The rise in benchmark interest rates is becoming a new burden for the savings bank sector, which has been accelerating the cleanup of troubled real estate project financing (PF). As interest rates increase, the financial costs for PF projects rise, potentially delaying their normalization. Additionally, the increase in deposit interest rates could further elevate the funding costs for savings banks.
According to the financial sector on July 25, the delinquency rate for real estate PF loans across the entire financial sector was 4.65% at the end of the first quarter, up 0.77 percentage points from the same period last year. While the ratio of real estate PF exposure to equity for savings banks decreased from 150% at the end of 2023 to 56% by the end of March this year, savings banks were the only financial institutions among banks, insurance companies, securities firms, credit finance companies, and mutual finance to exceed 50%.
Although savings banks have been reducing their risk exposure through the sale of non-performing assets and a decrease in new PF transactions, the burden of PF relative to their equity remains high. This is particularly concerning for smaller savings banks with relatively weaker capital, as delays in project resolution or additional losses could have a more significant impact on their soundness and profitability.
The Bank of Korea's increase in the benchmark interest rate could raise financial costs for PF projects, delaying their normalization and sale. As the interest burden on project operators grows, it may become more challenging to resume construction and secure new funding, prolonging the restructuring of these projects. Delays in project resolution could lead savings banks to hold onto related non-performing assets for extended periods, necessitating additional provisions for bad debts. An increase in provisioning burdens could reduce net income and delay improvements in soundness indicators such as delinquency rates and the ratio of non-performing loans.
Moreover, the rising deposit interest rates are compounding the funding cost pressures. According to the Korea Federation of Savings Banks, the average interest rate for one-year time deposits at savings banks was 3.86% as of today, up 0.54 percentage points from 3.32% on June 1. Although the average rate peaked at 3.93% last week before slightly declining, competition for high deposit rates continues. Some savings banks, including CK, HB, Daehan, and Sangsangin, are offering one-year time deposit products with interest rates exceeding 4.5%.
Most of the funding for savings banks comes from deposits, so rising deposit rates quickly translate into increased interest costs. However, due to the burdens of PF restructuring and household credit loan soundness, it is challenging to aggressively increase loan assets, and considering the repayment capacity of vulnerable borrowers, there are limits to significantly raising loan interest rates.
A financial sector official stated, “If financial costs for PF projects increase due to rising interest rates, the normalization and sale of these projects may be delayed longer than expected. In such a situation, if the funding costs and bad debt expenses for savings banks also rise, the recent recovery in performance could weaken again.”
* This article has been translated by AI.
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