When the KOSPI plunged 8.67% on July 2nd, shares in South Korean banks defied the rout, rising 5.35%. Kiwoom Securities, one of the country's leading brokerages, responded the following day by reaffirming its "overweight" recommendation on the banking sector.
Kiwoom's research team argued that as semiconductor stocks led the broader market lower, bank shares emerged as a relative refuge for investors. It cautioned, however, that the near-term direction of bank stocks may ultimately be driven more by movements in the semiconductor sector than by developments specific to banking.
The brokerage identified four reasons to find bank stocks attractive in their own right.
First, valuations have become more compelling. The sector's price-to-book ratio (PBR) has fallen to 0.70 times — down 16.7% from a recent peak of 0.84 times — while the forward return on equity (ROE) for the fourth quarter is projected at 9.2%.
Second, earnings momentum remains intact. Combined net profit for the second quarter is expected to rise 3% year on year, continuing a trend of incremental improvement.
Third, shareholder returns are improving. With payout ratios approaching 50%, several banks have refreshed their corporate value-enhancement plans — a disclosure framework introduced by South Korean regulators to encourage listed companies to close the gap between book value and market price. Further updates are anticipated when second-quarter results are released.
Fourth, Kiwoom argues that any interest-rate increase by the Bank of Korea in July would further enhance the relative appeal of bank stocks, as higher rates typically widen the lending margins on which banks depend.