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Finance stocks rally despite ELS woes

Investors upbeat on shareholder return policies under government’s ‘value-up’ program

March 17, 2024 - 17:27 By Choi Ji-won
Retail investors, who suffered losses from equity-linked securities underlying Hong Kong's slumping Hang Seng China Enterprises Index, hold a protest requesting for complete compensation for their losses in front of NongHyup Ban's headquarter in central Seoul on Friday. (Yonhap)

Despite internal setbacks, South Korean finance giants are forging ahead with a robust rally in the local stock market, as several companies reach historic highs.

The share prices of KB Financial Co. and Hana Financial Co., two of the nation's biggest finance holding firms, soared to unprecedented levels Thursday. KB Financial's shares hit 78,600 won ($59) after three consecutive days of record-setting gains, while Hana's reached 64,600 won. Shinhan Financial Co.'s shares also surged to 51,500 won, reaching the highest point in over five years, and Woori Financial Co. continued its four-day ascent, reaching a 52-week high of 15,500 won on Friday.

The stock rally comes after a weekslong winning streak for finance shares, which have emerged as significant beneficiaries of the government's "value-up program" aimed at revitalizing underperforming shares.

The positive trend has extended beyond finance giants, with major investment firms such as NH Investment & Securities and Kiwoom Securities also reaching 52-week highs amid days of upward momentum.

The upbeat investment sentiment is even defying concerns over local banks grappling with the misselling of equity-linked securities and possible compensation claims from investors.

Last week, the Financial Supervisory Service unveiled a compensation guideline for ELS products tied to the slumping Hang Seng China Enterprises Index, expected to result in losses of around 6 trillion won this year. Banks, responsible for over 80 percent of the total sales locally, may need to allocate hundreds of billions of won to compensate for these losses.

Market watchers anticipate Kookmin Bank, the largest seller of the Hong Kong bourse-tied ELS, may face compensation costs of around 600 billion won, contributing to an estimated sector-wide compensation of up to 2 trillion won.

The sellers have been recommended to draw up their own details for the compensation, and this is expected to be a top agenda for the lenders' board meetings, set to take place in the coming days. Starting with Hana Bank's board meeting on Wednesday, Kookmin Bank and Shinhan Bank will hold theirs on Thursday, followed by Woori Bank on Friday.

However, industry sources expect that the individual companies will not likely be able to come up with compensation measures at the coming board meetings as it could result in a potential breach of trust with shareholders.

Failure to voluntarily address these losses could lead to heavier regulatory sanctions and penalties from the FSS.

Despite lingering uncertainties, market analysts project financial stocks will remain resilient, fueled by investor anticipation of a potential boost to underperforming stocks.

"We posit that the surge in financial stocks has been driven by expectations of a resolution in the Hong Kong-linked ELS situation and anticipations regarding shareholder return policies," remarked Lim Seung-mi, an analyst at Hana Securities.

"While major commercial banks are expected to bear the burden of ELS compensation, given its one-time nature, its impact on the stock price is likely to be limited," Lim added.

Jung Gwang-myung, an analyst at DB Financial Investment, shared a similar sentiment, stating, “We believe that a significant portion of the issues related to ELS compensation has already been reflected in the stock price. ... Considering the high common equity capital ratio and profitability of commercial banks, the impact of the ELS crisis on the banks’ shareholder returns will not be significant."

In the meantime, heads of local commercial banks were scheduled to meet with FSS Governor Lee Bok-hyun on Monday to discuss compensation measures for the ELS crisis.