[MarketING] Bank Stocks Shaken by Overseas Financial Instability

KOSPI Closed Lower but Narrowed Losses, Ending in Slight Decline
Bank Stocks Continue Weak Trend

[Image source=Yonhap News]

The KOSPI closed slightly lower amid concerns over financial instability. Following the bankruptcy of the U.S. Silicon Valley Bank (SVB), financial instability intensified as issues regarding the financial soundness of Credit Suisse (CS) bank came to light, leading to particularly weak performance in bank stocks. Risks are emerging mainly among financial institutions with weak financial soundness, raising concerns that this will negatively affect investor sentiment toward financial stocks.

KOSPI Closes Slightly Lower... Bank Stocks Underperform

On the 16th, the KOSPI closed at 2,377.91, down 1.81 points (0.08%) from the previous day. The KOSDAQ ended the session at 781.98, up 0.81 points (0.10%). Although the KOSPI fell more than 1% in early trading, it narrowed its losses and closed near flat. The KOSDAQ, which started weak, turned positive and maintained gains for the second consecutive day.

Kim Seok-hwan, a researcher at Mirae Asset Securities, explained, "The U.S. stock market fell more than 1% the previous day, mainly in financial stocks due to concerns over CS's bankruptcy, which weighed on the market. However, news that the Swiss government would provide up to 50 billion Swiss francs (about 70 trillion won) in support eased concerns, allowing the market to partially recover losses."

Although the index recovered some losses, bank stocks showed significant declines. On the day, Hana Financial Group fell 3.21%, JB Financial Group 2.85%, Shinhan Financial Group 2.82%, KB Financial Group 1.94%, BNK Financial Group 1.59%, and Woori Financial Group 1.35%.

Financial instability originating overseas is negatively impacting investor sentiment toward bank stocks. Jeon Bae-seung, a researcher at Ebest Investment & Securities, said, "In the case of CS, cash and deposits account for 20% of total assets, and since the liquidity crisis was not triggered by a bank run (massive deposit withdrawals), it is fundamentally different from the SVB incident. Also, since prolonged deleveraging and deteriorating earnings have been ongoing, direct contagion concerns are not significant. However, risks are emerging mainly among financial institutions with weak financial soundness, which will negatively affect overall investor sentiment toward financial stocks."

Choi Jeong-ho, a researcher at Hana Securities, said, "Due to regulatory concerns, a weakening of bank fundamentals is expected, and external conditions such as the SVB incident are not favorable. Therefore, despite the price attractiveness from short-term declines, it will take time for investor sentiment toward bank stocks to recover."

There is an opinion that excessive corrections should be viewed as short-term trading opportunities. Kim Jae-woo, a researcher at Samsung Securities, said, "From a short-term perspective, the risks arising from the SVB incident and others are unlikely to be resolved quickly, which will weigh on investor sentiment. However, assuming that extreme global bank runs do not occur in succession, considering dividend yields and other factors, excessive corrections in domestic bank stocks can be effectively used as a trading opportunity."

Unfavorable Operating Environment Including Weak Loan Growth

While banks are shaken by overseas financial instability, the operating environment is also unfavorable, with loan growth expected to be weak in the first quarter.

Researcher Choi explained, "According to bank field tests, loans at the four major commercial banks are estimated to have contracted in January and February. Corporate loan growth is not high, and household loans have contracted significantly, likely resulting in negative overall won-denominated loan growth." He added, "We need to monitor March growth rates, but won-denominated loans are likely to decline in the first quarter. Also, the banks' monthly net interest margin (NIM), which fell in January, appears to have declined further in February, suggesting that the average NIM decline for banks in the first quarter may exceed 5 basis points (1 bp = 0.01 percentage points)."

With weak loan growth expected in the first quarter, the pace of recovery is also forecast to be slow. Researcher Jeon said, "Considering that corporate loans tend to decrease at the end of the quarter in March, the first-quarter loan growth rate is expected to be low. Due to government and financial authorities' pressure on interest rates, further increases in household loan rates are limited. Recently, housing transaction volumes have increased slightly, so the decline in household loans is expected to slow, but the recovery pace will be very slow."

Kim Eun-gap, a researcher at IBK Investment & Securities, said, "Although total loan balances are increasing, loan demand is clearly declining except for small and medium-sized enterprise loans, making it difficult for loan growth rates to rise. Negative factors such as sluggish housing transactions, conversion to monthly rent, and the resumption of corporate bond issuance are significant, and there seems to be little chance of change in the short term. Therefore, the total loan growth rate, which has fallen to 4.1%, may decline further."