[Asia Economy Reporter Park Jihwan] The securities industry is raising target prices for regional financial stocks that have recorded record-breaking earnings. Following record earnings in the third quarter of this year, it is expected that the benefits of interest rate hikes will be fully reflected from the fourth quarter. Additionally, unlike major banks, these stocks are expected to maintain solid earnings momentum as they are relatively unaffected by financial authorities' household loan regulations.
On the 30th, Hyundai Motor Securities raised the target price of JB Financial Group from 9,300 KRW to 10,400 KRW, an 11.8% increase. Ebest Investment & Securities also raised JB Financial's target price by 11.7%. Mirae Asset Securities raised the target price of DGB Financial Group to 13,000 KRW and BNK Financial Group to 10,700 KRW, up 4% and 7% respectively from previous levels.
The reason securities firms have a positive outlook on regional banks is that the record-breaking earnings momentum is expected to continue for some time. According to financial information provider FnGuide, the expected net profit for this year for the three regional financial groups BNK, DGB, and JB is 1.7676 trillion KRW, a 45.5% increase compared to 1.2151 trillion KRW in the same period last year.
Above all, the impact of interest rate hikes is significant. When the Bank of Korea raised the base rate from 0.5% to 0.75% by 0.25 percentage points in August, the profitability improvement effect became visible. When the base rate rises, banks' loan interest rates increase faster than deposit rates, improving the net interest margin (NIM), which is the difference between loan and deposit rates, thereby enhancing profitability. The securities industry expects the effect of the base rate hike to be fully reflected from the fourth quarter, anticipating further margin expansion. Given the possibility of two to three additional rate hikes next year, the NIM improvement trend is expected to continue for the time being.
Another strength highlighted is the relative freedom from financial authorities' household loan volume regulations. Regional banks maintain a loan ratio of over 60% to local small and medium-sized enterprises, thus staying one step away from the household loan restrictions imposed by financial authorities. The improvement in corporate loan conditions due to the recovery of local industries is also positive. Kim Hyunki, a researcher at Hi Investment & Securities, said, "In the case of BNK Financial, export amounts from Busan, Ulsan, and Gyeongnam have recovered to pre-COVID-19 levels," adding, "During economic upturns, valuations that had been low are expected to recover, leading to excess returns compared to indices." He also noted, "DGB Financial's high proportion of corporate loans is expected to lead to faster margin improvement compared to major banks."
Valuation competitiveness compared to major banks is also emphasized. The price-to-book ratios (PBR) of BNK Financial Group, DGB Financial Group, and JB Financial Group are 0.33x, 0.35x, and 0.48x respectively, all lower than KB Financial's 0.53x. Choi Jungwook, a researcher at Hana Financial Investment, said, "Thanks to the decline in loan loss cost ratios to levels comparable to major banks and improved performance of non-bank subsidiaries, the recent earnings improvement of regional banks has become more significant," adding, "Looking at stock price trends since 2016, regional banks offer more attractive prices with less increase compared to major banks and higher dividend yields can be expected."
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