A Beneficiary Stock of Interest Rate Hikes... Why Is the Bank ETF Falling?

Bank ETFs Yield -12% Over 1 Month
Financial Supervisory Service Chief in June: "Banks Pursuing Excessive Profits"
Shinhan Bank Lowers Loan Interest Rates
Bank Stocks Fall Simultaneously
Increased Loan Loss Provisions Also a Burden

[Asia Economy Reporter Hwang Yoon-joo] Bank stocks, considered beneficiaries of interest rate hikes, are struggling. Bank stock prices are at yearly lows due to 'government intervention.'

According to the Korea Exchange on the 19th, the recent one-month returns of two bank ETFs (KODEX and TIGER) recorded -12.86% and -12.85%, respectively. Although this is a significant improvement compared to the three-month returns (-25.08%, -24.55%), they still show double-digit negative returns.

Bank stocks belong to sectors that benefit from rising net interest margins (NIM) due to the expansion of loan-deposit spreads during periods of interest rate hikes. The weakness in bank stocks is interpreted as a result of the financial authorities' warning against loan interest rate increases in June. Policies deviating from market logic, such as statements about lowering interest rates and support for vulnerable borrowers, have had an impact.

Additionally, concerns are underlying that rapid interest rate hikes combined with increasing recession risks could turn non-performing companies and household debt into triggers, potentially burdening banks.

Financial Supervisory Service Governor Lee Bok-hyun is answering questions from reporters after completing an on-site visit related to the financial sector vulnerable borrower support program at Shinhan Bank Namdaemun Branch in Jung-gu, Seoul on the 14th. Photo by Kim Hyun-min kimhyun81@

Earlier, on the 21st of last month, Lee Bok-hyun, Governor of the Financial Supervisory Service, said at a meeting with representatives of domestic banks, "During periods of rising interest rates, the loan-deposit interest rate spread tends to widen," adding, "There is growing misunderstanding and criticism regarding banks' excessive profit-seeking."

Shinhan Bank was the first to respond. At the end of June, Shinhan Bank decided to lower the interest rate for borrowers using mortgage loans exceeding 5% annually to 5% for one year. They also decided to reduce the interest rate on jeonse loans by 0.3 percentage points.

The stock price also reacted. On the day Governor Lee issued the warning, Shinhan Financial Group's stock price fell from 39,600 KRW to 34,650 KRW within less than a month, a decline of 12.5% as of the previous day.

Starting with Shinhan Financial Group, all four major financial holding companies implemented loan interest rate reduction measures. Stock prices responded accordingly. During the same period (June 21 to July 18), KB Financial Group fell 13.2% (from 50,800 KRW to 44,050 KRW), Hana Financial Group dropped 15.6% (from 42,200 KRW to 35,600 KRW), and Woori Financial Group declined 12.4% (from 13,300 KRW to 11,650 KRW).

Although it is pointed out that only a small number of customers actually benefit from the interest rate cuts, the market logic appears to have collapsed in response to the financial authorities' message, leading to weakened investor sentiment.

The issue of expanding loan loss provisions also seems to have affected stock prices. As the possibility of a recession increased, financial authorities proactively demanded the accumulation of loan loss provisions. Due to the increased burden of loan loss provisions this year, there are forecasts that the rise in net interest income will not translate into expected increases in controlling net income and dividends per share (DPS). However, even with growing recession concerns, proactive provisioning is expected to significantly reduce worries about banks' credit quality.

Jung Joon-seop, a researcher at NH Investment & Securities, said, "Currently, bank stocks are showing weakness more than ever due to recession uncertainties, criticism of high loan interest rates, and regulatory risks," adding, "However, the stock prices have fallen much more than the scale of profits these factors would limit, and most bank stocks are near their lowest levels since 2021."

He continued, "We are lowering target prices for covered bank stocks reflecting the expansion of loan loss provisions and rising risk-free interest rates," but evaluated, "Stock prices are excessively reflecting domestic and international uncertainties, thus securing downside resilience more than ever."

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