[1mm Finance Talk] Why Equity-Linked Deposits Are Booming as KOSPI Surges Amid Low Interest Rates

Structure Adds Stock Index Returns to Time Deposits
Principal Protection and Higher Rates Drive Popularity
5 Trillion Won Sold in 7 Months, Surpassing 70% of Last Year’s Total

Banks are rushing to relaunch Equity-Linked Deposit (ELD) products. As the domestic stock market rises during this period of low interest rates, ELDs have rapidly emerged as a safe investment vehicle with principal protection. Nearly 5 trillion won worth of ELDs were sold in the first half of the year alone, reaching about 70% of last year's total sales.

According to the financial sector on August 11, Shinhan Bank launched the 'Safe Equity-Linked Deposit KOSPI 200' 25-18 series earlier this month and is currently accepting subscriptions. ELDs operate by setting a sales limit and recruiting customers for a specific period. Once the subscription period ends, the product is relaunched, and this year alone, Shinhan Bank has already introduced its 18th product.

KB Kookmin Bank also began offering its 'KB Star Equity-Linked Deposit' for the first time in May and has been relaunching the product every month since. Hana Bank started selling its 15th ELD product on July 25, while NH Nonghyup Bank has already sold its fifth ELD product this year.

As the name suggests, ELDs are bank deposit products linked to the KOSPI 200 index. The principal deposited by customers is invested in safe assets such as bonds, while the interest is invested in riskier assets to provide additional returns depending on the index’s performance. This structure allows customers to have their principal guaranteed at maturity, while also offering the potential for higher returns than regular time deposits.

ELDs have not received as much attention as traditional time deposits or Equity-Linked Securities (ELS) sold by banks, but recently, the number of subscribers has been increasing. The four major banks offering these products-KB Kookmin, Shinhan, Hana, and NH Nonghyup-recorded 4.6572 trillion won in sales in the first half of the year alone, already exceeding 60% of last year’s record high of 7.3733 trillion won. In July alone, approximately 600 billion won worth of ELDs were sold. Annual ELD sales have been growing steadily, from 1.7751 trillion won in 2022, to 2.2303 trillion won in 2023, and 7.3733 trillion won last year.

The popularity of these products is due to the combination of low interest rates and a rising KOSPI. As interest rates enter a downward trend, bank time deposit rates have dropped sharply. According to the Bank of Korea, the average interest rate for new bank time deposits fell from 3.08% in January this year to 2.54% in June. Meanwhile, the KOSPI 200 index has recently surged. According to the Korea Exchange, the KOSPI 200 index, which stood at 333.36 in January, surpassed 400 in June and jumped to 438.60 in July.

ELDs offer an additional interest rate based on the performance of the KOSPI 200 index, on top of the base rate. The higher the KOSPI 200 index rises, the greater the chance of receiving the highest interest rate. For example, Shinhan Bank offers a base rate of 2.45% for its regular time deposits, but its ELD guarantees an annual rate of 2.42%. If the KOSPI 200 index rises by more than 10%, customers can earn up to 2.67% (for the enhanced guarantee step-up product). KB Kookmin Bank, with its third product launched at the end of last month, offered a maximum maturity rate of 11.5% for its 'upside knockout' product. Hana Bank offers up to 3.25% per annum depending on the index's performance, while NH Nonghyup Bank provides up to 5%.

An industry official said, "Since ELDs are deposit products with principal protection, and offer higher interest rates than regular time deposits, more customers are seeking these products recently." The official added, "From the banks' perspective, due to last year's issues with misselling, it has become difficult to sell Hong Kong H-Index ELS products in the first half of this year. Additionally, during this period of low interest rates, ELDs can help retain funds that might otherwise move to savings banks, allowing banks to design products that offer greater returns."