CDS premium on Korea’s financial majors soars on debt woes

[Provided by Maekyung Media Group]

Although the fast rises in the key rate brought about record earnings for mainstay banks, credibility in South Korea’s top financial groups has been waning on concerns about liquidity squeeze in the corporate sector due to debt market woes.

According to Korea Center for International Finance on Tuesday, the average credit default swap (CDS) premium for Korea’s four major financial groups - KB Kookmin, Shinhan, Hana, and Woori - stood at 75 basis points as of Nov. 4, more than tripling from 22 basis points at the end of December.

The CDS premium for Hana Financial Group rose to 77 basis points from 22 basis points during the cited period, KB Financial Group 75 basis points from 22 basis points, Woori Financial 77 basis points from 22 basis points, and Shinhan Financial 73 basis points from 24 basis points.

The average CDS premium for the financial groups is the highest since 2017.

CDS is a kind of insurance-type financial derivative product that covers losses when a country or company that issued debt goes bankrupt. A high CDS premium means higher risk of insolvency.

The CDS premium of Korea’s financial groups rose to 50 basis points in the first half of this year and fell to 30 basis point range in August before rising to above 40 basis points in September.

Korea’s four major financial groups - KB, Shinhan, Hana, and Woori - raised a record combined cumulative net income of 13.85 trillion won ($10 billion) as of September this year amid jump in the base rate.

The key rate that has zoomed from 1.0 percent in December to 3.0 percent by October fueled the bottom line for banks as their lending rates rose faster than deposit rates due to higher demand for loans. Yet the rate increases have also increased the default risk of the private-sector debt at record-high levels and twice bigger than the gross domestic product.

The decisions by Legoland amusement park developer in September and Heungkuk Life Insurance to miss debt repayment have also undermined the credibility in Korean debt. Authorities have since persuaded the issuers to uphold their obligation and injected funds into debt and secondary financial sector to ease liquidity woes and restore confidence.

By Pulse