Korea steps up restructuring of savings banks

Financial authorities are quickening their moves to restructure savings banks struggling with growing bad debts to prevent their troubles from destabilizing the broader financial system.

The state-run Korea Asset Management Corp. said on Saturday it will conduct a sweeping investigation into all construction-related project financing schemes involving domestic savings banks.

Sources said the Financial Services Commission will also introduce tougher regulations in July to punish saving bank owners accountable for business failures stemming from risky investments and irregularities.

On Friday, the FSC suspended all banking operations of Samhwa Savings Bank.

“The FSC seeks to reduce uncertainties in the market by promoting pre-emptive and speedy restructuring (of local savings banks),” a FSC official said.

“The KDIC now onwards will prepare to sell Samhwa in case it fails to meet the financial requirement shortly.”

Samhwa accumulated debt totaling 50.4 billion won ($44.6 million) and its capital adequacy ratio stands at minus 1.42 percent, far below the 1 percent regulatory requirement, FSC said.

Samhwa is given a month to meet financial criteria again but watchers are expecting the lender to be put on auction given the short timeframe and the regulators’ stern disciplinary action. The regulator plans to announce a preferred bidder in mid-February.

State-run debt clearer KAMCO said it plans to probe 386 real estate-related project finance operations under the control of local savings banks.

It will decide whether it should buy out the operation losses or keep them under the hands of savings banks to prevent another financial lapse of a Samhwa kind.

KAMCO in 2008 spent 6.1 trillion won to take over loans extended to builders that had already gone bad or were likely to go bad. Among 422 project finance operations, it bought nine with public funds and has 27 to handle at the moment.

The regulators’ decision comes as the nation’s slumping housing market threatens savings banks that lent money to builders in the form of project financing loans. With project financing made during the real estate development boom, lenders took the risk of receiving repayments only upon the projects’ completion.

The delinquency rate on project finance loans ballooned to 24.3 percent as of November last year from 8.7 percent in June, according to the FSC.

“About half of distressed project finance loans should be regarded as written off. More cases like Samhwa could come soon,” Jeong Seong-tae, an economist at the LG Economic Research Institute said.

The market is focusing on the coming sale of Samhwa and other troubled savings banks.

It has been speculated that FSC Chairman Kim Seok-dong has called for major finance holding companies, including Woori Financial Holdings, to acquire ailing savings banks. A KDIC source said it expects Samhwa to be attractive to major financial institutions as the lender is headquartered in Seoul.

“We’re more positive about purchase of some assets at Samhwa than taking over the entire company,” a Woori official said.

Woori Financial Holdings CEO Lee Pal-seong said at the beginning of this month that the group was interested in buying over two or more savings banks.

By Cynthia J. Kim (cynthiak@heraldcorp.com)