Savings Banks Report 3.8 Trillion KRW Loss in First Half of the Year... "No Need for Artificial Restructuring Yet"

Savings banks recorded a loss of 3.8 trillion KRW in the first half of the year, mainly due to an increase of nearly 4 trillion KRW in loan loss provisions related to real estate project financing (PF).

Savings banks recorded a loss of 3.8 trillion KRW in the first half of the year, mainly due to an increase of nearly 4 trillion KRW in loan loss provisions related to real estate project financing (PF). Despite the significant drop in profits, the financial authorities have stated that the situation does not warrant artificial restructuring. Instead, they are focusing on promoting voluntary mergers and acquisitions (M&A). This blog post explores the reasons behind the losses and the regulatory responses.

1. Reasons Behind the Losses

In the first half of 2024, savings banks reported a loss of 3.8 trillion KRW, a substantial increase of 2.8 trillion KRW compared to the same period last year. The main reason for this loss is the increase in loan loss provisions by approximately 4 trillion KRW due to improvements in the evaluation criteria for real estate PF projects. As of the end of June, the amount of loans in real estate PF with potential risks was 4.5 trillion KRW, including 1.4 trillion KRW classified as significant and 3.2 trillion KRW as distressed.

2. Financial Condition and Strategic Response

The ratio of PF loans classified as non-performing or at risk surged from 10.9% at the end of last year to 29.7%. The delinquency rate also increased to 8.36%, up from 6.55% at the end of last year. Particularly, the delinquency rate for corporate loans rose from 8.02% to 11.92%.

As a result, the total assets of savings banks decreased from 126.6 trillion KRW at the end of last year to 120.1 trillion KRW. This decline reflects a more conservative operational strategy in response to the deteriorating performance. However, the Financial Supervisory Service (FSS) assessed that the savings banks have sufficient loss absorption capacity, with a BIS capital adequacy ratio of 15.04% and a liquidity ratio of 231.7%, well above the regulatory requirements.

3. Regulatory Response and Future Plans

Park Sang-won, Deputy Governor of the FSS, stated that "all savings banks are compliant with minimum capital ratio regulations, and there is no need for artificial M&A at this point." Instead, the financial authorities are preparing measures to promote voluntary M&A among savings banks. This approach aims to enhance competitiveness through voluntary consolidation.

Additionally, ongoing management evaluations of savings banks will continue. The FSS has been conducting these evaluations since May, and further corrective measures may be taken based on the results. Park indicated that if evaluations meet the FSS's criteria, continuous assessments will be carried out to ensure improvements in management.

4. Performance of Mutual Finance Sector

In the first half of the year, the mutual finance sector (including credit unions, agricultural cooperatives, fisheries cooperatives, and forestry cooperatives) reported a net profit of 1.0639 trillion KRW, a decrease of 954.6 billion KRW from the previous year. The rise in loan loss provisions significantly impacted the reduction in net profit. The delinquency rate also increased to 4.38% from 2.97% at the end of last year, with corporate loan delinquencies rising from 4.31% to 6.46%.

Despite a slight decrease in the net capital ratio to 8.01% from 8.13%, it remains above the minimum regulatory requirement, indicating stability in the sector.

The substantial losses reported by savings banks in the first half of the year are largely attributed to increased loan loss provisions related to real estate PF. However, the financial authorities do not see the need for artificial restructuring at this time. Instead, efforts are focused on encouraging voluntary M&A to strengthen competitiveness. As the situation evolves, the regulatory measures and ongoing management evaluations will play a crucial role in shaping the future of the savings bank sector.