Banking Industry
The author is an analyst of NH Investment & Securities. He can be reached at junsup@nhqv.com -- Ed.
While internal and external conditions have deteriorated markedly, we see no need for concern toward capital ratio figures. We see expansion of shareholder return as providing a potential trigger for share price rallies.
Domestic financial holding firms’ risk from hybrid securities is limited
Concerns over the issuance of new capital securities have recently been stoked by the Credit Suisse (CS) crisis. As it is difficult to issue refinancing even when the call time arrives, the burden of capital ratio management is higher than in the past.
That said, even if issuance of hybrid capital securities is difficult, there should be no major problems with the Tier 1 ratio of financial holding players in Korea’s banking sector. As of end-2022, the Tier 1 ratio of the 8 banking financial holding companies was 13.6~14.9% for the 5 largest financial holding companies, and 12.6~12.8% for 3 regional players, all sufficiently meeting the required level. Even assuming early repayment without refinancing over 2023~2024, all 8 firms’ Tier 1 ratios exceed the requirement.
Raising of capital regulation bar to proceed flexibly in stages
Since the outbreak of the Silicon Valley Bank (SVB) crisis, Korean financial authorities have been pushing ahead with the overhaul of soundness systems (including the introductions of a countercyclical capital buffer (CCyB) and a stress capital buffer) to beef up the loss absorption capacity of the banking sector. Given the SVB crisis, it is only natural that the financial regulator is seeking to strengthen capital adequacy and risk management requirements.
However, we point out that the financial authorities’ tightening of capital regulations is to proceed flexibly in stages as banks and financial holding companies have no choice but to strengthen their RWA management practices, even if there is no immediate Tier 1 ratio threat from the growing external uncertainties and from the deteriorating environment for issuance of hybrid capital securities. Under current circumstances, reinforcing capital regulations may lead to a weak credit supply of banks to the financially-underprivileged.
Banking shares at historical lows: Execution of shareholder return expansion policy to boost share prices
Domestic banking shares are currently facing a serious business environment, with seemingly every negative factor possible now impacting share prices. The shares of the four major financial holding companies are trading at 2023E P/Bs of 0.28~0.38x, near the bottom of their historical valuation bands. IBK in particular is trading at a very low P/B of 0.26x.
To address the fundamental slump in sector share prices, there is a strong need to sooth worries over the economic and real estate slumps and to address asset quality concerns. But, we believe a recovery in banking share prices could be triggered if shareholder return policies (promised at the beginning of the year) are implemented early. As we are still in the first half of the year, treasury share buyback/retirement programs are more likely to come out at this juncture than dividend payouts. While it is difficult to guarantee whether shareholder return policies will be expanded in response to the unstable internal and external conditions, if implemented, such measures should help to alleviate the various uncertainties presently facing banking plays.