Does central bank’s rate hike signal end to ‘bittoo’ era?

The central bank’s rate hike last week may signal an end to Korean investors borrowing heavily to invest -- and may even put retail stock investors at greater risk, according to market analysts Sunday.

The trend, known as “bittoo” in Korean -- from the “bit” meaning debt and “tooja” meaning investment -- has created sustained, rapid growth in the value of assets. But there are signs that this may be softening.

According to market researcher Infomax, the top 20 stocks that had the largest portion of investments through loans extended by brokerages declined by an average 9.7 percent from Aug. 17 to 20. The figure is steeper than the 3.5 percent decline of the main bourse Kospi over the same period.

“The size of the loans extended to retail investors by brokerages and how much of it was funneled to the stocks will affect the listed companies,” Hana Financial Investment analyst Lee Jae-sun said.

“Firms with stocks that consist of such large ‘debt money’ are likely to be hit with more volatility when the market turns bearish,” Lee added.

South Korea’s household credit reached a record high of 1,805.9 trillion ($1.55 trillion) won as of June, up 41.2 trillion won from three months earlier, according to the Bank of Korea data.

The stock market concerns follow South Korea’s monetary and fiscal policymakers’ latest moves to put a brake on the nation’s snowballing household debt, which is expected to result in higher lending rates and heavier debt burden.

It has already led to a spike in lending, as borrowers scurried to take out last minute loans before banks increased interest rates.

The five major commercial banks’ lending to households for mortgages, stocks and living expenses gained 2.8 trillion won ($2.3 billion) on-week to an accumulated 143.1 trillion won as of Friday, data provided by the lenders showed.

The gain itself had increased nearly sixfold on-week, compared to 467.9 billion won the previous week.

Of the total outstanding debt, lending through overdraft lines of credit increased 2.6 trillion won to 51.6 trillion won in the cited period. The gain had increased nearly eightfold on-week, compared with 345.3 billion won the previous week.

The abrupt surge in lending comes after financial authorities’ request to commercial banks earlier this month to adopt stricter loan measures and temporarily suspend some products to cut off supply.

The top five domestic commercial banks here -- KB Kookmin, Shinhan, Hana, Woori and NH Nonghyup -- alongside foreign banks Citibank Korea and Standard Chartered Korea, had reportedly submitted plans to the watchdog Financial Supervisory Service to cut loan limits to the level of the borrowers’ annual salary, in response to the request. Internet-only banks KakaoBank and K bank had also joined the plan.

On the plan to slash loan limits to the level of the borrowers’ salary, NH NongHyup and KB Kookmin have adopted the rule so far, with the rest reportedly planning to implement it in September.

NH NongHyup, which received a warning from financial authorities for the largest increase in household lending this year, abided by the request most strictly, temporarily suspending all of its mortgage services while slashing loan limits since last week.

KB Kookmin plans to lower borrowing limits for overdraft accounts as well, to 50 million won per borrower, starting next month, according to the submitted plan. Woori, Shinhan and Hana had already adopted the 50 million-won bar for overdraft accounts.

The Bank of Korea on Thursday lifted its benchmark interest rate by 25 basis points to 0.75 percent, ending 15 months of the record-low interest rate at 0.5 percent. The central bank cut the base rate to 0.5 percent in May last year to minimize financial woes from the COVID-19 pandemic and provide ample liquidity to the market.

As a result, the average interest rate charged on new bank loans, which came to 2.78 percent in July -- up 0.01 percentage point from the previous month – is projected to jump by the end of the year, with some projecting it will reach 4 percent.

But experts said that it was going to take more than one rate hike to close the lid on the “bittoo” movement and put a solid brake on the growing household credit.

“The monetary policy normalization goal for this year will be financial stability, so at least two rate hikes would have to carried out for visible effects,” Cho Jong-hyun, an analyst at Shinhan Investment said.

By Jung Min-kyung (mkjung@heraldcorp.com)