[Click eStock] "KB Financial, Uncertainty Over Hong Kong ELS Sales Fines Eases"

Fines Expected to Be Lower Than Anticipated
Total Shareholder Return Ratio Maintained Above 50%
Price Advantage Emerges with PBR at 0.69 Times

There are expectations that KB Financial Group will continue to deliver stable performance as uncertainties related to the incomplete sale of Hong Kong equity-linked securities (ELS) are alleviated. Analysts suggest that investor sentiment may focus on the company's efforts to reduce credit costs and achieve a high total shareholder return ratio.

On October 10, Hana Securities maintained its target price of 1,470,000 won and a 'buy' rating for KB Financial Group, citing these factors. The closing price on the previous trading day was 1,168,000 won.

Previously, the financial authorities heightened uncertainty by deciding to calculate fines for the incomplete sale of Hong Kong H Index ELS based on the 'sales amount.' However, the enforcement decree and supervisory regulations for fines have since been revised so that various factors, including the nature and extent of violations, are reflected in the calculation, and the reduction in fines can be significant if there were only minor violations or if there were efforts for preemptive prevention and post-incident measures. As a result, there are now expectations that the actual fine amount may be reduced. Additionally, KB Kookmin Bank's recent victory in the first trial related to the incomplete sale of Hong Kong ELS is also seen as a favorable factor.

By bank, KB Kookmin Bank had the largest amount of Hong Kong ELS sales at 8.1972 trillion won, followed by Shinhan Bank with 2.3701 trillion won, NH Nonghyup Bank with 2.1310 trillion won, Hana Bank with 2.1183 trillion won, and Woori Bank with 413 billion won.

The market was also concerned about the potential fine the Fair Trade Commission could impose on banks for alleged collusion on the loan-to-value (LTV) ratio for mortgage loans. However, it has been reported that the financial authorities are considering improving the criteria so that, if banks meet requirements such as establishing and implementing measures to prevent recurrence, the operating risk calculation due to fines can be excluded. The negative impact on the Common Equity Tier 1 (CET1) capital ratio is also expected to be limited.

Meanwhile, third-quarter net profit is expected to be 1.569 trillion won, down 2.8% from the same period last year, which is in line with market consensus. Bank won-denominated loans are projected to grow by about 0.5% in the third quarter, and the net interest margin (NIM) is expected to remain at the previous quarter's level. However, as 160 billion won in interest expenses related to the sale of the KDB Life Insurance building, recognized in the second quarter, will no longer be incurred, the group's net interest income in the third quarter is expected to increase by 5.9% compared to the previous quarter. In addition, fee income is estimated to expand due to increased brokerage commissions.

However, non-monetary foreign exchange losses and a decrease in trading valuation gains may occur due to the rise in the won-dollar exchange rate and market interest rates. As a result, other non-interest income is expected to slow compared to the previous quarter. Nevertheless, as the group's credit costs are expected to decrease from 655 billion won in the previous quarter to around 520 billion won in the third quarter, this is likely to offset the slowdown in non-interest income.

The CET1 ratio for the third quarter is expected to rise by about 10 basis points (bp; 1bp=0.01%) from the previous quarter to 13.85%. This figure takes into account the net profit effect of approximately 1.57 trillion won, the 236 billion won in share buybacks, and the 335 billion won in cash dividends paid in the third quarter.

Choi Jungwook, a researcher at Hana Securities, commented, "Even excluding the 190 billion won in share buybacks to be acquired next year due to insufficient distributable profit, the total shareholder return ratio for this year will exceed 50%. Considering the current CET1 ratio, this level is expected to be maintained next year as well. As uncertainties have eased and the current price-to-book ratio (PBR) stands at 0.69 times, there is now a relative price advantage," he analyzed.