The strengthening of the won is increasing the performance burden on export companies in the domestic stock market, while bank stocks are showing relatively strong trends. Analysts note that the direct impact of exchange rate changes on bank performance is limited, and expectations for foreign exchange translation gains and improvements in Common Equity Tier 1 (CET1) ratios due to the decline in the won-dollar exchange rate are raising expectations for third-quarter results.
According to the Korea Exchange on September 18, the KRX Bank Index rose 2.53% over the past week, marking the highest increase among major sector indices. In comparison, the KRX 300 Financial Index rose 0.43%, while the KRX Insurance Index fell 0.10%. The relative strength of bank stocks is even more pronounced when compared to the 4.53% decline in the KOSPI.
The rise in the bank index is supported by gains in most of its constituent stocks. Woori Financial Group saw the largest increase at 6.76%, followed by KB Financial (3.34%), Shinhan Financial Group (2.72%), Hana Financial Group (1.63%), BNK Financial Group (0.70%), and JB Financial Group (0.32%), all of which showed upward trends.
Recent strength in the won is cited as a background for this relative strength. Since the Korean stock market has a high proportion of export companies, an increase in the value of the won reduces the won-denominated value of overseas sales and profits, which can burden export price competitiveness. In contrast, the financial sector is less directly affected by exchange rate changes, allowing for greater performance stability during periods of won appreciation.
Yum Dong-chan, a researcher at Korea Investment & Securities, noted, "The stability of the financial sector's performance, which is relatively less affected by exchange rate changes, is noteworthy during periods of won strength."
Additionally, the decline in the won-dollar exchange rate may lead to foreign exchange translation gains and improvements in CET1 ratios for some banks, further boosting performance expectations. Choi Jeong-wook, a researcher at Hana Securities, stated, "As the won-dollar exchange rate falls to the 1,350 won range, the positive impact on third-quarter bank profits and CET1 ratios is expected to expand further."
If the downward trend in the exchange rate continues until the end of the quarter, it is theoretically estimated that Industrial Bank could see foreign exchange translation gains of about 250 billion won, while Hana Financial and Woori Financial could see gains of around 200 billion won and 130 billion won, respectively. The CET1 ratio may also improve due to a decrease in risk-weighted assets resulting from the exchange rate decline.
Choi added, "For every 10 won decrease in the exchange rate, there is an improvement effect of about 1 to 2 basis points. For large bank holding companies, a rise in CET1 ratios of about 20 to 40 basis points is expected during the third quarter."
Although recent government bond yields have risen, the improvement in third-quarter net interest margins (NIM) may be limited, making the interest rate environment a variable. However, there are expectations that loan growth rates may exceed market expectations, allowing net interest income to continue on a positive trajectory.
* This article has been translated by AI.
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