions' expected this month

Financial supervisory authorities have started soundness evaluations and on-site inspections to prevent insolvent savings banks from causing domino effects on the overall economy.

The Financial Services Commission is likely to discuss imposing prompt corrective actions on four savings banks at the regular meeting scheduled as early as the 19th. These savings banks received a management evaluation grade of 4 (vulnerable) as of the end of June last year in the Financial Supervisory Service's management status evaluation. Prompt corrective actions are management improvement measures (recommendations, demands, orders) imposed by financial authorities on financial companies at risk of insolvency. At the highest level, 'orders' can lead to suspension of operations or mergers and acquisitions.

In December last year, the Financial Services Commission imposed 'management improvement recommendations' as prompt corrective actions on Raon and Anguk Savings Banks. This was the first time in six years since January 2018 that a savings bank received such a recommendation. Since then, Raon has been pursuing a sale to Vessel, a KOSDAQ-listed company. Anguk has been cleaning up non-performing loans and conducting a paid-in capital increase worth tens of billions of KRW.

The Financial Supervisory Service has launched on-site inspections. On the 4th, it inspected two savings banks with sluggish cleanup of real estate PF default projects and plans to examine 7 to 8 savings banks together with the Korea Deposit Insurance Corporation in the first half of this year. Choi Hee-jae, senior researcher at Hana Financial Research Institute, said, "Additional losses may occur depending on the progress of auctions and reclassification of loans as watch or doubtful," adding, "The cleanup of PF defaults will continue until the first half of this year, and savings banks need to continue strengthening soundness management."