[Financial Essay] What Is the Fair Value of KakaoBank?

Over 40 Trillion Won Valued in OTC Market
Comparable to Market Cap of 4 Major Financial Groups
Almost No Publicly Traded Shares, Sparking 'Bubble Controversy'

[Asia Economy Reporter Minyoung Kim] What is the appropriate valuation of the internet-only bank KakaoBank?

KakaoBank recently held a board meeting and announced its plan to pursue an initial public offering (IPO), drawing attention to its market value. An IPO means listing the company on the stock market, allowing individuals to freely trade its shares.

As of the 27th, the price of one KakaoBank share in the over-the-counter (OTC) market is 116,000 KRW. Multiplying this by the number of shares, the market capitalization is estimated to reach 42.3512 trillion KRW.

However, the securities industry strongly argues that this price is an inflated "bubble." For comparison, the market capitalization of KB Financial Group, one of the major financial holding companies, was 15.8839 trillion KRW based on the closing price on the 25th (38,200 KRW per share).

This means KakaoBank's OTC market valuation is 2.66 times that of KB Financial Group. KB Financial Group's total assets amounted to approximately 570 trillion KRW as of the end of June. It owns 12 subsidiaries and 27 affiliates, including KB Kookmin Bank, KB Kookmin Card, KB Life Insurance, and KB Insurance.

On the other hand, KakaoBank, which operates solely in banking, had total assets of 24.4 trillion KRW as of the end of June. This is only about 1/23 of KB Financial Group's assets.

KakaoBank's OTC market capitalization is comparable to the combined market capitalization of the four major financial holding companies (KB, Shinhan, Hana, and Woori), which stands at 43.1639 trillion KRW.

KakaoBank secured 12.94 million customers (as of the end of August) within three years of starting operations in 2017, supported by the 20s and 30s generation. This year, it has been gaining more than 200,000 new customers every month.

KakaoBank's shareholders include Kakao (33.53%), Korea Investment Value Asset Management (28.60%), Korea Investment Holdings (4.93%), Kookmin Bank (9.86%), Netmarble (3.93%), SGI Seoul Guarantee (3.93%), Korea Post (3.93%), eBay (3.93%), SkyBlue (Tencent, 3.93%), Yes24 (1.97%), and the employee stock ownership association (1.40%). The major shareholders collectively hold 99.94% of the shares. Only 0.06%, about 210,000 shares, are actually circulating in the market, meaning trading is virtually non-existent.

Of course, stock prices reflect future growth potential. Nevertheless, whether KakaoBank will swallow all four major financial holding companies and dominate the Korean financial market in the future remains questionable.

Moreover, many believe it is excessive to assign a market capitalization worth tens of trillions of won to these shares, which have not yet selected an underwriter, set a price band, or conducted demand forecasting.

The securities industry estimates KakaoBank's appropriate valuation to be in the range of 8 to 12 trillion KRW. Kyunghoe Koo, a researcher at SK Securities, estimated KakaoBank's value at 8.9 trillion KRW in a report on Korea Financial Holdings, a shareholder of Kakao. Eun-gap Kim, a researcher at IBK Investment & Securities, also assumed a market capitalization of 12 trillion KRW upon KakaoBank's listing in a Korea Financial Holdings report.

Researcher Bae-seung Jeon of eBest Investment & Securities took a more conservative view of KakaoBank's market value. In a recent report on KakaoBank's IPO plans, Jeon stated, "Expectations for KakaoBank's listing have been high due to simultaneous asset growth and earnings improvement. Although the market capitalization calculated based on OTC stock prices is around 40 trillion KRW, considering the shareholding structure and limited circulating shares, its representativeness is low."

Jeon added, "KakaoBank's value is expected to be fluid depending on the capital increase scale during the IPO process. Assuming a capital increase of 500 billion KRW, a return on equity (ROE) of 10% in 2023-24, a selling and administrative expense ratio dropping to around 30%, and a loan growth rate falling below 10%, the estimated total capital in 2025 would be 3.45 trillion KRW. Applying a price-to-book ratio (PBR) of about 2.3 times, KakaoBank's value is estimated to be around 8 trillion KRW."

He noted, "This valuation considered the PBR level of Seven Bank, an internet bank listed in Japan, and the differentiation as a mobile bank. The key will be whether KakaoBank can establish a differentiated digital financial platform business model compared to traditional banks."