S.Korea asks savings banks to raise capital to avoid crisis

South Korea’s top financial regulator advised about 10 local savings banks in trouble to increase their capital by the end of this month to prevent an industry-wide crisis as project financing (PF) risks grow amid the sluggish property sector.

The savings bank industry plans to raise 70 billion won ($50.6 million), more than double the previous fund of 33 billion won, to stabilize troubled PF construction sites.

The Financial Supervisory Service (FSS) earlier this month asked savings banks with deteriorating financial soundness due to massive losses in the first quarter to further increase capital and raise their capital adequacy ratios to higher than recommended by the Bank for International Settlements (BIS), according to financial industry sources on Monday.

The BIS currently recommends savings banks maintain ratios of at least 10%. For banks with assets of more than 1 trillion won the recommendation is 11%.

The FSS’ request is tougher than usual as the regulator normally gives more time to those lenders to increase capital, industry sources said. In general, savings banks report the ratios to the FSS within 30 days after their quarterly earnings and the watchdog asks them to complete their financial soundness improvements in three months, according to the sources.

“The regulator required us to report the soundness ratio once we completed the earnings statement at the end of last month while asking us to improve the ratio earlier than usual,” said an official at a savings bank that FSS requested to increase capital. “We need to take extra measures as the pressure is so strong.”

DETERIORATING

That came as the business environments and financial structures of savings banks worsened due to PF problems. The delinquency rate of saving banks’ PF loans more than tripled to 6.94% at the end of 2023 from 2.05% a year earlier.

About 70 savings banks among the total 79 were estimated to have reported net losses in the first quarter. Last year, 41 of the total logged losses.

The capital adequacy ratios of some 15 savings banks were estimated to have failed to meet the BIS’ recommendation in the January-March period, according to industry sources. As of end-2023, only one savings bank’s capital adequacy ratio fell below the threshold.

The industry is expected to suffer further in the second quarter due to PF-related problems and higher provisions, industry sources said.

“Savings banks whose major shareholders cannot afford to increase capital may be ordered to suspend operations or sell their businesses,” said one of the sources.

ADDITIONAL FUND

The savings bank industry is poised to set up another fund for stabilization.

The Korea Federation of Savings Banks, large savings banks and units of major financial groups earlier this month discussed establishing another fund of 70 billion won, according to industry sources.

The fund, which the industry aims to complete raising by as early as later this month, will be used to take over PF construction sites suspended due to the weak real estate market and non-performing loans to restructure and improve them to fund projects with business potential.

The savings bank industry spent all the 33 billion won raised last September on five projects.

“Once the second fund moves to acquire insolvent businesses one by one, other investors are expected to actively buy rather than just wait and see,” said one of the sources. “That will accelerate the overall restructuring.”

Write to Hyun-Woo Kang and Hyeong-Gyo Seo at hkang@hankyung.com
 

Jongwoo Cheon edited this article.