Pepper Savings Bank headquarters in Seongnam, Gyeonggi Province / Courtesy of Pepper Savings Bank

The savings banking sector is facing deteriorating profitability and capital soundness amid deepening woes over real estate project financing loans in the country. The sense of crisis has heightened as some savings banks' credit ratings were downgraded to the brink of sub-investment grades, otherwise known as junk bonds or high-yield bonds.

According to credit ratings agencies, NICE Investors Service cut Pepper Savings Bank's credit rating from "BBB (negative)" to "BBB- (negative)" earlier this week.

Given that credit rating agencies typically evaluate the outlook of a downgraded company as "stable" when slashing down its rating by one notch, Pepper Savings Bank is seen to have a possibility of a further downgrade due to the unusual "negative" outlook, in addition to the latest rating cut.

Pepper is not the only one experiencing a credit rating cut.

Korea Ratings, another credit ratings agency in the country, downgraded Baro Savings Bank's credit rating from "BBB+ (negative)" to "BBB (stable)" early last month. Last year, the outlooks of eight savings banks, including OK Savings Bank (BBB+), Welcome Savings Bank (BBB+) and OSB Savings Bank (BBB), were downgraded to "negative."

The savings bank industry is trying to calm the market anxiety, explaining that the possibility of a liquidity crisis due to such credit ratings cuts would be limited, as savings banks do not raise funds through bond issuance, unlike most other financial companies.

However, market watchers point out that such downgraded ratings can spur other issues, if the ratings fall further below the investment grade level — meaning BB or below. In such case, savings banks are no longer qualified to manage retirement pensions, which have been rising in prominence in the savings banking business over the past few years.

Last year, retirement pensions accounted for 27.7 trillion won ($19.9 billion), representing about 25.9 percent of the savings banks' total deposits. This proportion stood at 20.4 percent in 2021 and 25.3 percent in 2022.

Currently, JT Savings Bank and Smart Savings Bank are at "BBB- (stable)," just one notch above the sub-investment bond grades.

Regarding such concerns, financial authorities said they are closely monitoring the situation, adding that even if savings banks' credit ratings fall below the BB grade, it won't be an immediate threat, because only new deposits of retirement pension funds will be limited, leaving most other funds intact at the savings banks.

Financial Supervisory Service headquarters in Seoul / Newsis

Meanwhile, financial authorities have demanded improvements to management at about 10 savings banks that suffered major losses in the first quarter of this year, urging them to submit emergency capital enhancement plans and soundness management plans by the end of this month.

This move is seen as the authorities' preemptive measure to prevent a crisis in the savings banking sector, amid looming concerns over the real estate project financing situation in the country.

Last year, 41 out of 79 domestic savings banks posted annual losses amounting to 555.9 billion won in total. It was the first time since 2014 that the savings banking sector logged an annual deficit, due mainly to increased provisions for losses over real estate project financing loans. This year's earnings are expected to be worsened from last year, with over half of the local savings banks forecast to post annual losses.