South Korean banks are seeing a resurgence in deposit-backed loans as tighter borrowing conditions and a buoyant stock market encourage investors to leverage their savings for short-term funding. Outstanding balances for these loans across the country’s five largest banks – KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup – reached 6.34 trillion won ($4.37 billion) as of , data shows. This represents an increase of 70.8 billion won ($48.7 million) since the end of last year and a more substantial rise of 508.3 billion won ($350 million) compared to .
Deposit-backed loans allow customers to borrow against their deposits or savings accounts, typically up to 95% or 100% of the balance. Interest rates are generally set at the underlying deposit rate plus approximately one percentage point. The recent uptick in demand comes as South Korea’s stock market has experienced a significant rally this month, coinciding with a period of constrained lending standards under broader household loan caps.
Bankers indicate that these loans are becoming an attractive option for consumers facing difficulties in securing traditional mortgages or other forms of credit. New deposit-backed loans are currently excluded from debt service ratio (DSR) calculations under stricter regulations implemented last year, making them less restrictive than many other household loans. This regulatory change has likely contributed to the increased appeal.
The current trend marks a reversal from the beginning of , when balances sharply declined. By the end of , deposit-secured loans at the five banks totaled 5.83 trillion won ($4.01 billion), a decrease of 604.2 billion won ($416 million) from the end of , when they stood at 6.43 trillion won ($4.43 billion). Banks typically adjust their annual lending quotas early in the year, which can initially ease loan conditions and reduce the need for deposit-backed loans.
However, the current environment of rising investment demand is driving borrowers to utilize their deposits as collateral while retaining those deposits. This dynamic is also reflected in the growing popularity of Equity-Linked Deposits (ELDs). Banks are actively re-launching ELD products, capitalizing on the low interest rate environment and the potential for returns linked to the KOSPI 200 index. Approximately 5 trillion won worth of ELDs were sold in the first seven months of , already exceeding 70% of the total sales for the entirety of .
Shinhan Bank, for example, launched its ‘Safe Equity-Linked Deposit KOSPI 200’ 25-18 series earlier this month and is currently accepting subscriptions. The bank has already introduced 18 such products this year alone. KB Kookmin Bank began offering its ‘KB Star Equity-Linked Deposit’ in and has been consistently re-launching the product on a monthly basis. Hana Bank and NH Nonghyup Bank have also been actively expanding their ELD offerings.
ELDs function by investing the principal deposited by customers in relatively safe assets like bonds, while allocating the interest earned to riskier assets tied to the performance of the KOSPI 200 index. This structure offers investors the potential for higher returns while providing principal protection. The increasing demand for ELDs and deposit-backed loans underscores a broader shift in investor behavior, with funds flowing from traditional bank deposits into the stock market.
This trend is also mirrored in the performance of South Korean securities firms. Five major brokerages – Korea Investment & Securities, Mirae Asset Securities, Samsung Securities, Kiwoom Securities, and NH Investment & Securities – have all reported net profits exceeding 1 trillion won. Korea Investment & Securities was the first to surpass 2 trillion won in net profit, even exceeding the earnings of NH Nonghyup Bank. This surge in profitability is attributed to increased trading volume driven by gains in the KOSPI and KOSDAQ indices, as well as the aforementioned “money move” from banks to brokerage accounts.
While experts anticipate continued strong earnings in the near term, they caution that brokerages must diversify their revenue streams and reduce their reliance on commission fees to ensure sustainable long-term growth. The interplay between deposit-backed loans, ELDs, and the performance of the securities industry highlights a complex dynamic within the South Korean financial landscape, driven by a combination of market conditions, regulatory changes, and investor preferences.
