Savings Banks to Launch NPL Subsidiary by Year-End... 0.5%p Delinquency Rate Improvement Expected Next Year

Visible Progress in NPL Resolution Across the Financial Sector
Savings Banks’ Delinquency Rate Remains Above 5%, Highest Among Peers
Federation’s New Subsidiary Expected to Accelerate Improvements

While efforts to resolve distressed real estate project financing (PF) loans are accelerating across the financial sector, savings banks continue to report the highest delinquency rates among all financial institutions. In response, the Korea Federation of Savings Banks has announced plans to launch a specialized non-performing loan (NPL) management subsidiary by the end of the year, aiming to lower the industry’s delinquency rate by up to 0.5 percentage points.

According to the Korea Federation of Savings Banks on October 4, its subsidiary, SB NPL Loan Company, completed its registration as a loan company last month and is set to begin full-scale NPL acquisition operations by the end of the year. The subsidiary’s current capital of approximately 500 million won will be increased to 10 billion won through capital injections over the next two months.

The soundness of real estate PF loans in the savings bank sector remains lower than that of other financial sectors. According to materials from the "Real Estate PF Situation Review Meeting" released on September 25 by the Financial Services Commission, the Financial Supervisory Service, the Ministry of Economy and Finance, and the Ministry of Land, Infrastructure and Transport, PF exposure as of the end of June stood at 186.6 trillion won, down 4.1 trillion won from the previous quarter. Loans rated as "Precautionary (C)" and "Substandard or Below (D)" totaled 20.8 trillion won, a decrease of 1.1 trillion won. The PF loan delinquency rate was 4.39%.

However, the indicators for savings banks remain weak. Their delinquency rate was 5.14%, higher than those of mutual finance (0.15%), banks (0.64%), and insurance companies (1.69%), and also higher than that of specialized credit finance companies (4.98%).

Nevertheless, the overall asset quality of loan receivables has improved. As of the end of June, the ratio of substandard or below loans at the 79 savings banks was 9.94%, down 1.19 percentage points from a year earlier. Substandard or below loans refer to loans that are in the third or lower category of the five-stage credit quality classification for savings bank loans, with a delinquency period of three months or more. A higher ratio of substandard or below loans in total credit means poorer asset quality.

The capital increase for the federation’s NPL subsidiary was also recommended by financial authorities. In November last year, the Financial Services Commission encouraged securing sufficient capital during PF project execution. Previously, PF investments were permitted with only 3% of the total project cost held as equity capital, but the standard has since been raised to "at least 20%."

The federation plans to begin full-scale NPL acquisition operations worth 100 billion won in book value starting in December. It aims to purchase between 100 billion and 500 billion won annually based on outstanding principal balance. The federation expects that if the specialized subsidiary acquires distressed loans at cost, restructures them, and then sells them, it will significantly ease the financial burden of savings banks and construction companies involved in PF projects.

Oh Hwakyung, Chairman of the Korea Federation of Savings Banks, stated, "As the construction market remains sluggish, financial institutions are reluctant to lend, and secondary financial institutions in particular are struggling to absorb the leverage taken on by project developers. The federation’s NPL subsidiary will acquire distressed loans, restructure them, and resell them-just as funds, asset management firms, and institutional investors have done-helping to reduce the burden of real estate PF loans for savings banks."