Outlook Bright for 2023
The author is an analyst of Shinhan Investment Corp. He can be reached at kw.eum@shinhan.com. -- Ed.
2022 disappoints, but outlook bright for 2023
KB Financial Group’s net profit of controlling interest is expected to come in slightly short of the consensus estimate for 3Q22 at KRW1.26tr (-3.3% YoY, -3.7% QoQ) on relatively slower improvement in net interest margin (NIM) and industry-wide weakness in non-interest income caused by financial market volatility. Due to its large portion of low-cost deposits, KB Financial Group stands to see upward pressure on funding costs persist through 2H22.
Weighed down by limited momentum, KB Financial Group has been the weakest performer among domestic commercial banks this year. However, the company boasts the brightest outlook for 2023, in our view. Although the extent may differ by company, non-life insurers are expected to report over-50% growth in net income on average from the adoption of IFRS17. With relevant impact on the holding company to become visible from end-2022, we fully expect to see upward adjustment of earnings and dividend forecasts in the near term plus a re-rating of valuations in the process.
Expanding shareholder return warrants a premium valuation
Financial authorities tend to be wary of rising dividend payouts and share buybacks in the banking sector due to the negative impact on capital ratios. Retiring treasury shares, on the other hand, flies under the radar as it does not affect capital ratios. KB Financial Group currently holds 4.7% of its outstanding shares in treasury, taking the lead among Korea's four largest commercial banks. As seen from the retirement of treasury shares worth roughly KRW300bn in 1H22, KB Financial Group holds a clear advantage in expanding shareholder return and thus warrants a premium valuation.
Initiate coverage as top pick at BUY for a target price of KRW65,000
We initiate coverage of KB Financial Group with BUY for a target price of KRW65,000, based on the 12MF BPS of KRW138,347 and a target PBR of 0.47x. Instead of the industry-wide improvement in NIM driven by base rate hikes, our focus remains on growth in shareholder return backed by steady earnings and solid capital. KB Financial Group, which stands out for its sector-high earnings fundamentals and capital ratio as well as top management's strong commitment to the expansion of shareholder return, is thus selected as one of our top picks in the banking sector.