Korea’s savings banks likely to post first loss in 9 years on high cost

A savings bank in Seoul [Photo by Han Joo-hyung]

South Korean savings banks are projected to post their first combined net loss in nine years due to a rise in financing cost on higher interest rates and additional reserves for bad debt.

According to multiple sources from the savings banks industry on Wednesday, the combined net loss of 79 savings banks in Korea is estimated at 80 billion won ($59.8 million) for the January-March period. During the same period a year ago, they posted a combined net profit of 456.1 billion won.

The net loss is largely attributed to the sharp rise in fund-raising expenses after the market interest rates surged due to the Legoland Korea credit crisis last year. The financial sector was actively engaged in introducing high interest rate products to consumers as part of efforts to raise funds in the fourth quarter.

Savings banks also joined and sold deposits that offer high annual interest rates of over 6 percent. The average interest rate of a one-year deposit was below 3 percent until the first half of last year but rose sharply to 5.53 percent in November.

“Financing costs doubled, affecting the earnings from the end of last year,” said an unnamed official from a savings bank. “Earnings also fell as banks were required to beef up reserves for bad debt last year.”

Concerns rise as small-size savings banks are more vulnerable to the unfavorable business environment. Large players are offering loans based on their relatively strong liquidity capacity but smaller lenders are cutting back on their loan service.

According to the Korea Federation of Savings Banks, savings banks’ mid-range interest rate loan supply increased in the first quarter but the number of lenders fell.

A total of 30 savings banks offered mid-range interest rate loans worth 1.6 trillion won in the January-March period whereas in the fourth quarter 33 lenders offered 1.5 trillion won.

Asset polarization is also seen among the savings banks.

Data from the Financial Supervisory Service showed that the combined assets of the country’s top 10 savings banks stood at 73.6 trillion won in December last year, which is 8 trillion won more than the entire assets of the remaining 69 savings banks at 65.02 trillion won.