From the Beginning of the Year, All-in and Debt Investment... Surge in Bank Credit Lines for LG Energy Solution Subscription (Comprehensive)

New Record in IPO Popularity Drives Surge in New and Outstanding Negative Balance Accounts

[Asia Economy Reporters Sunmi Park, Kiho Sung] #. Office worker Kim Cheol-ho (alias, 49 years old) opened a new overdraft account and took out a loan of 45 million KRW to apply for 300 shares after hearing from colleagues that investing in LG Energy Solution (LG EnSol) IPO stocks could result in a ‘ttasang’?where the opening price is twice the IPO price and then soars to the upper limit.

As LG Energy Solution’s subscription deposit surpassed 100 trillion KRW, setting a new record for IPO popularity, the balance of bank credit loans surged, reviving the atmosphere of ‘debt investment (bit-tu)’ and ‘all-in investment (young-kkeul).’ Amid rising interest rates with credit loan rates approaching 5% annually, the growing trend of debt investment and all-in investment since the beginning of the year raises concerns that it could trigger a household debt bomb.

According to the financial sector on the 19th, on the first day of LG EnSol’s general subscription, the overdraft balance at the five major commercial banks?Kookmin, Shinhan, Hana, Woori, and others?was 50.72 trillion KRW. This is about 1.6 trillion KRW more than a week earlier on the 10th, with an increase of over 1.37 trillion KRW in just one day of subscription. As more people opened overdraft accounts in preparation for LG EnSol’s subscription, the number of new overdraft accounts steadily increased over the past week. The number of new overdraft accounts at the five major banks reached 1,557 as of the previous day, nearly 500 more than on the 10th.

Considering that more subscription deposits usually pour in on the last day, the balance of bank credit loans is likely to increase further for LG EnSol’s IPO subscription. The credit loan balance at the five major commercial banks had decreased by 1.5766 trillion KRW in one month to 139.5572 trillion KRW at the end of last month, but the mood has completely reversed.

LG EnSol raised 32.6467 trillion KRW in deposits on the first day of subscription, recording a combined competition rate of 20.48 to 1 based on the number of subscription shares. This amount exceeds the 22.1594 trillion KRW raised on the first day of SKIET’s subscription last April, which currently holds the record for the highest subscription deposit.

Although the financial authorities have been strongly managing household debt with measures such as the application of the second stage of the Debt Service Ratio (DSR) from this month, and the increase in household loans at banks has slowed, the record-breaking success of large-scale IPOs has revived the atmosphere of debt investment and all-in investment.

The problem is that with the base interest rate rising since the beginning of the year, loan interest rates are also increasing, which could worsen household debt. According to the banking sector, the COFIX, which serves as the benchmark for bank loan interest rates, rose by 0.14 percentage points in one month, reaching its highest level in two years and six months. Reflecting the COFIX increase, mortgage and jeonse (lease) loan interest rates at commercial banks rose simultaneously. Moreover, with the Bank of Korea raising the base interest rate by 0.25 percentage points this month, credit loan interest rates have approached the 5% annual level.

Currently, credit loan interest rates (for grade 1 borrowers with a 1-year maturity) at the four major banks range from 3.148% to 4.798% annually. This is an increase of 0.5 to 1 percentage points from the levels of 2.65% to 3.76% at the end of last year.

If household debt risks increase further from the beginning of the year, banks will inevitably raise their lending thresholds again. According to the ‘Financial Institution Loan Behavior Survey’ recently released by the Bank of Korea, the credit risk index expected by domestic banks for the first quarter rose to 16, up 5 points from 11 in the fourth quarter of last year. In particular, when looking at changes in the credit risk index by loan subject, the household index rose 3 points from 12 in the fourth quarter of last year to 15 in the first quarter of this year. A positive credit risk index indicates an increase in credit risk, meaning more financial institutions expect credit risk to rise in the future. The baseline is ‘0,’ and the index ranges between 100 and -100. This suggests that strict loan screening, which was maintained last quarter, will continue this year.

A financial sector official expressed concern, saying, "Assuming the base interest rate rises to 1.75% this year, credit loan interest rates could rise to 6%. If household loans increase, banks will have no choice but to raise lending thresholds again."