A man walks by a savings bank in Seoul in this undated file photo. Yonhap

All of Korea's 79 savings banks registered a combined deficit of 555.9 billion won ($415 million) last year, crippled by a surge in interest rates and the consequent unexpected growth in loss reserves, market watchers said Friday. The combined net losses snapped their eight consecutive years of robust profits.

Further amplifying their financial deterioration are the soaring delinquency rates of over 6 percent, mostly of low-credit, low-income borrowers vulnerable to sustained economic stagnation, defined by a spike in the number of defaults on high-interest loans.

The banks maintain that the rates are not nearly as concerning as the previous highs of 25 percent in 2011 amid a series of defaults and suspension of operations.

However, the business conditions for banks with lower profiles will be exacerbated, unless the economy finds a breakthrough for a rebound in the near term.

According to Korea Federation of Savings Banks data, the over 555 billion won net loss is a significant dent, logged only a year after it posted 1.6 trillion won in profit in 2022. Their combined annual profit from 2018 to 2021 ranged from 1.1 trillion won and 2 trillion won.

The banks' interest paid on borrowings jumped to 5.35 trillion won last year, up from 2.9 trillion in 2022. This is far faster than the 1.92 trillion increase in their interest income in the same period.

The savings banks pushed ahead with large borrowing drives to meet the surging demands of cash-strapped market players during the 2022 liquidity crisis, sparked by the default of the amusement park Legoland. However, the acute crisis largely dissipated shortly after, aided by rapid stabilization of financial market conditions.

Their loss reserves total was raised to 3.9 trillion won last year, tripling from 1.3 trillion won the previous year.

The delinquency rate increased rapidly to 6.55 percent as of last year, up 3.14 percentage points from a year earlier.

Their customer base at the lower end of the income spectrum is far more prone to financial distress in an economic downturn, they added.

Also at play are high borrowing costs weighing heavily on real estate market participants including building developers and leveraged property owners at large.

"Over half of their corporate clients have taken out a loan against their real estate, an asset class tied closely to property market sentiment," said Lee Bo-mi, a research fellow at the Korea Institute of Finance.

The stagnated property market is likely to continue due to rising raw material prices, compounded further by high interest rates, she said.

"Corporate borrowers with little capital may not turn a profit in time to meet debt obligations, a major financial profile deterioration concern for not only the savings banks but also other lenders at large."