Seven Out of Ten Savings Banks Fall Short of Recommendations... Severe Polarization in Delinquency Rates

The Smaller the Savings Bank, the Harder the Recovery in Delinquency Rates
Real Estate Project Financing Insolvency and Sluggish Regional Economy Are the Root Causes
No Easy Short-term Solution... "Maintaining a Soundness-focused Management Stra

Seven out of ten savings banks have a delinquency rate higher than the threshold recommended by financial authorities. As the polarization intensifies, with smaller savings banks showing a slower pace of recovery in delinquency rates, there are growing calls for stricter management of financial soundness.

According to the Financial Supervisory Service’s Financial Statistics Information System on November 28, as of the end of June, 54 savings banks failed to meet the financial authorities’ recommended delinquency rate of 5-6%. This means that 68.4% of the 79 savings banks nationwide fell short of the recommended level. Most savings banks saw a sharp rise in delinquency rates following the so-called “Legoland incident” in the second half of 2022.

Despite encouragement from financial regulators, savings banks are struggling to manage their delinquency rates. A comprehensive review of delinquency rates from the end of 2022 to the end of June this year found that 37 savings banks (46.8%) recorded their highest delinquency rates at the end of last year. Although former Financial Supervisory Service Governor Lee Bokhyeon urged the resolution of bad real estate project financing (PF) loans at savings banks starting in 2023, satisfactory results have yet to be achieved.

Raon Savings Bank and SangSangIn Savings Bank, which received prompt corrective action from the Financial Services Commission, have seen their delinquency rates continue to rise. Raon Savings Bank, which received prompt corrective action in December last year, saw its delinquency rate climb from 14.87% at the end of 2023 to 19.03% at the end of last year, and further to 20.11% by the end of June. SangSangIn Savings Bank, which received prompt corrective action in March, saw its rate worsen from 13.83% to 18.7% to 21.24% over the same period. Meanwhile, Anguk Savings Bank, which received prompt corrective action on the same day as Raon Savings Bank, showed improvement, with its delinquency rate dropping from 18.13% to 11.56% to 8.14%.

Another concern is that local and smaller savings banks are recovering their soundness indicators more slowly than those in the Seoul metropolitan area and larger institutions. Some point out that, starting as early as the end of this year or by early next year, it will be difficult to improve soundness solely through the efforts of NPL companies such as “SB NPL Loan,” a specialized subsidiary of the Korea Federation of Savings Banks that will begin purchasing non-performing loans (NPLs), and the industry itself.

The fundamental reasons for the collapse in savings banks’ delinquency rates are structural issues, such as bad real estate project financing loans and a sluggish local economy, making it difficult to pursue profitability-focused business activities. As the pace of recovery in delinquency rates slows, savings banks are inevitably facing the double burden of deteriorating profitability.

The savings bank industry has decided to continue focusing its management strategy on strengthening risk management, such as enhancing asset soundness and proactively accumulating loan loss reserves, rather than expanding business operations.

An industry official stated, “Both the Korea Federation of Savings Banks and the entire industry are already employing every possible measure to reduce delinquency rates, including selling assets through their own auctions, write-offs, and operating normalization funds with asset management firms. For the time being, we do not plan to increase lending to achieve expected profits, but will instead devote all our resources to managing soundness indicators.”