After 13 Years Since the Savings Bank Crisis, 'Top 10' Early Corrective Action Warning... March 'Calm Before the Storm' [1mm Financial Talk]

Financial Services Commission to Decide on Measures on the 19th
SangSangIn and Pepper Likely to Receive 'Recommendation'
Last Year's Earnings and Deregulation Announcements
March Focused on Federation Chairman Election and More

As the decision on whether to impose timely corrective measures (recommendations, demands, or orders for management improvement) on four savings banks by financial authorities will be made in a week, tension is mounting as it is highly likely that, for the first time since the savings bank crisis, a 'Top 10' large institution will be subject to such measures.

If a savings bank ranked within the top 10 in assets receives timely corrective measures, it will be the first time in 12 years and 10 months since the suspension of operations of Solomon, Mirae, Hankook, and Hanju Savings Banks on May 6, 2012. The Korea Federation of Savings Banks and the industry are fully prepared for potential deposit withdrawals following the imposition of these measures.

Top 10 SangSangIn and Pepper Likely to Receive 'Recommendation' Measures

A savings bank in downtown Seoul. Photo by Yonhap News

According to financial supervisory authorities and the industry on the 13th, the agenda for timely corrective measures on four savings banks will be submitted and decided at the Financial Services Commission’s regular meeting on the 19th. The four banks targeted are confirmed to be those rated 4th grade in the Financial Supervisory Service’s management evaluation as of the end of June last year. The Financial Services Commission is deliberating whether to take action against all four or to postpone measures as was done with SNT Savings Bank in December last year. Currently, the Financial Supervisory Service has completed its review of the management improvement plans submitted by the four savings banks, and the matter has been passed to the Financial Services Commission. Both the Financial Supervisory Service and the Financial Services Commission must conclude that the plans can be implemented in the short term for a postponement to be granted.

The most closely watched issue is whether Pepper Savings Bank (Incheon-Gyeonggi region; assets of 3.1943 trillion KRW as of Q3 last year), ranked 7th in the industry, and SangSangIn Savings Bank (Seoul; 2.7577 trillion KRW), ranked 9th, will receive timely corrective measures. In the worst-case scenario, both could be subject to such measures. At the time of the suspension of operations in May 2012, Solomon Savings Bank was ranked 1st, Hankook Savings Bank 2nd, and Mirae Savings Bank was also in the top 10.

If they receive recommendation measures, they must implement intensive reform measures such as capital increases, asset sales, and internal workforce restructuring for six months. If improvements are not made thereafter, demand or order measures will be imposed. If an order measure is imposed, major shareholders must dispose of their shares, effectively meaning the business must be wound down. If 20% of total deposits in savings banks are withdrawn in a short period, it is considered grounds for suspension of operations. To prevent such worst-case scenarios, the Korea Federation of Savings Banks and individual savings banks monitor deposit amounts daily. Emergency funding support policies for savings banks may also be utilized if necessary.

The industry expects that even if Pepper and SangSangIn receive recommendation measures, it will not lead to a large-scale deposit withdrawal crisis (bank run). This is because the deposit insurance limit is scheduled to increase to 100 million KRW this year, and many customers with medium to low credit ratings currently have deposits below the existing limit of 50 million KRW, so funds are not expected to drain rapidly in the short term.

However, if SangSangIn Savings Bank does not receive a postponement, its bargaining power in price negotiations during the merger and acquisition (M&A) deal with OK Financial Group could weaken. Similarly, if Pepper Savings Bank’s major shareholders fail to increase capital, it may become a target for sale, according to industry views.

On the 27th of last month and the 10th of this month, Pepper Savings Bank announced that it conducted paid-in capital increases totaling 30 billion KRW in two installments over a 15-day period. A Pepper Savings Bank official stated, "The capital increase was made to strengthen soundness through capital expansion."

Focus on Authorities’ Competitiveness Enhancement Plans Amid Earnings Announcements

Meanwhile, the industry is expected to have a busy March. In addition to timely corrective measures, major issues such as the Korea Federation of Savings Banks chairman election, last year’s earnings announcements, and the Financial Services Commission’s competitiveness enhancement policy are scheduled one after another by the end of this month. The chairman election is a 'predictable variable' with a disclosed schedule, but the industry is paying close attention to whether a dark horse candidate from the Financial Services Commission will emerge by the registration deadline on the 17th. If no new candidates appear by the 17th, the likelihood of the current chairman Oh Hwa-kyung’s reappointment increases.

The Financial Supervisory Service is expected to announce the provisional 2024 business performance of savings banks and mutual finance cooperatives by the last week of this month at the latest. The Financial Services Commission’s competitiveness enhancement plan is also likely to be released by the end of this month. Both the Financial Services Commission and the Financial Supervisory Service have set a policy to announce the competitiveness enhancement plan as quickly as possible. However, there are reports that the originally anticipated policy easing M&A regulations in the metropolitan area may not be included, causing some unease within the industry.

An industry insider said, "Even savings banks not mentioned as targets for timely corrective measures are likely to be on edge about potential deposit withdrawals. Last year’s earnings are also likely to be in the red, and since there is no guarantee that the metropolitan area M&A regulation easing policy will definitely be included in the Financial Services Commission’s competitiveness enhancement plan, the industry is closely monitoring the situation."