With semiconductor stocks faltering and the KOSPI stuck in a trading range, bank stocks are emerging as a new haven. The favorable external backdrop, including the steep drop in the won-dollar exchange rate on top of the high-rate environment, is driving the shift.
According to the Korea Exchange (KRX) on the 7th, the KRX Bank Index rose 5.21% over the past two weeks (Aug. 24–Sept. 4) to 1,687.05. It was the fifth-highest gain among KRX indexes during the period. By contrast, the KOSPI index fell 3.27% to close at 6,687.21.
On the flows side, institutions were net buyers of bank stocks, while foreigners sold. Over the past two weeks, foreigners were net sellers of KB Financial Group (122.5 billion won), Hana Financial Group (122.7 billion won), and Shinhan Financial Group (171.6 billion won). Due to Eugene PE's block deal (large-lot trading), only Woori Financial Group was an exception, recording net purchases of 379.9 billion won.
◇ Double tailwinds from high rates and a stronger won
The KOSPI index has slowed under the impact of a sharp rise in U.S. Government Bonds yields. The U.S. 10-year Treasury yield topped 4.8% last week, the highest since Nov. 2021, a record high. Rising rates increase funding costs for corporations and raise discount rates for growth stocks, pressuring the broader market.
Bank stocks, by contrast, are seen as prime beneficiaries of high interest rates. In rising-rate periods, lending rates climb faster than funding costs such as on time deposits, widening net interest margins (NIM). As the resulting operating leverage effect expands, it feeds through to improvements in return on equity (ROE).
A stronger won is also considered favorable for bank stocks. After topping 1,550 won last month, the won-dollar exchange rate has fallen below 1,350 won in about a month. When the exchange rate falls, foreign exchange translation gains increase and the common equity Tier 1 (CET1) ratio improves. As capital buffers expand, shareholder-return policies such as dividends and share buybacks and cancellations gain momentum.
Choi Jung-uk, a researcher at Hana Securities, said, "As the won-dollar rate falls into the 1,350-won range, the positive impact on third-quarter bank earnings and CET1 ratios will expand further," and noted, "For every 10-won decline in the exchange rate, CET1 improves by about 1–2 basis points, so for large bank holding companies, it is likely to rise by around 20–40 basis points in the third quarter."
In particular, Hana Financial Group(086790) is cited as a beneficiary of the exchange rate. Shinhan Investment & Securities analyzed that, due to the lower exchange rate, Hana Financial Group will book 150 billion won in foreign exchange translation gains in the third quarter. It also forecast the common equity Tier 1 ratio will rise to 13.5%. If regulators approve a shorter application period for operational risk, it could secure more than 10 basis points in additional capital capacity and announce an extra 300 billion won share buyback and cancellation in the fourth quarter.
Additionally, Hana Securities projected that Industrial Bank of Korea (IBK) could theoretically post 250 billion won in foreign exchange translation gains in the third quarter, and Woori Financial Group about 130 billion won.
◇ Won strength to continue in the second half; rates are the swing factor
Whether the favorable setup for bank stocks will persist bears watching. First, the exchange rate is expected to remain stable in the second half. Kwon A-min, a researcher at NH Investment & Securities, said, "With the recent narrowing of foreigners' net selling in domestic equities, supply-demand conditions have shifted in favor of suppliers," and added, "Considering stronger-than-expected dollar supply from corporations, we see the short-term floor in the low-1,300-won range and forecast an average fourth-quarter rate of 1,380 won."
The rate path is a variable. After the Bank of Korea raised the base rate to 3% a year and left the door open to further hikes, domestic short-term rates may stay elevated for the time being. Long-term rates, by contrast, are heavily influenced by the global rate backdrop, including U.S. Government Bonds yields. If high U.S. rates persist, domestic long-term rates are also likely to remain high.
That said, the market is also discussing the possibility that the U.S. Federal Reserve (Fed) will hold rates steady in September. Recent comments by Fed officials suggested they could consider a pause depending on inflation trends, and labor data have exceeded market expectations. That is why attention is focused on inflation data to be released this week to gauge the future rate path.