NH Nonghyup Bank Halts Sale of Risky Equity-Linked Securities (ELS) Amid Expected Losses
By Lee Bora
As per a report on August 28, NH Nonghyup Bank has made the decision to cease the sale of equity-linked securities (ELS) due to potential large-scale losses connected to the Hong Kong H Index, an underlying asset. This marks the first instance within the banking sector where a halt in the sale of ELS has been implemented.
Securing Customer Assets
The bank has opted to discontinue the sale of ELS products that pose a risk of principal loss and instead focus on selling derivative bonds linked to stock prices (ELB), which offer principal guarantees. As per a bank official, this decision was made in response to growing concerns over potential principal loss in ELS products. The official further explained that an internal meeting led to the determination to halt the sale of unguaranteed principal products in order to safeguard customer assets.
Market Fluctuations and Bank Responses
ELS are derivative products whose profitability is tied to the performance of a specific stock index. Notably, the Hong Kong H Index soared to the 12,000 mark in 2021, only to plummet to half that level at 6,000. In response, Shinhan Bank and Woori Bank ceased the sale of ELS associated with the Hong Kong H Index in the previous year. Representatives from both banks have confirmed this change in strategy.
Other banks, including Hana Bank and Kookmin Bank, are currently evaluating the situation and contemplating potential actions, with the consideration to also suspend the sale of ELS.
Market Data Reveals Significant Exposure
Data provided by the office of People Power Party lawmaker Han-Hong Yoon from the Financial Supervision Service shows that the balance of ELS H-index index issued by banks in Hong Kong totaled 15.8 trillion won as of the end of August, with a significant portion set to mature in the first half of the upcoming year. Kookmin Bank holds the largest share in this exposure, accounting for over half of the total amount.
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[딜사이트 이보라 기자] As large-scale losses are expected from equity-linked securities (ELS) issued with the Hong Kong H Index as the underlying asset, NH Nonghyup Bank decided to stop selling ELS. This is the first time in the banking sector to stop the sale of ELS.
According to the financial sector on the 29th, Nonghyup Bank decided to stop selling ELS, which can cause a principal loss, from the 28th and sell only derivative bonds linked to stock prices (ELB) which can guarantee principal. This is interpreted as a measure to protect customer assets. A Nonghyup Bank official said, “As concerns emerged about the principal loss in ELS products, we decided through an internal meeting to stop selling products with unguaranteed principal.”
ELS is a derivative product whose profit structure is determined by the stock index used as the underlying asset. The H index rose to the 12,000 mark in 2021, but has now fallen to half the 6,000 mark. The index must rise by at least 7,000 by next year to recover the principal, but it is not expected to be easy.
Shinhan Bank and Woori Bank stopped selling ELS only for products linked to the Hong Kong H Index since last year. A Shinhan Bank official said, “We have stopped selling ELS linked to the Hong Kong H Index since November last year.” An official from Woori Bank also said, “Since December last year, the H index has been excluded from the underlying assets of ELS and ELT (Equity Linked Trust).
Other banks are also closely monitoring the situation and considering whether to suspend operations. A Hana Bank official said, “We are monitoring the market situation and considering whether to stop selling related products.” A Kookmin Bank official also said, “We are considering to stop selling ELS.”
According to data submitted by the office of People Power Party lawmaker Han-Hong Yoon from the Financial Supervision Service, the balance of Hong Kong’s ELS H-index index issued by banks at the end of August was 15.8 trillion won. Of these, 8.3 trillion won will mature in the first half of next year. Looking at all banks, Kookmin Bank accounts for more than half at 4.7726 trillion won. This is followed by ▲Nonghyup Bank 1.4833 trillion won, ▲Shinhan Bank 1.3766 trillion KRW, ▲Hana Bank 752.6 billion KRW, and ▲Woori Bank 24.9 billion KRW.
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