[Inbaeng, Bubble vs Innovation] ① Reassessing the Value of Inbaeng Triggered by Kakao Bank

Focus on Interest Profiteering Dulls 'Megyi Effect'
Initial Overvaluation Becomes a Burden
Hastiness Holds Back Innovation

[Asia Economy reporters Minwoo Lee and Baeri Boo] Five years after the launch of internet-only banks under the banner of innovation, voices are emerging that the so-called 'catfish effect'?where these banks lead changes in the financial industry?is not as significant as expected, as the structure remains heavily focused on interest income. Alongside various incidents, there are also calls to pay attention to ethics and responsibility beyond innovation.

According to industry sources on the 11th, as of the previous day, Kakao Bank's market capitalization stood at 10.9387 trillion KRW. Although this is more than a 30% increase from 7.5546 trillion KRW on the 28th of last month, it is still only about a quarter of the nearly 40 trillion KRW valuation at the time of its initial public offering (IPO). While earnings are growing and the number of members is steadily increasing, the market has yet to fully recognize the value initially expected. This is true not only for Kakao Bank but also for competitors such as Toss Bank and K Bank, which is preparing for its IPO. Ultimately, since they have not presented a path to evolve beyond being banks into ‘platforms,’ skeptical views from the market persist.

This is also reflected in reactions to their earnings. Kakao Bank recorded a quarterly net profit of 78.7 billion KRW in the third quarter of this year, marking the highest quarterly performance to date. This represents a 51.3% increase compared to the same period last year. However, securities firms have instead lowered their target prices one after another. Shinhan Investment Corp. cut Kakao Bank’s target price to 27,000 KRW on the 2nd, a day after the earnings announcement, down to about half of the 52,000 KRW target set on May 20. KB Securities (36,000 KRW → 24,000 KRW), Hana Securities (33,000 KRW → 26,000 KRW), and Hanwha Investment & Securities (30,000 KRW → 20,000 KRW) also lowered their targets by around 30%. This reflects the judgment that growth is limited under the current profit structure, which is not much different from traditional banks.

Kakao Bank’s profits are heavily concentrated on ‘interest business.’ Interest income in the third quarter of this year was 247 billion KRW, a 51.5% increase compared to the same period last year. On the other hand, non-interest income recorded a loss of 400 million KRW in the third quarter. Although fee income (43.9 billion KRW) and platform income (19.4 billion KRW) were generated, fee expenses paid to other banks amounted to 63.7 billion KRW, resulting in a deficit this quarter. Since Kakao Bank has no offline branches, it bears the cost when customers use ATMs of other banks. K Bank also still has a large proportion of interest income, and Toss Bank has yet to escape losses.

As the high-interest-rate period continues, even the interest rate competitiveness achieved through ‘branchless operations’ is fading, leading to concerns that the distinctiveness of internet banks is disappearing.

"Initial Overvaluation Became a Negative Factor... Ethics and Responsibility Must Also Be Considered"

Kim In, a researcher at BNK Investment & Securities, is being interviewed by Asia Economy on the 3rd at the BNK Investment & Securities Research Center in Yeouido, Yeongdeungpo-gu, Seoul.

There is also an opinion that the excessive expectations raised in the early stages became a negative factor for the entire industry. Kim In, a researcher at BNK Investment & Securities, released a ‘sell’ recommendation report in July last year, when the atmosphere was heating up ahead of Kakao Bank’s IPO. The target price was set at 24,000 KRW, 38.5% lower than the public offering price (39,000 KRW). This was an unusual ‘sell’ opinion at a time when other securities firms were forecasting prices as high as 100,000 KRW. The rationale was that since Kakao Bank is ultimately a bank, there was insufficient basis to justify a premium valuation compared to commercial banks. Kim reiterated this view recently in an interview with Asia Economy.

Kim pointed out, “Kakao Bank’s non-interest income is significantly lower than that of commercial banks, which still trade at a price-to-earnings ratio (PER) of 3 to 4 times, and its profit structure is heavily focused on interest income. Non-interest income, which was profitable in the first quarter of last year, recorded losses in the third quarter of this year, showing a steady downward trend.”

He explained that the initial overvaluation actually became a poison. Since finance is a heavy industry where innovation proceeds steadily over a long period, the high initial valuation made executives impatient. Kim said, “As the company’s value fluctuated sharply, executives seem to be more obsessed with recovering past corporate value rather than innovating the banking sector. This only distances them from innovation and increases their burden.” Rushing, in fact, hindered innovation.

K Bank is in a similar situation. There are voices that its recent aggressive product sales policies are a result of pressure to go public. In fact, Kakao Bank’s stock price plunge became a stumbling block for K Bank’s valuation. As Kakao Bank’s stock price fell, it affected K Bank’s valuation as well. KT and BC Card, the major shareholders of K Bank, had anticipated a valuation in the 7 trillion KRW range after listing, but now it seems that such a valuation is out of reach.

Earlier, K Bank successfully raised 1.25 trillion KRW in a paid-in capital increase early last year, increasing its capital to 2.1515 trillion KRW. At that time, the expected corporate value was projected to reach 10 trillion KRW by 2023. However, as the potential of internet banks has been evaluated more harshly, it has faced difficulties.

KT, BC Card, and the underwriting consortium considered lowering the corporate value to around 3.4 trillion KRW after the IPO, but even this is criticized as an overvaluation. Applying the banking industry’s price-to-book ratio (PBR) of 0.5 times, the corporate value would be just over 1 trillion KRW. In this case, the per-share value would be around 3,000 KRW, which could lead to redemption demands from financial investors who invested at about 6,500 KRW per share.

Moreover, crimes involving internet banks are increasing, and executives’ stock sales are also acting as negative factors. Kim emphasized, “Ultimately, there remains a question of who the IPO is for,” adding, “As financial companies, they need to demonstrate presence in ethics and responsibility while achieving innovation.”