South Korean commercial banks limited bond purchases during the first half despite tightening lending activities, according to industry data. The restrained buying occurred as rising interest rates reduced incentives for aggressive investment, while slower loan growth diminished regulatory pressure to expand bond holdings for liquidity coverage ratio compliance. Major institutions including KB Kookmin Bank and Shinhan Bank increased financial investment assets modestly compared to loan portfolio growth, with industry officials indicating that aggressive bond buying could emerge if interest rates are judged to have peaked.
Major Banks Report Modest Bond Portfolio Growth
KB Kookmin Bank's loan bonds increased approximately 11 trillion won during the first half, while financial investment assets grew by about 4 trillion won, according to first-half performance reports from the four major commercial banks. Short-term securities under the FVPL (Fair Value through Profit or Loss) account increased by only about 600 billion won during the same period.
Shinhan Bank's loan bonds expanded by approximately 13 trillion won, while financial assets under the FVOCI (Fair Value through Other Comprehensive Income) designation increased by about 2.7 trillion won. This growth rate appeared subdued compared to the previous year's first half, when FVOCI assets increased even as loan bonds declined.
Other commercial banks showed similar patterns, with no evidence of aggressive moves to expand bond holdings relative to loan portfolio growth.
Rising Rates and Reduced LCR Pressure Limit Bond Purchases
Banks faced reduced incentives to purchase bonds as lending growth remained constrained, diminishing the need to meet liquidity coverage ratio requirements through comprehensive bond buying. The continued interest rate increase environment further discouraged active investment-oriented bond purchases.
"It's not generally the case that banks buy bonds simply because loans aren't growing much," an official from Bank A explained. "Under LCR regulations, when loans increase, bonds automatically increase as well, so ultimately loans need to grow for bonds to increase simultaneously."
An official from Bank B stated: "We don't increase bond holdings simply because we have surplus funds. Especially during a period of rising interest rates, we would have tried to increase bond holdings gradually."
The challenging environment surrounding the bond market led banks to avoid aggressive bond purchasing.
Banks Hold Liquidity for Potential Rate Peak Buying
Industry observers express significant caution that multiple waves of buying could enter the market if a judgment emerges that interest rates have reached their peak.
Given the substantial reserves banks currently hold, aggressive buying appears possible if a determination is made that bond interest rates have peaked.
"I understand that some banks aggressively bought when bond rates were falling sharply in the past," an official from Bank C said. "While the possibility isn't high right now, it's a feasible scenario under the judgment that rates have peaked."
A bond dealer from Bank D stated: "In the case of corporate loans, RWA (risk-weighted assets) are set high depending on corporate credit ratings, so if a judgment is made that bond rate declines are beginning, there's a possibility of aggressive bond buying."
FAQ
Why did Korean banks limit bond purchases in the first half?
Banks limited bond purchases due to rising interest rates that discouraged aggressive investment and reduced loan growth that diminished regulatory pressure to expand bond holdings for liquidity coverage ratio compliance. The challenging bond market environment led institutions to avoid aggressive purchasing strategies.
What bond portfolio changes did major Korean banks report?
KB Kookmin Bank increased financial investment assets by about 4 trillion won while loan bonds grew approximately 11 trillion won. Shinhan Bank's FVOCI financial assets increased by about 2.7 trillion won while loan bonds expanded approximately 13 trillion won during the first half.
Under what conditions might Korean banks increase bond buying?
Bank officials indicated that aggressive bond purchasing could occur if interest rates are judged to have reached their peak. Banks currently hold significant liquidity reserves that could be deployed for bond purchases under a determination that bond rate declines are beginning.
