Busan Bank has become the first commercial bank in South Korea to sell equity-linked bonds (ELBs) based on an absolute return swap (ARS) index at a reduced subscription level that will make the product more accessible for local investors.
To differentiate itself from the securities firms that dominate this market, Busan has significantly reduced the minimum subscription amount, to KRW10m ($9,006), with investors needing at least KRW100m to subscribe to similar ARS-linked products offered by securities firms.
This latest ARS-linked ELB distributed by Busan Bank was issued by Hyundai Securities as the Hyundai ELB 2015-98, with the index managed by Sparx Asset Management. The two-year product offers a 101% guaranteed minimum return on maturity with the expected return at 8% pa. “Since the recent interest rate cut, we are seeing great demand for medium-return and medium-risk products from our clients; and we believe that, as the ARS-linked structured products have already been well-received by securities firms’ clients with a great sales and yield record, it was the right time to launch through banks,” said Dong Hun Choi, senior manager at Busan Bank.
As WTI crude oil-linked derivatives-linked securities (DLSs) saw significant capital losses last year, more investors are asking for capital-guaranteed products, said Choi. “The ARS-linked ELB has reflected this demand as it guarantees principal through investing in government bonds and certificate of deposit rates with 10% to 50% of capital to be looked after by Sparx Asset Management, which manages the capital through a long-short strategy.”
“The payoff of the product is similar to other ARS products, featuring uncapped calls,” said Choi. “However, we have significantly increased the participation rate to 85%, while the securities firms are offering 70% to 75% as the participation rate.”
Busan will continue introducing proprietary index-linked structured products this year, according to Choi. “Although we are not allowed to actively conduct marketing activities or persuade banking clients as these are all wrapped as trust products, many investors are asking for these proprietary indices-linked products,” said Choi.
Structured products issuance in South Korea is largely dominated by securities firms, while commercial banks, such as Hana Bank, Shinhan Bank and Daegu Bank, issue three to four ELBs a month.
Busan Bank stopped issuing ELBs in 2011 and only distributes structured products wrapped as trust products, which it sells on behalf of securities firms. In March, Busan sold seven products issued by Hyundai Securities and Mirae Asset Securities. “The sales volume of structured products by banks will keep on increasing this year due to increased interest among their investors, as banks seek to gain capital flow from the securities firms that are growing exponentially in the market,” said Choi.
There have been 983 structured products worth KRW3.5tr featuring propriety indices issued in South Korea since April 2013, according to SRP data. Shinhan Investment is the most active provider, raising KRW1.5tr, followed by NH Investment & Securities (formerly Woori Investment & Securities) with KRW912bn and Hana Daetoo Securities recording KRW240bn of sales.
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