[Practical Finance] 'Knock-Out Easing' ELD Sales Hit KRW 3.5 Trillion... KOSPI Plunge Clouds Q4 Outlook

Four major banks post KRW 3.4814 trillion in ELD sales in Q3
Monthly sales top KRW 1 trillion for three consecutive months from July to September
Q4 sales in focus amid increased stock market volatility and rising deposit rates

Equity-linked deposits (ELDs) at major commercial banks sold close to 3.5 trillion won in the third quarter of this year, their highest sales since the fourth quarter of last year. The strong performance is believed to reflect investor interest in a series of products that eased or eliminated the knock-out condition, which limits returns when stock indexes rise. However, a sharp decline in the KOSPI this month has clouded the outlook for sales growth to continue in the fourth quarter.

According to the financial sector on October 14, ELD sales at four commercial banks—KB Kookmin Bank, Shinhan Bank, Hana Bank and NH NongHyup Bank—totaled 1.0802 trillion won in September. After reaching 1.101 trillion won in July and 1.3002 trillion won in August, sales exceeded 1 trillion won for three consecutive months, bringing total third-quarter sales to 3.4814 trillion won.

An ELD is a deposit product whose interest rate is typically determined by movements in a stock index, using the KOSPI 200 as its underlying asset. It offers the potential for higher returns than a time deposit, and under the Depositor Protection Act, principal and a prescribed amount of interest are protected up to 100 million won per depositor per financial institution. ELDs typically have a term of six months or one year. Customers who hold them to maturity can receive their principal and interest in accordance with the agreed terms. However, early withdrawal may result in a loss of principal due to fees.

ELD sales recover in third quarter... Impact of eased knock-out conditions

This was the first time quarterly ELD sales at the four banks had exceeded 3 trillion won since the fourth quarter of last year. Sales in that quarter totaled 4.4899 trillion won, comprising 1.4981 trillion won in October, 1.7331 trillion won in November and 1.2587 trillion won in December. The KOSPI was rising sharply at the time, drawing investor interest to ELDs, which offer the potential for additional returns linked to the stock index. The KOSPI closed at 4,214.17 at the end of December, up 1,028.16 points, or 32.27%, from 3,186.01 at the end of August last year.

This year, ELD sales have fluctuated considerably in line with the KOSPI. Sales at the four banks rose from 439.1 billion won in January to 814.3 billion won in February, when the KOSPI closed at 6,244.13 at month-end. But in March, the KOSPI fell to a month-end close of 5,052.46 in the wake of the war in the Middle East, and sales declined to 588.2 billion won.

Sales picked up again in the second quarter as the stock market recovered, but remained below the level seen in the fourth quarter of last year. Monthly sales stayed under 1 trillion won for three consecutive months, at 907.4 billion won in April, 814 billion won in May and 780.3 billion won in June. In particular, the KOSPI surged to an intraday high of 9,385.59 on June 19. This is believed to have dampened investor sentiment amid concerns that ELD subscribers could trigger the knock-out condition and fail to earn the returns they had expected.

A knock-out condition applies the minimum interest rate if the underlying stock index exceeds a predetermined upper limit even once during the investment period. Under this structure, expected returns can actually fall if the index rises beyond a certain level. In fact, a knock-out event occurred in 133 of the 253 ELD products sold by the four major banks last year. In response, the Financial Supervisory Service summoned vice presidents of major banks in April, warning of the possibility of mis-selling ELD products and urging them to strengthen consumer protection. Banks subsequently launched a series of products that raised the knock-out threshold or removed the condition, while lowering maximum interest rates in some cases.

Monthly sales topped 1 trillion won throughout the third quarter, signaling a clear recovery. After extreme fluctuations, the KOSPI ended July at 6,595.45, then stood at 6,820.02 at the end of August and 6,838.04 at the end of September. The index settled around the 6,800 level at the end of August and September, following sharp swings in July. Along with the introduction of products with eased knock-out conditions, this is believed to have boosted interest in ELDs.

The Bank of Korea's two consecutive rate increases of 0.25 percentage points in July and August also had an impact. As deposit rates rose, funds moved from the stock market to banks in a trend known as a reverse money movement. Analysts say ELDs, which offer the potential for both principal protection and additional returns, were also considered an investment alternative.

"The reverse money movement has boosted interest not only in deposits and savings accounts but also in bank products such as ELDs," a banking industry official said. "Although the KOSPI has fallen from its June peak, volatility has eased compared with the second quarter. Expectations that semiconductor earnings will remain strong next year are also likely drawing attention to ELDs, which are linked to the stock market."

However, the recent sharp downturn in the stock market has introduced uncertainty into fourth-quarter ELD sales. The KOSPI closed at 6,384.24 on October 12, down 3.65% from the previous trading day, and continued to fall sharply on October 13, dropping below the 6,000 level during intraday trading. If the stock index falls, ELDs may not generate additional returns and may instead pay only the minimum interest rate. In particular, when index fluctuations are as large as they have been recently, investors also need to consider the possibility that a future rebound could trigger the knock-out condition. The impact of increased stock market volatility on demand for ELDs remains to be seen.

Time deposit rates approach 4% annually... Banks weigh ELD rates

With the top rate on some one-year time deposits at banks reaching 4% per year, banks are also weighing how to set rates for their ELD products in the fourth quarter. As rising policy rates have made time deposits more competitive, banks need to consider ELDs' minimum and maximum interest rates as well as their knock-out conditions.

For example, NongHyup Bank's principal-protected ELD No. 26-9, launched in September, offered an annual rate of 3.50% to 3.65% for its stable type, which has no knock-out condition, for individual customers. Its return-seeking type, which has a knock-out condition, offered an annual rate of 3.00% to 7.90%. On October 13, however, the bank launched a special one-year time deposit offering a maximum annual rate of 3.90%. As rates on conventional time deposits rise, securing competitive rates for ELD products has become all the more important.

Banks have continued to roll out ELD products with various return structures this month. Shinhan Bank's "Safe Equity-Linked Deposit, KOSPI 200 Enhanced-Protection Rising Type No. 26-19," offered for sale early this month, offered a maximum annual interest rate of 5.45% for a one-year term. However, if the KOSPI 200 rises more than 25% above its base level at any point during the investment period, the minimum annual interest rate of 3.30% applies.

Hana Bank also accepted subscriptions through October 13 for its "Index Plus Time Deposit No. 26-18." Its one-year high-return-seeking type offered returns of 2.80% to 11.60% per year, while its aggressive type offered 3.50% to 6.00% per year. For the high-return-seeking type, the minimum annual rate of 2.80% applies if the KOSPI 200 rises more than 40% above its base level during the investment period. From October 1 to 8, a five-business-day period, ELD sales at Shinhan Bank and Hana Bank totaled 109.1 billion won.

On October 1, Industrial Bank of Korea (IBK) also launched "IBK Equity-Linked Deposit (ELD) No. 26-2," with a six-month term. It comes in two types: rising knock-out and stable growth-seeking. The rising knock-out type offers an annual interest rate of 1.00% to 9.10% if the KOSPI 200 rises by no more than 30% above its base level. However, if it rises more than 30% even once during the investment period, the rate is fixed at the minimum of 1.00% per year. The stable growth-seeking type has no knock-out condition and offers an annual interest rate of 2.00% to 5.00%, depending on the index's rate of increase.

Banks are expected to adjust the return structures and rates of their ELD products in light of rising time deposit rates and the recent stock market downturn. Since actual returns can be lower than those of time deposits depending on stock index movements, the minimum rate and knock-out conditions, as well as the maximum rate, are likely to be key factors in choosing a product.

"Even a stable-type ELD with no knock-out condition is difficult to sell to customers if its maximum rate is lower than the rate on time deposits," a banking industry official said. "We will set ELD rates while monitoring increases in deposit and savings account rates."

This content was produced with the assistance of AI translation services.