Korean Financial Group could get a catalyst for the recovery.

2018.9.23
Korean Financial Group
Indices
KRX Bank 852.35 (+1.91%)
KOSPI200 300.81 (+0.59%)
S&P500 2,929.67 (-0.04%)
G 30y 2.342% (-0.018%)
G 10y 2.412% (-0.016%)
G 3y 2.022% (-0.013%)
USDKRW 1,115.3 (-0.46%)
1. Rising yields are being momentum for the sector The strongest movements of yields of Korean Government bonds are changing strongly with a recovery of stock market. Rising yields of the securities would be a catalyst for the sector to recover the plunge. Decreasing swap basis could accelerate the proceeding rise. The spread between 3y and 10y touched 32bp during the last week, but it ended at 39bp in this week. I think that the range become wider to 30bp to 50bp from 40bp to 45bp before. This could give uncertainty to the banks’ profitability. Or the narrowing spread would not give huge pressure to the banks in this time. Despite the narrowing spread, interest rates for mortgage loans are increasing faster than interest rates for deposit based on the highest demand for the houses. Local players expect the rates would touch 5% in this year with increasing Federal Funds Rate. The situation of regional real estate market in this days isn’t that different from that during 2003 – 2006. Government of former President Roh, was trying to give pressure to the market with a ton of restrictions except increasing supply of the houses. But enough liquidities in global market and endless demand didn’t stop increasing housing prices.   Housing Purchase Price Index from Jan 2003 to Dec 2006 (its 100 at Dec 2015)   Looks like that Government under President Moon Jae-in also doesn’t understand problem of the lack of supply, and has provided a ton of restriction except increasing supply. The policy for the market is exactly same with that of Mr. Roh. There will be no enough increase of supply in Seoul or near-Seoul in near future. Then, the correction for regional real estate market should come from  shrinkage of the liquidities. The liquidities are still full out there with no rises of Korean benchmark rate, however. And there are still enough liquidities from the Fed and other central banks. Fed’s balance sheet is still the hugest in its history, and same for ECB and BOJ. The bullish real-estate market might be continued until next year or next year but one, when global players expect that recession of the US would start with side-effect of policies of US Government.
2. Unlike commercial bank part, Insurance doesn’t care about yield-flattening. The rising yields will be giving momentum to the insurance sector. The sector’s main service isn’t deposit-service which has to provide interest to their customers. Even though the sector is struggling to get out of a bunch of traps like population structure, reverse-margin products or new accounting rules, the rising yields will be catalyst of reverse of the movements.   KRX Insurance index   With other traps, the decreasing yields of the government bonds had given pressure to the sector. But signal of a recovery is coming up: 10y US T-Note touching yield of 3%, the players’ adjustment of their portfolio with decreasing risks of the reverse-margin and lower number of disasters compared with those of US or Europe.
3. Volatility of stock market is being continued. The volatility in the regional market has led to increase of trading volume. The amount of trading volume in KRW has increased more than 8% from start of July to Sep 21, compared with same period in last year. This would give momentum to increase of revenues from brokerage fees. The increasing volatility will be proceeding with concerns about EM, rising Federal Funds Rate and geo-political issues. The groups have been increasing their exposure to the security services, and their subsidiaries of securities firms are unlisted for all three -KB, Shinhan, Hana-, but the listed holdings would reflect the momentum eventually.   Share price of NH Investment & Securities (005940.KS)   NH Investment & Securities, which I believe as the most competitive local securities firm, recovered its plunge to touch KRW14,000. It could be additional momentum for KB and Shinhan which got the major players as their subsidiaries in the local market.
4. My suggestion for the sector is still effective. In my last report, I forecasted the bull market for the sector. I guess it just be delayed, and preserve my opinion about the sector. Targets are like below: KB \60,000 (+12.78%), Shinhan \50,000 (+13.12%), Hana \47,000 (+7.43%)
Mr. Banker, http://markety.tistory.com

 

Korean Financial Groups (September 23).pdf