KIH
The author is an analyst for NH Investment & Securities. She can be reached at yd.yoon@nhqv.com -- Ed.
Financial authorities' guidance regarding real estate PF and CFD crisis situations is starting to be reflected in KIH’s earnings. Amid continued industry uncertainties, provisioning looks inevitable, making it difficult for larger companies with large PF loans to reverse investor sentiment. We maintain a Hold rating for now.
Focus on old NCR standard as indicator of capital soundness
Investment assets, including PFs of Korea Investment & Securities (KIS) and KIH’s affiliates, are to drain KIH's 2023 earnings. Its 2Q23 figures are to reflect provisioning for: 1) commercial properties among foreign alternative assets; and 2) past-due CFD receivables. Additional provisioning is highly likely going forward. Given both cuts to 2023E and 2024F BPS and a change in our ROE calculation period, we lower our TP from W65,000 to W58,000.
From July, according to the guidelines of financial authorities, part of PF ABCPs held by KIS is to be converted into loans. When converting to ABCP loans, the risk value of Net Capital Ratio (NCR; an indicator of capital soundness) rises, necessitating additional equity capital. Accordingly, on Jun 16, the company participated in a rights offering worth W400bn to recapitalize KIS. We note that the old NCR recommendation standard was 150%, but KIS’s 1Q23 ratio was over that mark at 158%.
2Q23 preview: Limited P/L due to market interest rate rebound
We now expect KIH to show 2Q23 consolidated NP (excl minority interests) of W174.2bn (+76.1% y-y, -42.2 q-q), below our previous estimate and consensus.
IB: Unlike the real estate PF division, traditional IB (ECM, DCM) sales for the quarter should prove sound. The firm will likely recognize income from pre-IPO investment in Witch Factory (for which the firm is an IPO underwriter).
Trading/other: We foresee 2Q23 losses of W2.4bn (TTL q-q). The trading division should see a drop in bond trading income amid anticipation of an upward trend (q-q) in bond yields (3yr KTB 4Q22 3.72% → 1Q23 3.27% → 6.19 3.58%) at end-2Q23. Looking at other domains, provisioning is likely in relation to overseas commercial real estate exposure of W400bn and past-due CFD receivables.