Banking shares remain solid amid foreigners' selling spree

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Experts show upbeat outlook over banks' earnings amid rising interest rates

By Anna J. Park

Despite a selling spree by foreign investors this year, domestic banking shares have been bullish during the past month as the sector has been the main beneficiary of rising interest rates.

According to the Korea Exchange, Shinhan Financial Group shares rose 6.33 percent from March 15 to April 15. Woori Financial Group shares also rose 5.19 percent during the same period, followed by KB Financial Group which rose 4.76 percent and Hana Financial Group which increased 1.15 percent.

Considering the fact that some major Korean conglomerates saw their stock prices fall during the same period, the solid performance of banking shares has stood out in particular. During the past month, the stock price of Samsung Electronics, the country's top company in terms of market cap, fell 4.17 percent, while those of big-tech internet portal groups such as Naver and Kakao each decreased 5.8 percent and 7.37 percent.

Continued net selling by foreign investors has been making the Korean stock market more vulnerable in recent months. This year alone, foreign investors net sold 20.8 trillion won ($16.8 billion) worth of Korean stocks ― both KOSPI and Kosdaq shares, as well as derivative products like futures and options ― with the net selling continuing for three consecutive months.

As a result, foreign investors' ownership of local stocks fell to the lowest level since the aftermath of the 2008 global financial crisis. As of the end of last month, they held 27.1 percent of the KOSPI and tech-heavy Kosdaq shares, the lowest weight since falling to 26.5 percent in May 2009.

However, shares of local financial giants are still regarded as an attractive investment for foreign investors.

The Bank of Korea's recent moves to raise the country's key interest rates are obviously one of the main reasons that are expected to result in the financial groups' enhanced net profit due to an improved net interest margin (NIM). But also, the financial giants' strengthened propensity for dividends to shareholders has also been responsible for the recent upward movements of their shares.

The incoming administration's flexible stance over the loan-to-value (LTV) ratio of banks' lending activities is also presumed to have benefitted banking shares.

“There is a possibility that the banking sectors' loan products would increase with the loosening up of current loan regulations, yet the core rationale for investment in banking shares lies in an NIM increase and rising interest rates,” Kim Eun-gab, an analyst at IBK Securities, said, confirming the brokerage house's overweight opinion on banking stocks.

Another renowned banking analyst also stressed that the banking shares had an overweight rating, or another way of putting it is that the stocks deserve a higher weighting than the current benchmark weighting.

“One of the hottest topics in the market is the squeezing of monetary policies. There will be a lot of talk about the U.S. Fed's potential interest rate hike, but it still remains in unknown territory. While the uncertainty over inflation continues, banking shares' relative strengths are likely to be maintained,” Eun Kyung-wan, analyst at Meritz Securities, stressed.

In particular, the analyst recommends KB Financial Group, JB Financial Group and Korea Investment Holdings among financial stocks.

Market experts forecast the banking sectors' valuation would gradually increase, given that one or two additional interest rate hikes are expected by the central bank within this year.

“Local banks' net profit during the first quarter is estimated to post 4.1 trillion won, an increase of 8.8 percent compared to the same period last year. With the effects of interest rate hikes in January and April expected to be reflected in the banks' second quarter earnings, their net profit in Q2 is likely to show a year-on-year increase of 5.4 percent,” Kim Soo-hyun, analyst at Shinhan Financial Group, said.