The savings bank sector has made the sale of troubled real estate project financing (PF) loans its top priority this year. With demand decreasing due to a downturn in the real estate market, the plan is to begin cleanup of troubled loans through auctions and the establishment of joint funds for the time being. As of the end of last year, among approximately 50 trillion won in corporate loans from savings banks, the scale of loans related to real estate, such as PF and bridge loans, was about 13 trillion won.
According to the Korea Savings Bank Association on the 21st, the delinquency rate for savings banks was 8.52% last year, the highest in nine years. This represents an increase of 1.97 percentage points from the end of the previous year (6.55%). While the delinquency rate for household loans fell by 0.48 percentage points to 4.53% during the same period, the delinquency rate for corporate loans surged by 4.79 percentage points to 8.52%, leading to an overall rise in the delinquency rate. The ratio of non-performing loans, indicating loans overdue by more than three months, rose from 7.75% at the end of 2023 to 10.66% at the end of last year, indicating deterioration in soundness.
The reason for the surge in the corporate loan delinquency rate is due to PF loans. Savings banks increased PF loans from 2018; however, starting with the 2022 'Legoland incident,' the PF market was constricted, and as the real estate market also slowed down, defaults occurred. Savings banks sold off troubled loans through auctions and the establishment of joint funds, and the scale of loans related to real estate decreased nearly by half, from 26 trillion won at the end of 2022 to 13 trillion won at the end of last year.
The savings bank sector plans to focus on the sale of troubled loans this year. Oh Hwa-gyeong, the chairman of the Korea Savings Bank Association, noted, "The first thing the financial authorities want is to accelerate the cleanup of real estate assets, such as PF and bridge loans, to secure market stability, and we agree with this and will actively promote it this year."
The savings bank sector expects that if the cleanup of troubled loans speeds up, the turnaround to profitability will also happen sooner. As concerns over PF defaults grew, savings banks piled up 30% of their real estate-related assets as loan loss reserves, leading to deteriorated profitability. The amount allocated for loan loss reserves by savings banks surged from 1.5 trillion won in 2020 to 3.7 trillion won last year. Last year's net loss for savings banks was approximately 397.4 billion won.
Oh noted, "According to the financial authorities' request to strengthen loan loss reserves, we incurred a deficit close to 400 billion won while piling up more reserves," and added, "The net income for the fourth quarter last year surpassed the breakeven point, so it seems the deficit ended in the first half of last year." However, he assessed, "There won't be any significantly meaningful numbers coming out," and added, "This trend is expected to continue until the end of the year."
The savings bank sector projected that although the delinquency rate has risen, their capital capacity is sufficient, indicating that the worst scenarios similar to the 2011 'savings bank crisis' will not occur. Oh stated, "While it would be risky if the delinquency rate rises amid declining capital safety, currently, even if the delinquency rate increases, there is sufficient buffer to withstand it." Last year, the Korea Savings Bank's Basel III capital adequacy ratio was 15.02%, higher than the legal standard (7-8%), and the liquidity ratio was reported at 181.92%, exceeding the legal standard of 100%.
Previously, financial authorities deemed that restructuring of the savings bank sector was necessary due to a downturn in business conditions and decided to relax the standards for mergers and acquisitions (M&A) for two years. To address troubled PF loans, they planned to create a 1 trillion won '3rd and 4th PF normalization fund' and promote the establishment of specialized non-performing loan (NPL) companies. Financial authorities are set to announce plans to strengthen the regulatory framework for the savings bank sector, termed 'Measures for the Development of Savings Banks,' in the second half of this year.