Banking Sector Confirms Autonomous Compensation for Hong Kong ELS This Week... Minimum 2 Trillion Expected

Major commercial banks are holding board meetings this week to finalize a voluntary compensation policy related to losses from Hong Kong H Index (Hang Seng China Enterprises Index·HSCEI) equity-linked securities (ELS). Accordingly, the loss amount related to compensation to be reflected in the first quarter earnings is expected to reach at least 2 trillion won.

According to the industry on the 24th, the five major domestic commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) and SC First Bank will convene extraordinary board meetings this week. Based on the dispute mediation standards for ELS loss compensation proposed by the Financial Supervisory Service on the 11th, each bank will report the estimated compensation amount to the board, and the board will approve reflecting the compensation-related losses as provisions in the first quarter earnings.

ELS victims heading to the bank holding flags
[Image source=Yonhap News]

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KB Kookmin Bank, which has the largest sales volume of Hong Kong H Index ELS, will hold a board meeting later this week. To estimate the approximate compensation amount, KB Kookmin Bank began a full survey on the 13th of about 80,000 accounts that purchased Hong Kong H Index ELS from January to July 2021 (the period around the peak of the Hong Kong H Index). Based on the survey results, voluntary compensation will be discussed and then resolved.

KB Kookmin Bank is expected to reflect approximately 1 trillion won in provisions related to Hong Kong H Index ELS compensation in the first quarter earnings after the board meeting. Although the exact compensation amount cannot be confirmed at this time, the full survey identified sales from January to July 2021 at about 5.2 trillion won. The current loss rate is around 50%, and the average compensation rate applied is 40%.

Shinhan Bank is also expected to hold a board meeting later this week to officially confirm voluntary compensation for ELS. The board members have already shared compensation-related matters through a preliminary meeting on the 21st. Considering the Shinhan Financial Group shareholders' meeting scheduled for the 26th, the compensation plan is likely to be finalized between the 27th and 29th.

Hana Bank is expected to discuss the compensation plan at its board meeting on the 27th, while NH Nonghyup Bank and SC First Bank will do so on the 28th.

Woori Bank was the first among the banks to hold a board meeting on the 22nd and resolved to proceed with voluntary compensation. It plans to start contacting investors from this week.

The banking sector is rushing to decide on voluntary compensation at board meetings within this month due to accounting treatment of business performance and political considerations.

Not only KB Kookmin Bank but also other banks, when calculating loss and compensation amounts focusing on sales from January to July 2021 (maturing from January to July 2024), are estimated to set aside at least 2 trillion won in provisions related to this matter in the first quarter of this year.

Once resolved at the board meetings, banks plan to begin voluntary compensation procedures next month for customers who suffered losses from investing in Hong Kong H Index ELS. Based on negotiation results, compensation ratios will be finalized through compensation committees at each bank. If voluntary adjustment fails, the process will move to dispute mediation or litigation stages.

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