Korean banks upping corporate loans including KEPCO to help liquidity woes

KEPCO [Photo by Lee Chung-woo]

South Korea’s top commercial lenders are mulling to arrange a special loan to deficit-ridden state power monopoly Korea Electric Power Corp. (KEPCO) amid a spike in corporate loans to near $7 billion in October amid debt market crunch.

Banks in an emergency task-force meeting with Financial Services Commission Chairman Kim Joo-hyun reported they have extended 8.9 trillion won ($6.5 billion) corporate loans in October. The funding went mostly to liquidity-short second-tier financial companies like brokerages and public institutions so that their short-dated bonds due to aggravate the strains in the local debt market.

Top banks Shinhan, Woori, Hana, KB Kookmin, and NH Nonghyup and regional majors Busan, and Jeonbuk Bank have been involved in the government-led task force aimed to contain the widening liquidity woes.

The lenders have been fueling liquidity through repurchase agreements (RP) and short-time money market funds.

Hana Bank and Woori Bank offered to up year-end RP ceiling or purchase two-to three-month dated issues by brokerages.

The lenders have purchased 6.1 trillion won in money market funds in October. Shinhan Bank and KB Kookmin Bank plan to buy more before the year end.

The bank rescue comes amid broad corporate bond market crunch, following declares of missing payments on Legoland Korea project financing and early redemption in long-dated hybrid bonds on top of oversupply by top-rated issuers.

The lenders also are expected to comply with the government plea to offer loan to KEPCO which has been swamping the debt market with issues due to widening losses from spike in fuel cost.

KB Kookmin, Shinhan, Hana, and Woori banks [Provided by Maekyung Media Group]

KB Kookmin, Shinhan, Hana, and Woori banks are discussing loan terms upon request from KEPCO.

They could dole out minimum 2 trillion won in one-year maturity loans to KEPCO. The loans will help KEPCO earn the time to secure funds until debt market stabilizes.

“All of the four lenders are positively reviewing KEPCO’s loan request as they all have balance for the power monopoly with loan guarantee from the government,” said an unnamed official from one of the banks.

Commercial lenders however would demand rationalization in power rates to address the colossal deficit KEPCO has been incurring due to overshoot in fuel costs.

“Since the tightening cycle will go on for some time, businesses would have to rely on banks to sustain operation,” said Jung Hwa-young, a researcher at Korea Capital Market Institute.

A Bank of Korea report on Wednesday also showed that corporate loans added 13.7 trillion won in October from the previous month. Loans to large companies surged 9.3 trillion won, nearly doubled from 4.7 trillion won in the previous month in the largest monthly gain since 11.2 trillion won in April 2020 at the onset of pandemic outbreak.

Corporate loans have been on a rise for a 10th straight month since January in line with the spike in market yields.

The yield on three-year corporate note jumped from the end of September. BOK data showed that the yield on a three-year BBB+ corporate bond surged to 9.11 percent as of Tuesday. The yield on short-dated commercial papers has also surged 1.74 percentage points to over 5 percent during the same period.

Households have been on deleveraging, reducing loans and making more deposits.

Deposit balance at commercial banks reached 2,252.1 trillion won as of end of October, up 6.8 trillion won from the end of September. Fixed deposits gained 56.2 trillion won in one month, the largest monthly gain since BOK began compiling related data in 2002.

Funds flowed into fixed deposits amid higher interest rates. Transferrable deposits, which includes demand deposits, fell 44.2 trillion won in October. Household loan balance was also down 600 billion won to 1,058.8 trillion won as of end of October, BOK data showed.

By Han Woo-ram, Chae Jong-won, Ryu Young-wook, and Lee Eun-joo