Bank Stocks Show Signs of Prolonged 'Slump'

Industry Index Down 6.94% in One Month... Adverse Factors Including Low Interest Rates and Loan Regulations Combine

[Image source=Yonhap News]

[Asia Economy Reporter Park Ji-hwan] Signs indicate that the prolonged slump of bank stocks is continuing. Although their relatively low prices highlight their attractiveness, it is pointed out that a turnaround in sentiment will not be easy for the time being due to adverse factors such as low interest rates, real estate mortgage loan regulations, and scandals involving derivative-linked funds (DLF) and Lime Asset Management.

According to the Korea Exchange on the 3rd, the banking sector index recorded 224.73 as of the 31st of last month. The index, which started at 241.49 in January this year, fell 6.94% in just one month. The return over the past year also reached -16%. The prolonged low interest rate environment has worsened net interest margins, and a combination of government housing mortgage loan regulations and various financial product-related issues have collectively impacted the sluggish stock prices.

Above all, the biggest problem is the deterioration of profitability due to interest rate cuts. The market interest rates have plummeted due to the novel coronavirus infection (Wuhan pneumonia), and there is also a possibility of further base rate cuts. This year, the net interest margin (NIM), a profitability indicator for banks’ interest income, is estimated to fall by around 0.1% compared to the previous year. Experts had expected that if there were no additional base rate cuts, the NIM figures would rebound from the second quarter, but as the novel coronavirus has hit the global economy, market interest rates have already turned downward.

This year, the NIM of major banks is estimated to decline by an average of 0.02 percentage points compared to the fourth quarter of last year, which predicts that the 2020 net interest margin will drop by 0.1 percentage points compared to the previous year. If the net interest margin falls by 0.1 percentage points, net profit is estimated to decrease by an average of 11%, and if it falls by 0.2 percentage points, it is expected to shrink by 26%.

Choi Jung-wook, a researcher at Hana Financial Investment, said, "Along with the decline in market interest rates, concerns about an economic recession have arisen, such as the inversion of yields between the 10-year and 3-month U.S. Treasury bonds, making it difficult to expect a rise in bank stocks for the time being," adding, "Without improvement in interest rate indicators, recovery of investor sentiment also seems distant."

The loss of trust caused by successive financial accidents, including the DLF and Lime scandals, is also an obstacle. Seo Young-soo, a researcher at Kiwoom Securities, analyzed, "Following the DLF scandal, the occurrence of the Lime scandal is likely to significantly shrink the domestic private banking (PB) market."

Strengthened real estate regulations are also a burden. It is analyzed that the government's regulation on jeonse loans (long-term rental deposits) is an issue that will affect banks' growth potential in the mid to long term.

This content was produced with the assistance of AI translation services.