When it comes to the god of lending and the god of receiving, I understand it when I see it, but if you ask me to write the characters, I can't do it. It's been a long time since I've seen these characters. Let’s talk about banks again. These days, it seems like there's no escaping from banks. What is lending? It means to extend credit. What about receiving? It means to check credit. This is the basic business model of banks. If they can't do this, they aren't banks. However, there are banks that have struggled with this, globally, in the United States, Europe, and elsewhere. They refer to it as bankruptcy, acquisition, closure, and so on. In the current macro situation, during a period of rising interest rates and liquidity issues, it’s interesting that there are banks that are unable to make money due to their lending operations. Specifically, these are internet-only banks. In Korea, their origin is quite unique, and in a way, I think the existence of these internet-only banks is very personal.

So why is that? Is there something like this in the United States? If so, is it okay in the U.S.? There are indeed some cases, but in the U.S., internet-only banks are often referred to as online banks. However, they are quite different. To be precise, the model of internet-only banks in Korea is fundamentally different. 

The biggest difference is that they operate as banks. They fulfill their primary role as banks, conducting business and successfully generating profits as banks. Each of them has its own strengths, capturing the specialty market. Examples of such banks include Capital One, Discover Bank, and Charles Schwab, which all have offline branches. This is how they started, so they have quite a bit of management experience. When you look at each one, they are representative...

There was a signature business. For example, in the case of Charles Schwab, they originally focused heavily on high-yield checking accounts and offered lectures related to securities accounts in retail. They became synonymous with premium card services and started their business with a focus on that. From there, they leveraged their strengths to later expand into personal loans and card loans. However, internet-only banks in Korea are very different. They started as IT startups and later obtained a banking license, which is a unique case. Additionally, in Korea, they face significant government regulations, and there are many demands placed on them. The government continually urges banks to engage in socially responsible activities, as they are destined to maintain a public service role.

Comparing these banks to those in the United States seems a bit unreasonable. So this time, let's talk about Korean banks. There has been a lot of discussion about banks in the U.S. and Europe, and recently, there was a brief controversy in Korea as well. About two weeks ago, rumors of a bank run at Toss Bank started circulating, causing quite a stir. The source of these rumors appeared to be on Blind. Over the weekend of the week before last, some people were claiming that Toss Bank was in danger, stating that a significant portion of their assets was heavily invested in securities, particularly bonds. They mentioned that these investments had substantial unrealized losses, high delinquency rates, and were therefore risky. These posts seemed to evoke memories of the Silicon Valley Bank incident, spreading like urban legends.

There was a spread of rumors, and a self-proclaimed Toss Bank employee was on Blind, so they must have been an employee. They directly clarified things and posted comments like, Hey, you make me more anxious. I already withdrew my money. When an employee goes to such lengths to say this, it really raises concerns. There were reactions like, Is there really a problem with Toss Bank? Although some time has passed, let's find out how much of this rumor was fact. First, let's examine how the bank run came about. Looking at the logic of the Blind post, it's funny that there is any logic at all, but it can happen. There seemed to be two main points: first, there was a relatively high ratio of securities, and second, there were issues with overdue rates that had been canceled repeatedly since Toss Bank started from scratch.

As of two weeks ago, the most recent disclosure document, based on the date when the bank run rumors were circulating, was the financial statements for the third quarter of 2022. According to that, the proportion of securities in total assets was 64%, and the delinquency rate was around 0.3%. You might wonder what the problem is with these figures, but understanding the banking industry can clarify this concern. 

First of all, the proportion of securities in total assets for commercial banks averages around 15% to 20%, which is significantly lower than that figure. So, shouldn't we compare it not just with commercial banks but also with other internet-only banks? If we do that, we find that even compared to Kakao Bank and K Bank, this ratio is still exceedingly high—almost double. Normally, banks earn money by taking deposits and significantly increasing their loans.

Toss Bank was investing a lot in low-yield securities that had lower interest rates than loans. This seems strange because, as you can see, the current interest rate for first-grade credit loans is around 6%, almost 7%. Yet, Toss Bank held more international assets, which only barely reached 3% or 4% last year, compared to their loan assets. I will explain this part in more detail later. Anyway, the available-for-sale securities that Toss Bank held are periodically remeasured for valuation gains and losses based on market fluctuations. Last year, the interest rate hike cycle was so rapid that the valuation losses also accumulated quickly. Even when looking at it quarterly, the first-quarter valuation loss...

After 68.4 billion, there are minus 196.7 billion and minus 230 billion, and so on. So, based on last year's third quarter, that amount was minus 238.5 billion. In terms of Toss Bank's assets, if we look only at the balance of securities, it seems that there could have been a connection to the previous liquidity crisis at Silicon Valley Bank, where they realized losses from selling all their bond assets due to cash shortages, which led to their collapse. Additionally, there is a significant issue here with the high proportion of medium to low credit loans. As of last year's third quarter, about 39% of loans were at risk of increasing delinquency rates, which raised concerns. Therefore, the rumors that circulated were about how the current situation would be managed. If problems arise in lending, additional funds would need to be injected to address the issues, and provisions should also be accumulated in advance. However, Toss is not in a situation to do that right now.

Ultimately, the conclusion seems to be that there will be a liquidity crisis. It sounds plausible when stated like that. However, when we look at these numbers, can we really say that Toss Bank could fail like Silicon Valley Bank? In fact, the comparison between Silicon Valley Bank and Toss Bank is somewhat forced. This is because, first of all, if we look at the nature of their deposits, Toss Bank has a deposit structure that could be considered on par with the top financial institutions. As of the third quarter, the total number of customers was nearly 5 million, and the deposits already exceeded 23 trillion won. The customer base was fundamentally different from that of Silicon Valley Bank, which mainly served startup corporate clients. Furthermore, unlike the startups that had to withdraw cash due to urgent needs, the situation with Toss Bank's deposits is different.

Dos Bank saw a decrease in deposits of about 5 trillion won in the third quarter. However, this was due to the intense competition for attracting deposits at that time, and it wasn't a significant outflow of deposits at the bank-run level. In fact, even though deposits decreased, the loan-to-deposit ratio was only 30%, which means the real concern now is how to manage the funds effectively. Looking at the nature of the securities held as assets, Silicon Valley Bank primarily held long-term securities, such as 10-year international bonds and MBS with maturities exceeding 10 years. On the other hand, as of the third quarter, Toss held nearly 18 trillion won in securities, of which about 11 trillion won consisted of bonds maturing within three years. Moreover, most of the bonds that exceeded three years in maturity were also largely...

Since it's a government bond, it wasn't exactly a situation that could be considered risky. Anyway, without understanding this, the city horror stories about Blinding became quite noisy due to social media opinions for a while. The source was about to announce the fourth quarter performance at that time, but they hurriedly pre-released the remittance products for the first quarter of 2023 on Monday, the 27th. As of March 2023, the loan balance was 9.3 trillion won, and the deposit balance was 23.2 trillion won, both increasing by 660 billion won and 2.9 trillion won, respectively, compared to the same period last year. The loan-to-deposit ratio was also at 44%, which was more than four times higher than the same period last year. They showed this data and made their point clear. In any case, the point was that we have sufficient liquidity and they wanted to appeal that it was okay. The Financial Supervisory Service also stepped in. From their perspective, such rumors and concerns were...

We need to prevent things from escalating, so after those remarks circulated, a few days later, our Financial Supervisory Service Chairman Lee Bok-hyun mentioned that other internet banks have a lower proportion of bonds in their assets, and most of their securities are short-term. Therefore, the price fluctuation risk is not significant, and the risk in terms of value is also minimal. He referred to this to calm the situation, and it seems that the issue has been somewhat resolved for now. However, the real problem stems from a controversial product that was launched two weeks ago on March 24 by Toss Bank. This product, called advance interest deposits, seems to have triggered the situation. From a minority perspective, one might wonder why this product was launched. Offering interest upfront could be seen as a marketing strategy to create a fresh and positive response from consumers.

It must have been something I was trying to do. But it seems like, under normal circumstances, I would have thought, Oh, first let me exchange the money. While asking to hold my money, I might have thought it was a sweet deal. However, these days, with the ongoing concerns about risks related to banks, when they talk about advance interest, it makes me think, Aha, they're extending this and that. It feels like they have fundamental risks in their business, and it seems they might have problems, so they are trying to attract deposits even with advance interest. Consumers these days are not that naive. Nevertheless, amidst all this noise, on the 31st, they confidently announced their fourth-quarter results, stating, We will achieve a surplus within this year. The nature of the bank's business, where they borrow money cheaply and lend it out at higher rates, makes the loan-to-deposit ratio important. The outstanding loan balance has been growing quite rapidly, and the loan-to-deposit ratio is currently...

Thanks to the rise, this can be seen as a kind of interest business. The net interest income at the end of last year, that is, at the end of 2021, reached 217.4 billion won after recording a surplus. While presenting this, they explain that the current deficit is due to the fact that we are proactively and comprehensively setting aside a lot of provisions. However, how could the net interest income have been negative before? Anyway, it seems reasonable to consider this part as their plan for now. In terms of business, they mentioned that they will continue to strengthen profitability and stability by continuously launching new products such as jeonse (long-term lease) and monthly rent loan products, as well as joint loans with local banks. However, it seems that the launch date for the jeonse and monthly rent loan products has been delayed and is still undecided. The talk about joint loans is also a recent development, so it’s unclear how exactly it will be implemented. Anyway, the current rumors are causing anxiety.

One of the factors was that the bond valuation losses have also decreased significantly. In the fourth quarter, it was -119.5 billion won, and as of March this year, it stands at -68.3 billion won. This is likely due to the benchmark interest rate hikes nearing their end, leading to a stabilization of market interest rates, which in turn reduced the valuation losses. With this, even though it may not directly correlate with net income, at least the items listed under other comprehensive income should improve. So, to conclude regarding the blind rumors, it seems that Toss Bank's current issue is not a liquidity problem but rather the challenge of achieving profitability. The reality is that for Toss Bank, as well as any bank, the steps to turn a profit are quite simple: increase lending, raise the loan-to-deposit ratio to secure profitability, and manage delinquencies. That's all it takes for a bank to operate effectively.

You can just do the work. However, when comparing Kakao Bank and K-Bank based on last year's third quarter, they already had a lower proportion of securities and a higher proportion of loans, with a loan-to-deposit ratio more than double that of Toss at that time. This raises the question: why couldn't Toss do the same? They have deposits exceeding 23 trillion won, so why are they only able to provide a loan structure that is less than half of that? 

One important reason is that Toss proudly promotes its mid-interest loans. As of the end of last year, the proportion of loans to borrowers with low to medium credit was over 40%. Therefore, we emphasize that Toss Bank is fulfilling its role as an internet-only bank with inclusive finance, a unique term that exists only in Korea. They also highlight the figure of 44%, which they promised to the financial authorities.

They said they would achieve 44%, but the problem is that they can't just freely increase loans for low to mid-credit borrowers. This is because, as a bank, there is a BIS ratio that must be maintained. I usually explain this every time I talk about banks, so if you look at my past videos, you'll find a good explanation. However, since you probably won't watch them, let me explain it again. Banks calculate the risk-weighted assets (RWA) by applying the risk weights to the assets they hold. Ultimately, they need to maintain a certain ratio of equity capital to these risk-weighted assets. Since Toss Bank started operations in 2021, they didn't immediately apply the Basel III standards like other commercial banks; instead, they are still applying transitional measures until this year. Therefore, banks must maintain a minimum BIS ratio of 8%, and this was at the end of last year.

The current standard is 11.35%, which means that it has surpassed the track squad. However, if Toss Bank maintains its current level of equity, even a slight increase in loans could quickly drop this below 8%. At the end of last year, the equity of Vias was 995.1 billion won, and if we assume it to be around 1 trillion won, this would easily imply that the maximum risk-weighted assets based on an 8% standard could reach 12.5 trillion won. This suggests that it could potentially increase risk-weighted assets by approximately 4 trillion won. 

If we calculate Vias based on Basel I standards, for retail loans, 75% of the position is accounted for as risk-weighted assets. Recalculating this means that it could potentially extend loans by about 5.3 trillion won. However, even if we push this fully, since the deposits are now at 3 trillion won, the loan-to-deposit ratio would be slightly over 50%. Currently, other internet banks are...

It seems that it is still a challenge for banks and commercial banks to reach a level of about 90 to 100%. So, let’s return to the same topic we discussed earlier. If we look back at the loan growth rate, it showed a decline of 66%, 21%, and 7.6%. While the total balance certainly has increased, there is a visible issue because they need to maintain the BIS ratio, making it difficult to expand aggressively. Therefore, there is a sad story behind these growth numbers. Ultimately, to improve loans, it is essential for the risk-weighted assets (RWA) to be lower than the equity capital. But how can equity capital be increased? One way is to earn money organically, but there is also the option of issuing new shares. However, Toss Bank has already conducted a significant number of capital increases. The most recent one was in mid-March.

If you add up everything done up to 200 billion, it totals nine times. This time, they acknowledged a valuation of 2 trillion, but compared to Kakao Bank, this valuation is still quite lacking. Even with continuous capital increases, the total capital has only grown from the original 1.45 trillion won to about 1.6 trillion won after adding the recent 200 billion. Banks conduct capital increases to raise funds. According to the data from the end of last year, the BIS capital was roughly 1 trillion won. If we simply think that 200 billion has been added to the BIS capital, it would amount to 1.2 trillion won, which means that the total lending capacity could be around 20 trillion won. As of March this year, the amount lent was said to be 9.3 trillion won, so ideally, there is room to lend about 10 trillion more. This is necessary to maintain a loan-to-deposit ratio of 90% to 100%.

It can come out, but it's not the end of the sentence. With this level of capital, it is not enough. There are three more issues. First, the structure is such that deficits will continue until the loan-to-value ratio reaches an appropriate level. Because of this deficit structure, it is expected that the self-sufficiency in BI will continue to decrease. In fact, Toss Bank already reported a loss of 80 billion won in 2021 and 264.4 billion won last year in 2022, and its capital is being eroded. Even when viewed quarterly, the losses were -65 billion, -58 billion, -58.9 billion, -47.6 billion, and -92.5 billion, showing a clear downward trend. However, Toss Bank's position is that last year, their net profit was 210 billion won, and by February, it had already surpassed 70 billion won. They claim that the deficit will significantly decrease in the future, and that the comprehensive income losses recorded in other comprehensive income have also decreased. However, there is still...

Even if we look at it that way, we won't really know how the cost structure has come out before analyzing the increase in interest income. Also, reducing the deficit and realizing a surplus are somewhat separate issues. Particularly in the case of interest income, it may be difficult to maintain a long-term upward trend. Last year, the base interest rate rose significantly, and it seems that interest income increased by expanding loans to low- and medium-credit borrowers. However, the problem is that loans to these low- and medium-credit borrowers tend to have high interest rates, and often, they borrow for a short-term need and quickly pay it back. To prevent this, banks typically impose a prepayment penalty to avoid losses. However, this is not working now because they need to align with the targets set by financial authorities for low- and medium-credit borrower loans. The competition in this market, especially among the three major internet banks, is so fierce that every penny counts.

In this situation, they need to attract loans, so they are promoting that there are no prepayment penalties, and in doing so, they are engaging in a fierce competition among themselves, which is quite self-destructive. Moreover, leaving all that aside, the realistic question is whether a customer base that consistently pays interest at high rates above 7% for over a year can grow stably. It’s not a realistic proposition, right? If their credit ratings improve or they earn a bit more money, they will likely pay off their loans quickly and switch to other products. 

The second issue is that as Toss Bank increases its ratio of mid-credit loans, the delinquency rate also rises. This is somewhat expected, but in the fourth quarter, it has already more than doubled compared to the third quarter. The same chart we saw earlier shows that the delinquency rate for the fourth quarter is 0.72%, which is more than double.

The proportion has increased, and here, Toss Bank is planning to raise its share from 40% to 44% this year, so the increase will likely be more significant. If we calculate this, the loan assets at the end of 2022 were almost 8.8 trillion won. Assuming deposits remain the same at 4%, it means they plan to lend an additional 350 billion won to mid-level borrowers. Earlier, we mentioned that the amount lent as of March this year was structured at 300 billion won. Therefore, the increase in loans compared to the end of last year is 500 billion won, which means they intend to lend about 70% of that to mid- to low-credit borrowers. This raises concerns because, as obvious as it may sound, if the delinquency rate rises, it will negatively impact the calculation of risk-weighted assets (RWA). Some areas are supposed to be calculated at 75% or 100%, and if they keep the loan loss provisions below 20%, it will be calculated at 150%.

해야 되는 거잖아요. 이런 거예요. 예를 들어서, 100억짜리 대출이 RW의 75억으로 잡혔는데, 이게 3개월 연체가 되면 이게 100억으로 잡히고, 여기에 대한 충당금을 20억 미만으로 잡으면 이걸 이제 150억으로 잡히게 된다는 거죠. 물론 아직 전체 대출 대비 차지하는 비중이 매우 작지만, 이 증가율이 꽤 빠른 것 같아서 주의할 필요가 있습니다. 그래서 이 관점으로 아까 봤던 토스뱅크의 대손충당금 적립률을 보면, 아까 봤던 똑같은 숫자가 느낌이 달라집니다. 보수적으로 경영하기 위해서 RW 때문에 충당금을 충분히 쌓아둔 건지, 아니면 사실은 생존에 필요해서 어쩔 수 없이 그랬던 건지. 필요해서 그런 거라면, 이걸 지키기 위해서 순이익이 과연 얼마나 빨리 개선될 수 있을까 의문스럽습니다. 그리고 마지막으로 세 번째 문제는 소스 뱅크가...

Starting next year, from 2024, the three criteria for gradual implementation must be applied. Therefore, the BIS ratio needs to be increased from the current 8% to 10.5%, including the gradual addition of buffer capital. Without additional capital, it is difficult to reduce RWA right away, and it is challenging to quickly increase the interest rate. Toss Bank absolutely needs this capital expansion. Operating a bank in Korea is a highly challenging task. Initially, there are many difficult situations like this. So, why did internet-only banks emerge? There is a backstory to their creation. Toss Bank, being the youngest internet-only bank, likely faced more difficult challenges from the start. Moreover, the concept of internet-only banks was born out of a public interest goal to expand loans for individuals with mid to low credit ratings. Additionally, they do not require offline branches, which means fewer personnel at physical locations.

It's unnecessary; it's much more efficient, but I don't know what that means. There are parts that are not true, and that's that. Originally, when something emerges in the market that didn't exist before, or when the government launches something that didn't have a market, there is always a public interest vision at the time of its launch. This includes consumer convenience, enhancing financial consumer convenience, promoting competition in the banking industry, and creating future growth capabilities. With such grand ideals, they established Kakao Bank and K Bank. However, upon checking, it turns out that they are not meeting the goals they set for themselves. In the case of Kakao Bank, the target by the end of 2021 was 21%, but they only achieved 17%. K Bank also aimed for 21.5% but only reached 16.6%. From an informational standpoint,

Now, they probably didn't want to grant a license to a latecomer like Toss Bank. However, for Toss, entering the banking sector must have been extremely important at the company-wide level, and considering how absolutely crucial this license is for the banking industry in our country, Toss Bank began operations in October 2021. This means that the banking license was granted starting in October, but obtaining that banking license was likely much more difficult and required higher standards than what Kakao Bank had to go through previously. Therefore, from the very beginning, competitors who had entered the market earlier were able to showcase a performance that was more than double that of the 17% loan rate for mid-to-low credit borrowers, presenting 34.9% instead, and they seemed to be saying, We will do better; we will do better, and took the plunge. In such a dramatic fashion, they obtained the banking license, and so Toss Bank...

It seems that we are facing a dilemma like this. It's a complete vicious cycle. Because we are in the red, we need to quickly turn a profit. To earn money, the loan-to-deposit ratio needs to increase, and we have to maintain the BIS ratio as well as meet the mid-interest loan targets. To raise the loan-to-deposit ratio, we need more capital, but since we are in the red, we have nothing to appeal to investors. The only thing we can push is our platform-based user metrics, and if we lose that, we will go under. Therefore, we have to keep pouring money into marketing while continuously increasing the number of users. This platform business must be maintained, and occasionally we need to introduce unique and unusual products. However, we still need money, and the market atmosphere isn't great, making it extremely difficult. After struggling to raise capital, marketing has also led to an increase in deposits.

It seems that they are also struggling to raise funds and are operating at a loss. The cycle of sadness and hardship seems to continue. We really need new products or policy support, or whatever it may be; it's time for a new target. Recently, in the banking sector, a task force was established within the management and sales system. The Internet Young Bank Council, consisting of Kakao Bank, Toss Bank, and K Bank, submitted several proposals to the authorities. They suggested measures to expand competition, such as activating the loan mobility system and easing the target ratio for mid- to low-credit loans. They also proposed cooperation between internet banks and regional banks in joint lending. The loan mobility system means that they want the exemption of early repayment fees, and for internet banks to provide lower interest rates, they asked that those who switch loans should not be included in the calculation of the mid- to low-credit loan ratio.

In addition to household loans, we would like to expand the scope to include loans for individual business owners. And regarding the cooperative joint loans with local banks, this refers to a unique platform business of internet banks. By utilizing IT infrastructure, loan applications are received through the internet bank's app, and local banks conduct separate evaluations, with loans being disbursed based on a pre-agreed ratio with the customer. This model makes it easier for internet banks to increase their total loan volume, and local banks can also attract more customers. Aside from that, there are requests to increase non-face-to-face transaction methods, to enable ETF brokerage, and to relax regulations on insurance products. There are various requests, but ultimately, there is a need to increase revenue streams in multiple ways, which seems to be what they are asking for. However,

Our financial authorities have expressed a tone that suggests, That’s your issue, do your own thing, and make sure you meet your targets. Among these remarks, it seems they have only taken the regional banks and joint loans somewhat seriously. I can understand this reaction; initially, these internet banks offered higher deposit rates than other banks to attract customers, but later, their deposit rates became similar to others while their loan rates continued to rise. What does that mean? And what's the point of not having offline branches? The IT infrastructure costs are enormous. It's just that they don't have branches, but the costs are comparable to those of traditional banks, and in the end, it all affects consumer pricing. So, what exactly are you achieving? Moreover, since these are IT companies rather than traditional banks, there are also labor costs involved.

There is a joker called labor costs, which has significantly raised the value of employees across the industry. A representative example of this is Toss, and since it is a startup, there are also stock option costs. Anyway, you guys are not cheap either; it's a costly structure. There are also issues with valuation. So, it seems we need to prove numerically that internet-only banks are more beneficial to the consumer finance market. Until this is resolved, the financial authorities have no justification for providing new incentives. In fact, this year, devising a sales strategy for Toss Bank and figuring out how to execute the banking strategy will likely be a tough battle. However, it shouldn't be too difficult. Just looking at the people around me, everyone uses Toss Bank. They say they take pictures of their daily transactions and manage their finances that way.

If you receive 200 won a day, what does that mean? If you think about it as 5 million won, does that mean you're burning 10 billion won? If you add everything up, is it correct that Toss Bank spends around 12 billion won a year? Anyway, since I have many loyal consumers around me, I hope everything gets resolved well. Go Toss Bank!

토스 뱅크는 뭐가 문제인가

Occasional ramblings of a New Yorker on various topics, with heavy bias on stocks and corporate finance. 
ex Wall Street Investment Banker & Hedge Fund Analyst.

Also running an AI company that's building an Autopilot Media Platform. We automate every finance news, articles, research, newsletter, video content... & more! 

Business Inquiry:  info@projectpluto.co
