Top-Rated Savings Banks Cut to One-Tenth... Major Firms Also Drop Out of the '88 Club' [Savings Banks in Crisis] ①

The number of high-quality savings banks shrank to one-tenth in just one year due to the fallout from the real estate project financing (PF) defaults. The so-called ‘88 Club,’ which refers to savings banks with strong financial structures, accounted for only 6% of the total.

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The 88 Club was a system where financial authorities provided incentives to savings banks that met the Bank for International Settlements (BIS) criteria of a capital adequacy ratio of 8% or higher and a non-performing loan ratio of 8% or lower. Although the system has since been abolished, it still serves as a benchmark for identifying high-quality savings banks in the industry.

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On the 9th, Asia Economy conducted a full survey of the third-quarter management disclosures of 79 domestic savings banks and found that only six banks met the 88 Club criteria. Excluding Daewon Savings Bank, which has no loan business performance, only five high-quality savings banks remain. This accounts for just 6.3% of all savings banks.

The number of high-quality savings banks in the 88 Club has been rapidly declining each quarter. In the first quarter of last year, there were 69 banks in the 88 Club, but about 30 dropped out within a year, decreasing to 41 by the end of last year. As of the end of the first quarter this year, the number of high-quality savings banks was 15, halving in just three months, and by the end of the second quarter, it was counted at eight, halving again.

The disappearance of high-quality savings banks is due to their failure to meet the ‘non-performing loan ratio of 8% or lower’ condition. Non-performing loans refer to bad debts that are overdue for more than three months and are judged difficult to recover after lending. As of the end of the third quarter this year, the overall non-performing loan ratio of savings banks was 11.16%, about twice the 6.4% recorded in the same period last year. Considering the total loans of savings banks (97 trillion won), the scale of bad debts amounts to approximately 10.8252 trillion won.

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Due to this deterioration in soundness, even large savings banks failed to remain in the 88 Club. OK Savings Bank (11.17%), Korea Investment Savings Bank (9.25%), and Welcome Savings Bank (13.59%), which are among the ‘Big 5’ by assets, recorded non-performing loan ratios around 10% as of the end of the third quarter this year. The non-performing loan ratio of SangSangIn Savings Bank, ranked in the top 10 in the industry, soared to 22.27%.

During the same period, financial holding company-affiliated savings banks such as Woori Financial Group (11.2%), KB (11.39%), NH (11.34%), Hana (12.14%), and IBK Savings Bank (15.09%) also had non-performing loan ratios exceeding 10%.

This is the result of bad debts snowballing during the period of rising benchmark interest rates. In particular, the aggressive expansion of real estate PF loans during the construction boom was decisive. Lee Hyuk-jun, head of the Financial Evaluation Division at NICE Credit Rating, analyzed, “Due to the global ultra-low interest rates, even unviable projects were recklessly initiated as PF projects during the COVID-19 pandemic. The PF risk is being experienced by the savings bank industry as ‘bubble’ projects are exposed.”

Meanwhile, savings banks have also shrunk in size over the past year. The total assets of 79 domestic savings banks were 138.2 trillion won in the third quarter of last year but decreased to 122 trillion won in the third quarter of this year, a drop of more than 16 trillion won. This is analyzed as a result of conservative loan handling to manage soundness.

The outlook for the soundness of savings banks is not bright going forward. Although the Bank of Korea has eased its tightening stance by cutting the benchmark interest rate twice in the second half of this year, creating strong expectations for economic recovery, difficult business conditions are expected to continue for the time being. This is because management of real estate PF loans has been strengthened, and it will take time for borrowers’ repayment capacity, which worsened due to the economic downturn, to recover.

A savings bank official explained, “The decline in debt repayment ability continues due to the slowdown in the real estate market and economic recovery. In particular, some savings banks are struggling with soundness management due to delays in selling bad debts.”

Accordingly, financial authorities are expected to issue timely corrective measures to some savings banks this month. It has been confirmed that about 10 savings banks received a rating of 4 or lower in asset soundness or capital soundness in the Financial Supervisory Service’s management evaluation from March to September (for two consecutive quarters). The Financial Services Commission is known to be considering the level of sanctions such as recommendations, demands, or orders for one or two savings banks based on the management evaluation results and improvement plans.

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