'Delta Shock Plunge' Bank Stocks, To Buy or Not... The Time for Dividends Approaches

[Asia Economy Reporter Lee Seon-ae] Bank stocks have struggled to rebound after a sharp decline. They are reacting more sensitively to the negative signal of the 'spread of the Delta variant virus' than the positive signal of 'interest rate hikes.' Market opinions on bank stocks, which are representative beneficiaries of interest rate hikes, are divided. This calls for a cautious approach due to variables arising from the spread of COVID-19. However, from a dividend stock perspective, investment is generally considered valid.

According to the Korea Exchange on the 21st, the stock prices of the four major financial holding companies?KB Financial Group, Shinhan Financial Group, Hana Financial Group, and Woori Financial Group?have all been on a downward trend since July. They have fallen by 7-8% just this month. Financial-related indices have also failed to avoid a decline. The KOSPI 200 Financial Index has dropped by -4.47% this month. The KRX 300 Financial Index has also fallen by -4.33%. The KRX Bank Index declined by as much as 5.20%. Compared to a 30.4% rise in the first half of this year, this is a sharp plunge. Until the first half, with the COVID-19 vaccination campaign in full swing and expectations of economic recovery, interest rate hikes within the year were considered certain, leading to a KOSPI increase of 10.22% during the same period. When interest rates rise, banks improve their net interest margin (NIM), boosting performance. Expectations that financial holding companies would expand dividends based on strong earnings also influenced the rise in bank stocks.

However, despite being considered beneficiaries of interest rate hikes, bank stocks currently show a complex pattern due to external variables such as the spread of COVID-19 and delayed economic normalization. The spread of the Delta variant virus has strengthened the preference for safe assets, leading to a decline in government bond yields (rise in bond prices), which is a negative factor for bank stocks.

Choi Jung-wook, a researcher at Hana Financial Investment, explained, "The recent weakness in bank stocks is a phenomenon common not only domestically but also in global financial stocks. This is because the spread of the Delta variant virus has weakened expectations for global economic recovery, causing market interest rates to plummet."

Market forecasts are divided between expectations of continued weakness in bank stocks and a recovery in upward momentum based on strong earnings. Researcher Choi said, "The rise in short-term interest rates and expectations of base rate hikes are favorable factors for bank fundamentals, and second-quarter earnings are expected to be very good. However, the global spread of the Delta variant and the downward trend in long-term interest rates are concerns. A conservative approach is needed in the short term."

However, those who foresee an increase emphasize the attractiveness of bank stocks as dividend stocks. Kim Jae-woo, a researcher at Samsung Securities, said, "After the second-quarter earnings, a year-end dividend stock approach is considered valid for domestic bank stocks. Domestic banks have high expectations for a year-end dividend rally every year, and unlike U.S. banks, the increase in interest income, which is the core of banking, is expected to drive earnings improvement from a fundamental perspective."

In particular, the dividend appeal of bank stocks this year is expected to be higher than in previous years. This is because the improvement in banks' earnings is attributed not to one-time factors but to their ability to generate recurring profits, implying an increase in dividend capacity. Additionally, with the easing of restrictions on bank dividends, the dividend payout ratio of banks is expected to improve to levels similar to or slightly exceeding those of 2019.

Jeong Tae-jun, a researcher at Yuanta Securities, also said, "Banks can now pay interim dividends, which suggests normalization in line with the decrease in bad debt costs. The economic slowdown caused by the Delta variant virus is expected to be temporary, as with previous pandemics, and early tapering (reduction of asset purchases) is being carried out in response to inflation. Therefore, both the economy and bank stock prices are expected to recover their upward momentum."

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