Korean stock market rally draws liquidity from banks into stocks

(Image generated by ChatGPT)

South Korean retail investors are increasingly taking out bank deposits and placing them as funds waiting to enter the stock market, as the Kospi continues to set new all-time highs in the New Year.

According to the Korea Financial Investment Association on Monday, investor deposits excluding on-exchange derivatives margins totaled 87.8 trillion won ($60.7 billion) as of the end of December, up nearly 10 trillion won from 77.9 trillion won about a month earlier.

Investor deposits refer to funds held in brokerage accounts for stock purchases or proceeds from stock sales that have not been withdrawn, and are widely viewed as liquidity that can flow into the stock market at any time.

After reaching a record 88.27 trillion won in early November, investor deposits declined as the market stalled, but have since rebounded to near their peak.

The buildup of standby funds is also reflected in cash management account (CMA) balances at securities firms.

CMA balances surpassed 100 trillion won for the first time in December, reaching 100.3 trillion won as of December 31, up more than 2 trillion won from a month earlier.

Investor deposits and CMA balances suggest that more than 12 trillion won moved into stock market-related assets in December alone.

(Yonhap)

Banks, meanwhile, are experiencing sustained outflows.

According to data from the country’s five major commercial banks, time deposits totaled 939.3 trillion won at the end of last year, down 32.7 trillion won from the previous month. The five lenders are KB Kookmin, Shinhan, Hana, Woori and NH NongHyup.

The decline came despite banks raising deposit rates toward year-end to shore up funding.

The Korea Federation of Banks said the highest one-year time deposit rates at major lenders recently rose to between 2.55 and 3 percent.

Although deposit balances typically fall around year-end due to settlement effects, last year’s drop was steeper than usual.

In December 2024, deposits declined by about 21 trillion won, largely due to corporate fund movements, but last year’s contraction far exceeded that level.

Market participants point to the sharp rise in the Kospi as a major factor pulling liquidity away from banks.

“Concerns are mounting internally as funds continue to move toward capital markets,” said an industry insider.

The government’s push to boost shareholder value under its Kospi 5,000 initiative is also reinforcing the trend.

The Ministry of Economy and Finance is expected to include tax incentives aimed at drawing domestic liquidity into capital markets in its forthcoming 2026 economic growth strategy.

“Bank deposits alone are insufficient to keep pace with rising inflation in a super-aged society,” said Huh Jae-hwan, a researcher at Eugene Investment and Securities Co. “Domestic retail investors’ stock buying is likely to persist as investment in risk assets becomes increasingly unavoidable.”

The launch of integrated management accounts (IMAs) at securities firms is also cited as a contributing factor.

IMAs offer principal protection while targeting annual returns in the 4 percent range, higher than bank deposit rates. Korea Investment and Securities’ IMA No. 1 reached its 1 trillion won subscription limit just four days after its debut.