Lee Yeon-woo is a financial journalist at The Korea Times. Her wide range of reporting includes policies, macroeconomics, stock market, companies and even crypto. She is passionate about connecting the dots in Korean finance and making it easier for foreign nationals to understand. Based on her previous experience as a national reporter, she also has a keen interest in social issues within the sector, including gender equality and ESG. Your tips and insights are always appreciated. You can send them to yanu@koreatimes.co.kr.
Major banks to determine HK-tied ELS compensation plans this week
A group of investors who suffered losses from equity-linked securities tied to the performance of the Hang Seng China Enterprises Index stage a protest at Korea Federation of Banks headquarters in Seoul, Monday. Yonhap
By Lee Yeon-woo
Compensation unlikely to affect banking shares
Major commercial banks in Korea have announced plans to hold board meetings this week to finalize their compensation plans for investors who incurred financial losses caused by equity-linked securities (ELS) that are tied to the performance of the Hang Seng China Enterprises Index.
According to industry sources, Hana Bank is set to kick off discussions on compensation plans this Wednesday. NH NongHyup Bank and SC Bank Korea are scheduled to hold their deliberations on Thursday. Toward the end of the week, KB Kookmin and Shinhan Bank will also hold their board meetings to address the matter.
Once the board approvals are completed, each bank is expected to begin negotiations with individual investors on the actual compensation ratios starting from the following month. They were followed by Woori's proactive move on Friday, when it decided on voluntary compensation.
The total losses for these banks, including KB Kookmin, Shinhan, Woori, Hana, NH Nonghyup Bank and Standard Chartered (SC) Bank Korea is anticipated to reach 2 trillion won ($1.4 billion), with KB Kookmin Bank alone accounting for 1 trillion won.
However, brokerage industry forecasts suggest such compensation plans are unlikely to significantly impact banking shareholders' returns and their share prices.
"While the compensation scale for investors' ELS losses is significant, it is unlikely to affect banks' shareholder return policies substantially," Kim Eun-gap, a researcher at Kiwoom Securities, said.
Kim estimated the compensation amounts to be approximately 1.07 trillion won for KB Financial Group, 350 billion won for Shinhan Financial Group, and 200 billion won for Hana Financial Group.
Given the considerably lower sales volume of the problematic ELS compared to other financial groups, Woori Financial Group's compensation amount is anticipated to be the smallest. Although Kim did not offer a specific estimate for Woori, market expectations hover at around 10 billion won.
Kim said, except for KB, the other banks could offset their losses by either lowering their provisions or boosting their non-interest income. While he noted concerns over a potential decrease in operating income for KB, he said such a reduction is not expected to markedly affect its policies on shareholder returns.
"Even after reflecting compensations, with their expected return on equity of 8.6 percent, the banking sector's price-to-book ratio still remains low, suggesting that an increase in valuation is still anticipated," Kim said.
Financial holding groups have seen their stock prices climb since the introduction of the Corporate Value-up Program in January, attributed to their relatively low valuation.
Following the finance minister's announcement of tax incentives for companies increasing their shareholder returns, these stocks have experienced a further surge. This is particularly due to their pre-announced plans to retire treasury stocks.
Since the government announced the program on Jan. 17, stock prices of KB have increased by 44.1 percent, Shinhan 38.4 percent, Hana 52.7 percent and Woori 21 percent, as of Monday, 11 a.m.
Meanwhile, the proportion of foreign investors in the benchmark KOSPI's market capitalization has reached its highest point in over two years, marking a significant increase attributed to the Corporate Value-up Program. As of Thursday, their holdings constituted 34.07 percent of the KOSPI's total market cap.