[KH Explains] Why Korean bank shares got bump from Trump's 2nd term

Shares of local banks are putting up a fight in the bearish Korean stock market, as investors are pricing in expectations that lenders could excel in the second Donald Trump administration under softened regulation and higher interest rates.

The KRX Banks index, representing shares of top financial service providers such as KB, Shinhan, Woori and Hana, closed at 913.69 on Nov. 7, up 2.33 percent on-day, after Trump secured his victory in the US presidential election. It was the highest-gaining index on the Korea Exchange on the day, outrunning the KRX Constructions, which surged by 0.69 percent.

The index dropped by 3.92 percent in the following week, taking a blow from the overall market crash which took the benchmark Kospi down by 5.63 percent. However, the KRX Banks index fared well compared to other indices, such as KRX Energy & Chemicals and KRX Steels, which shed 10.75 percent and 11.72 percent, respectively.

The relatively positive investor sentiment for local bank shares is coupled with the recent surge in US bank shares following Trump’s election victory.

"Trump is likely to scale back regulations on the financial industry when he returns to the White House. While US banks would largely benefit from the presumably light-touch approach to regulation, Korean lenders would not be left out of the picture," said Lee Hyo-seob, senior research fellow at the Korea Capital Market Institute.

The market believes Trump’s win could lead to looser merger policies and antitrust scrutiny, and possibly delay the full application of Basel III Endgame, a set of international measures that regulate lenders, involving capital increases for large banks.

Though major Korean lenders have already applied the key provisions of Basel III under the pressure of local authorities, a delay in the global application would prompt the regulators to ease the grip on the banks. This would allow them to compete with their international peers equally, Lee explained.

“These days, banks are executing deals on an international level. In such an era, asset quality regulations on banks mostly move in synchronization. It may take a while for the rules to be softened for Korean lenders, but they will certainly not lag behind in terms of regulation,” he said.

The outlook of “higher for longer” interest rates has also sparked investors’ preference for banking shares.

Trump’s return has fueled fears of a resurgence in inflation as aggressive tariffs and strict border measures could drive up prices. Amid such speculation, investors have scaled back their expectations for how quickly the US Federal Reserve will cut interest rates.

Pricing in the expectations for higher rates, the US treasury yields have already jumped, following Trump’s victory, despite the Fed's recent interest rate cut for a second consecutive time. Korea’s treasury yields have not yet picked up.

“Considering the Bank of Korea’s monetary policy is not entirely independent from that of the Fed, local banks would be able to maintain higher profitability based on net interest margin under a higher interest rate environment,” Lee said.

With higher hopes for the business prospects of local banks, more foreign investors are raising their stakes in local lenders.

The Capital Group Companies, a major asset manager based in the US overseeing assets worth 3,900 trillion won ($2.8 trillion), has been gaining stakes in local banking groups.

According to a regulatory filing on Nov. 7, the asset manager holds a 5.3 percent stake in KB Financial Group, 0.25 percentage points higher than the previous reporting. On the same day, it also announced it owns 5.55 percent of Hana Financial Group, up 0.11 percentage points.

With the stakes, it is the third largest shareholder of both KB and Hana, following the National Pension Service and BlackRock Fund Advisors. It also holds a 5.7 percent stake in JB Financial Group as of June, another constituent on the KRX Banks index.