Savings banks see delinquency rates drop after 10 quarters

[Photo by Yonhap]

The delinquency rates for Korean savings banks decreased for the first time in two and a half years, following active efforts to clear bad debts under pressure from financial authorities.

According to financial industry and regulatory sources on Sunday, the delinquency rate for savings banks was 8.3 percent at the end of June 2024, down 0.5 percentage points from 8.8 percent at the end of March. The rate surged from 3.41 percent at the end of 2022 to 6.55 percent by the end of 2023 and exceeded 8 percent in the first quarter of 2024 due to economic slowdown, high interest rates, and real estate project financing (PF) issues.

Financial authorities attribute the recent decline to savings banks actively disposing of delinquent loans during the second quarter of 2024, with savings banks selling 136 billion won ($98.8 million) worth of delinquent loans from individuals and sole proprietors to non-performing loan buyers in June. The Korea Asset Management Corp. also acquired 150 billion won worth of delinquent loans from savings banks during the same month and the savings bank sector established a fund of about 540 billion won aimed at “normalizing” real estate PF in two phases.

The Financial Supervisory Service (FSS) conducted management evaluations on three insolvent savings banks at the end of June 2024. These on-site inspections can lead to forced management improvement measures if results fall below certain standards, with the watchdog undertaking management evaluations of savings banks for the first time in about ten years. The FSS also announced plans to assess savings banks‘ insolvency and conduct management evaluations quarterly.

With the halt in the rising delinquency rate, the number of savings banks subject to future management evaluations is likely to be lower than initially expected. The FSS considers savings banks with a delinquency rate and non-performing loan ratio (NPL) exceeding 20 percent for two consecutive quarters as candidates for evaluation, with around ten savings banks meeting this criterion as of the end of March 2024. The financial industry expects a mere two or three additional savings banks to be subject to evaluation due to the decline in delinquency rates.

“Savings banks have become more active in disposing bad debts following the financial authorities’ actions, which seems to have had some effect on strengthening soundness management,” an industry insider said.

But concerns about the insolvency of savings banks could still grow. Savings banks completed evaluations of real estate PF projects earlier in July 2024, which could significantly increase bad debts. The FSS will inspect the adequacy of these project evaluations through on-site investigations and finalize the results and provisions by the end of the month. These outcomes will be reflected in the second-quarter performance of savings banks that will be announced in August.

”Although the delinquency rate has slightly declined, there is still a possibility of an increase in the non-performing loan ratio, so we will closely monitor the situation,” an FSS official said.

According to Bank of Korea data obtained by Democratic Party Representative Yang Bu-nam, the delinquency rates for the construction and real estate sectors in the secondary financial sector, including savings banks, were 7.42 percent and 5.86 percent respectively in the first quarter of 2024, the highest since related statistics began being compiled in 201, with the non-performing loan ratios for these sectors at record highs of 19.75 percent and 14.26 percent respectively.

Financial authorities are also investigating the genuine sale status of the real estate PF normalization fund created by savings banks. They suspect that savings banks may have temporarily improved their soundness by moving their bad debts to funds they contributed their own capital to, as over 80 percent of the bonds in the second fund of 510 billion won reportedly came from the contributing savings banks. The savings bank sector has also faced a halt in the creation of a third fund.