April 27, 2024

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A group of people who claim to have suffered from the misselling of equity-linked securities tied to Hong Kong's Hang Seng China Enterprises Index, stage a protest in front of the headquarters of KB Kookmin Bank, Friday. (Yonhap)

Korea's top lenders have all decided to accept the compensation guidelines suggested by the country's financial watchdog, agreeing to make up for the losses from the misselling of equity-linked securities tied to a Hong Kong index, with KB Kookmin Bank and Shinhan Bank joining the list Friday.

Following company board meetings held earlier in the day, KB Kookmin Bank and Shinhan Bank announced they would carry out the compensation procedure, accepting the recent voluntary-basis plan suggested by the Financial Supervisory Service earlier this month.

Both KB and Shinhan are to set up a committee to begin the compensation process, initiating contact with investors from April.

As Woori Bank, Hana Bank, and NH NongHyup Bank have already decided to go forward with the compensation plan, Korea's top five lenders are to compensate the consumers’ losses from the ELS, along with Standard Chartered Bank Korea. The six lenders were the largest sellers of the ELS product.

The plan is projected to cost around 1.95 trillion won ($1.44 billion) in total for the six banks, if they compensate 40 percent of individual traders' losses as expected by the market, according to a report released by local rating agency Korea Investors Service on the same day.

The projection was made assuming the Hong Kong's Hang Seng China Enterprises Index declines by around 50 percent.

KB Kookmin, the industry's top seller of the ELS product, will have to cough up some 990 billion won, followed by Shinhan at 287 billion won, NH NongHyup at 259 billion won, Hana at 257 billion won, SC at 156 billion won and Woori at 50 billion won.

The estimated amount for Standard Chartered Bank Korea and KB Kookmin account for 44 percent and 33 percent of their respective net profit generated last year.

“The ELS compensation will be a burden on the banks, which have been pressured to (increase) dividends to boost shareholder value while seeing a fall in profitability,” the report said.

“But considering the size and ratio of common equity capital, the capital adequacy of the banks is unlikely to experience a steep decline due to the compensation losses.”

On March 11, the FSS announced the guidelines for the banking sector's compensation. The proposal suggests the compensation ratio to range from 20 to 60 percent of losses, with an industry-wide average of 40 percent.

In the past week, banks have swiftly adopted the compensation move, starting with Woori Bank, which was the first to accept the regulator’s guidelines on March 22.

If the banks were not to accept the FSS' voluntary-basis plan, they could face heavy fines for misselling. The Act on the Protection of Financial Consumers states the banks could be fined up to 50 percent of the total sales amount for misselling. The FSS said it would consider the compensation efforts when determining sanctions and penalties for the sellers.

“Settlement efforts, including compensation, will be taken into deliberation when deciding on the level of regulation such as penalty surcharges,” FSS Governor Lee Bok-hyun said when announcing the compensation guidelines.

By Im Eun-byel (silverstar@heraldcorp.com)
The Korea Herald