Are Rate Hike Cycles Always Favorable for Financial Stocks? [Weekend Money]

Samsung Securities Analyzes Two Rate Hike Cycles

"Current Rate Trend Is Positive, But Today's Environment Differs from the Past"

"Korean Financial Stocks Extremely Undervalued, Investment Appeal Rising"

As the possibility of additional interest rate hikes by the U.S. Federal Reserve (Fed) grows, investor interest in financial stocks is increasing. However, according to securities firms' analysis, past periods of rate hikes suggest that, in addition to interest rates, a variety of factors such as economic conditions and long-term rates must also be considered.

Kevin Wash, Federal Reserve Chairman AP Yonhap News

Samsung Securities analyzed two rate hike cycles over the past ten years in a report, stating, "Interest rate hike cycles are not necessarily favorable for financial stocks." The two cycles refer to the periods from 2016 to 2018 and from 2022 to 2023.

Rate Hike Cycle ①

The 2016–2018 rate hike cycle began in December 2016, as the Fed raised the federal funds target rate from 0.25–0.50% to 0.50–0.75%. The Fed continued to raise rates, with three increases in 2017 and four in 2018, resulting in a policy rate of 2.25–2.50% by the end of 2018.

The core driver behind the Fed's rate hikes at that time was reflation (a state of escaping deflation but not yet reaching severe inflation). Samsung Securities explained, "With the turnaround in oil prices, an economic recovery, and a declining unemployment rate, the U.S. asset market showed strength. The Fed was thus highly incentivized to raise rates to prevent asset market overheating and to bolster the policy's ability to respond to future economic shocks."

The rise in financial stock prices was particularly notable in the early phase of the cycle. Expectations for policy rate hikes were already reflected in stock prices starting in November 2016, one month prior to the actual rate hike in December, and share prices began to climb. The stock prices of global banks and insurers rose between 14.8–32.3% during this period.

Among financial stocks, banks outperformed insurers in terms of gains. Because the rate hikes were driven by economic recovery, this had positive implications for banks' fundamentals, such as net interest margin (NIM) expansion, improved credit cost ratio (CCR), and recovery in return on equity (ROE). From November 2016 to March 2018, banks’ share prices rose by 20–100%, while insurers’ shares increased by 5–66%.

Rate Hike Cycle ②

In the 2022–2023 cycle, interest rates were raised in response to inflationary pressures. Disruptions in the supply chain caused by COVID-19, excess liquidity, and the impacts of the Russia–Ukraine war led to a spike in inflation. The Fed began raising the federal funds target rate from 0.25–0.50% in March 2022, reaching 4.25–4.50% by the end of 2022. By July 2023, the policy rate stood at 5.25–5.50%.

Despite the rate hikes, returns on financial stocks remained low. U.S. bank stocks fell by 23.7%, and Korean bank stocks dropped by 18.1%, while insurance stocks rose by only 6.5% and 11.2%, respectively. In March 2022, at the time of the Silicon Valley Bank (SVB) crisis, financial stocks hit their lowest point.

The reason banks underperformed insurers was the inversion of the yield curve between short- and long-term interest rates. As economic outlook deteriorated, the U.S. yield curve shifted from 0.9 percentage points at the beginning of 2022 to -0.8 percentage points by year-end, while Korea's moved from 0.4 to -0.2 percentage points over the same period. This not only weakened investor sentiment due to a structural decline in banks' profitability but also led to an actual contraction in banks' NIMs.

Additionally, rising rates heightened concerns about an economic downturn due to increased interest burdens on borrowers, which in turn drove up banks' credit costs. In contrast, insurers, which rely on super-long-term funding, maintained a more stable operating structure compared to banks.

Jerome Powell, former Chair of the Federal Reserve serving from 2018 to 2026

What About This Cycle?

Samsung Securities, while forecasting a gradual rate hike, also assessed the interest rate trend as positive. The firm noted, "Long-term rates continue to rise, and the pressure for improvement in the yield curve is also mounting." They added, "In particular, as Korea's yield curve continues to improve compared to that of the U.S. or Europe, this is creating a relatively favorable environment for domestic bank stocks." Samsung Securities further stated, "This interest rate environment is positive for both insurers and banks. Insurers can expect improved investment yields and higher capital ratios, while banks are projected to see enhanced profitability driven by the expansion of NIM."

However, the firm stressed the need for a sober approach, as the current environment is different from past cycles. During the previous two cycles, policy rates were near zero, but today, rates are already high. Currently, the U.S. policy rate is 3.75–4.00%, and the Bank of Korea’s base rate is 3.0%. Uncertainty from geopolitical risks in the Middle East also remains. Furthermore, since the strong capital market in the first half supported improved financial sector results, concerns remain over decreased trading value in the domestic stock market.

"Korean Financial Stocks: Distinct Investment Appeal"

Although various analyses are possible regarding the impact of the current rate hike cycle, Samsung Securities made clear that Korean financial stocks, in particular, possess a distinctive investment appeal. "While valuations of domestic financial stocks remain extremely low compared to those of global financial stocks, Korea is expected to maintain differentiated economic growth globally. Positive spillover effects from the domestic corporate investment expansion cycle are also anticipated to create a virtuous cycle for the financial sector," Samsung Securities explained. "Specifically, for banks, the ROE gains driven by interest income should translate into stronger shareholder returns, while for insurers, both investment and insurance profits can improve simultaneously."

The firm also highlighted the importance of watching the three major financial holding companies led by KB Financial Group among bank stocks, and DB Insurance among insurers. Samsung Securities stated, "KB Financial Group stands out for the highest non-bank income contribution in the sector and, in terms of size and scope of work, is achieving differentiated performance improvement, driving groupwide ROE improvement. Its shareholder return ratio is also the highest in the industry."

Regarding DB Insurance, the firm presented it as the top pick in the insurance sector, noting, "The company has raised its shareholder return targets to 40% on a consolidated basis and 50% on a separate basis by 2030, explicitly promising to increase dividends per share by more than 10% annually." Samsung Securities added, "Additionally, by setting management indicators that prioritize distributable earnings, the company signaled its intention to pursue profit and distribute earnings growth even if it means accepting slower external growth."

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