Financial Stocks in the Sunlight, Preparing to Jump Higher

[Asia Economy Reporter Minji Lee] As expectations for economic recovery, which had sharply contracted due to the spread of the Delta variant, revive, bank stocks are expected to show strength due to the rise in the long-term and short-term interest rate spread.

According to the Korea Exchange on the 12th, the KRX Bank Index rose 2.53% this month, ranking second in growth after the healthcare sector. Considering that the KOSPI rose 0.57% this month, the upward trend was relatively pronounced. During this period, KB Financial Group rose 5%, Hana Financial Group (3.5%), Woori Financial Group (3.6%), BNK Financial Group (2.7%), Shinhan Financial Group (1.5%), and DGB Financial Group (1.2%) also showed upward trends.

Over the past month, bank stocks fell about 4.56% due to concerns that the strength of economic recovery could weaken with the spread of the Delta variant. The quarterly dividend card, introduced for the first time ever, also failed to lift the index further. Although long-term interest rates, which are influenced by economic recovery expectations, showed a steep decline, short-term interest rates rose reflecting the base rate hike, resulting in a narrowing of the long-term and short-term interest rate spread. When the spread between long-term and short-term interest rates narrows, banks' net interest margins inevitably shrink.

However, this month, bank stocks are attempting a rebound as solid earnings and renewed economic recovery expectations flow back in. All four major financial groups (KB, Shinhan, Woori, Hana) continued their earnings growth trend in the second quarter, with the highest annual performance expected. The annual operating profit estimate for the four major financial groups is 19.3345 trillion KRW, which is a 25% increase compared to the previous year (15.4626 trillion KRW).

The improvement in net interest margins and steady loan growth are factors supporting these earnings. Taejun Jeong, a researcher at Yuanta Securities, said, "Net interest margins tend to rise from the end of the base rate cut period until the rate hike phase. At this point, the imminent base rate hike will be implemented at a level that does not hinder the economic recovery." He added, "Since the U.S. Federal Reserve (Fed) has announced it will raise the base rate in 2023, the sharply declined long-term and short-term interest rate spread is expected to rebound." Maintaining a healthy loan balance is also positive. Although loan interest rates are rising, as of last month, the loan balance of deposit banks was 2,074 trillion KRW, a 10% increase compared to the same period last year. Strong loan demand from households and self-employed borrowers continues, and deposits still maintain a low-cost structure, so banks' interest income is expected to increase.

In addition, continuous earnings improvement and high dividend yields in non-bank sectors such as securities, cards, and insurance also enhance investment attractiveness. Jungwook Choi, a researcher at Hana Financial Investment, said, "Foreign investors increased their sales of bank stocks last month, but the selling pressure has significantly decreased this month." He added, "Bank stocks are closely linked to the global long-term interest rate trend, and the upward reversal of interest rates at the bottom will further improve investor sentiment."