Bank Stocks to Surpass Dividend Play If ROE Exceeds 10% [Click e-Industry]

Record-High Bank Net Profit in Q2
Net Interest Income, Non-Bank Recovery, and Operating Leverage

Yonhap News

The perspective on bank stocks is shifting. Traditionally, bank stocks have been seen as defensive or dividend stocks that hold steady when the equity market is volatile. However, some analysts now say the conversation should go beyond mere stability to focus on the potential for a structural re-rating.

On August 13, Samsung Securities stated in a recent report that, "Stability is now the default for bank stocks, and the focus should now be on the possibility of a structural re-rating." The report added that while the stability of bank stocks has already been confirmed amid high stock market volatility, the key going forward will be improvements in return on equity (ROE).

Earnings have been robust. Second-quarter net profit for banks covered by Samsung Securities—including KB Financial Group, Shinhan Financial Group, Hana Financial Group, Industrial Bank of Korea, BNK Financial Group, iM Financial Group, JB Financial Group, KakaoBank, and K Bank—reached 7.4 trillion won, marking an all-time quarterly high. This represents an increase of 6.7% from the same period last year and 8.7% from the previous quarter. KB Financial Group and Shinhan Financial Group reported year-on-year profit growth rates of 14.6% and 17.5%, respectively, confirming that the largest financial groups are leading performance improvement.

In the second quarter, the net interest income of these nine banks grew by 291 billion won from the previous quarter and 1.18 trillion won from a year earlier. Loan growth has also been more stable than previously feared. Banks’ loan growth rate in the second quarter stood at 1.4% quarter-on-quarter and 4.7% year-on-year, with expectations rising for annual growth of around 5%.

The primary driver behind loan growth was corporate loans, especially those to large enterprises. While large corporate loans may appear less attractive on headline rates alone, they are a rational choice from a risk-weighted assets (RoRWA) perspective, considering associated transactions such as foreign exchange and low credit costs.

Samsung Securities believes banks’ ROE can exceed 10%. First, it cited the beginning of an improved banking cycle, represented by interest rates, loan growth, and provisions. The report also highlighted that profitability in non-banking divisions is rising, especially for securities companies. In addition, as finance becomes more digital, the sales leverage effect is expected to expand, as revenue growth is likely to outpace increases in selling and administrative expenses.

Shareholder returns are also a pillar of re-rating. With improved earnings, banks have greater capacity for dividends, and some are planning to increase total dividend payouts by more than 10% to take advantage of separated taxation benefits. KB Financial Group, Shinhan Financial Group, Hana Financial Group, and iM Financial Group will also offer tax-free dividends starting early next year.

However, not all bank stocks are expected to grow at the same pace. Small and mid-sized financial groups and internet-only banks must demonstrate differentiated earnings improvement and expand shareholder returns accordingly.

Jaewoo Kim, Head of the Financial & Consumer Goods Research Team at Samsung Securities Research Center, commented, “Even amid heightened market volatility, bank stocks have demonstrated stability, and structural re-rating is possible as earnings continue to grow. KB Financial Group is expected to play a leading role, given the improvement in ROE centered on non-banking divisions and differentiated shareholder returns, while attention should also be given to Shinhan Financial Group and Hana Financial Group, both of which have shareholder return rates exceeding 50%.”

This content was produced with the assistance of AI translation services.