Lee Min-hyung joined The Korea Times in 2014 and has worked as a journalist mainly in Korea’s finance, tech and automotive industry. He specializes in content creation, breaking news and in-depth analysis currently on transportation and mobility. You can reach him via mhlee@koreatimes.co.kr.
Banks face rising CDS premium
Loan products are advertised in front of a sales office of a commercial bank in Seoul, Nov. 6. Yonhap
By Lee Min-hyung
By Lee Min-hyung
The credit default swap (CDS) premiums of commercial banks have soared over the past year due to their weakening credibility in the wake of recent financial scandals sparked by a debt default related to the Legoland Korea Resort in Gangwon Province. The CDS premium is used to measure credit risk. When the figure rises, it indicates a firm's increasing risk of bankruptcy.
According to data from the Korea Center for International Finance, the average CDS premium of Korea's four major banking groups ― KB, Shinhan, Hana and Woori ― reached 75 basis points on Nov. 4. This more than tripled as of the end of 2022 when the figure came in at 22 basis points.
The CDS premiums of Hana Financial Group and Woori Financial Group rose more sharply than others during the same period. Their CDS premiums came in at 22 basis points by the end of last year, but soared to 77 basis points, respectively, by Nov. 4. That of Shinhan jumped with a similar margin from 24 to 73 basis points during the same period. KB's CDS premium also increased to 75 from 22.
The status quo is at the highest level in about five years since the end of 2017.
Even if the banking groups are widely forecast to report a new earnings record again this year, the rapid pace of rate hikes has increased the risk of their possible default and this was reflected in their CDS premiums. The Bank of Korea raised the key rate up to 3 percent in several large jumps over the last year, in line with the U.S. Federal Reserve's aggressive rate hikes.
“Another scandal surrounding Heungkuk Life Insurance's earlier decision to delay exercising a call option for hybrid bonds worth $500 million also aggravated investor sentiment on the local financial market,” an industry analyst said.