Another savings bank crisis feared

Two savings banks were ordered to suspend operations on Friday, with their new major shareholder Korea Deposit Insurance Corp. to sell them considering market conditions.

The Financial Services Commission in a meeting decided to suspend Woongjin Seoul Savings Bank and Youngnam Savings Bank. The savings bank industry is anxious to see if more banks will be shut down in the second half of this year.

○ Losses inevitable for subordinate bond investors

Financial authorities issued a management improvement order to both banks in an early warning that the banks will be forced to close if they fail to keep their BIS capital adequacy ratio above 1 percent and avoid negative net assets.

Woongjin was forced to suspend operations as its parent company Woongjin Holdings was put under corporate rehabilitation proceedings and failed to secure equity capital. Youngnam, an affiliate of the now-defunct Korea Savings Bank, was under management of the deposit insurance company after the liquidation of its parent company. Youngnam`s net asset amount was minus 11 billion won (10.2 million U.S. dollars) and its BSI capital adequacy ratio was minus 1.7 percent in November last year.

Both banks will be absorbed by a bridging savings bank set by the deposit corporation. Most of the Woongjin bank`s debts and assets will be transferred to Yeju Savings Bank and that of Youngnam will go to Yesol Savings Bank. To minimize depositor confusion, both the Woongjin and Youngnam banks will move their assets and debts to their bridging savings banks over the weekend to resume operations Monday.

Customers who deposited less than 50 million won (46,339 dollars), the government protection ceiling, will see no losses but those with more than that amount in either bank as well as subordinate bond investors will inevitably suffer damage. Seventy-four depositors have more than 50 million won in either bank, with their average deposit of 72.7 million won (67,377 dollars). The amount of subordinate bond investments is 8.7 billion won (8.1 million dollars) for 236 people in Woongjin and 13.7 billion won (13 million dollars) for 388 people in Youngnam.

○ Earnings conditions worsen

Korea first suspended a mutual savings bank in 2011, with Samhwa Savings Bank forced to shut down in January that year followed by 16 others. Last year, Solomon Savings Bank, which was the country`s top savings bank, and seven others were closed, bringing the tally to 26 suspended savings banks.

Conditions have worsened after the series of shutdowns. According to financial authorities, 11 of 16 savings banks that announced earnings in last year`s second half were in deficit. Among them, Shinmin Savings Bank saw its equity capital more than halved, with the Korea Exchange suspending its share certificate trading and delisting it Feb. 27.

Financial authorities say there will be no further shutdowns, but rumors are spreading in the sector on which banks will likely face suspension, raising fears of more closures in the second half of this year. Though a few might stay alive this time, they will likely get closed eventually due to worsening profitability.

A source in the savings bank industry said, "It`s difficult for savings banks to raise their competitiveness due to the narrowing deposit rate gap with commercial banks," adding, "Many savings banks will inevitably be forced to shut down without external support."

crystal@donga.com