Domestic banks are continuing their streak of 'sold-out' issuances of new hybrid capital securities (contingent capital securities). As interest rates on savings and deposits decline, investors are focusing on bank hybrid capital securities, which offer relatively stable yet higher interest rates.
According to the financial sector on the 13th, Woori Financial Group will issue hybrid capital securities worth 400 billion KRW on the 19th. The interest rate is 4.27% per annum, which is on the lower side among financial holding companies' hybrid capital securities issued this year, and the spread is 91 basis points (1bp=0.01%), marking a record low.
Previously, Woori Financial had reported an issuance amount of 270 billion KRW for the hybrid capital securities, but during the demand forecast conducted on the 11th, effective demand surged to 688 billion KRW, 2.5 times the initial amount, leading to an increase in the issuance size to 400 billion KRW.
Such success in selling out hybrid capital securities is not unique to Woori Financial. At the end of last month, Kookmin Bank decided to issue hybrid capital securities worth 358 billion KRW at an interest rate of 4.22% per annum (spread of 78bp). In the preceding demand forecast, effective demand reached 654 billion KRW.
Earlier in April, Shinhan Bank and BNK Busan Bank successfully issued hybrid capital securities worth 400 billion KRW at an interest rate of 4.19% per annum and 100 billion KRW at 4.37% per annum (spread of 88bp), respectively. Both banks attracted effective demand approximately 2.8 to 3.3 times their initial issuance amounts during the demand forecast process, marking a successful reception.
Hybrid capital securities are hybrid bonds with maturities of over 30 years, paying fixed interest annually. Typically, a call option (early redemption) can be exercised after 5 years to recover the investment. Since they rank lower in repayment priority than subordinated bonds, recovering the principal is difficult if the issuer goes bankrupt, but they offer higher interest rates as compensation.
The concentration of investor demand on hybrid capital securities is due to the recent decline in market interest rates, which has significantly reduced the attractiveness of savings and deposits. According to the Korea Federation of Banks, the one-year fixed deposit interest rates at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) remain at around 3.45% to 3.60%.
In particular, as expectations grow for future base rate cuts, the appeal of hybrid capital securities is increasing. Although the principal may not be recovered in the event of institutional bankruptcy or default, the fact that the issuers are financial holding companies or banks provides a considerable safety net, and investors can secure interest rates in the 4% range for at least five years.
Hybrid capital securities are also an attractive option for banks. In urgent situations requiring funds to respond to crises such as real estate project financing (PF) defaults, hybrid capital securities are recognized as capital when calculating the Basel Committee on Banking Supervision (BIS) capital adequacy ratio, allowing banks to achieve dual benefits. In some financial holding companies, this is also interpreted as preparation for potential participation in mergers and acquisitions (M&A) involving insurance companies.
A financial sector official said, "Since the current base rate has reached a peak, savings and deposit products will not plummet sharply but will not return to the levels of 2022-2023. Although these are subordinated bonds, the possibility of financial holding companies or banks going bankrupt is extremely low, which is attracting investors' attention."
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