Five major banks will see 6 trillion won in bank bonds issued during a low-interest period mature next year. If these bonds are refinanced at the current market rate of 4%, annual interest costs will increase by 83.5 billion won. As the possibility of further tightening by the U.S. continues to exert upward pressure on market rates, the banking sector is entering a 'refinancing time' where they must replace low-rate funding with higher-rate capital.
According to data compiled by the Korea Securities Depository, the five major banks—KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup—have a minimum of 6.05 trillion won in fixed-rate senior bank bonds maturing in 2027.
By bank, Hana Bank has the largest amount at 2.26 trillion won, followed by NH Nonghyup Bank at 1.43 trillion won, Woori Bank at 1.33 trillion won, KB Kookmin Bank at 600 billion won, and Shinhan Bank at 430 billion won.
The weighted average coupon rate of these bonds is approximately 2.62%. Considering that the average rate for AAA-rated two-year bank bonds has been around 4.06% over the past month, if the refinancing rate is assumed to be 4%, annual interest costs could rise from about 158.5 billion won to 242 billion won. This means that the banking sector will face an additional annual cost of 83.5 billion won to maintain the same level of funding.
Applying the overall average rate of 2.62% uniformly to the maturity amounts by bank, Hana Bank would incur the highest additional cost of about 31.2 billion won. NH Nonghyup Bank would face an additional cost of about 19.7 billion won, Woori Bank about 18.4 billion won, KB Kookmin Bank about 8.3 billion won, and Shinhan Bank about 5.9 billion won. However, since the actual coupon rates of bonds differ by bank, the additional costs may vary.
Last year, the Bank of Korea's interest rate cuts and expectations for further reductions, along with concerns about economic slowdown, contributed to a decline in bank bond rates to the 2% range. While banks were able to secure funding at low costs during this period, recent increases in domestic bond rates following the Federal Reserve's rate hikes have changed the funding landscape.
The challenge is that as interest rates rise over the long term, the maturity of low-rate bonds leads to increased costs for banks. If banks repay existing bonds and issue new ones of the same size, they will have to bear the higher market rates at the time of issuance. While banks may reduce bond issuance and seek funding through other means such as deposits, it will be difficult to avoid rising funding costs if deposit rates also increase.
However, banks may not refinance the entire maturity amount with the same size of bank bonds, and the actual issuance rates will vary depending on market conditions at the time of maturity and the specific bonds. Since the comparison is made between the coupon rates of existing bonds and the current market average rates, the actual increase in funding costs may differ.
Kim Sang-bong, a professor of economics at Hansung University, stated, "Considering the current inflation, growth rates, and trends in U.S. interest rates and the bond market, upward pressure on domestic market rates is likely to continue."
* This article has been translated by AI.
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