Stock Price Plummets 10-20% Despite Strong Earnings Ahead
Challenges Ahead in H2: NIM Decline and Rising Delinquency Rates
Despite expectations that major domestic financial holding companies will record unprecedented earnings in the second quarter, they are unable to smile. This is because challenges affecting profitability, such as rising delinquency rates, declining net interest margins (NIM), and regulatory pressure for cooperative finance, are expected to intensify from the second half of the year.
According to the financial sector on the 29th, the combined consensus net income attributable to controlling shareholders of the four major financial holding companies (KB Kookmin, Shinhan, Hana, and Woori) for the second quarter was estimated at 4.4458 trillion KRW. This represents a 1.69% increase compared to the same period last year (4.3718 trillion KRW).
Contrary to these earnings forecasts, the stock prices of major financial holding companies have not escaped a downward trend. As of the 27th, KB Financial Group’s stock price was 47,550 KRW per share, down 20.7% from the early-year peak (60,000 KRW on January 16). Other financial holding companies also saw their stock prices fall by more than 10-20%, including Woori Financial Group (-11.2%), Shinhan Financial Group (-22.8%), and Hana Financial Group (-24.9%).
The cause of this stock price movement, which runs counter to earnings forecasts, is concerns that the profitability of banks may deteriorate from the second half of the year. First, there are indications that the rising trend in interest income, which has driven the strong performance of financial holding companies, may slow down. With the base interest rate hikes nearing their end and regulatory pressure to lower loan interest rates continuing, it is highly likely that funding costs will continue to rise due to increased high-interest deposits and rising bank bond yields.
Jeon Bae-seung, a researcher at eBest Investment & Securities, noted in a recent report titled “Second Half Financial Industry Outlook” that “even assuming one more rate hike in the second half, downward pressure on NIM is expected to continue,” adding, “the effect of rising loan interest rates has plateaued, but the upward trend in funding costs is expected to persist until next year, maintaining the slowdown trend.”
Expansion of delinquency rates is another hidden risk. According to the Bank of Korea, as of the end of March, the delinquency rate on won-denominated loans at domestic banks stood at about 0.33%. While not yet considered a critical risk level, concerns are rising as this is the highest level since the end of June 2020, showing a steep upward trend. The second half of the year faces numerous negative factors that could push delinquency rates higher, such as the end of COVID-19 financial support and reverse jeonse (lease deposit) issues. Regulators are emphasizing soundness management by demanding increased provisions and imposing countercyclical capital buffers (CCyB) to prepare for these risks, which is expected to lead to increased related costs.
Loan demand has recently shown a slight increase, but there is considerable analysis suggesting it is not a sustained upward trend. According to eBest Investment & Securities, the loan growth rate in the banking sector was 1.0% in April-May, up from 0.5% in the first quarter, but excluding government policy mortgages (special home purchase loans), the loan growth rate was 0.6%, showing little difference. A financial sector official commented, “Although the real estate market has somewhat entered a recovery phase, there are significant regional disparities, and it is difficult to guarantee whether the recovery trend will continue after policy funds are exhausted.”
Meanwhile, regulatory pressure for cooperative finance is expected to continue. Recently, despite controversy over negative interest margins, the government introduced the ‘Youth Leap Account’ product, which pays up to 6% annual interest, and plans to disclose the loan-to-deposit interest rate spread based on balances starting in July. The loan-to-deposit interest rate spread based on balances is an indicator of bank profitability and could further intensify interest rate competition among banks. Additionally, by the end of the year, other cooperative finance policies are expected to follow, such as expanding the refinancing loan platform from existing unsecured loans to mortgage loans.
Some argue that the ‘good times’ for the financial sector, which has accumulated massive net profits relying on interest income, have come to an end. A senior official from a financial regulatory authority stated, “The situation where banks post record-high profits every quarter seems to be nearing its end.”
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