Yi Whan-woo is a Korea Times journalist primarily covering finance. He writes in-depth articles on macroeconomy and financial markets and previously covered sports, politics, diplomacy and inter-Korean affairs, among others. Feel free to contact him at yistory@koreatimes.co.kr.
KB under probe for possible 5 tril. won loss through ELS sales in Hong Kong
New headquarters of KB Kookmin Bank in Yeouido, Seoul / Courtesy of KB Kookmin Bank
By Yi Whan-woo
KB Kookmin Bank is under probe by the Financial Supervisory Service (FSS) for the possible loss of nearly 5 trillion won ($3.83 billion) that it could potentially inflict on its customers through equity-linequity-linked securities (ELS) sales in Hong Kong, according to industry sources, Friday.
The probe began, Nov. 20, as Hong Kong’s Hang Seng Index (HSI) nearly halved from early 2021 and currently retreated to a range of 6,000 points.
Such a market fall is worrisome for Korean ELS investors in the HSI, as their returns cannot be guaranteed under the mechanism that such a derivative product is designed to raise profits.
The return of ELS is determined by the performance of an underlying equity such as stock indices, a basket of stocks or a mixture of both.
The investors are entitled to receive the promised returns from the issuer if the underlying asset’s price does not fall below a certain level or knock-in level until maturity.
Many of the HSI-linked ELS products were issued in early 2021 with a three-year maturity, meaning their value needs to stay above the knock-in level, which is normally set at 50 percent of the stock market value on the subscription date, to ensure a return in 2024.
“And the fact that the HSI nosedived by almost half from almost three years ago suggests investors will be left with a loss if the market does not recover by the time the products reach maturity,” a source said.
According to the FSS data, outstanding balance of Korea’s ELS sales in Hong Kong amounted to 20.5 trillion won as of June this year.
Of the total outstanding balance, sales of around 16 trillion won were made through major commercial banks in Seoul.
The country’s largest lender, KB Kookmin accounted for 8.19 trillion won of the 16 trillion won, outpacing sales of its competitors by a greater margin.
For instance, the the outstanding sales balance of Shinhan Bank was at 2.37 trillion won, while that of NH NongHyup Bank was at 2.13 trillion and Hana Bank at 2.11 trillion won.
Under the circumstances, an estimated 4.9 trillion won worth of ELS products issued by KB Kookmin Bank hover around the knock-in level. Moreover, 4.64 trillion won worth of the products will reach maturity in the first half of 2024.