Financial groups' stocks on course toward further decline

By Anna J. Park

Major financial groups' stocks are expected to continue their bearish runs due to a mixture of worsening profitability caused by falling net interest margins (NIMs) and the shock from the rapid spread of COVID-19, analysts said Monday.

They expect that the top four group stocks ― Shinhan, KB, Hana and Woori ― are unlikely to bounce back in the immediate future, as central banks around the world have joined a global wave of rate cuts amid fears that the coronavirus could trigger a global financial crisis.

The Bank of Korea's (BOK) cut its key interest rate by 50 basis points to a record low of 0.75 percent at an emergency monetary board meeting Monday.

In line with a further interest rate cut, banks' net interest margin (NIM) is expected to decrease by some 5 basis points (0.05 percentage points) during the first quarter of this year.

This shows the negative impact from COVID-19, as market analysts previously expected the NIM index would decrease about 1 to 2 basis points during the first quarter. NIM, the difference between the interest rate a bank receives from loans and what it pays for deposits, is one measure of profitability

“Previously, banks' average NIM decrease this year was forecast to be around 9 basis points. However, with the impact from COVID-19 and an interest rate cut, the margin is expected to decrease by about 11 to 12 basis points,” Choi Jung-wook, an analyst at Hanan Financial Investment said.

Another analyst also pointed out the possibility of banks' extended role during the coronavirus crisis could further slash their shares attractiveness to investors.

“In addition to concerns over the coronavirus-led economic recession, the fact that financial companies' public roles could be widened ― through extensions of loans and grace periods of loan repayments, and a reduction of interest rates ― could further negatively affect investor sentiment,“ said Meritz Securities analyst Eun Kyung-wan.

The gloomy outlook for banking group stocks comes on top of their plunging share prices since the start of the year.

While the benchmark KOSPI has fallen by 18.5 percent from Jan. 2 to March 13 this year, share prices of Korea's four major financial groups plummeted much more during the same period.

Shinhan Financial, currently mired in its brokerage arm's alleged involvement in selling fraudulent Lime Asset products and a consequential prosecution investigation, saw the largest decrease in its price during the period, dropping by 35.4 percent from 42,600 won ($34.98) Jan. 2 to 27,500 March 13.

Shinhan, the nation's largest financial group by assets and profits, is not the only financial conglomerate that's suffering from the fallout of financial “incidents.”

Earlier this month, the Financial Supervisory Service (FSS) imposed a penalty of 19.7 billion won and 16.8 billion won on Woori and Hana financial groups, respectively, for their mis-selling of high-risk derivative-linked funds.

Hana Financial Group's stocks fell by 32.9 percent from 35,950 won at the start of the year to 24,100 won last Friday. Similarly, Woori Financial Group's stock recorded a decrease of 32.9 percent during the same period, and KB Financial Group saw its share price fall by 29.3 percent.

Against this backdrop, some of the financial groups are seeking to prevent any further drops by buying back their shares. Woori Financial Group Chairman Sohn Tae-seung and ranking executives bought back 11,782 shares as of last Thursday.