More face suspension, M&As

The Financial Services Commission has launched a massive restructuring of the secondary banking sector, halting operations of a leading savings bank Friday.

The financial watchdog suspended the main business of Samhwa Savings Bank, headquartered in southern Seoul, for six months until Jul. 13 for its poorly-performed financial statements.

Samhwa saw its debt come to 50.4 billion won ($44.6 million) and capital adequacy ratio stay at minus 1.42 percent while the regulatory requirement is at least 1 percent, according to the FSC.

The distressed savings bank failed to meet requirements for management normalization instructed in the memorandum of understanding with financial regulators several months ago.

In case the savings bank continues to see its financial soundness stand at a weak level until February, the FSC plans to put it up for auction to find a preferred bidder.

It has been reported that Samhwa’s capital adequacy ratio has fallen below zero as it accumulated loan loss provisions totaling about 60 billion won under the watchdog’s low-key audit since last October.

As a following step, the state-run Korea Deposit Insurance Corp. said it would probe Samhwa’s major shareholders and staffers to screen out figures to be held accountable.

The KDIC plans to inquire into whether major shareholders engaged in issuing unauthorized loans or embezzlement, which could later be linked to filing damage claims against rule-violators with the court.

The market is focusing on the coming sanctions against several other troubled savings banks and following M&As while FSC Chairman Kim Seok-dong has recently expressed his willingness to take necessary measures toward them.

It has been speculated that Kim called for major finance holding companies, including Woori Financial Group, to acquire ailing savings banks.

“With their acquisition of savings banks, systems of the financial market will also be stabilized,” he said two weeks ago.

The chief regulator said financial groups also could enjoy diversification of business sectors and savings banks will see their profit-taking structure improve, through mergers between the first and secondary banking industry.

Since the third quarter of last year, the Financial Supervisory Service, an executive arm of the FSC, signed MOUs with distressed savings banks to beef up their financial soundness.

Several savings banks were required in the MOUs to write off soured construction project-related loans -- also known as project financing -- and raise more capital to buffer against possible loan losses.

But most of them failed to see their bad PF loans reduce, which have been blamed as the primary risk factor.

The average default rate on savings banks’ PF loans soared to over 10 percent during the fourth quarter of 2010 as a rising number of unsold homes and falling housing prices have dried up builders’ cash flows, derailing construction firms’ repayment of loans.

(kys@heraldcorp.com)