S Korea's 1,000t won household debt spurs bank bond sales

Seoul

SOUTH Korean households have a serious debt problem: They've got one of the world's biggest borrowing burdens and that's prompting banks to sell bonds to protect their balance sheets if a crisis causes the loans to go bad.

As Koreans boosted borrowing to get a piece of the nation's red-hot housing market, their debt climbed above 1,000 trillion won (S$1.12 trillion) for the first time last year. That total exceeds the nation's entire annual economic output, at 103 per cent, compared with Japan's 65 per cent and US's 80 per cent, according to International Monetary Fund data.

It's a debt pile that Fitch Ratings says "stands out" among its global peers, and "has exposed banks to a greater susceptibility to a severe economic shock". Korea's biggest lenders are responding by seeking funds in the debt market to bolster their capital at a time when rising interest rates also pose risks for them.

Shinhan Financial Group this month priced 600 billion won of additional Tier 1 notes that count as capital and carry the risk of being written off first should the lender's balance sheet deteriorate to a point of non-viability. Hana Financial Group sold 270 billion won of similar debt, while KB Financial Group, Meritz Financial Group and Woori Financial Group also plan to sell such notes next month.

While the so-called contingent convertible notes, or CoCos, are considered the highest-risk debt that banks sell, their elevated yields draw investors.

The Korean borrowers have also been redeeming their domestic bonds at the first opportunity they had the option to do so, avoiding investment risks from longer maturities. Shinhan Financial's perpetual notes that can't be called for five years paid 3.9 per cent, for example, compared with an average yield of around 2.9 per cent for five-year Korean corporate debt.

"CoCo bond sales by Korean banks or financial holding companies will continue for a while given their need to raise capital buffers after household loans soared last year," said Han Gwangyeol, credit analyst at NH Investment & Securities Co in Seoul. BLOOMBERG