Time Prefers Sustainable Top-tier Players over Dark Horses
The author is an analyst of NH Investment & Securities. She can be reached at michelle.cho@nhqv.com. -- Ed.
Our FY2020 fundamental scorecard analysis shows unchanged positions among domestic banks, even amid Covid-19 woes. We prefer banking players offering top-tier fundamentals: KBFG and HFG.
Time prefers sustainable top-tier players over dark horses
Domestic banking sector results for FY20 show no change in our fundamental scorecard rankings, even amid the special circumstances brought about by the Covid-19 crisis. But, the score gaps between top-tier and low/mid-tier banks are becoming narrower amid intensifying competition.
Correlation exists between stability and quality of fundamentals
With FY20 marking a year of several extraordinary events (PEF incidents and Covid-19), it is necessary to carefully analyze one-off items. Woori Financial Group (WFG), Shinhan Financial Group (SFG), and Hana Financial Group (HFG) have been the sector players most affected by PEF-related losses (6~11% of pre-tax profit). All of the domestic banks have been impacted by pandemic-related provisioning, with IBK, WFG, and BNK Financial Group (BNKFG) being affected the most.
PPOP growth and earnings contributions from the non-banking businesses served to absorb losses from external shocks. Pointing out that these stabilizing elements are directly connected to the quality of fundamentals, we believe that these factors will continue to help banks defend their earnings in FY21.
Top picks: KBFG and HFG
We maintain a conservative view towards the banking sector for now. We offer KB Financial Group (KBFG) as our sector top pick, noting its: 1) balance between banking and non-banking domains; 2) aggressive shareholder return policy; and 3) stable governance (reappointment of top executives). We also like HFG, which shows top-tier quality in terms of its fundamentals.