(Bloomberg) -- Standard Chartered Plc stuck it out in South Korea’s hotly contested consumer banking market while its global rivals threw in the towel one by one. It’s now paying the price.

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The British lender is under pressure to compensate thousands of individuals in the country, after selling them around $900 million in complex securities tied to a Chinese stock index that performed badly. Standard Chartered estimated last month that Korean customers’ losses from the so-called equity-linked securities (ELS) may total several hundred million dollars when they mature this year and beyond.

The losses are a reputational black eye and are once again raising questions about Standard Chartered’s strategy for South Korea, which used to be its second-largest market. Stiff competition forced the lender to downsize earlier, and led HSBC Holdings Plc and Citigroup Inc. to wind down their retail-banking businesses in the country. Standard Chartered’s $100 million provision for the expected compensation is already equivalent to around 40% of its net income from the country last year.

The bank is still trying to make business work, but the tough operating environment means it has had to aggressively track larger domestic rivals. Standard Chartered Bank Korea was one of the top five sellers of securities linked to the Hang Seng China Enterprises Index, even though it ranks ninth by assets in the country’s banking sector.

“It’s in a disadvantageous position when it comes to economies of scale and competition with domestic nationwide banks,” said Hyukjoon Lee, a director of financial industry analysis at credit rater NICE Investors Service Co. StanChart Korea reported a drop of more than 10% in its total assets last year, and Lee said that has fueled speculation about the bank’s future. It has 150 physical branches in the country, less than half the number it had in 2005.

StanChart Korea halted sales of equity-linked securities in January. Irate customers have threatened to cancel their credit cards and move their account balances to other banks if they don’t receive full compensation for their losses. Financial regulators are also planning to impose penalties on the biggest ELS sellers.

A spokesman for Standard Chartered Bank Korea said in an emailed statement that the firm can’t comment on regulators’ investigation while it is ongoing. He said the board has approved a compensation plan for affected customers, and the bank takes the issue seriously. It also plans to continue discussions with authorities.

Korea is still one of Standard Chartered’s top five income contributors, the spokesman said, adding that the group remains committed to its long-term investment in the country and continues to expand its business partnerships there.

Sales Push

For years, Standard Chartered’s international stature helped it attract more affluent Koreans, enabling it to generate steady income from mortgages and other loans, and lucrative fees from selling investment products.

Banks and brokerages had advertised the China equity-linked notes with coupons of 3% to 4% annually when local bank deposit rates were around 1.2%, and actively marketed them to many middle-aged and elderly Koreans. The catch — which many people overlooked — was that investors would lose most or all of their money if the underlying index declined significantly. The HSCEI is about 43% below its early 2021 peak, even after a recent rebound.

South Korea’s Financial Supervisory Service said misselling was rampant among the banks it investigated, and that they had set similarly aggressive internal sales targets for the equity-linked securities. Korean investors were expected to lose a total of 5.8 trillion won ($4.2 billion) from securities tied to HSCEI, based on the Hong Kong stock benchmark’s end-February level.

It isn’t the first time Standard Chartered has gotten into regulatory trouble for selling complex investment products to individuals. More than a decade ago, the bank’s Hong Kong unit had to compensate customers in the Chinese territory after some structured notes it sold lost value when Lehman Brothers Holdings collapsed. Other Western banks were also embroiled in that debacle.

Hundreds of StanChart Korea customers banded together in an online group after they lost money. S. Chang, a 46-year-old who asked that his first name not be used, said he was told the equity-linked securities were a safe alternative to term deposits, and that losses were unlikely. “I told the banker that I didn’t want to buy investment products like stocks,” Chang recalled. He said he invested money he got from selling his home and nearly all his dollar deposits into the China-linked securities.

At StanChart Korea branches, people with maturing term deposits or large savings account balances were escorted by bank tellers to private rooms, where staffers pitched them the notes, according to several customers and an employee.

Chang said some members of the group he represents invested their retirement savings and even funds from insurance payouts following the death of their loved ones. He showed Bloomberg two investment contracts that he was given by the bank. One stated on its front that there was risk of principal loss, and another didn’t.

Some buyers were lured by the free gifts, including a a 3.75-gram (0.13 oz) gold coin engraved with the face of a bull and a Dyson Airwrap hair dryer that usually retails for about $600.

“My sister didn’t get the gold so I asked why? The banker said it was only for a first-time customer who buys at least 200 million won worth” of the notes, said a woman surnamed Kim, who received the coin. She said her sibling, a longtime customer of the bank, invested a similar amount and now also stands to lose money when the notes mature.

Tough Competition

Standard Chartered expanded its presence in South Korea in 2005, after paying $3.3 billion for Korea First Bank and beating out HSBC in the deal. Korea First at the time had a 6% market share, around 400 branches and 3.3 million retail customers.

StanChart Korea’s annual operating income peaked at around $1.9 billion in 2012. The business took a turn shortly after, as intense competition squeezed many lenders’ interest margins and fee income, while loan impairments increased. The bank downsized its business, cut staff and closed some branches. HSBC in 2013 wound down its retail banking and wealth management business in the country after failing to gain scale.

In 2021, Citigroup said it would wind down its South Korea consumer banking business as part of a broader plan to exit retail banking in most Asian markets. That year, StanChart Korea and many domestic banks ramped up sales of the China equity linked securities.

StanChart Korea had 56 trillion won ($41 billion) in deposits at the end of last year, about 3.2% of the total across the country’s six commercial nationwide lenders. The business still provides steady income stream for the broader group, thanks in part to its mortgage lending and corporate banking operations, said Daehyun Kim, a director at S&P Global Ratings. He said the compensation to investors related to potential misselling of ELS could weigh on StanChart Korea in the near term.

“It could weaken some of the sales of investment products, and it could raise some concerns on internal control issues. That’s also what we are closely monitoring — whether this misselling issue will have any material damage on the bank’s franchise,” he said.

--With assistance from Ambereen Choudhury.

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