Base Rate Increase... Banks and Insurance Stocks Smile While Securities Stocks Face Pressure

Improvement in Net Interest Margin for Banking Sector
Insurance Sector Benefits from Easing Negative Margins
Adjustments Across Securities Business Overall

[Asia Economy Reporter Park Jihwan] Attention is focused on the impact of the Bank of Korea's sudden interest rate hike on the financial sector, including banks, insurance, and securities. Experts unanimously agree that the banking sector will benefit the most from the improvement in net interest margin (NIM), and the insurance sector is also expected to be positively affected, especially life insurers, due to the alleviation of negative interest rate spreads. On the other hand, opinions are divided regarding the securities sector, with some analyzing that the rate hike will burden overall business operations, while others believe the impact will be limited since the rate increase was anticipated.

On the 26th, the Monetary Policy Committee of the Bank of Korea decided to raise the base interest rate by 0.25 percentage points to 0.75%. This is the first increase in 15 months. Experts view this rate hike as the first step toward normalization of interest rates and see a high possibility of further increases within the year.

With the interest rate hike, the banking sector is expected to see a more pronounced improvement in earnings from interest income, a major revenue source. The rate increase leads to higher market and bank interest rates, which expands the spread between lending and deposit rates and thus the net interest margin (NIM). Generally, when interest rates rise, both loan and deposit rates increase, but loan rates tend to rise faster than deposit rates, improving bank profitability. Koo Kyunghoe, a researcher at SK Securities, stated, "The NIM of domestic banks rose from 1.67% in Q4 last year to 1.74% in Q2 this year, but the slower increase in Q2 was due to bank interest rates not rising. This rate hike is expected to lead to higher bank interest rates and an expansion of NIM."

The insurance sector is also considered a representative beneficiary of the rate hike because asset management yields improve. Insurers mainly invest premiums received from customers in bonds to generate asset management income, and higher interest rates result in greater profits. In particular, if the current asset yield, which is in the 3% range, rises above the interest rate, it is expected to somewhat resolve the negative interest rate spread issue caused by the gap with the promised 5% range interest rate returned to policyholders.

The securities industry, which has enjoyed an unprecedented boom due to prolonged low interest rates, is analyzed to face downward pressure on stock trading volumes and real estate, negatively affecting major revenue sources such as brokerage and investment banking (IB). Jung Taejun, a researcher at Yuanta Securities, forecasted, "The securities industry has a business structure that benefits from liquidity expansion and has experienced significant adjustments during the trend of base rate hikes."

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