Bank Stocks Rise as ELS Penalty Slashed from 4 Trillion to 600 Billion Won

Bank stocks have risen as the penalty for the sale of Equity-Linked Securities (ELS) linked to the Hang Seng China Enterprises Index (HSCEI) was significantly reduced from an initial estimate of 4 trillion won to 600 billion won. The Financial Supervisory Service's Disciplinary Committee decided to impose a total penalty of approximately 600 billion won on five banks – KB Kookmin, Shinhan, Hana, NH Nonghyup, and SC First Bank – in relation to the ELS loss incident. This is a considerable reduction from the approximately 4 trillion won initially calculated by the Financial Supervisory Service, a result of lowered assessment criteria. The Financial Supervisory Service considered the fact that the violations occurred during the initial phase of the Financial Consumer Protection Act's enforcement as a mitigating factor. The disciplinary measure will be finalized after approval by the Financial Services Commission.

The reduction in the penalty amount has improved investor sentiment towards bank stocks, leading them to move against the KOSPI for the second consecutive day. Major financial holding companies had already reflected provisions for ELS penalties related to the Hang Seng China Enterprises Index in their fourth-quarter last year and first-quarter this year earnings. Therefore, this decision is unlikely to lead to additional cost recognition or a decline in capital ratios. Analysis suggests that the banking sector's regulatory risks have entered a phase of resolution following the Financial Supervisory Service's decision. If regulations on calculating risk-weighted assets (RWA) in the securities sector are also eased, banks' capital capacity could expand further, widening the scope for shareholder return policies such as dividend increases or treasury stock buybacks.

Over the past six months, while the KOSPI index saw double-digit gains, the KRX Bank Index performed relatively poorly, and bank stocks were sidelined in the market rally driven by semiconductors and artificial intelligence (AI). In some trading sessions, bank stocks even moved inversely to the KOSPI, despite the latter's sharp rise. With the ELS penalty issue now settled, expectations are growing that a phase for re-evaluating the intrinsic profitability, capital soundness, and shareholder return attractiveness of bank stocks has opened. However, recent soaring exchange rates and increasing external uncertainties could pose new variables for bank stocks.