As global inflation rises sharply every day, there is speculation that the Monetary Policy Committee of the Bank of Korea will raise the key interest rate one after another.  (Maekyung DB)
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Are you a beneficiary of an interest rate hike? frustrated bank

As global inflation rises sharply every day, there is speculation that the Monetary Policy Committee of the Bank of Korea will raise the key interest rate one after another. (Maekyung DB)

There are predictions that the US could take a ‘big step’ to raise interest rates by 0.5 percentage points at a time, but the stock price of domestic banking stocks appears to be sluggish. It is analyzed that this is because expectations for a rate hike have already been reflected, and concerns have arisen that a steep rate hike will rather cause an economic downturn.

According to the Korea Exchange and the financial investment industry, the stock price of KB Financial had a slight decline from April until the 21st. During the same period, Shinhan Financial Group and Hana Financial Group also experienced a slight decline or stood still, while Kakao Bank, an internet-only bank, fell by about 10%. After privatization, only Woori Financial Group, which has individual positives such as expectations for business diversification, rose. Although the KOSPI seems to have done well in light of the 2% drop in the KOSPI during this period, considering that interest rates are on the rise, it is evaluated that the recent share price of bank stocks is far below the level of investors.

A rise in interest rates is usually seen as a boon for banking stocks. In the case of banks, when interest rates rise, the loan-to-deposit margin (profit from the difference between deposit and loan interest rates) and net interest margin (NIM) improve. Nevertheless, bank stock stocks are not doing well because concerns about an economic slowdown such as the inversion of short- and long-term interest rates have recently risen. In the financial sector, the controversy over an economic downturn over the inversion of short- and long-term interest rates is hot, and concerns about the performance of the banking industry are rising.

An inversion of short-term yields is usually seen as a harbinger of a recession. In recent years, short-term interest rates have often been inverted as short-term interest rates have risen sharply due to the full-fledged quantitative tightening of central banks around the world. Generally, banks apply short-term interest rates to deposit interest and long-term interest rates by adding a premium to lending. From a bank’s point of view, interest income can be maximized when the long-term interest rate spread is wide, but if this spread is narrowed or inverted, profitability deteriorates.

In other words, the short-term interest rates that banks are expected to pay are constantly rising, while the long-term interest rates that banks are expected to receive are rising relatively less. Bank stocks are also concerned about the decline in corporate loan demand in the event of an economic downturn. Kim Do-ha, an analyst at Hanwha Investment & Securities, said, “Although long-term interest rates are continuing to rise, the short-term interest rate differential has narrowed significantly.

For this reason, the financial investment industry raised a voice that domestic banks should follow a more active shareholder return policy, such as the cancellation of treasury stock. Many experts are diagnosing that domestic bank stocks are in a situation where they have to pay large dividends by drawing retained earnings rather than paying dividends within the current net income range, as they do now, and increase ROE by reducing the total capital.

Lee Byung-geon, an analyst at DB Financial Investment, said, “The expectation of a further increase in the base rate has already been reflected in the stock price, and we are hoping for a further improvement in the net interest margin (NIM) by the first half of this year under this forecast. It seems necessary to approach the plan by observing it.”

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Reference-www.mk.co.kr

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