As the KOSPI plunged close to 1,500 points in two weeks and volatility widened, bank stocks are emerging as a representative defensive play. With expectations of a base rate hike in the second half, better earnings, and expanded shareholder returns aligning, some expect bank stocks to serve as a haven in a volatile market for the time being.
According to the Korea Exchange (KRX) on the 15th, the KOSPI fell about 1,500 points from 8,303.41 at the close on the 1st to 6,856.83 the previous day. The semiconductor sector, which had led the rally, saw the steepest decline. Over the same period, the KRX information technology (IT) index and the KRX semiconductor index dropped 26.96% and 22.80%, respectively, marking the highest declines among exchange sector indexes.
Banks, however, rose even in the sell-off. The KRX bank index climbed 11.38% over the same period, the only sector to post a double-digit gain. Its advance far outpaced other sectors that managed positive returns in the downturn, such as consumer staples (1.28%) and transportation (0.83%). KB금융 had a market capitalization of 63조8438억원 at the previous day's close, surpassing Samsung Life Insurance and Samsung Biologics to rank eighth on the main board.
This trend is not limited to Korea. Mitsubishi UFJ Financial Group (MUFG), Japan's largest financial group, overtook Toyota Motor and Kioxia Holdings on the 13th to become No. 1 in market capitalization among Japanese corporations. It is the first time in about 40 years that a Japanese financial company has taken the top spot in market cap, since Sumitomo Bank in 1986 during the bubble economy.
This year, Japan's market-cap No. 1 shifted from Toyota to SoftBank Group, back to Toyota and Kioxia, and then to Mitsubishi UFJ in quick succession. As leading themes such as AI, semiconductors, and finance cycle swiftly, the market-cap leader is changing with them. Expectations for normalization of monetary policy, including a base rate hike by the Bank of Japan (BOJ), a recovery in corporations' loan demand, and strong shareholder return policies are cited as reasons behind the strength in financials.
Analysts say changing interest-rate conditions are also working in favor of bank stocks in Korea. Generally, when the base rate rises, the net interest margin (the difference between deposit and lending rates) tends to widen, increasing the likelihood of improved profitability for banks.
Kim Ji-young, an analyst at Kyobo Securities, said, "The reason the bank industry index outperformed the KOSPI over the past month appears to be that bank stocks have stood out as interest-rate beneficiaries amid expectations for a Bank of Korea base rate hike in the second half," adding, "As foreign investors rebalance out of semiconductor stocks that have surged this year, interest has grown in dividend and value stocks, which also had an impact."
Earnings are also expected to be solid. Kyobo Securities projected that the combined net profit for the second quarter of this year for nine domestic financial holding companies and banks (Shinhan Financial Group, KB Financial, Hana Financial Group, Woori Financial Group, Industrial Bank of Korea (IBK), iM Financial Group, BNK Financial Group, JB Financial Group, KakaoBank) will be about 7.1858 trillion won, up 5.7% from the previous quarter and 4.3% from a year earlier. It said higher market rates improving the net interest margin (NIM), growth in corporate loans, and better results at securities subsidiaries should support profit growth.
Expanded shareholder returns are also boosting the investment appeal of bank stocks. The shareholder return ratio at major domestic financial holding companies (KB, Shinhan, Hana, Woori) rose from the 20% range in 2020 to the 40%–50% range last year. Large-scale share buybacks and cancellations are expected to continue in the second half.
Yoo Jun-seok, an analyst at Heungkuk Metaltech Securities, said, "In the first half, flows concentrated heavily into AI-related stocks, leaving banks range-bound, but steady buybacks and improving results gave them the strongest defense among non-AI sectors," adding, "With sector rotation gathering pace in July, bank stocks are now outperforming the market."
Tighter oversight of household loans by financial authorities and broader lending regulations are variables. Even so, brokerages say that with growth centered on corporate loans, NIM improvement from rising rates, and continued aggressive shareholder returns expected, bank stocks are likely to keep their defensive role in a stock market with rising volatility.
Jun-seung Jeon, an analyst at LS Securities, said, "Historically, bank stocks have shown the strongest momentum early in rate-hike cycles, making the early phase of hikes the right time to overweight banks," adding, "From the perspective of positive earnings outlooks and expanded shareholder returns, they should provide a sturdy backstop even as market volatility widens."