South Korean banks are expected to see a recovery in their earnings for the January-March period, as their interest income remains solid thanks to the mid-term benefit from the rise in lending volume last year.

HMC Investment Securities projected that eight lenders including KB, Shinhan, Woori would produce a combined net profit of 3.28 trillion won ($2.87 billion) for the first quarter, up 102.4 percent from the previous quarter. The figure, however, is down 6.2 percent from the year-earlier period.

Net interest margins for banks are estimated to weaken by 2.71 percent in the first quarter from the previous quarter but the increase in interest income will bolster their overall balance sheets, HMC said.

Interest rates applied for savings accounts stood at about 3.7 percent in December last year and January this year, a high level due to seasonal effects. But the rates are set to return to a normal level soon, helping prop up the NIM, the brokerage said.

HMC said Korean banking shares appear undervalued in consideration of their book value, but a turning point might be in the offing as more capital gets circulated in the global financial market and liquidity conditions in Korea are also improving.

“Given the positive factors, downside pressure for banking shares will be limited and share prices in the sector will attempt to rise,” it said.

Hana Financial Group’s take-over of KEB is regarded as one of the notable sources of momentum that helped the sector move forward. Their sales operations are set to regain impetus as the merger process gets wrapped up, helping boost their combined net profits in the coming quarters.

HMC noted that preference for KB Financial Group among investors would intensify as the financial giant runs the country’s biggest retail banking business amid rising expectations that the banking sector will see a rebound. The market talk about the tie-up of KB and Woori is also likely to keep KB shares staying at a solid level, the brokerage said.

By Yang Sung-jin (insight@heraldcorp.com)