H-Index ELS sales spark concerns amid regulatory fallout

As concerns about the potential scale of losses from equity-linked securities (ELS) tied to Hong Kong’s Hang Seng China Enterprises Index (HSCEI) grow, KB Kookmin Bank is a major South Korean bank expecting to see large-scale losses due to its substantial sales volume of ELS products linked to HSCEI.

According to financial industry sources on Tuesday, KB Kookmin Bank accounted for 52.3 percent, or 8.2 trillion won ($6.3 billion), of the total HSCEI-linked ELS balance at all domestic banks, which stood at 15.67 trillion won as of August 2023. KB Kookmin Bank’s ELS sales are more than three times the amount sold by Shinhan Bank, NH Nonghyup Bank, and Hana Bank respectively, whose sales were about 2 trillion won each. KB Kookmin Bank alone has 4.64 trillion won in maturities coming due in the first half of 2024.

Some analysts attribute the exceptionally high sales of the ELS products in question at KB Kookmin Bank to relatively lax regulations by financial authorities.

After the mishandling of derivative-linked funds (DLFs) in 2019, Korean financial authorities introduced regulatory ceilings on the total amount of derivative sales to each bank based on their derivative products balance as of November that year. The sales ceiling for KB Kookmin Bank was set at 13 trillion won, as the bank mostly focused on ELS products and did not handle DLF products at that time, while Hana Bank’s total limit was set at 6 trillion won, and Shinhan Bank’s at 4 trillion won. Woori Bank and NH Nonghyup Bank were limited to 4 trillion won and 3 trillion won respectively.

“Other banks, such as Hana Bank and Woori Bank, reduced their derivative sales in the aftermath of the DLF crisis, leading to relatively lower total ELS sales currently. But KB Kookmin Bank was less affected by this crisis, leading to concerns in relation to the HSCEI-linked derivatives this time,” an industry insider said.

Financial authorities are also looking at the possibility of large-scale losses from the ELS products while reviewing the need to overhaul the existing total sales limit regulations.

Regarding the ongoing concerns about HSCEI-linked ELS products, Financial Services Commission Chairman Kim Joo-hyun told the press that the authority would review the need for regulatory revisions after a meeting with bank chiefs on Monday. “Discussions on the regulatory changes will likely advance once the outlines of losses in the first half of next year are available,” he said.

The nation’s financial watchdog, the Financial Supervisory Service, is also considering a full-scale investigation of the sellers of HSCEI-linked ELS products. Banks have launched their internal task forces to prepare for the possibility that the HSCEI could continue this sluggish trend through the first half of next year.

When questioned by Maeil Business Newspaper about the possibility of losses from the ELS products in question, some banks, including Shinhan Bank, NH Nonghyup Bank, and Hana Bank, confirmed that losses would not be incurred if the HSCEI reaches the 8,000 range by the first half of 2024, based on the products with the highest risks of losses at those banks. In contrast, the index must be above the 8500 range to avoid incurring losses for KB Kookmin Bank, as the bank has sold a relatively large share of knock-in products. In general, knock-in products must recover to the final repayment threshold of 70 percent at maturity to avoid principal loss, while non-knock-in products must hit the 65 percent mark or higher to preserve principal.

Some ELS subscribers are poised to take collective action by forming a group of victims of alleged mis-selling by banks. One HSCEI-linked ELS customer who recently joined the group told Maeil Business Newspaper that the bank staff did not provide sufficient explanation of the risks of the relevant product.