[Click eStock] KB Financial, Foreign Interest Fades... Weakening Status as Industry Leader

[Asia Economy Reporter Lee Seon-ae] Hana Securities announced on the 20th that it maintains a buy rating and a target price of 64,000 KRW for KB Financial Group. However, it noted that the supply-demand premium as the sector's representative stock is expected to weaken somewhat due to decreased interest from foreign investors.

Choi Jung-wook, a researcher at Hana Securities, explained, "In addition to concerns about a global economic recession, regulatory worries such as the financial authorities' recommendation to lower the interest rate spread between loans and deposits and the controversy over the introduction of special loan loss reserves have intensified, leading foreign investors to net sell domestic bank stocks for four consecutive months since June." He added, "In a situation where foreign investors' interest in domestic bank stocks significantly declines, the supply-demand premium for the sector's representative stocks inevitably weakens considerably." He further emphasized, "Although the current stock price is clearly undervalued with a price-to-book ratio (PBR) of only 0.40 times, considering foreign investors' supply-demand and net interest margin (NIM) trends, it is difficult to expect the stock price to significantly outperform the sector average in the near term."

The bank NIM for the third quarter is expected to rise by only 1?2 basis points from the previous quarter to 1.74?1.75%, marking the smallest improvement among banks. Considering that competitor Shinhan Bank is expected to improve by 5?6 basis points and Industrial Bank of Korea and regional banks are expected to increase by more than 12?13 basis points, this is a relatively poor figure.

Due to the recent interest rate hikes, the outflow of low-cost deposits in the banking sector has accelerated. For KB Financial Group, which has a high proportion of low-cost deposits, the impact of rising funding costs is greater, and there is also significant pressure to raise the low liquidity coverage ratio (LCR). At the end of the second quarter, the LCR was only 91.0%, significantly lower than the 97?100% level of other commercial banks. While other banks raised their LCR substantially in the first half of the year, KB Financial Group's LCR actually declined. Whether the weak NIM performance is a temporary phenomenon in the third quarter remains to be seen, but considering the changes in deposit trends in the banking sector, there is a possibility that relative margin weakness will continue.

The estimated net profit for the third quarter is about 1.29 trillion KRW, a 1.3% decrease from the previous quarter, slightly below consensus. Due to the selection as a partner bank for personal credit loan refinancing from Citibank, approximately 0.8?0.9 trillion KRW in loans are expected to flow in, leading to a loan growth rate of 1.3% in the third quarter, somewhat recovering compared to the first half. However, the NIM improvement is expected to be only around 1?2 basis points, which is somewhat disappointing. Researcher Choi said, "With recent sharp rises in exchange rates and interest rates, non-interest income from banks continues to be sluggish, and earnings from non-bank affiliates such as securities are also expected to be somewhat weak." He added, "Although the additional provision of 120 billion KRW reflecting future economic outlook in the second quarter will disappear, leading to a slight decrease in loan loss expenses in the third quarter compared to the previous quarter, the reduction will not be very significant."