Suspension of banks causes ripple effects

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Suspension of banks causes ripple effects

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The latest shock wave to hit the savings bank sector is expected to cause ripples in the M&A market, among construction firms and nonbank lenders. Some companies will find financing difficult, while others attempt to turn crisis into opportunity.

Though it’s been only two days since Solomon, Korea, Mirae and Hanju savings banks were closed Sunday, speculation has already surfaced of possible buyers for the banks as three out of four were among the top seven in the sector.

Solomon, a Seoul-based savings bank which had been industry’s No. 1 before its closing on Sunday, had assets of 4.98 trillion won ($4.37 billion) in 2011, according to Financial Supervisory Service data. Also based in Seoul, Korea Savings Bank had 2.02 trillion won in assets, while Jeju-based Mirae Savings Bank had 1.76 trillion won. South Chungcheong-based Hanju Savings Bank had assets of just 150.2 billion won.

Some 45 days after closing, the savings banks are slated to be gradually sold to bidders chosen by the Korea Deposit Insurance Corporation (KDIC).

If no fit buyers emerge, the savings banks will pass on ownership to KDIC and will be sold under a purchase-and-assumption agreement, in which the buyer would not acquire debt liabilities but just assets and deposit obligations.

But because three of the four banks suspended Sunday have substantial assets, experts think it would be difficult to find buyers outside Korea’s deep-pocketed financial holding companies.

And because four leading financial companies have all picked up a savings bank after last year’s suspensions, and an additional three suspended savings banks still haven’t found new owners yet, many expected it would be difficult to find buyers.

What was formerly Jeil Savings Bank is now owned by KB Financial Group, while the former Samwha, Tomato and Jeil 2 plus Ace savings banks are now owned by Woori, Shinhan and Hana financial groups, respectively.

Meanwhile, the suspensions are not expected to have a large impact on Korea’s builders as savings banks had already shrunk their construction project financing loans considerably last year.

However, some beleaguered midsized builders could face a liquidity crunch, should suspended savings banks remain closed and fail to roll over loans.

According to the Bank of Korea, savings banks’ project financing (PF) loans peaked at nearly 13 trillion won in September 2010, but fell rapidly during the course of the 2011 savings bank crisis to 6 trillion won at the end of last year.

“Most builders moved their PF loans from savings banks to other financial companies or other sources of liquidity,” said a construction company official. “If due dates are not pushed back on construction project financing loans held by closed savings banks, it’s only natural that midsized builders’ financial conditions will deteriorate,” said Kim Eun-ki, analyst at Hanwha Securities.

On the other hand, nonbank lenders, such as consumer finance companies and private lenders, are expected to benefit from the hit on the savings bank sector.

“We expect both demands for loans and deposits to shift to other sectors, especially because Solomon Savings Bank had rapidly increased its small loans business for low-credit customers,” wrote ETrade Securities analyst Lee Chi-young in a report yesterday. “Consumer finance firms such as Aju Capital, Woori Financial and Lead Corp. are expected to benefit on the loan side, whereas the entire insurance sector is expected to benefit in terms of deposits.”

By Lee Jung-yoon [joyce@joongang.co.kr]

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