The author is an analyst of NH Investment & Securities. She can be reached at firstname.lastname@example.org. -- Ed.
Banks’ fundamentals will likely continue down the same path in 2020. Believing that fundamentals and sentiment will be key in the near term, we maintain KBFG as our sector top pick.
Top-tier banks maintain position, mid-tier banks consolidate
Results from 4Q19/2019 show that upper-tier banks have solidified their position and the level of mid-tier banks has consolidated. Given one-off year-end factors and preemptive cost recognition, mid/upper-tier banks’ core profits remain stable. On the other hand, the gap between lower- and upper-tier banks has widened, with the economic recession weighing on core profits and asset quality. We expect the gap between banks to remain intact in 2020.
Both fundamentals and sentiment important; premature to expect inflection point
There appear to be no near-term catalysts to reverse banks’ growth and profitability trends. Moreover, we believe that banking sector fundamentals and sentiment will be further burdened by: 1) concerns over the economic slowdown from the spread of Covid-19; and 2) issues raised by massive private equity losses, including related sanctions. In the mid/long term, share price momentum will likely be determined by the sustainability of fundamental quality.
After analyzing 4Q19/2019 fundamental indicators, we have made downward revisions to our earnings estimates and TPs. With our key assumptions (growth, margin, asset quality) reflecting banks’ downward risks, we turn to a more conservative stance towards the sector. Given such, it appears too early to expect an inflection point for share price/valuation momentum.
Maintain KBFG as sector top pick
In order to minimize investment risks in the current banking cycle, we recommend focusing on large banks that can continue to implement shareholder return policies and build foundations for further growth based on stable performance and capital. We maintain KB Financial Group (KBFG) as our sector top pick.