The Korea Development Bank (KDB) has gained market share in the South Korean derivatives market over the past 12 months, rising to the top position in outstanding derivatives volumes. At the end of the first quarter of 2016, the bank held 7.2 percent of the domestic market with $417 billion outstanding, up from $405 billion, or third overall, at the end of 2015.
With bond yields under significant pressure, the bank has offered a number of solutions to help clients gain additional yield pick-up through various structures, including callable zero-coupon swaps, callable average constant maturity spread swaps and callable average constant maturity spread zero-coupon swaps. From July 2015 to June 2016, the bank issued 84 structured bonds with a notional value of around $29 billion.
The most popular structure was a callable zero-coupon bond, which allowed investors to gain additional yield while decreasing funding costs for the bank. For example, the bank issued a 15-year bond with a callable option that may be exercised every year. Investors were typically insurance companies or pension funds and the bond tenor ranged from 15 to 20 years.
“This appealed to investors looking for a pick-up over traditional bonds. The investor sells the option to KDB in exchange for a higher return. The call feature gives KDB a stop-loss option when interest rates are lowered while the credit rating of KDB-issued bonds also makes it attractive to investors," says Eunhwan Kim, an options trader with KDB.
“Volumes of structured bonds sold by the bank grew by nearly three times in 2015 from 2014 and are set to reach another record high in 2016, adds Kim.
Sangyoon Choi, a senior manager in the foreign exchange and derivatives department at KDB, says the bank has seen increased demand for derivative-based solutions from domestic financial institutions such as commercial banks, securities firms and investment trust managers.
"Some of these firms have limited experience in product structuring so our solutions proved to be an effective means to satisfy this demand," says Choi.
The bank's derivative sales teams have achieved a 51 percent increase in sales compared with the corresponding period last year. In order to attract new business, KDB also implemented a new marketing strategy by offering currency and other risk management consulting services to corporate clients. This proved timely, as the Korean won depreciated by around 10 percent against the U.S. dollar over the last 12 months.
Korea Development Bank provides various banking products and services.
The company’s deposit products include demand, time, and savings deposits; and certificates of deposit. Its corporate banking products include corporate loans, such as facility capital loans, working capital loans, etc.; equity investments, public/corporate bonds, private placement securities, etc.; and debt guarantees, payment guarantees, bond guarantees.
The company also provides investment banking products comprising merger and acquisition, TechnoBanking, venture capital, project finance, private equity fund, and other funding services; and international banking products, including syndication, structured finance, trading, trade finance, and cross-border corporate finance. In addition, it offers indirect investment products, such as on-lending and venture capital funds; and consulting services for a range of business areas that include new projects, corporate management strategy, corporate restructuring, public projects, development projects, overseas projects, and financial advisory and arrangement. Further, the company provides trust and bancassurance, retirement fund, safe-deposit-box, tax and legal counselling, reunification finance, check cards, bonds, and Internet banking services. The company is headquartered in Seoul.
