[Real Estate PF Crisis] Last Year, Savings Banks Recorded a Loss of 555.9 Billion KRW... First Deficit in 9 Years

Increase in Interest Expenses and Allowance for Bad Debts Causes Deficit
Deterioration of Asset Quality Due to Rising Delinquency and Non-Performing Loan Ratios
Korea Federation of Savings Banks "Sufficient Loss Absorption Capacity"

Last year, savings banks recorded a net loss of 550 billion won. This is the first deficit in nine years since 2014, following the aftermath of the 'Savings Bank Crisis' that occurred in 2011.

[Source: Financial Supervisory Service]

According to the Financial Supervisory Service on the 22nd, 79 domestic savings banks posted a net loss of 555.9 billion won last year. This marks a turnaround from a profit of 1.5622 trillion won in 2022. The trend of consecutive profits for eight years since 2015, after recording losses from 2011 to 2014, has now come to a halt.

The savings bank industry cited increased interest expenses and proactive provisioning for loan losses as the main reasons for the deficit. Last year, interest expenses surged by 83.3% (2.4331 trillion won) to 5.3508 trillion won compared to the previous year (2.9177 trillion won). This increase is explained by the higher interest rates in 2022, which attracted many deposits, thereby increasing interest burdens last year. Oh Hwa-kyung, chairman of the Korea Federation of Savings Banks, explained, "Unlike banks with many variable-rate products, savings banks mostly offer one-year fixed-rate loans for corporate lending. Even if interest expenses rise, it is difficult to immediately reflect this in loan interest rates to offset losses."

Loan loss provisions amounted to 3.9 trillion won last year, an increase of 1.3 trillion won compared to 2.6 trillion won in 2022. This was influenced by financial authorities pressuring banks in the fourth quarter to increase provisions in preparation for risks related to real estate project financing (PF). Savings banks set aside an additional 400 billion won in provisions in the fourth quarter alone, which decisively impacted the expansion of the deficit. Looking at the quarterly performance of savings banks last year, the net loss in the fourth quarter was 415.4 billion won, significantly higher than the first quarter (-52.7 billion won), second quarter (-43.2 billion won), and third quarter (-44.6 billion won).

Last year, the total assets of savings banks stood at 126.6 trillion won, down 8.7% (12 trillion won) from 138.6 trillion won the previous year. This decline was due to a sharp decrease in corporate loan assets amid prolonged high interest rates and delayed economic recovery. Household loans last year were 38.9 trillion won, down 3.1% (1.3 trillion won) from 42 trillion won the previous year. Corporate loans shrank by 14.3% (9.8 trillion won) to 58.9 trillion won from 68.7 trillion won.

Savings bank deposits totaled 107.1 trillion won, a 10.9% (13.1 trillion won) decrease from 120.2 trillion won the previous year. In 2022, deposits increased as funds were actively raised to secure liquidity in response to the Legoland crisis. Last year, deposits returned to normal levels due to market stabilization and a decrease in loans. Capital stood at 14.8 trillion won, up 2% (300 billion won) from 14.5 trillion won the previous year, due to capital increases and other measures.

Asset quality indicators such as delinquency rates and non-performing loan ratios also rose. The delinquency rate for savings banks was 6.55% last year, up 3.14 percentage points from 3.41% the previous year. The delinquency rate for household loans increased by 0.27 percentage points to 5.01%, while corporate loans rose by 5.12 percentage points to 8.02%. The non-performing loan ratio increased by 3.64 percentage points to 7.72% from 4.08% the previous year.

The Basel Committee on Banking Supervision (BIS) capital adequacy ratio, a measure of capital soundness, rose by 1.2 percentage points to 14.35% from 13.15% the previous year. This is well above the regulatory requirement of 7-8%. Although loans decreased, reducing risk-weighted assets, capital increased due to capital expansion efforts, resulting in a higher BIS ratio.

Oh Hwa-kyung, Chairman of the Korea Federation of Savings Banks, held a press conference on the 21st in Yeouido, Seoul, explaining the "2023 Savings Banks Management Performance."
[Photo by Korea Federation of Savings Banks]

The Korea Federation of Savings Banks explained that although performance turned to a deficit and delinquency and non-performing loan ratios increased, the loss absorption capacity is sufficient considering capital and the scale of loan loss provisions. Chairman Oh said, "Even if a bank run (massive deposit withdrawal) occurs, savings banks can adequately respond through their own liquidity, liquidity supply from the federation, external credit lines, and liquidity support from the Bank of Korea," adding, "Deposit trends and interest rate fluctuations are also being stably maintained and managed."

It is expected to take some time for savings banks to improve profitability. Negative conditions such as increased risks related to the real estate market downturn and rising delinquency rates due to slowed economic recovery are expected to persist for the time being. Chairman Oh said, "I think the industry will pass its bottom this year," and added, "If market interest rates stabilize downward, interest expenses, which are a major factor in loss expansion, will decrease, leading to some improvement in related profits and losses."

Regarding real estate PF loans, a soft landing is planned. They intend to establish a fund to manage their own PF non-performing loans, pursue diversified sales through Korea Asset Management Corporation (KAMCO) and auctions, and promote debt restructuring and normalization through agreements with major creditors. Chairman Oh stated, "We will continue to strengthen soundness management through policy and supervisory authority support," and added, "We will also continue efforts to improve business performance through cost reduction and new business activities that align with market changes."

This content was produced with the assistance of AI translation services.