[Click eStock] Korea Financial Group, Target Price Up Reflecting KakaoBank Profit Contribution

[Asia Economy Reporter Lee Seon-ae] Yuanta Securities announced on the 8th that it raised the target price of Korea Financial Group to 130,000 KRW from 98,000 KRW, assuming the listing of KakaoBank in the fourth quarter of this year, and maintained a 'Buy' investment rating.

The assumed public offering market capitalization of KakaoBank by the company is 10 trillion KRW (24,531 KRW per share), with a capital increase ratio of about 20%. (100%

Assuming third-party allotment). Accordingly, the one-time non-operating income recognized at the time of listing is about 410 billion KRW. The contribution profit, which remained at around 10 billion KRW per quarter last year, is expected to rise to the 15 billion KRW range in 2021 and to the 30 billion KRW range after listing in 2022. Accordingly, the previously expected return on equity (ROE) for 2021 was raised from 16.0% to 20.6%, and the cost of equity (COE) was slightly lowered, reflecting a decrease in market sensitivity due to increased interest income upon KakaoBank's listing.

The company did not adopt the SOTP (sum of the parts) valuation method that includes the equity value of KakaoBank in the fair value when calculating the target price, because the one-time profit generated at the time of listing due to the increase in equity value was reflected in future earnings estimates. Including equity method disposal gains and adding equity value would result in double counting the value of KakaoBank.

Meanwhile, KakaoBank is expected to achieve loans of 53 trillion KRW by the end of 2022. The meaning of capital reaching 5 trillion KRW after the capital increase is that a much larger scale of capital expansion will be made than the capital increases conducted so far, so it is expected to take more time for the ratio of total loans to capital to recover to previous levels. Accordingly, the estimated ratio of total loans to capital for KakaoBank at the end of 2022 is 9.9 times, and considering this, loans are expected to increase to 53 trillion KRW. Through this, annual profits are expected to grow by 81% and 67% year-on-year to 219.4 billion KRW in 2021 and 367 billion KRW in 2022, respectively.

Researcher Jung Tae-jun of Yuanta Securities said, "Assuming that this listing is made through 100% third-party allotment, Korea Financial Group's shareholding ratio will gradually decline, so the increase in contribution profit will be less than this, but as growth continues, the amount is expected to steadily expand," adding, "Also, if the recent situation of a sharp decline in trading volume continues, Korea Financial Group could establish itself as a differentiated revenue source from other companies during a potential downturn in the securities industry."