[Manbo Jeongdam] Oh Hwakyung, Chairman of the Korea Federation of Savings Banks: "Ease M&A Regulations to Enable a Second Kyobo-SBI Deal"

Interview with Oh Hwakyung, Chairman of the Korea Federation of Savings Banks
'OK Deal' Fell Through, but 'SBI Deal' Succeeded
First Year of Reappointment... "Regulatory Easing Is My Remaining Goal"
NPL Subsidiary in Operation... "Delinquency Rat

Oh Hwakyung, chairman of the Korea Federation of Savings Banks, is walking while having an interview with Asia Economy and Manbojeongdam at Namsangol Hanok Village in Jung-gu, Seoul on the 24th. Chairman Oh expressed regret that he was a soccer player until middle school but could not walk long due to knee surgery after an injury. Photo by Kang Jinhyung

The generational syllables in the names of Oh Hwakyung, chairman of the Korea Federation of Savings Banks, and his three brothers together mean "wealth and honor." He is the first civilian to be reappointed as chairman in the 53-year history of the Korea Federation of Savings Banks. His mission is not only to enjoy wealth and honor himself, but also to help as many ordinary Koreans as possible achieve the same.

When interviewed by Asia Economy at Namsangol Hanok Village in Chungmuro, Jung-gu, Seoul on the morning of the 24th, Chairman Oh said, "I regret that I cannot walk for long due to my knee." He was a soccer player until middle school, but had to undergo knee surgery after an injury. He smiled, saying, "I am getting by thanks to the exercise I did in the past."

His stamina remains strong. He constantly meets with the CEOs of all 79 savings banks nationwide, as well as key figures from government, politics, and business. Carrying several neckties and jackets is standard for him. He describes himself as having "lived like a weed." After graduating from university, he joined a securities firm and rose to the position of executive director at a foreign bank within 14 years. Having worked without a break throughout his career, his children gave him the nickname "Smile," encouraging him to enjoy life. It is a life that would be hard to sustain without good health.

Vitalizing Savings Bank M&A, Need for Mega Deals

Oh Hwakyeong, chairman of the Korea Federation of Savings Banks, is being interviewed by Asia Economy and Manbojeongdam on the 24th at Namsangol Hanok Village in Jung-gu, Seoul. Chairman Oh spoke in detail for an hour about current issues such as the deregulation of savings bank mergers and acquisitions (M&A), the handling of non-performing real estate project financing (PF) bonds, and the federation's policies. Photo by Kang Jinhyung

In the interview, Chairman Oh emphasized that more large-scale savings banks like SBI Savings Bank and OK Savings Bank should be fostered through active mergers and acquisitions (M&A). He argued that differentiated supervisory systems should be applied to large and small-to-medium-sized institutions to facilitate "mega deals" such as Kyobo Life Insurance's acquisition of SBI Savings Bank. He said, "We need to encourage a variety of players (acquirers) to enter the market, as in the case of Kyobo Life Insurance acquiring SBI Savings Bank," and added, "There is sufficient demand for savings bank acquisitions." He continued, "I hope the sale of SangSangIn Savings Bank, which fell through with OK Savings Bank, will proceed quickly."

He also proposed measures to protect financial consumers. He said that rather than simply having branch staff explain the debt restructuring and interest rate reduction request systems, MyData service providers should conduct credit evaluations every six months to identify "thin file" customers with limited credit histories. However, he pointed out, "The scope of consumer protection emphasized by the Financial Supervisory Service is excessively broad," and added, "It could be interpreted in an arbitrary way depending on the situation." He further stated, "There has not been enough verification as to whether the system that makes financial institutions fully responsible for voice phishing incidents is just," and stressed, "Clear principles are needed."

He also pointed out that tightening lending regulations to stabilize housing prices has made it more difficult for low-income individuals to obtain living expense loans from secondary financial institutions. Chairman Oh said, "The likelihood of financial consumers becoming credit delinquents has increased as they roll over their debts and fall into arrears," and added, "Since the purpose of mortgage loan policies is to stabilize housing prices, and most customers using mortgage loans are clients of primary financial institutions, targeted adjustments to lending policies are needed to minimize the damage to secondary financial institution customers."

Need to Ease Mandatory Lending Ratios by Business Area... Full-Scale Operation of NPL Subsidiary

Oh Hwakyeong, chairman of the Korea Federation of Savings Banks, is giving an interview to Asia Economy and Manbojeongdam at Namsangol Hanok Village in Jung-gu, Seoul on the 24th. Chairman Oh spoke in detail for an hour about current issues such as the deregulation of savings bank mergers and acquisitions (M&A), the handling of non-performing real estate project financing (PF) bonds, and the federation's policies. Photo by Kang Jinhyung

He also said that mandatory lending ratios by business area need to be eased. Savings banks operate in six regions nationwide (Seoul, Incheon/Gyeonggi, Busan/Gyeongnam, Daegu/Gyeongbuk/Gangwon, Honam, and Chungcheong). Savings banks in Seoul, Incheon, and Gyeonggi must make at least 50% of their loans within their region, while those in other regions must make at least 40% within their respective areas. However, 85% of outstanding savings bank loans nationwide are concentrated in the capital area, making it difficult for regional savings banks to meet their mandatory ratios.

Chairman Oh said, "With declining regional loan demand due to the local construction industry slump, the 40% mandatory ratio is unrealistic," and added, "We have requested the Financial Services Commission to lower the ratio for regional banks to 30%." For example, the seven savings banks in Honam must meet a 40% local lending ratio, even though the region's gross regional domestic product (GRDP) accounts for only 8.9% of the nation's gross domestic product (GDP). He lamented, "We have to operate with a structural handicap that prevents us from making loans even when good real estate collateral is located in other regions."

After the Legoland incident in 2022, resolving non-performing real estate project financing (PF) bonds has become a key industry issue. Chairman Oh explained, "The NPL-specialized subsidiary 'SB NPL Loan,' under the federation, has completed its registration as a loan company and will begin full-scale operations by the end of the year."

Starting in December, the subsidiary will begin purchasing NPLs with a book value of 100 billion won, and plans to purchase between 100 billion and 500 billion won in original principal balance (OPB) annually. If successful, this could lower the industry's delinquency rate by 0.1 to 0.5 percentage points per year. He said, "We will quickly increase the subsidiary's capital from the current 500 million won to 10 billion won to handle 100 billion won in non-performing loans."

Regarding the statement by Lee Chanjin, governor of the Financial Supervisory Service, at a savings bank CEO meeting on the 4th, urging banks to refrain from high-risk lending linked to the real estate market, Chairman Oh said he agreed. As of the end of the second quarter (end of June), the average Bank for International Settlements (BIS) capital adequacy ratio of the 79 savings banks nationwide had reached a record high of 15.6%, and they had proactively set aside loan loss provisions to absorb potential losses. Chairman Oh said, "We are working to reduce risks in PF lending by strengthening business feasibility assessment standards, conducting on-site inspections, and operating an early warning system."

The following is a Q&A with Chairman Oh.

-After your reappointment in March, you identified M&A deregulation as a key task.

▲We need to actively promote savings bank M&A. Acquirers with sufficient capital and a strong will to manage should be accepted flexibly. Currently, the supervisory authority holds the approval rights. At present, only the acquirer's management track record and eligibility as a major shareholder are considered. We need to be more flexible in accepting new entrants into the savings bank market.

-What is the demand for acquiring SangSangIn Savings Bank?

▲There are quite a few institutions interested in acquiring savings banks. Some individuals also wish to acquire them. Over the past five to six years, the authorities have been cautious about allowing private equity funds (PE) to acquire savings banks. There are no regulations prohibiting such acquisitions, but since the business model of private equity funds is to quickly increase assets and then sell, it was judged unsuitable for the long-term management of savings banks. However, SangSangIn Savings Bank needs to be sold quickly, and I understand that contact is currently being made with new potential buyers.

-Some say that the industry's expectations were dampened after OK Savings Bank's failed attempt to acquire SangSangIn Savings Bank.

▲I understand that the authorities have been cautious about large-scale and regional M&As, i.e., deregulation, since the "savings bank crisis" of 2011-2012, which led to the suspension of operations at several banks. However, the ownership structure of savings banks needs to be diversified to include financial holding companies, securities firms, and foreign financial institutions. Larger companies have more professional management systems and higher standards of risk management, not just better performance. They also implement consumer protection more thoroughly, as the authorities emphasize. We need to encourage capable acquirers from various industries, as in the case of Kyobo Life Insurance acquiring SBI Savings Bank, to enter the savings bank market. To this end, it is necessary to ease inheritance and gift tax rules for major shareholders and support acquirers in autonomously recovering their investment (exit).

-You are credited with establishing a systematic system for handling non-performing real estate PF bonds by setting up an NPL subsidiary during your term.

▲It is true that there is still criticism that savings banks rely too much on real estate PF even after the savings bank crisis. However, unlike project developers, who cover only about 3% of total project costs with their own capital, savings banks must contribute 20%. This has reduced moral hazard. The problem is that when a project faces difficulties, creditors participating in syndicated loans tend to withdraw support easily. When borrowers (institutions or individuals who took out the loans) face trouble, creditors think about cutting off loans instead of helping them recover. If even a few debtors drop out, the whole project could collapse. We need a system that allows for loan extensions, interest rate reductions, and debt restructuring after assessing the project's success potential. For example, if three-quarters of the debtors agree, the remaining quarter should be required to participate as well.

-Your predecessor also suggested the idea of establishing an NPL subsidiary, but you actually made it happen. Isn't that your achievement?

▲Currently, the subsidiary's capital is only 500 million won. This needs to be quickly increased to 10 billion won. Under the Enforcement Decree of the Loan Business Act, a loan company's total assets are limited to 10 times its capital. If we increase the capital to 10 billion won, we can purchase up to 100 billion won in non-performing loans. For example, we can buy a bond for 1,000 won and restructure it to sell for 700 or 500 won. This will help the savings bank industry quickly clean up non-performing loans.

-Do you have any targets for the NPL subsidiary by the end of the year or next year?

▲We established the company in May, and this month we completed registration as a loan company. We have agreed to conduct a capital increase over the next two months. Starting in December, we plan to begin purchasing NPL bonds with a book value of 100 billion won. Next year, we plan to pursue an additional capital increase and convert the company into an asset management company. As an asset management company, we can also provide entrusted management services without directly purchasing assets. This will help improve the management indicators and market credibility of savings banks. We plan to purchase between 100 billion and 500 billion won in NPLs annually, which should reduce the industry's delinquency rate by 0.1 to 0.5 percentage points each year.

-Lee Chanjin, governor of the Financial Supervisory Service, urged savings bank CEOs to refrain from focusing on high-risk loans such as PF. What is your view?

▲The average BIS capital adequacy ratio of the savings bank industry is at a record high of 15.6%. We have proactively set aside loan loss provisions and increased capital to secure sufficient loss-absorbing capacity. We are also working to diversify our loan portfolios and strengthen internal controls and screening capabilities. To reduce risks in PF lending, we are strengthening business feasibility assessment standards, conducting on-site inspections, and operating an early warning system. Savings banks are financial institutions that serve mid- to low-credit, vulnerable borrowers. Therefore, it is necessary to apply differentiated regulations by asset size in areas such as M&A promotion, easing mandatory lending ratios by business area, and setting limits on loans and securities investments.

-The industry is calling for easing mandatory lending ratios by business area.

▲Out of the 100 trillion won in outstanding savings bank loans, 85 trillion won is concentrated in the capital region. In effect, savings banks in Seoul, Incheon, and Gyeonggi are large institutions, while those in the other four regions are small to medium-sized. For example, the Honam region's GRDP is less than 10% of the national GDP, yet 40% of all loans must be made in Honam. This makes it difficult to make loans even when there is good collateral in other regions. We have requested the Financial Services Commission to lower the mandatory ratio for regional banks to 30%, a reduction of 10 percentage points. In addition, I believe there would be no problem in integrating the four regional areas of Busan/Gyeongnam, Daegu/Gyeongbuk/Gangwon, Honam, and Chungcheong. This would help strengthen the self-sufficiency of regional lending.

-The government has tightened mortgage loan regulations to manage household debt and housing prices.

▲Mortgage loans are not closely related to secondary financial institutions. Most customers use banks (primary financial institutions). However, due to the new regulations, customers who use savings banks and credit card companies are being affected. These customers often have lower incomes and seek loans for living expenses, not for business purposes. Some continue to repay by rolling over loans, even if they are temporarily in arrears. But now, the likelihood of becoming credit delinquents has increased. For non-mortgage loans, targeted adjustments are needed so that customers of secondary financial institutions can smoothly obtain living expense loans. Lending by secondary financial institutions does not cause housing prices to rise.

-The Financial Supervisory Service emphasized consumer protection at the CEO meeting.

▲We are encouraging branch staff to thoroughly explain debt restructuring and interest rate reduction request systems to customers. However, it would be more effective to ease regulations on MyData service providers so that customer credit evaluations are conducted every six months and reflected in credit ratings. If credit scores improve, loan interest rates can be lowered accordingly. This would reduce blind spots where only customers who know about the system benefit. The current scope of consumer protection emphasized by the financial authorities is excessively broad. It could be interpreted arbitrarily depending on the situation. The system that makes financial institutions fully liable for voice phishing incidents also lacks sufficient verification of its legitimacy. There may be complaints such as "Who will take responsibility?" Clear principles are needed.

-Who is Oh Hwakyung, chairman of the Korea Federation of Savings Banks?

Chairman Oh Hwakyung began his career in 1989 as an industry analyst at Seoul Securities (now Eugene Investment & Securities). In 2003, he became executive director and head of sales at HSBC Korea. From 2007, he worked for three years as vice president of the Korea Desk at HSBC's China branch. From 2010, he served for eight years as vice president and CEO at AJU Capital and AJU Savings Bank. From 2018, he served for four years as CEO of Hana Savings Bank, and since 2022 has served as chairman of the Korea Federation of Savings Banks for four years. He graduated from Sungkyunkwan University with a degree in business administration and accounting in 1988, and earned a master's degree in financial management from Korea University Graduate School in 1995. His accounting and financial expertise led to the establishment of the first NPL subsidiary by the federation. The savings bank industry recognizes him as the key figure who established a control tower to respond to crises such as local real estate insolvencies.

-Profile: Oh Hwakyung, Chairman of the Korea Federation of Savings Banks

▲Born in Uijeongbu, Gyeonggi Province in 1960 ▲Bachelor's in Business Administration and Accounting, Sungkyunkwan University ▲Master's in Business Administration (Financial Management), Korea University Graduate School ▲Completed KMA-Wharton Advanced Management Program ▲Industry Analyst, Seoul Securities ▲Executive Director and Head of Sales, HSBC Korea ▲Vice President, Korea Desk, HSBC China ▲Executive Vice President, AJU Capital ▲CEO, AJU Savings Bank ▲CEO, AJU Capital ▲CEO, Hana Savings Bank ▲Chairman, Korea Federation of Savings Banks

Interview by: Lee Seonae, Head of Economic and Financial News Department

Compiled by: Moon Chaeseok, Reporter