[Weekend Money] "Growing stock market volatility... Bank stocks as defensive players are needed too"

Earnings, shareholder returns, and tax reform expected to drive gains
"Average PBR of bank stocks at 0.7 times... still undervalued"

Securities analysts say that in a highly volatile market like the current one, investors should pay attention to bank stocks as "defensive stocks" that can help reduce losses.

Kim In, researcher at BNK Investment & Securities, maintained an "Overweight" investment opinion on the banking sector, saying, "In a stock market environment with heightened volatility, investing in bank stocks, which are both defensive and value stocks, is advantageous from a portfolio perspective." As recommended stocks, he pointed to Hana Financial Group among commercial banks, which has a relatively low price-to-book ratio (PBR), and BNK Financial Group among regional banks, which shows a large improvement in earnings.

Tax benefits on dividends begin this year

Kim noted that when considering the combination of the following factors: continued record-high earnings, expanded shareholder returns, and low PBR levels, bank stocks can serve as a key alternative amid a volatile market.

First, from this year, "separate taxation on dividend income" will be applied to dividends paid out. This is a system under which dividend income for shareholders of companies that have a payout ratio of 40% or higher, or 25% or higher with the total dividend amount increasing by more than 10% from the previous year, is taxed at a "separate tax rate." It will be applied on a temporary basis for three years.

Kim explained, "It is a favorable investment vehicle for high-net-worth investors whose financial income is expected to exceed 20 million won," adding, "The introduction of tax-exempt dividends is also highly likely, which will further enhance the attractiveness of bank-stock dividends for general investors." Woori Financial Group has already finalized tax-exempt dividends, and Shinhan Financial Group, KB Financial Group, Hana Financial Group, and JB Financial Group are also expected to implement them.

To meet the separate-taxation requirements, listed banks paid out larger fourth-quarter dividends than initially expected. Last year, the average dividend per share of bank stocks increased by 20% compared with the previous year. Kim said, "To apply separate taxation on dividend income, banks that pay equal dividends each quarter still raised their fourth-quarter dividends last year. Banks that pay split quarterly dividends also decided to pay out more than the market had expected," and added, "With the payout ratio being raised, the total shareholder return ratio has improved, and Shinhan Financial Group and KB Financial Group are expected to achieve their 2027 target of 50% two years ahead of schedule."

Total shareholder return ratio surpasses 43%... Share buybacks and cancellations hit record high

The scale of share buybacks and cancellations increased rapidly from 1.4 trillion won in 2023 to 2.1 trillion won in 2024, and to 3.9 trillion won last year. The combined total shareholder return ratio, including dividends and share cancellations, averaged 43.0% last year, with KB Financial Group at 52.4% and Shinhan Financial Group at 50.3% leading the pack. Kim forecast, "They have decided to expand the share of buybacks and cancellations until the target PBR of 0.8 to 1.0 times is reached," adding, "They are expected to maintain a high level going forward."

Citizens are using commercial bank ATMs. Kim Hyunmin, Reporter

Last year, the combined net income attributable to controlling shareholders of listed banks reached a record high of 22.6 trillion won, up 9.8% from the previous year. This year, supported by an increase in interest income and a decrease in loan-loss provisions, it is expected to grow a further 4.0% to 23.5 trillion won. Kim projected, "With market interest rates rising and the policy stance on base-rate cuts remaining conservative, the downward pressure on net interest margins (NIM) is not significant, and the reduction in provisions for project financing (PF) will also contribute to earnings improvement."

Above all, based on this year’s estimates, the average PBR of bank stocks is 0.7 times, which is less than half of the KOSPI’s 1.7 times. It is also low compared with the global major-bank average of 1.2 times. Kim added, "If the domestic stock market is in the process of normalizing relative to advanced markets, the recent share-price gains should be interpreted as a normalization process for PBR," and continued, "if banks overcome the challenge of improving capital efficiency by reducing excess capital, the elimination of the PBR discount will accelerate further as return on equity (ROE) rises."

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