Bank stocks set to outperform market on expectations toward Corporate Value-up plan

ATMs of major banks are installed in central Seoul, Thursday. Yonhap

Despite increasing regulatory pressure from financial authorities and growing geopolitical uncertainties, analysis suggests that bank stocks could outperform the market on the back of heightened expectations toward the government’s Corporate Value-up Program.

The initiative, launched in late February, aims to encourage local listed firms to enhance their capacities as part of efforts to address the so-called Korea discount, describing how Korean shares are sold at prices lower than their fundamentals.

Additionally, the strengthening of the Korean won is also expected to support the bullish trend in bank stocks.

Hana Securities analyst Choi Jeong-wook maintained the earlier recommendation for investors to expand their holdings in bank stocks.

“Despite increasing uncertainties both domestically and internationally due to regulations in addition to geopolitical factors, including clashes between Israel and Hezbollah, the environment remains favorable for value enhancement, such as rising capital ratio. As a result, bank stocks are expected to continue outperforming the market,” Choi said.

Hana Financial Group has continued its upward trend, surging by about 10 percent on the bourse last week, while KB Financial Group saw a 3.3 percent increase.

On Monday, Hana’s share price rose 2.23 percent to 68,800 won ($52), while KB’s rose 1.96 percent to 88,500 won. The KOSPI closed at 2,698.01, down 3.68 points, or 0.14 percent, from the previous business day.

Choi noted that the declining won-dollar exchange rate is also leading to growing interest in bank stocks.

With U.S. Federal Reserve Chair Jerome Powell signaling a potential pivot, expectations are growing that the Fed will start cutting rates in September. This is also raising the likelihood that the exchange rate could fall below the 1,300-won level, according to the Korean analyst.

“If all other conditions are equal, the current exchange rate alone is expected to boost banks’ common equity tier 1 (CET 1) ratio — measured by a financial firm's capital divided by its assets — by approximately 15 basis points within the third quarter,” he said. One basis point is equivalent to 0.01 percent.

“Improvement in the capital ratio makes it easier to increase shareholder returns, which is a factor that enhances the value-up momentum," he added. "Additionally, the decline in the exchange rate could positively impact foreign currency translation gains as well as the net interest margin and the liquidity coverage ratio.”

Data from market tracker FnGuide showed that earnings forecasts for parent companies of banks have been revised upward while the banks were raising household loan interest rates as instructed by financial authorities.

This indicates that these financial holding companies will continue to benefit from a combination of conditions where expectations for a base rate cut drive a decline in market interest rates and lower deposit rates and where loan rates remain high to curb household lending.

According to the data, the total projected net profits for the four major financial holding companies — KB, Shinhan, Hana and Woori — for the third quarter of this year come to 4.77 trillion won.

This figure represents an upward revision from the market forecast at the end of June. Earlier, securities firms had projected a total net profit of 4.72 trillion won for the third quarter. This means the forecast has increased by over 500 billion won in just two months.