With renewed worries about worldwide increases in interest rates, banking shares—which were previously ignored—are now attracting focus as safe-haven investments. Although market declines driven by semiconductors and higher long-term interest rates have hurt stock markets, bank stocks remain more stable under assumptions of potential gains from elevated interest rates.
◇Different performance of banking and stock market shares in June
As reported by the Korea Exchange, the KRX Bank Index increased by 3.18% this month, standing in stark contrast to the KOSPI's drop of 8.79%. Out of the 27 sector indexes monitored by KRX, just five—namely banking, consumer discretionary, insurance, financial services, and broadcast and communication sectors—gained value this month. This underscores the more resilient defense offered by bank stocks amid the market downturn.
Although the KOSPI declined by more than 4% and major semiconductor companies lost over 5% on the 10th, banking sector shares remained fairly stable. KB Financial Group decreased only 0.52%, while Hana Financial Group slipped 0.92%. Kbank and Jeju Bank rose by 4.3% and 14.6%, respectively.
On the contrary, the KRX Securities Index decreased by 8.6% during this month. Experts believe this is due to reduced growth in trade volumes as part of the KOSPI adjustment, along with investors cashing in their gains. Specifically, the average daily trading volume on the KOSPI dropped by around 200,000 shares, and the total transaction value fell by 3 trillion South Korean won from the previous month.
◇Rising interest rates: Benefit for banks, challenge for bonds
Market participants credit the differing performances of banking and securities sector stocks to current pressure from interest rates. Higher rates usually enhance expectations for banks' net interest margins (NIM), whereas securities companies encounter worries about potential losses in bond valuations and declining investor confidence.
Global monetary policy conditions continue to be beneficial for banking institutions. Ongoing worries about rising prices have led to renewed hopes for further increases in interest rates, mainly in the United States. On the 10th, the U.S. May Consumer Price Index (CPI) was reported to have increased by 4.2% compared to the previous year—its highest level in three years. This data reinforced beliefs that the Federal Open Market Committee (FOMC) meetings scheduled from the 16th to the 17th would keep interest rates unchanged instead of reducing them. David Kelly, head of global strategy at JP Morgan Asset Management, commented, "The Fed will still feel uneasy about inflation but probably won’t alter its approach. It’s highly likely that the FOMC will agree to maintain current rates during their upcoming session."
Ko Yeon-su, a researcher from Hana Securities, stated, "Due to expectations of two key rate increases during the latter part of the year, increasing interest rates have put pressure on stock markets." Heo Jae-hwan, leader of the global macro team at Eugene Investment & Securities, remarked, "During times when interest rates rise sharply, insurance companies perform better than banks, which in turn do better than securities firms."
◇Investment banks draw attention despite market fluctuations
Experts anticipate that the protective nature of banking sector shares will remain strong. In combination with ongoing high-interest rates, reduced anticipation of penalties associated with Hong Kong H-index equity-linked notes (ELS), and growing investor interest in consistent dividend returns amidst increased market instability are bolstering bank stocks. Their reliable income streams and dividends render them appealing choices during periods of financial uncertainty or when interest rates rise.
Na Min-wook, a researcher from DB Securities, stated, "Bank shares offer security amid uncertain times. We continue to favor bank stocks due to their solid defensive qualities, considering ongoing global challenges such as the U.S.-Iran conflict."
Nevertheless, the increasing value of the U.S. dollar presents a potential threat. The won has surpassed the 1,560 South Korean won level relative to the dollar for the first time in 17 years, prompting worries regarding financial institutions' capital sufficiency. Sustained elevated exchange rates might marginally lower main banks' Common Equity Tier 1 ratios, an essential indicator of fundamental capital.
