Bank loans to Korean corporations rose at the fastest pace in 10 months in February as companies shifted away from bond financing amid heightened interest rate volatility, central bank data showed Tuesday.
Outstanding corporate loans at banks reached 1,379.2 trillion won ($1.02 trillion), up 9.6 trillion won from the previous month, according to the Bank of Korea's February Financial Market Trends report. The increase nearly doubled January's 5.7 trillion won gain and marked the largest monthly rise since April last year, when loans grew by 14.4 trillion won.
Large corporations drove the expansion, with their borrowing jumping to 5.2 trillion won in February from 3.4 trillion won in January. Loans to small and medium-sized enterprises also accelerated, rising 4.3 trillion won compared with 2.3 trillion won the prior month. The BOK attributed the growth to banks' lending expansion strategies and working capital demand related to the Lunar New Year holiday.
In contrast, direct financing through bond issuance contracted sharply. Corporate bond issuance totaled 29.67 trillion won this year through Tuesday while redemptions reached 30.60 trillion won, resulting in net redemptions of 928.3 billion won, according to the Korea Financial Investment Association. Issuance fell 16.9% year-on-year while redemptions increased 20.7%.
Commercial paper and short-term bonds also swung to net redemptions of 100 billion won in February after net issuance of 10.1 trillion won in January, as companies deferred bond sales and repaid short-term debt amid maturing obligations and volatile rates.
"Market interest rate volatility has increased due to factors including the U.S.-Iran conflict, making companies reluctant to issue bonds," a BOK official said.
Most corporate bonds maturing now were issued three years ago when rates were higher, making bank loans more cost-effective than refinancing at current elevated rates, market participants noted.
Weakening demand for bond investments as funds flow into equity markets has also deteriorated issuance conditions. "In a phase of high inflation volatility, lower-rated companies may struggle to raise funds through corporate bonds, potentially dampening the broader market," said Jung Yong-taek, chief economist at IBK Investment & Securities.
Meanwhile, household loans declined for the third consecutive month, falling 300 billion won in February—a smaller drop than January's 1.1 trillion won decrease. Mortgage loans rose 400 billion won on increased housing transactions at year-end and moving demand ahead of the new school year, but other loans fell 700 billion won as holiday bonuses were used for repayments.