Bank Stocks Rebound Despite Interest Rate Cut

[Asia Economy Reporter Koh Hyung-kwang] Although the Bank of Korea lowered the base interest rate to an all-time low in response to the impact of the novel coronavirus infection (COVID-19), bank stocks collectively showed an upward trend. Typically, a cut in the base interest rate is interpreted as a signal of deteriorating bank performance, leading to weak stock prices, but this time the pattern was the opposite.

According to the Korea Exchange on the 29th, Hana Financial Group closed the day at 28,450 won, up 4.6% from the previous trading day. Most bank stocks recorded gains the previous day, including Woori Financial Group up 4.5%, Industrial Bank of Korea up 5.5%, KB Financial Group up 3.3%, and Shinhan Financial Group up 1.6%. Despite the Bank of Korea lowering the base interest rate to a record low of 0.5% the day before, bank stocks showed an upward trend.

Generally, when the Bank of Korea lowers the base interest rate, it acts as a negative factor for the banking sector, causing stock prices to decline. This is because when interest rates fall, banks’ sources of income such as the loan-deposit margin (the difference between loan interest rates and deposit interest rates) or net interest margin (NIM) shrink, reducing profitability.

However, the previous day’s base rate cut acted as a positive factor for bank stocks. Rather than the deterioration of banks’ profitability, the disappearance of uncertainty regarding the direction of the base interest rate was more prominent, acting as a positive factor for bank stocks. Since the Bank of Korea lowered the base interest rate to an all-time low, the possibility of further rate cuts is low, which is interpreted as enabling stable operations for the banking industry.

Choi Jung-wook, a researcher at Hana Financial Investment, said, "With the base interest rate lowered to 0.5%, it is judged that the capacity for further cuts has been exhausted. Even if there are additional cuts, it is more likely that the base rate will be adjusted by 10 basis points rather than 25 basis points, and in this case, the impact on NIM will be very minimal, which will be an opportunity for a turnaround in the bank stock sentiment."

The fact that bank stocks have been excessively undervalued so far also has a significant potential to act as a positive factor for future stock prices. As of the 27th, the day before the Bank of Korea’s base rate decision, the KOSPI had fallen 6.6% compared to the first trading day of the year on January 2, but the KOSPI Financials Index had dropped by as much as 23.3%.

Park Jin-hyung, a researcher at Yuanta Securities, said, "Volatility in the financial market due to the COVID-19 crisis, pressure from economic recession, the possibility of the Bank of Korea lowering the base interest rate, and concerns about WM (wealth management) customer attrition due to the trend of non-face-to-face transactions have been factors causing undervaluation of bank stocks. Looking at the valuation, dividend attractiveness, profit-generating ability, and structural improvement trends of bank stocks, there is clearly room for stock price growth."