Bank, insurance stocks to rise amid extra rate hike expectations

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Market interprets BOK Governor's remarks hinting at further interest rate raise

By Anna J. Park

Upon the announcement by the Bank of Korea (BOK) of its much-anticipated decision to raise its key rate to 0.75 percent from 0.5 percent, Thursday, investors' positive reaction was seen in banking and insurance stocks, which benefited the most.

With the interest rate rising, banks' profitability from interest rate margins jumps up, as the interest rate for customers' savings rises slowly, while loan interest soars faster in line with the benchmark rate.

Insurers are also expected to garner more profits with the interest rate increase, as insurance companies invest customers' monthly premiums to fixed income products, such as bonds. With the rate increase, their investment returns will tend to rise as well.

Based on the nature of such reflections, banks and insurers' stock prices advanced. Hanwha General Insurance's stock finished at 4,365 won ($3.73) at Thursday's closing, a 1.99 percent increase from the previous trading session. The stock price of Korean Re also rose by 1.86 percent. Other insurers like Samsung Fire & Marine Insurance, DB Insurance and Lotte Insurance, all rose by 1.77 percent, 1.69 percent and 1.13 percent, respectively.

Banking stocks also increased with KakaoBank rising 1.58 percent to 83,400 won. Woori Financial Group advanced 1.82 percent, while Shinhan Financial Group and KB Financial Group rose 1.03 percent and 0.93 percent, respectively.

While some analysts view the impact of the key interest rate hike has already been factored in these financial companies' stock prices, the general thoughts are BOK's August rate hike has improved the stocks' long-term growth potential. That's mainly because yet another interest rate hike is expected to take place nearing the end of this year.

The government's urgent need to control ever-increasing household debt as well as rising inflation pressure from consumer prices, mostly from the energy and agricultural sector, are some of the key rationales that might push the central bank to announce another interest rate hike within this year.

After the rate increase decision, BOK Governor Lee Ju-yeol said solid growth in terms of export volume and facility investment is backing up the economy's fundamentals, possibly justifying another rate hike this year. Governor Lee also mentioned that the COVID-19 shock has dwindled down compared to the initial stages of the pandemic, hinting that the local economy could bear the stress stemming from further interest rate increases.

“Governor Lee implied the possibility of further raising the key interest rate as his remarks can be interpreted that the country's monetary policy is still on the expansionary track despite the BOK's interest rate hike this time,” said Kong Dong-rak, economist and fixed income strategist at Daishin Securities. “Governor Lee also said even with the hike this time, the real interest rate still remains at a minus level, clearly suggesting the possibility of a further increase.”

Kyobo Securities expects the central bank to raise its key rate once more in November this year as the main monetary policy goal of the central bank seems to have shifted to responding to the country's deepening financial imbalance.

With the market interpreting the BOK chief's remarks as hinting further rise within this year, banking and insurances shares are surely expected to enjoy more upward movement.

“Banking shares see ample upside room for further increases, not only in terms of their fundamentals, but also with the possibility of a further interest rate hike that would be a boon for the stocks,” said Seo Young-soo, analyst at Kiwoom Securities.