The year of the dragon opened with a brief rally on Hong Kong's stock market, which then slumped back into its familiar malaise. Korean investors, with substantial stakes in structured products pegged to the Hang Seng China Enterprises Index (HSCEI), are watching nervously.
The figures reveal the extent of their concern. Over W19.3 trillion ($11.7 billion) of equity-linked securities (ELS) linked to the HSCEI – which tracks the largest Chinese corporates listed in Hong Kong – have been issued in Korea. Domestic banks have sold 82% of them.
The bulk of them are maturing this year and the current loss rate hovers at around 50%: as of January 26, four banks – Kookmin, Shinhan, Hana and NongHyup – had confirmed investor losses totalling W312.1 billion, out of the W588.8 billion-worth of products they sold.
Heakyu Chang, senior director of financial institutions at Fitch Ratings Korea, says that while losses would not directly affect the credit ratings of Korean banks, some may face hefty compensation demands, denting their profitability.
He forecasts tighter regulatory oversight on product sales, which could reduce banks’ commission and fee income.
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