Banking: A Safe Haven


The authors are analysts of Shinhan Investment Corp. They can be reached at sh.kim@shinhan.com and mintz95@shinhan.com, respectively. — Ed.

Banks with high share of variable-rate loans show stronger fundamentals during rate hike cycles

Banks with a relatively large portion of variable-rate loans tend to show stronger fundamentals vs. peers during rate hike cycles accompanied by economic recovery. There are various factors affecting fundamentals such as risks around rate hikes and portion of low-cost funds. However, the most important factor should be the share of variable-rate loans during rate hike cycles, provided that the economy is on a recovery path.

Shinhan Bank boasts the highest share (78%) of variable-rate loans in total KRW-denominated loans among Korea’s four major banks, followed by Hana Bank (75%). With an annual household loan growth target set at 4-5% by the financial authorities, the two banks should show relatively strong fundamentals. Banks with higher share of fixed-rate loans may fare better in terms of soundness.

Share price correction for Kakao Bank vs. rise of Woori FG shares

Kakao Bank shares declined sharply on January 10due to: 1) possibility of Kbank IPO mentioned in media reports; and 2) recent correction of tech stocks (Kakao, NAVER, etc.).

In contrast, Woori Financial Group shares rose nearly6% on the same day, outperforming the banking sector. The share price gain is partially attributable to the group’s 12.68% stake (second largest) in Kbank. We recommend a more cautious approach given that the possibility of stake sale is limited and Kbank’s IPO has yet to be confirmed. However, the shares are likely to rise further, backed by: 1) continuing inflow of passive funds following the recent increase in MSCI weight; and 2) attractive earnings and dividends.

4Q earnings likely short of consensus; earlier-than-usual upturn expected for banking shares

Banks should have seen solid top-line growth for 4Q21, with a 3-4bp upturn in net interest margin (NIM). The fourth quarter is typically a weak season as earnings are weighed down by early retirement expenses and one-off provisions. Banking stocks thus tend to rebound after the 4Q earnings season. With early retirement expenses estimated at usual levels, the banks’ 4Q21 earnings are likely to miss consensus estimates by a small margin. However, we recommend investors to start accumulating banking shares in small quantities, given: 1) rapidly-changing market conditions in favor of value stocks; and 2) banks’ profits and NIM expected to continue on an uptrend through 1Q22. Hana Financial Group remains our top pick in the sector.

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