Idle Funds with No Destination, Soaring into Financial Companies' Trust Products (Comprehensive)

Riding Low Interest and Low Growth Trends, Financial Companies' Trusts Gain Popularity
Last Year, Bank Sector Trust Product Investments Near 500 Trillion Won
Big 4 Banks' Trust Fee Profits Also Up 10.4% Year-on-Year

[Asia Economy Reporter Song Seung-seop] Despite the fund mis-selling scandal and government regulations, trust products in the financial sector are showing remarkable growth. As trust assets steadily increase, fee income is also surging. This is interpreted as a result of market funds, unable to find investment destinations due to the ongoing low interest rate and low growth environment, flocking to trust products.

According to the Financial Supervisory Service on the 30th, the investment funds in trust products entering the banking sector at the end of last year reached 492.6 trillion won, an increase of 12.2 trillion won (2.5%) from 480.4 trillion won the previous year. Considering it was only 355 trillion won in 2016, this represents a 38.4% increase.

A trust refers to a system where a customer transfers and disposes of property rights to a trustworthy individual or institution (trustee). The trustee manages or disposes of the property to generate profits or achieve specific objectives according to operational instructions. The advantage is that the professional management capabilities of trust companies can be utilized stably. In Korea, a total of 61 companies operate trust businesses.

Trust Market and Retirement Pension Scale by Year. Photo by Financial Services Commission

Specifically, money trusts, which receive and manage money and return principal and profits in money, amounted to 271.9 trillion won, exceeding property trusts at 220.5 trillion won. Compared to the previous year, money trusts increased by about 13 trillion won (5.3%), while property trusts decreased by 1.8 trillion won (0.8%). However, among property trusts, real estate trust products slightly increased from 50.2 trillion won to 51.1 trillion won. Looking at the overall trust market size, it has grown annually from 71.5 billion won in 2016 to 103.9 billion won at the end of last year.

As funds continuously flow into trust products offered by the banking sector, fee income is generally increasing. As of the first quarter, trust-related fee income of the four major financial groups?KB, Shinhan, Hana, and Woori Financial?reached 361.3 billion won. This is a 10.46% (34.2 billion won) increase from 327.1 billion won in the same period last year. In particular, KB Financial Group recorded the largest scale and growth, with fee income increasing by 30.9 billion won (22.6%) to 167.4 billion won.

This is in stark contrast to the environment last year when sales of trust products were restricted due to mis-selling and redemption suspension incidents. Financial authorities classified derivative-linked securities (DLS) and equity-linked trusts (ELT), which are types of trust products in the banking sector, as high-risk products as a follow-up measure to the derivative-linked fund (DLF) and Lime Fund incidents. ELT sales were even limited in total volume. Regulations on the sale of non-deposit products without principal guarantees were also generally tightened.

Increased Trust Appeal Due to Low Interest Rates, Low Growth, and Aging Population

Nevertheless, the background for the success of trust products lies in the low interest rate and low growth trend. Unlike in the past, many products have low returns or high volatility, so funds without suitable investment destinations flowed into trust products. A representative from a commercial bank said, "Interest in exchange-traded fund (ETF) trust products has greatly increased due to the direct investment craze among individual investors," adding, "We plan to expand the supply of related products that can be used for asset management." Another commercial bank official hinted, "Customers who do not invest directly often sought trust-type ETFs at branches."

From the financial companies' perspective, expanding non-interest income under the low interest rate environment made the launch of trust products necessary. Since last year, banks have been actively attracting customers by launching related trust products. Shinhan Bank launched the ‘S Life Care Gift Trust’ last month, which allows for prior gifting, long-term investment, and tax savings. This product was created by newly incorporating exchange-traded funds (ETFs) into the assets managed by existing gift trusts. Related marketing is also being steadily conducted. Hana Bank is engaging in celebrity marketing, signing a living trust contract with Kim Sang-hee, chairman of the Korean Entertainers' Unity Association, on the same day. A living trust is a trust product that manages assets and transfers them to desired heirs upon the grantor’s death.

The increase in the elderly population is also a factor enhancing the appeal of trust products. According to the report titled ‘Mid- to Long-Term Development Prospects and Tasks of the Trust Industry in the Aging Era’ published by the Korea Capital Market Institute in January, aging is the most direct factor affecting the development of trust asset management. Elderly people, who have a high demand for retirement pensions, need to convert property income into cash, and trusts, having the nature of comprehensive asset management services, inevitably become more attractive. The ability to transfer property rights and provide inheritance services was also cited as an advantage.

Financial authorities are considering ways to revitalize the trust market in response to the deepening aging population. On the 18th, the Financial Services Commission announced plans to promote ‘Strengthening the Comprehensive Asset Management Function of the Trust Industry’ to expand growth engines. This is to strengthen the comprehensive asset management function of the trust industry and promote the development of products specialized for the elderly to meet the needs of retirement asset management. The goal is to expand the scope of trust assets and allow various structures to reorganize the market itself into a comprehensive asset management system for old age.

However, it is uncertain whether land trusts and re-trust operations, which the banking sector desires, will become possible. Land trusts refer to businesses where trustees receive land, develop and manage it, and then return it. Re-trust refers to a system where trustees, with consent, entrust the trust again to a third party. Although land trusts are legally permissible, financial authorities prohibit them through administrative guidance because they assume the development project entity operates them. Re-trust is not allowed under the Capital Markets Act.

This content was produced with the assistance of AI translation services.