[Financial Microscope] Countdown to Strengthening Savings Banks' Competitiveness... Will M&A Regulations in the Seoul Metropolitan Area Be Lifted?

Easing Mandatory Provincial Loan Ratios and Calls to Expand PF Buyers
Authorities Consider Whether to Include Metropolitan Area M&A in 'Competitiveness Measures'

The government is expected to announce measures to strengthen the competitiveness of savings banks as early as the end of this month, and the savings bank industry is paying close attention to whether regulations on mergers and acquisitions (M&A) in the metropolitan area will be eased.

There is also interest in whether the regulatory relaxation will include easing the mandatory maintenance ratio of loans to individuals and small and medium-sized enterprises within the business area among total loans, and increasing the number of institutions allowed to sell non-performing loans. The government is considering including measures to expand supervisory incentives when handling loans to medium- and low-credit borrowers.

Metropolitan Area M&A Regulation Easing, Industry’s Long-standing Wish

According to the savings bank industry on the 12th, among the 79 savings banks, only five?SBI, OK, Korea Investment, Welcome, and Aequan Savings Banks?had assets exceeding 5 trillion won as of the third quarter of last year. Expanding the scope to those with assets over 3 trillion won includes Daol and Pepper Savings Banks, making seven companies, and expanding to 2 trillion won includes Shinhan, Sangsangin, KB, and OSB, totaling 11 companies. Thus, in reality, the entire savings bank industry is of a small scale. Experts emphasize that the industry needs to expand asset soundness and profitability through large-scale M&A.

The industry welcomes the government’s announcement of measures to strengthen the competitiveness of savings banks but is concerned whether the easing of metropolitan area M&A regulations will be included.

When the Financial Services Commission announced the 'Revision Plan for Approval Criteria for Mutual Savings Bank Mergers' in July 2023 to encourage M&A expansion, expectations for transaction activation were high, but only one deal was completed. Hanwha Life’s 100% acquisition of Hanwha Savings Bank last year was the only case.

By regulation, the business areas of savings banks are divided into six regions: two metropolitan areas (① Seoul, ② Incheon·Gyeonggi) and four non-metropolitan areas (③ Busan·Ulsan·Gyeongnam, ④ Daegu·Gyeongbuk·Gangwon, ⑤ Gwangju·Jeolla·Jeju, ⑥ Daejeon·Sejong·Chungcheong). M&A outside the business area is restricted. Except for cases of merging with a savings bank at risk of insolvency, M&A among metropolitan area savings banks is prohibited. It is also difficult for a Seoul-based savings bank to acquire a bank in Incheon or Gyeonggi in reality.

Easing Mandatory Loan Ratios in Provinces Also a Variable

The industry generally believes that survival is impossible by operating only within the business area. Along with easing metropolitan area M&A, they hope for a reduction in the mandatory loan ratio in provinces. Specifically, they request lowering the mandatory maintenance ratio of loans to individuals and small and medium-sized enterprises within the business area from 40% to 30% of total loans by savings banks.

As the authorities encourage the auction and sale of non-performing real estate project financing (PF), there are also strong calls to increase the number of buyers for non-performing loans. At a meeting held on February 6 by the Korea Federation of Savings Banks for sales managers of nine large savings banks (SBI, OK, Korea Investment, Welcome, Aequan, Daol, Pepper, Shinhan, DB), the expansion of buyers for non-performing PF was intensively discussed.

Earlier, in January last year, the Financial Services Commission eased regulations to allow the sale of delinquent loans of individual business owners not only to the Korea Asset Management Corporation (KAMCO) but also to private securitization companies (specialized investors in non-performing loans). Savings banks are additionally requesting to increase buyers to 'third parties' such as loan companies that purchase assets at high prices.

Authorities Are Conservative: "Fulfill the Original Role of Local Microfinance"

The financial supervisory authorities urge savings banks to faithfully serve medium- and low-credit borrowers in local areas. Whenever the authorities announce policy directions for small and medium finance, the message "Fulfill the original role of local microfinance" is always emphasized.

On the 5th, Han-gu, Deputy Director of the Financial Supervisory Service, said at this year’s financial supervision briefing for the small and medium finance sector, "The small and medium finance sectors, including savings banks, mutual finance, and credit finance companies, have portfolios skewed toward PF projects, so when the real estate market deteriorates, they repeatedly fall into a vicious cycle of worsening soundness and profitability," adding, "We will consider various institutional supports so that companies fulfilling their original role of lending to medium- and low-credit borrowers can expand their business opportunities based on solid soundness management."

Some in the industry lament that despite the application of stronger regulations than any other sector since the savings bank crisis in the early 2010s, which somewhat strengthened self-cleansing capabilities, the authorities’ excessive emphasis on the 'original role' has rather solidified the image of a troubled sector.

The Financial Services Commission is reportedly designing policies to expand supervisory incentives during the handling of loans to medium- and low-credit borrowers as part of the competitiveness enhancement measures. The policy is being planned to provide modest incentives, such as partially deducting private mid-interest rate loan amounts in the calculation of the loan-to-deposit ratio. Whether to include the industry’s long-standing wish for easing metropolitan area M&A in this plan is still under consideration.

A Financial Services Commission official said, "It is difficult to confirm at this time whether the competitiveness enhancement measures will include a full easing of metropolitan area M&A."