The authors are analysts of Shinhan Investment Corp. They can be reached at firstname.lastname@example.org and email@example.com, respectively. -- Ed.
Rate risk: Current share prices represent just 20-40% of intrinsic value even at zero base rate
A 25bp base rate cut is estimated to lower the intrinsic value of banks by 0.35-0.58%. NIM should drop 4bp for the full year. Current market capitalization of the banking sector represents just 20-40% of its intrinsic value even when assuming a zero base rate. At a zero rate, the sector’s trailing PBR comes to a mere 0.19-0.40x and NIM of the four major banks to 1.24-1.47%.
Credit risk: Current share prices reflect default risk at 10 times of NPL ratio
Concerns are rising that loans extended to the self-employed, or so-called small office home office (SOHO) businesses, may go sour due to the COVID-19 outbreak. Current share prices reflect 32-49% losses on SOHO loans. We believe banking stocks are excessively undervalued given that secured and guaranteed loans account for 80% of SOHO loans, of which 73-81% are secured mostly by property. Current share prices reflect NPL ratio of 6.6-10.2%, which is more than ten times that of actual figures (0.33-1.28%).
Focus on intrinsic value vs. share price, dividend yield nears 8% level
We downgrade our 2020 net income forecasts and target prices for banks under our coverage to reflect expected base rate cut in April and rise in bad debt expense. Banking stocks are down 27.2%, while we expect a 5.1% growth in intrinsic value this year. For four years in a row, share prices have declined when their intrinsic value increased. Dividend yields now approach 6-8% levels with share price declines. We recommend buying top-tier players once the COVID-19 outbreak subsides. KB Financial Group remains our top pick.