[Market Eye] Record-breaking year expected for banking groups; financial stocks, maybe

Bank stocks in South Korea have long been regarded as an unappealing option for investors, but analysts say it may be their time to shine as the economy makes progress toward normalization and interest rates are no longer at record lows.

The country’s big four banking groups -- KB Financial, Hana Financial, Shinhan Financial and Woori Financial -- are expected to see their combined profits grow by double digits in the quarter that ended in September, according to FnGuide, a financial information company.

Last week, KB and Hana posted record-breaking net profit for the first nine months while the other two are set to announce their earnings this week. A parade of glowing earnings reports is expected to excite the market this week.

Supporting the banks’ stellar performance and rosy outlook is higher demand for loans as the country shifts to “living with COVID-19” mode and enterprises gear up for the resumption of economic activities. Soaring asset prices are also prompting a buying spree among young people, who are looking to borrow money in hopes of profiting from trade in stocks, digital coins and property.

Higher interest rates helped banks generate revenue. After maintaining its benchmark rate at a record low of 0.5 percent for 15 months, the Bank of Korea raised it by 25 basis points in August.

Also, the government’s efforts to bring snowballing household debt under control pushed lenders to raise their lending rates, resulting in higher net interest margins for banks.

Analysts are upbeat about financial holding firms’ performance for the remainder of the year. Daishin Securities analyst Park Hye-jin predicted that KB Financial Group’s annual net profit would exceed 4 trillion won for the first time in its history.

“As another base rate hike is expected in November and the macro environment favorable to banks will continue, there is a high possibility that the company will continue to perform well through the first half of next year,” she said.

On Thursday, KB reported its largest-ever quarterly profit of 1.29 trillion won, up 7.8 percent from the previous quarter and up 9.3 percent from the same period a year earlier.

In a rare occurrence, Woori Financial Group shares rose more than 10 percent this month, reflecting investors’ sanguine view of its performance in the third quarter and of a long-delayed move toward privatization.

In September the government announced its plans to sell most of the 15.25 percent stake it holds in Woori Financial Group, after which it would retain as little as 5.25 percent. Some 18 investors, including telecommunications firm KT Corporation, Hoban Construction and eBest Investment & Securities, have reportedly submitted letters of intent to buy Woori shares from the government.

“The sale of the remaining stake goes beyond a simple stake sale, and means that management autonomy will increase through privatization,” Hi Investment & Securities analyst Kim Hyun-ki said.

On Friday, Hana Financial Group reported a third-quarter net income of 942 billion won, up 22.3 percent from a year earlier. The robust results led the company to achieve record-high net income for the January-September period.

The interest income the company earned from its lending activities -- which centered on loans to small and mid-sized enterprises -- rose 15.3 percent on-year.

Buoyed by the strong performance, the firm is considering distributing dividends each quarter in what would be a departure from its six-month-basis payout system.

The dividend payout ratio, the ratio of all dividends paid out to shareholders relative to the net income of the company, will recover to the pre-COVID-19 level of 26 percent, the company’s Chief Financial Officer Lee Hoo-seung said during a Friday conference call on the results for the third fiscal quarter.

Like KB, Shinhan Financial Group is expected to see its annual net income surpass 4 trillion won for the first time.

Seeking to boost its market cap, Shinhan has already revealed plans to pay dividends on a quarterly basis, making it the first financial holding company to do so. The amount of the dividends will be decided at a board of directors meeting Tuesday.

By Park Han-na (hnpark@heraldcorp.com)