Bank Stocks Taking a Breather, Set to Rise Again in the Second Half

Average 27% Rise in Stocks of 4 Major Banks... Interest Rate Increase and Dividend Benefits

[Image source=Yonhap News]

[Asia Economy Reporter Park Jihwan] Bank stocks, which have shown strong performance with soaring earnings this year, have taken a brief pause this month. This is largely seen as profit-taking following a nearly 40% surge in stock prices from February through last month. However, the securities industry largely expects bank stocks to resume their upward trend, supported by continued strong earnings, an accelerated interest rate hike timeline, and the added appeal of dividend investments.

According to the Korea Exchange on the 21st, the stock prices of the four major domestic banks?KB Financial, Shinhan Financial Group, Hana Financial Group, and Woori Financial Group?have risen an average of 27.4% since the beginning of the year through the previous day. Bank stocks began a significant rebound starting in February, climbing an average of 38.4% through last month, showing a steep upward trend. This is attributed to record-breaking net profits in the first quarter amid COVID-19 and a low interest rate environment, with strong earnings expected to continue into the second quarter. Both KB Kookmin and Shinhan posted their highest-ever quarterly net profits of around 1.2 trillion won in Q1, while Woori and Hana showed nearly 30% profit growth compared to the same period last year.

This month, bank stock returns have paused with a -1.3% performance. Choi Jungwook, a researcher at Hana Financial Investment, said, "Due to fatigue from the excess gains between February and May and concerns over KakaoBank’s initial public offering (IPO), the supply and demand situation for bank stocks among domestic and foreign institutions has not been favorable." However, the securities industry forecasts that with economic recovery and interest rate hikes in the second half of the year, banks’ earnings will further improve, and stock prices will continue their upward momentum. Kim Jaewoo, a researcher at Samsung Securities, stated, "The second-quarter earnings will confirm the improvement in banks’ core profit strength, and expectations for interest rate hikes in the second half are also likely to positively contribute to bank profitability."

The U.S. Federal Open Market Committee (FOMC) signaling an earlier-than-expected rate hike in 2023, one year ahead of previous projections, is also a beneficial factor. During periods of rising interest rates, the net interest margin (NIM), a core source of bank revenue, increases. Typically, loan interest rates rise immediately, while deposit interest rates tend to lag, resulting in an increased NIM from the difference between the two.

Another factor enhancing investment appeal is the high likelihood that the financial authorities’ dividend restriction policy?limiting dividends to within 20% of net profits, implemented since last year?will end this month. Dividend payouts had been reduced due to recommendations to restrain dividends, but with economic normalization and strong earnings expected this year, a significant increase in dividends is anticipated. Jeon Baeseung, a researcher at Ebest Investment & Securities, said, "Continuous dividend payments and gradual expansion of dividend payout ratios in the future are expected to positively affect the valuation of domestic bank stocks."