South Korean Financial Firms Rush Hybrid Capital Sales Before Rates Rise Further

Banks, securities firms and insurers in South Korea are rushing to issue hybrid capital securities. The move is aimed at shoring up capital in advance and managing capital adequacy metrics before any further rise in interest rates drives funding costs higher.

According to the financial industry on Sept. 25, major financial firms including Industrial Bank of Korea, Meritz Financial Group, Kiwoom Securities and Kyobo Life Insurance have recently issued hybrid capital securities or finalized plans to do so.

Industrial Bank of Korea issued $289 million of hybrid capital securities on Sept. 21 at an annual rate of 4.84%. It returned to the market about seven months after raising $505 million in February. On the same day, Meritz Financial Group decided to issue $146 million of hybrid capital securities through a private placement.

Securities firms are also moving to bolster capital. Kiwoom Securities issued $289 million of privately placed hybrid capital securities on Sept. 18. The notes have a 30-year maturity and a call option that allows early redemption after five years. It was the firm's first such issuance.

Insurers have also tapped the market. Kyobo Life Insurance issued $361 million of hybrid capital securities earlier in September at an annual rate of 5.39%. The deal effectively refinanced $339 million of hybrid capital securities issued in 2021.

Some firms are also turning to overseas markets for capital raising. Hana Securities conducted bookbuilding for a dollar-denominated hybrid capital securities sale in the global bond market and decided to raise $300 million. It marks the first time a South Korean securities firm has issued hybrid capital securities in the foreign-currency bond market.

Financial firms are increasing sales of hybrid capital securities because the instruments can lift capital ratios. Hybrid capital securities have the characteristics of perpetual bonds, with no maturity or very long tenors, but are recognized as capital for accounting purposes. That makes them useful for improving capital soundness. They typically carry a call option that allows early redemption after a certain period.

The possibility of further rate increases is also prompting issuers to move quickly. If monetary tightening in the US and South Korea persists, market rates could climb further and raise funding costs for financial firms. That is fueling demand to secure capital before interest burdens rise further.

As volatility in financial markets increases, the move to prepare for potential losses is also likely to continue. "With market uncertainty elevated, financial firms are likely to keep securing capital in advance to defend their soundness for the time being," a financial industry official said.