[Click e-Stock] "Securities Sector: Gap Between Policy Expectations and Earnings Growth"

On June 23, KB Securities maintained a positive investment opinion on the securities sector, but noted that "there is a gap between policy expectations and the pace of earnings growth."

On this day, Kang Seunggeon, a researcher at KB Securities, stated, "We recommend a portfolio strategy focused on securities firms that can demonstrate a return on equity (ROE) sufficient to justify the elevated valuations and that directly benefit from increased trading volume." He added that they continue to prefer Korea Financial Group, Samsung Securities, and Kiwoom Securities.

The securities sector rose by 70% in the second quarter. Kang commented, "Even considering the resolution of uncertainties following the launch of the new administration, the rise in the stock market, and the increase in trading volume, the surge was very steep." He said, "Not only the willingness to improve the stock investment environment?such as the revision of the Commercial Act, changes to dividend income taxation, and encouragement to retire treasury shares?but also policy expectations for shifting household assets away from real estate have been the most significant drivers of the sharp rise in securities sector stock prices."

The pace of earnings improvement has been limited compared to the sharp rise in stock prices. Although the second-quarter results for securities firms are expected to exceed the market average forecast by 16.2%, the combined ROE is projected to reach only 12.4%, up just 0.6 percentage points from last year. Kang explained, "This level is not sufficient to fully explain the sharp rise in stock prices," and added, "For the time being, we are entering a valuation phase where stock price volatility may increase depending on the pace of expectations."

Reflecting the strong stock market, KB Securities raised its forecasts for average daily trading value this year and next year by 12.0% and 20.6% to 22.1 trillion won and 23.1 trillion won, respectively. Accordingly, they also made significant adjustments to the target prices of the analyzed securities firms. By individual stock, the target price for Samsung Securities was raised from 68,000 won to 82,000 won, NH Investment & Securities from 18,000 won to 22,500 won, Korea Financial Group from 113,000 won to 165,000 won, and Kiwoom Securities from 183,000 won to 260,000 won. For Mirae Asset Securities, which has seen a particularly sharp rise in its stock price recently, the target price was raised from 14,100 won to 18,000 won, but the investment opinion was downgraded from Buy to Hold.

The combined net profit of the five securities firms in the second quarter is expected to reach 1.35 trillion won, up 15.4% from the same period last year and 16.2% above the market average forecast. Kang noted, "With a significant increase in trading volume, profits related to brokerage business have greatly exceeded initial forecasts." He continued, "While there may not be significant changes in the performance of the investment banking (IB) division, the asset management (WM) division is also expected to improve due to the stock market's rise. Provisions related to project financing (PF) and overseas real estate funds are expected to continue stabilizing."