"Preconceptions About Korea" Drive Stagnation in Domestic Bank Stocks While Global Bank Shares Surge [Weekend Money]

The share prices of Korean banks have remained stagnant in the second quarter of this year, despite posting the highest quarterly earnings in history. This stands in contrast to major global banks, which have surpassed their annual highs and continued their upward trend. Analysts suggest that this is largely due to a preconceived notion that domestic banks’ return on equity (ROE) is capped at 10%. They believe that the banks’ robust performance could challenge and ultimately overcome this perception.

According to Samsung Securities, major global banks began to climb around the second-quarter earnings season, surpassing their previous annual highs. Jaewoo Kim, a researcher at Samsung Securities, explained, "Initially, rising macroeconomic uncertainty—such as higher oil prices from escalating geopolitical risks—had weighed on global investor sentiment toward the banking sector. However, as these uncertainties began to ease recently and banks continued to show additional improvements in their second-quarter results following strong first-quarter performance, some financial institutions even raised their ROE targets, which played a decisive role."

Unlike global banks that have surpassed their annual highs, the share prices of domestic banks appear to be capped at 1.0 times price-to-book ratio (PBR), with KB Financial Group’s former high acting as a ceiling. Kim pointed out, "This phenomenon is largely attributed to the notion that 'Korean bank ROE = 10%'," adding, "In reality, the banking sector’s ROE has struggled to consistently exceed the 10% threshold for an extended period. This has led to a widely held perception that domestic bank PBRs are implicitly capped at 1.0 times."

Bank earnings outperformance is expected to serve as a catalyst for overcoming this ingrained perception. Last year, KB Financial Group recorded a 10.9% ROE, despite both the burden of provisions for Hong Kong equity-linked securities (ELS) and a conservative provisioning stance in the first half. Attention is also warranted on the fact that, as the second quarter progressed, continued growth in banks’ net interest income and a recovery in non-banking segments led to consecutive improvements in ROE. Kim stated, "If, going forward, banks can generate ROE that exceeds market expectations by leveraging their accumulated fundamental strengths, their valuation could be rerated based on a new consensus, moving beyond existing preconceptions."

Samsung Securities cited improvements in the banking industry cycle and profit upgrades in non-banking units such as securities firms as key drivers behind the rise in bank ROE. Kim noted, "The positive shift in the banking cycle—driven by factors such as interest rates, lending growth, and provisions—has already begun. Meanwhile, structural profit upgrades in non-banking segments, centered around securities companies, are expected to lift group-wide ROE. In addition, as digitalization of finance progresses, the impact of operating leverage is expected to grow, with revenue increasing more rapidly than selling and administrative expenses."

The long-standing unfavorable environment for the banking sector is gradually turning around this year. Kim explained, "During the interest rate hike cycle, banks’ net interest margins (NIM) are highly likely to improve, while lending growth will remain solid, supported by productive financing and economic recovery. In addition, credit cost ratios (CCR) are expected to gradually stabilize downward."

Samsung Securities estimates that banks’ earnings will show robust growth of 13.0% this year and 8.8% next year. Kim commented, "As the improvement in the bank sector cycle increasingly becomes apparent in objective figures, it will serve to enhance the visibility of earnings growth prospects for banks."

Recently, Korean banks have been raising their ROE targets. Kim stated, "Just two to three years ago, most banks had set mid- to long-term ROE targets at 10%. However, Hana Financial Group, in its second-quarter value enhancement plan update, raised its target from 10% to 12%. KB Financial Group not only expects its annual ROE to exceed 11% this year but has also mentioned 13% as a mid- to long-term goal. Similarly, Shinhan Financial Group raised its ROE target in April from 10% to 'over 10%' for return on tangible common equity (ROTCE), with a target of at least 11.5%."

There is a strong possibility that banks’ performance in the second half of this year will provide the results needed to break through the 10% ROE ceiling. Already, the top three financial holding companies posted an average ROE of 12.8% in the first half. Even taking into account seasonal headwinds in the fourth quarter, it is highly likely that the annual figure will significantly surpass 10%. Kim analyzed, "A simple estimate shows that if the quarterly net profit of the three leading financial groups remains at first-quarter levels through the third quarter, and fourth-quarter earnings do not fall below 15% of those in the first quarter, the average ROE will exceed 10%. In particular, if KB Financial Group’s fourth-quarter earnings are at least 48% of the first-quarter level, its annual ROE could even reach 12% this year."

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