Korean bank stocks are struggling to gain ground despite a favorable backdrop of rising interest rates and a stronger won. Even with expectations that higher rates would improve net interest margins (NIM), investor sentiment toward bank stocks has failed to recover, weighed down by foreign selling and concerns over slowing earnings tied to a drop in stock trading volume.
According to the Korea Exchange, over the five trading sessions from the 18th through the 24th, Woori Financial Group (316140.KS) fell 5.33%, while KB Financial Group (105560.KS) dropped 3.20%, Shinhan Financial Group (055550.KS) 3.00% and Hana Financial Group (086790.KS) 1.53%. The KRX Banks Index declined 4.72%.
Foreign selling also continued. During the period, foreign investors net-sold 42.08 billion won of Woori Financial Group, 41.49 billion won of Hana Financial Group, 34.31 billion won of Shinhan Financial Group and 32.52 billion won of KB Financial Group. Net selling of the four financial groups totaled 150.4 billion won.
What stands out is that the share weakness has persisted even as the macroeconomic environment has moved in the sector's favor. Typically, rising market rates feed through to higher lending rates and net interest margins, boosting banks' interest income. A decline in the won-dollar exchange rate also eases the burden of foreign-currency translation losses. Yields on three-year and 10-year Korean treasury bonds rose to 3.83% and 4.34%, respectively, while the won-dollar rate fell to 1,382.4 won.
A stock market that has struggled to find clear direction is also constraining any rebound in bank stocks. With the KOSPI stuck in a trading range this month, analysts say concerns are growing over slowing profit at financial groups as brokerage trading volume declines in the third quarter. "Bank stocks have yet to shed their image as defensive plays, and concerns that banking groups' second-quarter earnings have peaked out amid falling stock trading volume are also limiting any improvement in investor sentiment," said Choi Jung-wook, an analyst at Hana Securities.
Improving profitability in banks' core business on the back of higher rates is cited as a potential driver of a future rebound. "If gradual rate increases are accompanied by an economic recovery, we can expect growth in interest income from recovering loan demand and rising net interest margins," said Kim Jae-woo, an analyst at Samsung Securities.
