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Banks to resume compensation talks for ELS losses

May 26, 2024 - 15:30 By Choi Ji-won
A group of investors who suffered losses from local banks' misselling of Hong Kong stock index-linked derivatives stage a protest in front of the Financial Supervisory Service headquarters in Yeouido, Seoul, on Tuesday. (Yonhap)

Major local banks are expediting compensation procedures for losses tied to Hong Kong-linked derivative products, with some poised to distribute payments this week.

KB Kookmin Bank, the largest seller of equity-linked securities tracking the troubled Hang Seng China Enterprises Index, will officially begin negotiations for voluntary compensation with clients starting Monday, an official from the bank said Sunday.

The bank plans to address accounts based on their order of maturation, starting with approximately 6,300 that confirmed losses in January. An internal committee at the bank, tasked with overseeing ELS compensation, will determine individual compensation ratios and notify investors about the process.

Hana Bank is also initiating discussions with its clients this week. The lender said it has established an internal compensation committee and a computerized system for the task, with the committee set to convene a bi-weekly meeting to finalize compensation procedures.

Other banks are at various stages of the compensation process. Shinhan Bank, the second-largest ELS seller, has completed discussions for around 820 cases but has not confirmed the number of payments executed. NongHyup Bank has received 667 voluntary compensation cases and, except for some 70 disputed cases, plans to complete and distribute compensation by this week.

Progress in compensation procedures had been stalled since banks announced voluntary compensation in March. The announcement followed a probe by local financial authorities into 11 institutions for possible misselling of ELS products based on the HSCEI, which had plunged more than 50 percent from its 2021 peak earlier this year.

Banks have accelerated efforts after the Financial Supervisory Service recommended they recoup 30 to 65 percent of total losses, based on the agency's dispute resolution committee decisions two weeks ago. The four banks, along with Woori Bank, have put aside approximately 1.8 trillion won ($1.3 billion) in first-quarter provisions for ELS loss compensation.

Despite these efforts, challenges remain. Many retail investors are demanding full compensation, with some considering class-action lawsuits against the sellers.

The recent recovery of the HSCEI adds another dimension. After hitting a low of around 5,000 points in January, the index has rebounded by about 40 percent and is currently hovering around 6,600. There is anticipation that if the index exceeds 7,000, there will be no losses for products maturing in the latter half of the year.

This year, approximately 15.4 trillion won in HSCEI-tied ELS products are set to mature across the local financial sector, with around 87 percent sold by banks. Of this total, about 3.9 trillion won matured in the first quarter, and 9.4 trillion won are scheduled to mature in the second and third quarters.