Interest Rate Hikes Accelerate... Bank Stocks Decline

KRX Bank Index Drops 5% This Month... Largest Decline Rate

[Asia Economy Reporter Minji Lee] Although the possibility of a giant step by the U.S. Federal Reserve (Fed)?raising the benchmark interest rate by 75 basis points at once?is resurfacing, bank stocks remain quiet. Over the past two years, whenever there was an issue of interest rate hikes, bank stocks attracted money due to improved earnings prospects, but now they are out of favor.

According to the Korea Exchange on the 13th, the KRX Bank Index fell 4.99% from the beginning of this month through the 10th. Along with the semiconductor index, it recorded one of the largest declines among KRX indices. Looking at the stock price trends of major components in the index, KB Financial Group dropped more than 8%, Hana Financial Group (-7%), JB Financial Group (-5.1%), BNK Financial Group (-3.7%), KakaoBank (-3.7%), Industrial Bank of Korea (-3.5%), DGB Financial Group (-2.7%), and Shinhan Financial Group (-2%) all showed downward trends.

Major domestic financial holding companies and banks have shown upward trends whenever aggressive interest rate hike forecasts by the Fed emerged. This is because the Bank of Korea’s Monetary Policy Committee (MPC) has proactively raised the benchmark interest rate to prevent the aftershocks of interest rate inversion, which could trigger severe foreign capital outflows. An increase in the benchmark interest rate directly leads to a rise in banks’ net interest margin (NIM), which is positive for earnings. In fact, when the possibility of the Fed’s big step (a 50 basis point hike at once) was first raised in January this year, the KRX Bank Index rose 5% over two months from January to February, significantly outperforming the KOSPI return (-9%).

It is analyzed that concerns over the deterioration of banks’ soundness have emerged due to the rapid short-term rise in interest rates. Interest rate hikes lead to a sharp increase in loan interest rates, which means more borrowers may fail to repay their debts. Youngsoo Seo, a researcher at Kiwoom Securities, said, "If interest rates rise by more than 1 to 2 percentage points in a short period, the burden of principal and interest repayment will increase significantly, causing a sharp rise in the possibility of defaults." He added, "The worsening of high-risk borrowers with a debt service ratio (DSR) over 70%, who account for 40% of total debt, will be an important variable for financial stability."

The possibility of an economic slowdown is another wild card that could further worsen banks’ soundness. In a situation where inflation is prolonged, if the economic slowdown intensifies, not only will the number of companies taking out loans decrease, but there will also be companies going bankrupt because they cannot repay their debts. The global economic growth rate is already showing a downward trend, with the World Bank (WB) revising its global economic growth forecast down by 1.2 percentage points from the January projection to 2.9%. Jungwook Choi, a researcher at Hana Financial Investment, said, "Despite the rapid rise in interest rates, global financial stocks are showing weakness as recession concerns spread. While defensive appeal may occasionally be highlighted, it will not be easy for bank stocks to continue their excess upward trend."

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