Regional Financial Stocks Highlighted for Undervalued Appeal

[Asia Economy Reporter Ji-hwan Park] Regional financial holding companies are gaining attention as they benefit from a full-scale rise in market interest rates and growing expectations for economic recovery in key operational bases such as Busan and Ulsan.

According to the Korea Exchange on the 21st, financial stocks, which fell 4.15% even during last year's broad KOSPI rally, have shown a clear rebound this year. The KRX Bank Index, composed of eight major domestic financial holding companies and banks, closed at 634.44, down 6.77 points (1.06%) from the previous trading day. Since January 4th (599.98), the index has risen 5.74% this year.

The recent rise in bank stock prices is attributed to the sharp increase in U.S. Treasury yields, especially long-term bonds. The possibility of increased Treasury issuance is becoming a reality due to large-scale economic stimulus measures following the inauguration of the Biden administration. An increase in Treasury issuance means a decline in Treasury prices. Since interest rates move inversely to prices, when Treasury prices fall, Treasury yields rise. If domestic market interest rates, which have a high correlation with U.S. Treasury yields, increase, it is analyzed that the profitability of financial companies will improve due to the interest rate spread between deposits and loans.

In particular, expectations for economic recovery in key regional hubs such as Busan, Ulsan, and Daegu are enhancing the attractiveness of regional financial stocks. The BNK Economic Research Institute forecasted that major industries in the Southeast region, including shipbuilding, automobiles, and steel, will improve this year, leading to a regional economic growth rate of 2.9%. As the core industries in the operational base?automobiles, steel, and shipbuilding?recover, corporate loan demand is expected to improve significantly. Youngsoo Seo, a researcher at Kiwoom Securities, explained, "Regional financial stocks have significant lending exposure to manufacturing industries, and they are expected to benefit from government policy support for these sectors."

Regional financial stocks stand out even among financial stocks. Looking at the PBR of domestic financial stocks: KB Financial (0.4), Hana Financial (0.4), Shinhan Financial (0.4), Woori Financial (0.3), JB Financial (0.3), BNK Financial (0.2), and DGB Financial (0.2). A PBR below 1 indicates that the stock price is lower than the company's liquidation value. Although financial companies overall are undervalued, regional financial stocks are considered to have more room for stock price appreciation.