Google sales

Korea’s $834 billion household debt binge boosts bank bond sales

(Bloomberg) – South Korean households have a serious debt problem: they have one of the biggest borrowing burdens in the world and that prompts banks to sell bonds to protect their balance sheets if a crisis leads to deterioration. loans.

Bloomberg’s Most Read

As Koreans increased their borrowing to get a share of the country’s scorching real estate market, their debt topped 1 trillion won ($834 billion) for the first time last year. That total exceeds the country’s entire annual economic output, at 103%, compared with 65% in Japan and 80% in the United States, according to data from the International Monetary Fund.

It’s a pile of debt that Fitch Ratings says “stands out” from its global peers and “has exposed banks to greater sensitivity to a severe economic shock.” Korea’s biggest lenders are responding by seeking funds from the debt market to bolster their capital at a time when rising interest rates also pose risks for them.

Shinhan Financial Group Co. this month priced an additional 600 billion won of Tier 1 notes that count as capital and carry the risk of being written off first if the lender’s balance sheet deteriorates to a point of no -viability. Hana Financial Group Inc. sold 270 billion won of similar debt, while KB Financial Group Inc., Meritz Financial Group Inc. and Woori Financial Group Inc. also plan to sell those notes next month.

While so-called contingent convertible notes, or CoCos, are considered the riskiest debt banks sell, their high yields attract investors. Korean borrowers also redeemed their domestic bonds at the earliest opportunity, avoiding the investment risks associated with longer maturities.

Shinhan Financial’s perpetual bonds that cannot be called for five years paid 3.9%, for example, compared to an average yield of around 2.9% for five-year Korean corporate debt.

“Sales of CoCo bonds by Korean banks or financial holding companies will continue for some time given their need to raise equity after the surge in household lending last year,” Han said. Gwangyeol, credit analyst at NH Investment & Securities Co. in Seoul. “It’s a good deal for investors, especially retail investors, given that their AT1s are typically called after five years with a coupon of around 4%.”

Inflation-adjusted residential house prices in Korea rose for the 23rd consecutive month in December, according to calculations by Bloomberg using official figures. Soaring housing prices have hit middle-class Koreans and have been cited as one of the main factors for voters disapproving of President Moon Jae-in.

However, Bank of Korea rate hikes and government regulations are beginning to dampen borrowing, with the country’s monthly mortgage gains cooling to more than three years in November.

Bloomberg Businessweek’s Most Read

©2022 Bloomberg LP