[This Week's Gwan.Jong] 'Excluded from Value-Up Index' KB Geumyung, Shareholder Returns Expansion Continues

Stock Price Weakness Following Value-Up Index Inclusion Failure
"The Core Is Shareholder Returns, Not the Index... Now Is a Buying Opportunity"
Value-Up Disclosure Scheduled for the 24th

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The market is paying close attention to the stock price trend of KB Financial Group after its exclusion from the 'Korea Value-Up Index.' KB Financial has been recognized as a leading financial company aligning proactively with the government's value-up program this year, but it was recently excluded from the index components announced by the Korea Exchange. Experts agree that "although the exclusion from the index has increased stock price volatility, KB Financial's stock price fluctuations will ultimately depend on whether the shareholder return ratio continues to expand." KB Financial plans to announce its Q3 earnings on the 24th and will simultaneously disclose its 'value-up' report.

Leading Financial Group Holding Company... "Continued Expansion of Shareholder Returns"

This year has seen significant changes in the economic environment surrounding the financial sector. In particular, market attention was high regarding macroeconomic changes such as the U.S. interest rate cuts. Seol Yong-jin, a researcher at SK Securities, said, "Considering various recent domestic and international environmental changes, when approaching the financial sector, one must consider ▲ the impact of interest rate declines and ▲ the efficiency of capital utilization from a value-up perspective."

Alongside this, a government-led value-up program has been underway domestically since the beginning of the year. The core of this policy, promoted by financial authorities from early this year, is to provide benefits to listed companies that disclose value enhancement plans. In response, KB Financial, the top comprehensive financial group holding company, moved swiftly. In May, it was the first in all industries to announce a value-up preliminary disclosure and announced an active shareholder return policy, including the repurchase and cancellation of treasury shares worth a total of 720 billion KRW.

The stock price responded accordingly. KB Financial, which closed at 72,300 KRW on May 2, rose to 90,800 KRW by July 29 after joining the value-up program. Although the stock price plunged during the early August 'Black Monday' when the overall market declined, it resumed its upward trend due to expectations of shareholder returns.

However, on the 24th of last month, the Korea Exchange shocked the market by excluding KB Financial from the 100 components of the Korea Value-Up Index it announced. Controversies over the criteria and validity of the value-up index repeated, leading Yang Tae-young, head of the Korea Exchange's KOSPI Market Division, to hold an emergency briefing at the Seoul Yeouido office on the afternoon of the 26th. The reason given was that KB Financial and others failed to meet the return on equity (ROE) and price-to-book ratio (PBR) requirements.

Park Hye-jin, a researcher at Daishin Securities, said, "The timing of the index announcement is problematic, but market skepticism about the component stocks is inevitable," adding, "Expectations for financial companies that could be included in the index, considering profitability, capital efficiency, and shareholder return ratio, have been steadily reflected since the beginning of the year. Therefore, the index launch is more likely to trigger short-term profit-taking rather than stock price increases." However, she also noted, "The government's policy direction places more weight on sustainability than impact. Trust in companies that consistently communicate with investors with the right direction for enhancing corporate value will continue to rise."

"Diversified Non-Bank Portfolio... Stable ROE Expected to Continue"

Ultimately, the market judges that whether shareholder returns are implemented going forward is more important. Choi Jung-wook, a researcher at Hana Securities, emphasized, "What matters in KB Financial's value-up is not simply whether it is included in the index. The key is how sustainable and meaningful the future expansion of the shareholder return ratio will be." Researcher Seol Yong-jin said, "With a total amount-based equal dividend policy securing a floor for shareholder returns and active initiatives such as announcing treasury stock repurchases and cancellations to enhance shareholder value, expectations related to value-up will continue."

The Japanese value-up index also serves as a reference case. Researcher Choi Jung-wook said, "No Japanese bank is included in the JPX Prime 150 Index, but since the announcement of the corporate value-up program by the Japan Exchange in March last year, Japanese banks have significantly increased treasury stock repurchases and cancellations, raising the total shareholder return ratio. As a result, the stock prices of major Japanese banks MUFG and SMFG rose an additional average of 80%." He explained, "The average price-to-book ratio (PBR) of these two Japanese banks currently exceeds 0.8 times, while KB Financial's stock price has risen 50% since the beginning of the year but its PBR remains around 0.5 times." He added, "With the failure to be included in the Korea Value-Up Index, there is a greater chance that KB Financial will pursue a more proactive expansion of the shareholder return ratio than planned," and "It is expected to sufficiently meet market expectations."

Most experts maintain a positive investment opinion on KB Financial going forward. Although the stock price weakened unexpectedly after being excluded from the index, the company's sufficient capital capacity and active willingness regarding shareholder returns make it a "buying opportunity at a low price." Researcher Park Hye-jin said, "Ultimately, companies with low PBR and ROE were excluded, and the final goal of the index is to induce improvement in these metrics. Therefore, there is no reason not to buy the excluded stocks," adding, "KB Financial is scheduled to disclose its value-up report next month. It meets the early disclosure special conditions and could be included in the index by June next year."

KB Financial's total expected controlling net profit for this year is 4.8702 trillion KRW, a 5.1% increase from last year. Although a decline in net interest margin (NIM) is expected due to U.S. interest rate cuts, a diversified non-bank portfolio is expected to sustain stable ROE. Researcher Seol Yong-jin emphasized, "Despite the interest rate decline, NIM can be defended at a level similar to last year," and "Based on stable ROE going forward, a continuous expansion of shareholder returns can be expected."

Researcher Kim In of BNK Investment & Securities said, "The controlling shareholder net profit for Q3 is expected to increase by 20.3% year-on-year to 1.653 trillion KRW. Although the non-life insurance subsidiary will face increased loss ratios due to large fires and costs related to voluntary retirement, other subsidiaries' performance continues to improve, with non-interest income expected to increase by 25.8% compared to the same period last year," adding, "Unlike other competitors, there is not a significant additional provision burden related to real estate project financing (PF)."

Researcher Jung Kwang-myung of DB Financial Investment said, "The shareholder return ratio for this year is expected to be about 38%, considering the already announced 720 billion KRW treasury stock repurchase and annual dividends of 1.2 trillion KRW," and "The total shareholder return ratio is expected to exceed 40% next year." He added, "Considering the relatively high capital ratio, KB Financial will record the highest total shareholder return ratio among banks even after next year," and "Although the shareholder return scale has already been announced this year, the company is currently repurchasing 400 billion KRW of treasury stock announced last quarter. There is still about 240 billion KRW of treasury stock repurchase remaining, which is also positive."

KB Financial Group, Yeouido, Seoul. Photo by Jinhyung Kang aymsdream@