Financial groups may avoid taking on bad assets of savings banks


The government-led restructuring of savings banks may end up injecting a sizable amount of taxpayers’ money into troubled secondary financial institutions, industry watchers said.

The Financial Supervisory Commission is in talks with potential investors including Woori Financial Group to arrange a sweeping rescue scheme for distressed savings banks hit by rising bad debts.

As a sweetener, the watchdog is proposing a method called purchase and assumption, under which, unlike in an ordinary merger and acquisition, they acquire only the viable assets, not all of them, on a selective basis.

They are also relatively free of the obligation to retain a large portion of the employees.

“I believe the FSC is suggesting P&A as a compromise to placate the potential investors while pressuring them to take over the savings banks,” a commercial bank official said.

He said acquirers are likely to hand over the remaining insolvent assets to the state-run Korea Asset Management Corp.

A banking research analyst said, “The financial authority will have no choice but to inject public funds to dispose of nonviable loans via KAMCO.”

The FSC has been striving to minimize taxpayer’s burden but it will be an uphill battle due to favorable conditions, analysts said.

Some watchers called on the authority to push for mergers between savings banks and liquidate nonviable savings banks.

Concerns are growing that the acquisitions will undermine the financial groups’ brand image and financial health.

Since the 1997 Asian financial crisis, trillions of won in public funds has been poured into savings banks.

This year alone, the government is allocating about 3.5 trillion won ($3 billion) for purchasing their bad loans.

The accumulated public funds for the savings bank industry are expected to exceed 20 trillion won at the end of 2011.

The combined public funds amounted to 17.28 trillion won as of November 2010. More than 60 percent of that was allocated from taxes.

While their recent bad assets were due mainly to construction-related project financing loans, KAMCO has launched to probe construction companies funded by savings banks.

KAMCO is also seeking to attract investors for construction companies failing to repay their debt.

“The Bank of Korea is set to raise the benchmark interest rate further after lifting it in January,” an analyst said. “The rising rates will be another poison to the sluggish construction sector.”

By Kim Yon-se (kys@heraldcorp.com)