Two South Korean banks have compensated retail investors for their losses involving troubled Hong Kong-tied equity-linked securities (ELS) after financial authorities' probe into possible illegal activities related to the sale of the high-risk notes, industry sources said Sunday.

Shinhan Bank and Hana Bank provided the compensation to some of the individual retailers who invested in Chinese shares listed on the Hong Kong bourse through ELS products sold in their outlets, they said.

Other banks, including KB Kookmin, Woori and HN Nonghyup, are set to follow suit. But it appears to be taking some time for them to come up with their compensation plans for their HK-tied ELS investors.

KB Kookmin said it will initially start negotiations with investors who have terminated their accounts since late last year and finalized the value of their losses.

An average of 40 percent of investment losses in the ELS products are expected to be covered for each investor.

The HK-tied ELS is linked to the movement of the Hang Seng China Enterprises Index, and its value more than halved in March this year from its 2021 peak.

This year, the Financial Supervisory Service (FSS) has expanded its investigation into banks and brokerages over the possible mis-selling of the ELS products following complaints from investors concerned about heavy losses from the products.

The sellers came under fire for not properly explaining the investment risks of the ELS products. The FSS found that some banks focused on selling more ELS products despite growing risks to boost their non-interest income.

Financial institutions will be punished for any illegal activities committed during the sale of the products in order to strengthen regulatory oversight and investor protection, the FSS said.

The FSS estimated the investors' losses linked to the ELS products sold by six local banks at 1.9 trillion won, or 50 percent of their investments of 3.9 trillion won, this year through March 22. (Yonhap)