Why are Korean bank stocks so undervalued?

22-Nov-2020 Intellasia | KoreaTimes | 9:09 AM Print This Post

Korean banks’ low price-to-book ratio (PBR) has been evident throughout 2020, as investors paid little attention to bank stocks as opposed to other tech-savvy growth stocks amid the coronavirus-induced economic panic here and abroad.

But market experts and industry officials expected bank stocks to bounce back next year amid a series of positive signals for their growth.

According to data by the nation’s top-tier financial holding firms, KB Financial Group’s PBR came in at 0.39, which was followed by Shinhan Financial Group’s 0.36. The two firms are the nation’s two largest financial groups. Those of Hana and Woori also reached mere 0.3 and 0.29, respectively.

The PBR is a barometer indicating a stock’s current valuation. When it falls below 1, it is widely considered that the stock is undervalued in the market.

Officials from the bank industry attributed this to not receiving much attention from investors here and abroad.

“Bank stocks here have failed to steal the limelight from other growth stocks in industries such as battery or internet platforms whose valuation has been on the steep rise amid the coronavirus outbreak this year,” an official from the bank industry said.

But banks expect their stock value to gradually improve with the approach of the end of the year dividend season, according to the official.

“Banks’ valuation will be on track for slow yet steady growth in 2021 amid a diminishing sign of virus-induced economic downfall,” he said.

In 2020, bank stocks here have failed to bounce back due to the pandemic-induced interest rate decline. The virus shock drove the nation’s key interest rate down to a record low of 0.5 percent. The government’s repeated call for them to increase the allowance for bad debts has also played a negative part in raising their valuation.

But other external factors will raise expectations for bank stocks’ growth next year, according to market experts.

US President-elect Joe Biden plans to expand fiscal spending next year, as part of his pledge to boost pump priming of the virus-hit US economy. According to a recent report by KB, this will result in a rise in interest rates here and abroad.

Even if the Bank of Korea (BOK) is maintaining a wait-and-see attitude over raising the benchmark rate sometime next year, chances are the central bank can do so in the case that the economy revitalises rapidly and the virus panic subsides earlier than expected.

The strengthening won against the US dollar is also another positive signal for bank stocks’ additional growth. The won-dollar exchange rate is around 1,130 won per US dollar as of Friday, and this is a somewhat steep decline compared with early this year when the rate surged to as high as 1,285 won per dollar.

Market analysts said bank stocks are “too undervalued” to decline further amid a series of positive signals for economic recovery here and abroad.

“The average PBR of local banks came in at 0.33 despite their decent profitability and dividend attraction, and this is one of the lowest levels, compared with global bank stocks,” Hana Financial Investment analyst Choi Chung-uk said.

He expected the result of the US election to drive a paradigm shift in the global investment industry from the current growth stocks to value stocks.

“The hyper-attention to growth stocks will be alleviated and value stocks will regain their luster in 2021,” he said. “The outlook is sparked by expectations for the global interest rate hike.”

The stock prices of KB and Shinhan are on a track for slow recovery based on the past three months. KB Financial Group is being traded at around 45,000 won per share as of Friday, a steep growth from around 36,000 won three months ago. Shinhan shares are also enhancing their valuation in recent months amid a stronger outlook for the end of the year dividend.



Category: Korea

Print This Post

Comments are closed.