Financial Stocks Gain on Won Strength; Korea Investment Urges Focus on Third-Quarter Earnings

A stronger won may lower third-quarter earnings expectations for South Korean companies, but financial stocks stand out as more likely to post relatively stable results, according to Korea Investment & Securities.

In a report on Sept. 18, Korea Investment & Securities said investors should pay attention to financial shares ahead of third-quarter earnings releases, citing upward revisions to profit forecasts for the sector and a favorable foreign-exchange backdrop.

Yeom Dong-chan, an analyst at Korea Investment & Securities, wrote that the market is closely watching how won strength will affect corporate earnings estimates. As estimate revisions begin in earnest later this month, won appreciation could add further downward pressure, he wrote.

The average won-dollar exchange rate was 1,430 won per dollar in the third quarter, down 4.8% from the second-quarter average of 1,501 won. Since 2011, only the fourth quarter of 2020 and the first quarter of 2023 saw a larger decline in the quarterly average exchange rate.

During past earnings seasons marked by won strength, South Korean companies' results came in an average of 4% below market expectations. Weakness was particularly pronounced in the energy, materials, industrials and information technology sectors.

By contrast, financial companies beat market forecasts in all five periods when the won strengthened. The sector is relatively less exposed to direct earnings swings from currency moves, making its earnings stability more notable during periods of won strength, Yeom wrote.