As the semiconductor concentration in Korea's stock market deepens, bank stocks are failing to gain traction despite the KOSPI rally. Still, securities houses say bank stocks remain attractive on expectations of a rate hike in the second half and expanded shareholder returns. In particular, they note that the recent investment yardstick for bank stocks is shifting from the traditional price-to-book ratio (PBR) to the total shareholder return (TSR), which encompasses dividends and share buybacks and cancellations.
According to the Korea Exchange (KRX) on the 1st, the KRX Bank Index, which comprises major bank stocks such as KB Financial, Shinhan Financial Group, Hana Financial Group and Woori Financial Group, fell 8.54% during the month of May (4–29). By contrast, the KOSPI rose 28.45% over the same period.
Recently, as the domestic market has moved around semiconductor heavyweights such as Samsung Electronics and SK hynix, the relative neglect of bank stocks has become even more pronounced. From January to May this year, while KRX Banks rose 14.46%, KRX Information Technology jumped 205.83% and KRX Semiconductors surged 163.34%.
Choi Jeong-uk, an analyst at Hana Securities, said, "As concentration within the KOSPI has persisted, even domestic institutions such as insurers and asset managers have joined net selling of bank stocks to boost returns, widening their underperformance," and added, "Until second-quarter earnings are released, aside from the valuation factor that PBR is undervalued relative to profitability, there is no clear momentum driver."
Still, there are projections that conditions surrounding bank stocks could improve in the second half. The Bank of Korea (BOK) has hinted at the possibility of a rate hike, raising expectations for improved bank profitability. Earlier, at its meeting on the 28th, the the Bank of Korea's monetary policy committee kept the base rate unchanged at 2.50%, but Bank of Korea (BOK) Governor Shin Hyun-song said, "It is necessary to raise the base rate at an appropriate time," signaling a potential shift to monetary tightening.
Securities houses cite sluggish foreign flows as the reason bank stocks are not benefiting from rate hike expectations. They say foreign buying is constrained because exchange-rate volatility remains high and concerns about soundness linger. However, if policy issues come back into focus after the local elections and external uncertainties ease, such as the outcome of U.S.–Iran talks, flows could spread to relatively neglected bank stocks.
In particular, the scale of shareholder returns has recently emerged as a key variable in evaluating bank stocks. Following last year's value-up policy, financial holding companies have actively pursued share buybacks and cancellations and increased dividends. The four major financial holding companies (KB, Shinhan, Hana and Woori Financial) have secured more than 31 trillion won in resources available for dividends by reducing capital reserves and transferring retained earnings. In effect, resources have been set aside that can be used for dividends over the next three to five years. There is growing expectation that if profits increase due to rising rates, the scale of shareholder returns could also expand.
Jo A-hae, an analyst at Meritz Securities, said, "The banking sector is maintaining solid profitability thanks to higher interest income from rising rates and improved results in the nonbank institutional sector," and added, "If capital regulations are eased and capital ratios improve on the back of future won–dollar exchange-rate stability, banks will have ample capacity to pursue aggressive shareholder returns, including share buybacks and cancellations and increased dividends."
This shift is also affecting the investment criteria for bank stocks. Because banks generate revenue based on capital, the price-to-book ratio (PBR) has been used as a representative valuation metric. However, as financial holding companies have entered full-fledged competition over shareholder returns, the total shareholder return has recently emerged as the more important investment yardstick. Total shareholder return is an indicator that divides the amount of dividends and share buybacks and cancellations by net income.
Eun Kyung-wan, an analyst at Shinhan Investment & Securities, said, "Investor attention is focused less on headline results themselves than on the scale of second-half share buybacks and cancellations," explaining, "Total shareholder return has established itself as the key investment metric over PBR or return on equity (ROE)."
Eun added, "The core of future value-up policy will not be a simple expansion of returns, but whether it includes a growth story such as efficient resource allocation plans and securing business competitiveness."