Bank Stocks Stir as Base Interest Rate Rises... Will They Soar Further?

[Asia Economy Reporter Minji Lee] Bank stocks are stirring amid the base interest rate hike.

As of 1:42 PM on the 26th, KB Financial Group is trading at 54,000 KRW, up 0.56% from the previous trading day. On the same day, KB Financial Group's stock price surged to as high as 54,700 KRW during the session. At the same time, other bank stocks such as Woori Financial Group (0.45%), Shinhan Financial Group (0.39%), and Industrial Bank of Korea (0.48%) also showed upward trends, with intraday gains reaching over 1%. This is interpreted as a reaction to the Bank of Korea's Monetary Policy Committee raising the base interest rate by 0.25 percentage points from 0.5% to 0.75% earlier that morning. The Monetary Policy Committee had kept the rate frozen for about 1 year and 3 months after lowering it to a record low of 0.5% in May last year.

Bank stocks have been on the rise throughout this month due to expectations of interest rate hikes. As inflationary pressures increased and household loan growth hit a record high last month, there was a growing forecast that the Monetary Policy Committee members would prioritize financial stabilization over the real economy when deciding the base rate. In fact, despite the KOSPI falling by over 2% due to foreign selling, the KRX Bank Index rose by 1.97%, showing the second-highest gain after the healthcare sector (6.72%). Among related stocks, KB Financial Group (5.5%), Hana Financial Group (4.9%), JB Financial Group (4.8%), Industrial Bank of Korea (1.5%), Woori Financial Group (1.4%), Shinhan Financial Group (1%), and BNK Financial Group (1%) showed upward trends in that order.

This base interest rate hike is seen as a positive factor for bank stocks as it accelerates the Bank of Korea's rate hike timeline. The market expects another rate hike in October. Bank stock prices are closely linked to long-term interest rates, and if long-term rates rise due to the base rate hike, the spread between short- and long-term rates widens, which is expected to increase the net interest margin (NIM).

Inflow of bargain buying by foreign investors is also anticipated. Since the beginning of this month, foreigners have purchased 487.6 billion KRW worth of KakaoBank shares, while buying only 54.9 billion KRW worth of KB Financial Group shares, the traditional leader in the banking industry. Looking at the price-to-book ratio (PBR), KakaoBank is valued at up to 8 times, whereas KB Financial Group is only around 0.4 times. The current stock price is cheap compared to future value, so additional gains from bargain buying inflows are expected.

Although concerns remain about loan regulations by financial authorities to curb household debt expansion, it is expected not to significantly burden earnings. Jungwook Choi, a researcher at Hana Financial Investment, said, "While the regulatory risk to suppress loan growth is inevitably unfavorable for bank stocks, the possibility of loan interest rate increases due to regulation means it will not negatively affect profitability," adding, "If comments suggesting further rate hikes emerge, the upward trend in bank stocks will accelerate."