High-Risk 'Debt-Financed' Investing Hits Record High as Investors Tap Credit Lines for Stocks

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High-risk investments in the domestic stock market, including those financed by debt, are on the rise.

According to the Bank of Korea (BOK) on July 5, the ratio of credit trading loans and leveraged exchange-traded fund (ETF) balances to total market capitalization (based on the KOSPI) reached 0.80% as of the end of April this year, surpassing the previous peak of 0.76% recorded in October 2020 during the COVID-19 pandemic.

Since then, the ratio has maintained a high level in the 0.8% to 0.9% range.

The BOK classifies the ratio of credit loans and leveraged ETF balances to the total market capitalization of the KOSPI market as a measure of "high-risk investment," using its trend to gauge the extent of investors' risk appetite.

An increase in this ratio indicates that more individual investors are taking on debt to invest in stocks, hoping for returns that exceed their loan interest rates.

According to the Korea Financial Investment Association, the balance of credit trading loans totaled 37.7187 trillion won as of July 2.

This figure represents the amount that investors have borrowed from securities firms for stock investments and have yet to repay.

This balance grew by approximately 400 billion won in just two trading days this month.

Previously, it surpassed the 38 trillion won mark for the first time in history on May 29, and reached an all-time high of 38.6328 trillion won on June 24.

Indicators of debt-financed investment in the banking sector showed a similar trend.

According to the financial sector, the total balance of credit loans at the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) stood at 109.1648 trillion won as of July 2, an increase of 494.4 billion won from the end of the previous month (108.6704 trillion won).

When breaking down these credit loans into personal revolving credit lines (minus-account loans) and general credit loans, the increase in revolving credit lines was overwhelmingly larger.

The balance of revolving credit lines surged by 493 billion won, from 43.2812 trillion won at the end of last month to 43.7742 trillion won on July 2.

This amounts to an average daily increase of nearly 250 billion won.

During the same period, the usage rate of revolving credit lines at the five major banks (amount used divided by the maximum limit set) also rose by 0.5 percentage points, from an average of 44.8% to 45.2%.

In contrast, the balance of general credit loans increased by only about 1.5 billion won, from 65.3892 trillion won to 65.3907 trillion won.

This appears to be the result of a surge in demand for withdrawing funds from existing revolving credit lines, as banks have tightened restrictions on general credit loans and new revolving credit lines to curb debt-financed investing.

Meanwhile, the balance of demand deposits, which are classified as standby funds, is decreasing very rapidly.

As of July 2, the total balance of demand deposits at the five major banks was 704.2854 trillion won, a sharp decline of 18.0074 trillion won from the end of the previous month.

This means that an average of 9 trillion won in deposits has been withdrawn daily.

It is analyzed that as the KOSPI fell sharply between July 1 and 2, individual investors and others tapped into their standby funds to invest.

Amid this situation, the BOK expressed caution regarding the side effects of excessive leveraged investment aimed at short-term profits.

In a written response to a query from Representative Park Soo-young of the People Power Party, the BOK stated, "While the recent rapid rise in stock prices is based on solid fundamentals, such as strong corporate earnings centered on semiconductors, the increase in individual leveraged investments (debt-financed investing), such as credit loans, also appears to have had a certain level of impact."

The response leaves room for interpretation that current stock price levels may have entered an "overshooting" (overheated) phase, exceeding fundamentals such as the earnings of listed companies.

However, the BOK pointed out that the price-to-earnings ratio (PER), which indicates how many times a stock price is relative to net profit, fell from 10.0 times at the end of last year to 8.0 times as of June 23.

This means that stock prices have not yet caught up with corporate earnings.

The BOK is focusing on the possibility of losses for individual investors.

The BOK analyzed, "In a situation where debt-financed investments and leveraged ETFs have increased, the scale of losses for individual investors could expand if stock prices undergo a significant correction."

In particular, it emphasized, "Caution is required as stock price volatility can be amplified through forced liquidations and increased redemptions, which could lead to losses for other investors."

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