Bank stocks continue to draw attention from investors as interest rate hikes by the U.S. Federal Reserve can benefit money lenders. Among the local bank stocks to watch is DGB Financial Group, a Daegu-headquartered financial holding firm in South Korea.

As with other banks, DGB Financial Group can expect more interest income from its funds mobilized when borrowing costs were lower than now. This means the bank’s net interest margin (NIM), a key measure of profitability, will increase on rising interest rates.

Daegu Bank, one of DGB Financial Group’s major affiliates, has the highest ratio of floating rate loans to total outstanding loans. The ratio stood at 86.6 percent at the end of 2016. In particular, the bank leads the pack with 73 percent in the ratio of loans linked to bank bonds which are the most sensitive to the movement of market interest rates.

“We use only bank bonds to gauge the interest rate of corporate loans. These respond to market interest rate hikes fast and a rise in the net interest margin will dramatically improve our interest income,” said an official at DGB Financial Group.

In the fourth quarter when interest rates of bank bonds bounced back, Daegu Bank’s NIM gained 0.03 percentage point to 2.15 percent from three months ago. Given the current trend of market interest rates after the U.S. recent rate hike, the bank’s NIM is expected to climb to up to 2.18 percent this year. Analysts forecast that DGB Financial Group’s operating profit will grow 15 percent on-year to 447.3 billion won ($398 million) this year.

Another positive factor is that the bank is free from the risk of loan loss provisions in connection with Daewoo Shipbuilding & Marine Engineering which is plaguing other commercial banks.

In addition, the bank’s sufficient capital base against risky asset allows it to maintain dividend payment at a stable level. DGB Financial Group’s equity capital for common stocks was 10.17 percent at the end of 2016, the highest level among regional banks in South Korea. DGB Financial Group offered a dividend of 300 won ($0.27) per share last year, or a 3 percent dividend rate.

By Bae Mi-jung

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