Overpay Concerns Seen Limited
The authors are analysts of Shinhan Investment Corp. They can be reached at sh.kim@shinhan.com and jongseon@shinhan.com. -- Ed.
Acquiring Korean unit of Prudential Life for KRW2.2tr-2.4tr (PBR 0.76-0.82x)
KB Financial Group signed an agreement on April 10 to acquire a 100% stake in Prudential Life Insurance of Korea. The acquisition price was announced at KRW2.26tr but could increase up to a maximum of KRW2.4tr. Overpay concerns are seen limited with the price tag translating to a valuation of 0.76-0.82x to the target's total shareholders’ equity as of 2019. KB Financial Group’s risk-based capital (RBC) ratio topped the industry at 425% in 2019, and management expects to see no change in its top ranking even after the implementation of K-ICS. If needed, the group should be able to expand its available capital through reclassification of held-to-maturity securities.
Takeover to drive up NP by 4.8%, ROE by 0.27%p, non-bank profit share by 3.3%p
We expect the acquisition of the Korean unit of Prudential Life Insurance to drive up KB Financial Group’s consolidated net profit of controlling interests by 4.8% and ROE by 0.27%p compared to 2019 levels. The takeover of the life insurer should also shore up the share of non-banking businesses to 30% of group-wide profit (vs. 26.7%as of end-2019) and 28% of total assets (vs. 25%).
Even with the acquisition expected to cause a 75bp dip in common equity tier-1 (CET1) ratio from 13.59% to 12.84%, KB Financial Group should still maintain a sufficient buffer in capital adequacy. We plan to raise our projection for 2020 net profit of controlling interests by 5.3% from KRW3.01tr to KRW3.17tr once deal terms are finalized.
Retain BUY for a target price of KRW48,000
KB Financial Group could book bargain purchase gains from the deal if the fair value of the acquired unit exceeds the acquisition price. Targeting completion by 3Q20, the group plans to finance the acquisition with contingent convertible (CoCo) bonds, CPs, and dividend from affiliates (bank, brokerage, etc.). Key points to watch for include the funding rates and terms of CoCo bonds and possible changes in yearend dividend policy. We retain our BUY rating on KB Financial Group for a target price of KRW48,000.