[Financial Microscope] "Most Issues Resolved"... Savings Bank M&A Resumes, PF Resolution Accelerates

Three M&A Deals This Year: Most Since the Savings Bank Crisis
Positive Outlook for Sale of Regional Asset 'Raon' Under 1 Trillion Won
2.5 Trillion Won in Distressed PF Resolved by Normalization Funds This Year
Resolution to Accelerate with Federation’s NPL Subsidiary Joining

This year, the profitability and soundness of the savings bank industry have shown signs of improvement following the financial authorities’ easing of regulations. Looking ahead to next year, it is expected that the market for mergers and acquisitions (M&A) of savings banks will remain active, and the pace of resolving distressed real estate project financing (PF) will accelerate further. While it is difficult to make definitive predictions about M&A activity due to numerous variables, experts believe that the expansion of eligible acquisition targets by the authorities has had a clear positive effect on investor sentiment. There is also a view that as soundness indicators such as the ratio of substandard and below loans improve, a virtuous cycle may be established in which the process of resolving distressed PF gains momentum.

Easing of M&A Regulations: "Visible Results After Four Years, Regional Deals Also Significant"

Even immediately after OK Financial Group’s failed attempt to acquire SangSangin Savings Bank in August, the savings bank industry responded that “it is difficult to say that M&A transactions have frozen due to regulatory issues.” Despite the collapse of a large-scale deal worth about 300 billion won (the fourth largest on record at the time), there were still considerable expectations for follow-up transactions, given the significant regulatory easing related to M&A. In fact, just three months after the failed OK deal, KBI Group succeeded in signing a contract to acquire SangSangin Savings Bank for approximately 100 billion won, further boosting industry expectations.

Acuon Savings Bank, Pepper Savings Bank, and SangSangin Plus Savings Bank are being discussed as major potential deals. In particular, there are assessments that if Acuon Savings Bank is bundled with Acuon Capital, the sale price could reach between 1 trillion and 1.4 trillion won.

The industry believes that the Financial Services Commission’s announcement in March of the “Plan to Enhance the Role of Savings Banks” had a significant impact on the three M&A deals completed this year. The policy’s key feature was to ease regulations by expanding the range of eligible acquisition targets. The commission relaxed the criteria for inclusion in the “gray zone” (signs of insolvency) for M&A targets from a Bank for International Settlements (BIS) capital adequacy ratio of less than 9% to less than 11% (and less than 12% for banks with assets of 1 trillion won or more). In addition, the criteria for insolvent savings banks eligible for M&A were expanded from those subject to prompt corrective action to those rated fourth grade or lower in asset soundness indicators within the past two years.

This year’s M&A activity among savings banks has been the most robust since the large-scale illegal and insolvent savings bank crisis of 2012. Of the nine M&A deals that have occurred since 2012, three (33.3%) were completed this year. The industry is particularly focused on the case of KBI Group affiliate KBI Kukin Industry acquiring Raon Savings Bank for about 6 billion won. Raon Savings Bank had been subject to prompt corrective action and was a non-metropolitan savings bank with assets under 1 trillion won. This marks the first time since the 2012 crisis that a non-metropolitan savings bank has been sold. Considering that the industry has viewed the regulatory easing by the Financial Services Commission as effectively targeting the revitalization of transactions involving non-metropolitan and sub-1-trillion-won savings banks, this is seen as highly significant.

An industry official stated, “When considering the scale and number of deals, as well as the asset size and regional distribution of the acquired savings banks, this year’s M&A achievements are more than just numbers. There are growing expectations that both large and small deals involving various savings banks will be completed next year.”

Improved Soundness Indicators: Increased Performance Expected from NPL Servicing Companies

The policy of the Financial Services Commission is also seen as having a positive effect on improving the soundness of the industry by accelerating the resolution of distressed real estate PF. This year, the profitability and soundness of savings banks have shown a clear recovery, supported by the effects of resolving distressed PF. Although the pace is not as fast as in previous years, it is expected to accelerate next year as SB NPL Loan Servicing, a non-performing loan (NPL) specialist subsidiary of the Korea Federation of Savings Banks, begins full-scale operations.

The industry positively notes that as of the end of the third quarter, the ratio of substandard and below loans had fallen by about 2 percentage points compared to the beginning of the year. This ratio refers to the proportion of loans classified as substandard or below (normal, precautionary, substandard, doubtful, presumed loss), and a lower ratio indicates better soundness. It is directly linked to profitability indicators such as delinquency rates and net income.

The ratio of substandard and below loans in the savings bank industry fell from 10.59% at the end of the first quarter to 8.79% at the end of the third quarter, a decrease of 1.8 percentage points. During the same period, the delinquency rate also dropped from 9% to 6.1%, a decline of 2.9 percentage points. Profitability improved as well, shifting from a deficit at the end of last year to a surplus at the beginning of this year and continuing to improve for three consecutive quarters, rising from 44 billion won at the end of the first quarter to 422.1 billion won at the end of the third quarter-an increase of nearly tenfold.

According to the industry, approximately 2.5 trillion won worth of distressed PF was resolved this year alone through the first to sixth joint funds for normalization of distressed PF led by the Korea Federation of Savings Banks. SB NPL Loan Servicing is preparing to convert into an asset management company (AMC), and the Financial Services Commission also plans to swiftly amend relevant laws. Once converted to an AMC, the previous cap on NPL purchases-up to 100 billion won based on book value-will effectively be eliminated, allowing for virtually unlimited purchases of non-performing loans, as the rule limiting purchases to ten times the capital will no longer apply. In addition, by securing the authority to handle savings bank NPL collection on a consignment basis, fee income is expected to increase, and overall processing capabilities are likely to be strengthened, creating a virtuous cycle.

An industry official commented, “Despite the negative factors of a sluggish regional economy, the launch of a specialized NPL subsidiary and the creation of joint normalization funds are working together to accelerate the resolution of distressed PF. While profitability is important, improving soundness will remain the top priority next year as well.”