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(News Focus) Savings banks' overhaul won't hurt big financial firms: analysts

All Headlines 17:50 January 11, 2011

SEOUL, Jan. 11 (Yonhap) -- South Korea's major financial groups will sustain little damage from acquisitions of embattled savings banks thanks to low takeover costs and their strong asset base, analysts said Tuesday.

The government is rushing to clean up the nation's savings bank industry that is troubled by snowballing defaults on loans extended to finance construction projects, which policymakers fear could destabilize the whole financial sector.

The worsening of such project financing (PF) loans has dogged savings banks since last year, when the country's real estate market, which has remained mired in a 2008 global crisis-triggered slump, began to erode builders' ability to pay back their debts.

According to the Financial Supervisory Service, the financial regulator, 91 savings banks held a combined 11.9 trillion won (US$10.6 billion) in PF loans as of the end of June, about one-third of which could turn sour.

In a desperate bid to head off a pileup of distressed PF loans and a potential time bomb, the government spent 2.8 trillion won of taxpayers' money to clear some of savings banks' soured loans in June last year.

On top of the bailout, the local financial authorities have urged the nation's top four banking groups to buy at least one beleaguered savings bank each to help normalize the savings bank sector.

Responding to the government's call, the financial groups -- Woori Finance Holdings Co., KB Financial Group Inc., Shinhan Financial Group Co. and Hana Financial Group Inc. -- expressed their intentions last week to take over troubled savings banks.

Lee Pal-seung, chairman of biggest financial group, Woori Finance, noted last week that the group is planning to take over one or two troubled savings banks, reportedly by the first half of 2011, saying, "If the savings banks issue is not solved, it could deal a blow to the banking sector as a whole."

Analysts predict about six to seven savings banks, whose assets reach around 1 trillion won and capital adequacy ratios are below 5 percent, may be put up for sale.

Experts said the banking groups' acquisitions of troubled savings banks are not likely to damage their capital strength or profitability, given the minimal costs needed.

"The purchase of savings banks with 1 trillion won asset sizes by bank units controlling more than 200 trillion won in assets is not deemed immoderate," said Lee Soo-jeong, an analyst at SK Securities.

Such takeover deals are unlikely to make the savings banks' bad debts issues spill over into the commercial banking sector, given the government's support measures for the transactions, the analyst said.

Bank earnings are also unlikely to be affected by absorbing savings banks, analysts noted, predicting potential loan losses of purchased banks to be small.

"The actual impact on profits will be limited regarding that potential losses from savings bank purchases will be well covered by buyers' one-off profits," Samsung Securities analyst Kim Jae-woo said, referring to banks' earnings expected to come from sales of their stake holdings in Samsung Life Insurance Co., which went public last year.

Risks and profitability aside, other experts pointed out that there will be little synergy from the consolidation between stability-seeking commercial banks and savings banks accustomed to risky activities of profit chasing.

"Commercial banks with little experience in high-risk, high-return business models are feared to face rising bad debts if they buy savings banks," said Seo Young-soo, an analyst at Kiwoom Securities.

The overhaul of the local savings bank industry, meanwhile, has raised the specter of the government's attempt to control the financial sector.

In a report released on Monday, global credit appraiser Moody's Investors Service said the groups' purchase plan comes not from necessity, given negligible risks the savings bank issue poses, but from the result of the government's arm-twisting.

"The acquisitions may raise questions about the ability of the major banking groups to act independently of regulatory pressure," said Choi Young-il, an analyst at Moody's.

"The government's main concern appears to be an increase in the credit squeeze on obligors' borrowing from mutual savings banks," he said.


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