Will Bank Bond Issuance Normalize in Q1 Next Year? Financial Authorities Give 'Green Signal'

Authorities Judging 'Market Stability' Allow Limited Bank Bond Issuance
Banks: "Net Issuance Must Be Possible in Q1 Next Year for Fundraising"
LCR Regulation Tightening Grace Period Ends June Next Year
Financial Services Commission: "Market Will Improve If Institutional Investors Release Funds Early Next Year"

[Asia Economy Reporter Sim Nayoung] Financial authorities have partially lifted the restrictions on bank bond issuance, which had been under a restraint order since last October to stabilize the bond market. This has drawn attention from the financial sector as to whether bank bond issuance will normalize in the first quarter of next year. The bond market sentiment, which had frozen after the Legoland incident, is gradually reviving, and with the strengthening of bank liquidity regulations (Liquidity Coverage Ratio, LCR), raising funds through bank bond issuance is essential.

Bond Market Demand Stirs... Shinhan 4.30%, Woori 4.23% Lower than Market Average

According to financial authorities and the banking sector on the 20th, the total amount of bank bonds maturing by the end of December for the five major banks is 2.27 trillion KRW (KB Kookmin Bank 240 billion KRW, Shinhan Bank 500 billion KRW, Woori Bank 620 billion KRW, Hana Bank 440 billion KRW, NH Nonghyup 470 billion KRW). The Financial Services Commission announced that starting with the resumption of refinancing bank bond issuance, "for maturities in January next year and thereafter, issuance timing and scale will be flexibly managed by dispersing and adjusting according to market conditions."

Authorities and the financial sector emphasized that the bank bond interest rates of Shinhan Bank and Woori Bank, which issued bonds on this day, were lower than the average rates set by private bond rating companies. This indicates that bond demand sentiment has revived. Shinhan Bank's (250 billion KRW) bond interest rate was 4.30%, and Woori Bank's (280 billion KRW) bond interest rate was 4.23%. A Financial Services Commission official said, "The average market interest rate for one-year bank bonds is around 4.5%, so these rates are lower than that," adding, "Including CP (commercial paper), bond interest rates are gradually decreasing, indicating market stabilization."

Banks: "Stepwise Normalization of Issuance Needed"
Authorities: "If Funds Flow into the Bond Market Early Next Year, Conditions Will Improve"

Banks are hopeful that they will be able to issue bank bonds without restrictions starting from the first quarter of next year. The financial authorities effectively halted bank bond issuance since last October to redirect funds that had concentrated in bank bonds toward specialized credit finance companies or the corporate bond market. As a result, net issuance of bank bonds retreated for two consecutive months, from minus 3.21 trillion KRW in November to minus 710 billion KRW in December (1st to 19th). Although the Financial Services Commission has eased the situation by allowing refinancing bank bond issuance, banks argue that normalization of bank bond issuance is necessary considering the upcoming LCR regulation tightening in June next year and the increasing demand for corporate loans.

An official from a commercial bank said, "Deposits and bank bonds are the bank's representative funding methods, but since authorities have suppressed deposit interest rate hikes, bank bond issuance should be allowed stepwise," adding, "By blocking bank funding channels, the LCR ratio has also declined." The LCR is a liquidity indicator showing the ratio of high-liquidity assets such as deposits and government bonds to the bank's net cash outflows over 30 days. The higher this ratio, the more surplus funds the bank has. The LCR of the four major banks all exceeded 100% in October, but due to the authorities' directive to reduce bank bond issuance and lower deposit interest rates, fund inflows became sluggish, causing the LCR to drop to the 90% range in November, just one month later.

A senior official from the Financial Services Commission said, "The resumption of bank bond issuance sends a positive signal that market tightening has somewhat eased and aims to quickly resolve the urgent funding needs of banks," adding, "Although there are concerns about additional interest rate hikes next year and many bonds maturing, if funds from institutional investors who closed their books at year-end are released from early next year, the funding market could improve compared to now."

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