South Korea's major commercial banks are stepping up purchases of corporate bonds as market interest rates climb. The strategy aims to diversify where they put their money while lifting returns, with a focus on the highest-rated debt.
Combined corporate bond holdings at KB Kookmin Bank, Shinhan Bank, Hana Bank and Woori Bank stood at 79.6767 trillion won as of the end of June, up 4.8566 trillion won, or about 6.4%, from the end of last year, according to financial industry sources on the 4th. The category covers bonds issued by government-invested companies and ordinary corporate bonds, excluding sovereign, municipal and financial debentures.
KB Kookmin Bank held 24.25 trillion won at the end of June, an increase of 1.9 trillion won from the end of last year. Shinhan Bank's holdings rose 2.73 trillion won over the same period to 21.88 trillion won.
Hana Bank's total corporate bond figure declined. Its balance came to 24.2366 trillion won at the end of June, down about 4.87% from 25.48 trillion won at the end of last year. The bank said, however, that ordinary corporate bonds excluding debt issued by public institutions grew substantially. "The decline reflects a drop in the balance of bonds issued by government-invested companies, while the balance of ordinary corporate bonds rose about 16%," a Hana Bank official said.
Woori Bank posted the sharpest percentage gain. Its corporate bond holdings swelled by about 1.47 trillion won, from 7.84 trillion won at the end of last year to 9.31 trillion won at the end of June.
The buying spree is tied to yields. One-year unsecured corporate bonds rated AAA and sold through public offerings yielded about 3.8% as of the 4th, according to the Korea Financial Investment Association. Three-year and five-year notes yielded about 4.3% and 4.4%, respectively. Privately placed debt carries even higher rates.
Supply of top-rated paper has also surged. Issuance of AAA-rated ordinary unsecured corporate bonds reached 6.8 trillion won from January through July, up 48.1% from a year earlier. Some observers say the banks' expanded bond investment is broadening the funding options available to companies. "With household lending rules blocking growth centered on mortgages, commercial banks are turning to corporate finance as a new revenue source," a financial industry official said. "It both aligns with the government's push for productive finance and opens a channel for corporate funding."
Corporate lending is expanding in parallel. Corporate loan balances at the five largest commercial banks totaled 883.9647 trillion won at the end of last month, up 39.2393 trillion won from the end of last year. Loans to large companies rose 25.6754 trillion won, or 15.1%, while lending to small and midsize firms increased 13.5639 trillion won, or 2.0%. Credit supply is expanding rapidly, led by large corporations.
Critics point out, however, that the lending is flowing into working capital rather than large-scale investment such as facility spending. Working capital accounted for 13.6132 trillion won, or 94.2%, of the 14.4545 trillion won month-on-month increase in total loans at deposit-taking banks in June, the highest share in about seven years, or since July 2019, according to the Bank of Korea. Working capital loans have risen 47.7695 trillion won so far this year, while facility loans have grown just 15.2291 trillion won. Demand for working capital is effectively more than double that for facility funding.
As recently as January, facility loans rose 3 trillion won, far outpacing the 1.3 trillion won increase in working capital. Demand for working capital began picking up in February, when tensions flared in the Middle East. Freight rates and international oil prices rose amid disruptions including the closure of the Strait of Hormuz, squeezing corporate liquidity. Reliance on working capital was highest in domestically oriented sectors, including agriculture, forestry and fisheries at 65.8%, wholesale and retail at 61.1%, and construction at 60.8%.
Demand for working capital is expected to keep growing for some time, as rising long-term sovereign yields globally and a rate increase by the Bank of Korea usher in a high-rate environment. While higher corporate bond yields are prompting banks to invest more, the same trend could also drive companies to borrow more from banks instead.
"When exchange rates, energy prices and freight rates all move at once, working capital risk is bound to emerge first in the short term," a financial industry official said. "There is a need to manage this pre-emptively so that a short-term liquidity squeeze does not occur."
