Policy Rate Cut to Lower Banks' NIM
The authors are analysts of Shinhan Investment Corp. They can be reached at sh.kim@shinhan.com and jongseon@shinhan.com. -- Ed.
25bp policy rate cut to lower annual NIM by around 3-4bp
The Bank of Korea cut the policy rate earlier than expected at the May 28meeting, down by 25bp from 0.75% to 0.50%. Given the subsequent effect on CD and COFIX rates, the rate cut is estimated to reduce bank net interest margin (NIM)by around 3-4bp. Interest rate sensitivity has declined at such low levels. The recent growth in loans to large enterprises should considerably offset the impact of the rate cut.
25% upside to major bank holding companies based on SOTP valuation
The share prices of major bank holding companies seem to be generally distorted by about 25% based on market cap. While it is not the traditional valuation method for banks, we can use the sum-of-the-parts method to calculate the combined market cap if the subsidiaries are listed. We found share price distortion of around 12% when applying a 10% discount to be conservative, although there is no dual listing of parent and subsidiaries. We applied a trailing PER of listed peers to each subsidiary.
Top picks are KB Financial Group and Hana Financial Group
We recommend KB Financial Group and Hana Financial Group as our top picks in the banking sector, as they are undervalued in absolute terms despite earnings improvement forecast for 2Q20. KB Financial Group may see upward revision of 2020 net profit consensus in view of the inclusion of PRASAC Microfinance Institution in consolidated statements and acquisition of Prudential Life Insurance and related gains on bargain purchase.