Rock Bottom Valuation Levels Could Be Renewed
The author is an analyst of NH Investment & Securities. She can be reached at michelle.cho@nhqv.com. -- Ed.
Downward economic risks arising from the Covid-19 crisis indicate declines in banking industry growth and profitability. We lower the earnings forecasts and TPs for our coverage banks in light of shrinking overall economic activities, falling interest rates, and increased credit risk (especially higher corporate credit risk).
Lower earnings estimates and TPs
A contraction in economic activity amid the Covid-19 outbreak is to lead to both reduced investment/employment by companies and more conservative bank operations in terms of lending. We believe that household loan growth has already hit a wall due to stricter real estate measures. A series of base rate cuts over 4Q19~1Q20 has undermined NIM. Also, an increase in credit costs appears inevitable given both likely higher numbers of corporate NPLs and a slower pace of loan growth.
We believe that the volatility in share prices/discounts will be substantial until macroeconomic variables stabilize.
Investors’ top-three questions: Probability of insolvencies; buy/sell timing; when is rock bottom?
Recently, investor interest in the banking industry has been focused upon three questions: 1) Do current share prices suggest the possibility of insolvencies?; 2) What is best timing for buy/sell positions?; and 3) Have valuations/share prices reached rock bottom?
Since the 2008 global financial crisis, financial authorities and banks have emphasized systemic risk control and conservative management in order to endure internal and external shocks. However, with recent valuations/shares reflecting concerns towards the economic downturn being caused by the Covid-19 crisis and accompanying various uncertainties, we believe that rock bottom valuation levels could be renewed as long as these concerns remain in play. Given that the short-term stock price correction has been steep, it is possible to attempt a rebound; however, it is judged that share price volatility/discounts will be large in scale until macroeconomic variables stabilize.