[Click eStock] "Unexpected Interest Rate Cut Puts Pressure on Financial Stocks' Capital Soundness"

Bank of Korea Continues Interest Rate Cuts Following October
Rate Cuts and Strengthened Debt Discount Rates Pose Capital Adequacy Challenges
Value-Up Index Rebalancing and Positive Supply-Demand Conditions Expected to Persist

The Bank of Korea cut the base interest rate by an additional 25 basis points (1bp=0.01%) in November, following a consecutive rate cut in October. This measure was taken considering the slow pace of domestic demand recovery, the slowdown in export growth, and the potential deterioration of the external environment after the U.S. presidential election. In the economic outlook announced on the same day, the domestic GDP growth rate for 2024 was revised down to 2.2%, and for 2025 to 1.9%. The consumer price inflation rate is also expected to slow to the 1% range in 2024.

On the 29th, Jeon Bae-seung, a researcher at LS Securities, said, "Despite the rate cut in October, the impact on NIM (Net Interest Margin), such as the rebound in the new loan-deposit interest rate spread due to household loan regulations, has been limited," adding, "The November rate cut is also already priced in by the market, so the additional decline is expected to be small." However, with one more rate cut expected in each half of next year, NIM is expected to decline until the first half of 2025 and then stabilize.

According to LS Securities, the consecutive rate cuts and the strengthening of the debt discount rate measures are acting as factors burdening capital soundness. In particular, the extension of the final observation maturity and an additional 25bp cut in the long-term forward rate, scheduled to be applied from 2025, are expected. The life insurance sector is anticipated to be more negatively affected due to the decline in new contract profitability and the K-ICS ratio.

Additionally, the rate cuts and the slowdown in inflation provide a favorable operating environment for securities firms, but concerns about an economic downturn still pose a risk of sluggish stock market performance. Real estate PF risks are gradually being resolved, and the improvement in financial conditions is expected to continue the recovery of the business environment.

Researcher Jeon said, "Despite the rate cuts, financial stocks are showing a steady trend," adding, "The December value-up index rebalancing and the value-up disclosures by insurance and securities companies scheduled for early next year are expected to sustain a positive supply-demand environment." However, he also noted, "Concerns about overall profitability deterioration may increase toward the second half of next year."