The closing prices of the Kospi, SK hynix and Samsung Electronics are displayed on a board at Hana Bank's dealing room in Jung-gu, Seoul, on July 3, when the Kospi reclaimed the 8,000 mark. The index closed up 440.25 points, or 5.76 percent, at 8,088.34, while the Kosdaq ended 1.69 points, or 0.19 percent, higher at 868.41. [Yonhap]
The closing prices of the Kospi, SK hynix and Samsung Electronics are displayed on a board at Hana Bank's dealing room in Jung-gu, Seoul, on July 3, when the Kospi reclaimed the 8,000 mark. The index closed up 440.25 points, or 5.76 percent, at 8,088.34, while the Kosdaq ended 1.69 points, or 0.19 percent, higher at 868.41. [Yonhap]

Debt-fueled investing by retail investors hit a record high in the second quarter as the Kospi surged past the 9,000 mark for the first time. The daily average balance of margin loans and stock-backed borrowing combined approached 62 trillion won ($39.9 billion), and brokerages are estimated to have collected about 1.4 trillion won in interest income from those loans.

According to the Korea Financial Investment Association, the daily average balance of margin financing — loans taken out by investors to buy shares — stood at 35.94 trillion won in the second quarter (April–June), up 15.9 percent, or 4.93 trillion won, from the first-quarter average of 31.01 trillion won. The figure is the highest since the association began tracking the data.

Margin financing represents the amount investors have borrowed from brokerages to buy stocks and have yet to repay, making it a key gauge of leveraged retail investing. The balance, which stood at around 32 trillion won at the start of the second quarter, surged to an all-time high of 38.63 trillion won on June 24.

Stock-backed loans — where investors pledge their holdings as collateral — also remained elevated. The daily average balance in the second quarter was 25.97 trillion won, a slight dip from the first-quarter average of 26.03 trillion won, but the figure held steadily in the 24 trillion to 26 trillion won range throughout the period.

Stock-backed loans carry less volatility than margin financing because the range of eligible collateral is restricted and pledged shares cannot be freely sold. However, industry officials say a growing share of such borrowing now appears to be flowing back into the stock market for additional investment, rather than being used to cover living expenses.

"In the past, stock-backed loans were used for a variety of purposes — cash withdrawals, business funding and the like — but recently, given the bull market, a significant portion has likely been reinvested in equities," an industry official said.

Combined, the daily average balance of margin financing and stock-backed loans reached a record 61.91 trillion won in the second quarter, up 8.5 percent from the first-quarter average of 57.04 trillion won.

The buoyant market fed directly into brokerage earnings. Interest rates on margin loans typically run at around 8 to 9 percent annually, though they vary by firm and loan duration. Short-term loans of up to one week carry rates in the mid-5 percent range annually, while loans exceeding 180 days can approach 10 percent at some firms. Most loans held for more than a month are charged around 9 percent annually.

Applying a 9 percent annual rate to the second-quarter daily average margin financing balance of 35.94 trillion won, brokerages are estimated to have earned about 808.6 billion won in interest income from margin loans alone.

Stock-backed loans carry rates in the high-7 percent range annually for terms of up to 15 days, rising to the mid-to-high 8 percent range for loans held longer than a month. Applying an 8.5 percent annual rate to the daily average balance of 25.97 trillion won yields an estimated 551.7 billion won in interest income.

Combined, brokerages are estimated to have earned about 1.36 trillion won in interest income from debt-fueled investing in the second quarter — up 8.7 percent from the estimated 1.25 trillion won in the first quarter, calculated using the same method.

The 10 largest domestic brokerages collected about 600 billion won in interest income from margin financing alone in the first quarter. Analysts say margin loan interest has become a core revenue driver for brokerages, alongside commissions boosted by higher trading volumes.

The margin financing balance has recently been hovering around 38 trillion won, as many brokerages have approached the regulatory ceiling — firms may not extend credit to customers beyond 100 percent of their own equity capital.

However, the industry does not expect the growth in leveraged investing to slow easily. NH Investment Securities, KB Securities and other major brokerages have recently moved to raise capital in quick succession, which is likely to expand their credit limits and allow them to lend more to investors.

Experts caution that while leveraged investing can amplify returns during a rising market, excessive use of margin poses risks: a sharp downturn could trigger a wave of forced liquidations, amplifying volatility.

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attom@heraldcorp.com