[Hong Kong ELS Compensation] Cumulative Losses of 1.1 Trillion Won... Total Expected Losses of 6 Trillion Won

Since the beginning of the new year, the cumulative loss related to Hong Kong H Index (Hang Seng China Enterprises Index·HSCEI)-based equity-linked securities (ELS) managed by the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) has exceeded 1.1 trillion KRW. Financial supervisory authorities estimate that if the current level of the Hong Kong H Index is maintained, combined losses for banks and securities firms could reach 5.8 trillion KRW this year.

According to the financial sector on the 11th, the maturity amount of Hong Kong H Index-based ELS products from the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) is approximately 2.1995 trillion KRW, with expected losses estimated at about 1.1532 trillion KRW.

The expected repayment amount is about 1.0464 trillion KRW, resulting in a loss rate of 52.4%. In just over two months since the start of the new year, investors in Hong Kong H Index-based ELS have suffered losses exceeding half of their principal.

[Image source=Yonhap News]

Despite the growing scale of losses, the outlook is not very optimistic. The Hong Kong H Index, which once peaked at 12,228.63 in 2021, has continued to decline, hitting a low of 5,001.95 on January 22, then showing some recovery, but no upward trend sufficient to offset losses has appeared. As of the 7th, the closing price of the Hong Kong H Index stood at 5,613.83.

Recently, the Chinese authorities have shown intentions to boost the stock market, and the market expects the U.S. Federal Reserve (Fed) to cut interest rates in the second half of the year, which are positive factors. However, these remain in the realm of possibilities. A representative from a commercial bank stated, "The Chinese government is managing the market by pouring 400 trillion KRW into stock market support," adding, "Unless there is a major event such as a significant interest rate cut, a recovery sufficient to offset the loss rate is unlikely."

Meanwhile, according to the Financial Supervisory Service, as of the end of December last year, the outstanding balance of derivative-linked securities including Hong Kong H Index-based ELS reached a total of 18.8 trillion KRW (396,000 accounts). By sales company, banks accounted for 15.4 trillion KRW, and securities firms 3.4 trillion KRW. By investor type, individuals held about 17.3 trillion KRW, and corporations about 1.5 trillion KRW.

Breaking down individual investors, elderly investors aged 65 and over accounted for 84,000 accounts (21.5%), and first-time investors accounted for 26,000 accounts (6.7%). Regarding sales channels, offline channels such as bank branches accounted for 90.6% in banks, while online channels accounted for 87.3% in securities firms.

Maturities due within the year amount to 15.1 trillion KRW, representing 80.5% of the total outstanding balance. By quarter, maturities are mainly concentrated in the first half of the year, with 3.8 trillion KRW (20.4%) in Q1 and 6 trillion KRW (32.1%) in Q2.

Accordingly, the Financial Supervisory Service estimates total expected losses to reach 5.8 trillion KRW. Assuming the Hong Kong H Index remains at 5,678 points as of the end of February, losses of 1.2 trillion KRW occurred in January and February, with an additional 3.6 trillion KRW expected from March to June, and further losses of about 1 trillion KRW possible in the second half of the year.