NIM Recovery Faster than Expected
The author is an analyst of Shinhan Investment Corp. He can be reached at sh.kim@shinhan.com. -- Ed.
1Q NP preview: Nominal KRW1.08tr (+48.6% YoY), ordinary KRW1.15tr
KB Financial Group’s nominal net profit is expected to have increased 48.6% YoY to KRW1.08tr in 1Q21. Ordinary net profit, which excludes employee welfare fund contribution booked in the first quarter of each year, is estimated at KRW1.15tr vs. the past quarterly average of KRW950bn. We believe earnings will continue on an uptrend for quite some time, given that 1Q21 improvement is attributable not to cost control but to the inclusion of Prudential Life Insurance as a subsidiary, as well as evenly strong earnings from banking and credit card operations and improving performance of insurance subsidiaries.
Market consensus for 1Q21 net profit has been revised steadily upwards since January and now reaches near KRW1.02tr. We expect to see further upward adjustments up to the release of 1Q21 results, with market confidence for earnings visibility continuing to improve.
Faster-than-expected recovery in NIM seen positive
Growth in KRW-denominated loans should come in on the lower side at 0.88% QoQ for 1Q21, but we believe the company's full-year target of 5% remains within reach given that temporary, internal issues likely caused loan growth to remain relatively weak during the first quarter. Meanwhile, NIM is expected to have climbed by 4bp QoQ with funding conditions seen more favorable than expected from a steady decline in portion of time deposits, increasing inflow of low-cost deposits, and repricing of funding costs. Non-interest income was likely solid in 1Q21, thanks to growth in trading value and strong commission income from investment banking (IPO, etc.).
The faster-than-expected recovery in NIM is seen positive, but we will need to check whether margins remain at solid levels even as the pace of loan growth recovers in 2Q21. From 2Q21 onwards, we also expect to see a further cutback of preferential interest rate offerings for loans and rise in spreads amid household deleveraging.
TP raised by 10% to KRW65,000; BIS-CET1 gap continues to widen
Shares of the banking sector leader are trading at an increasingly steeper valuation premium vs. peers with market focus once again shifting to KB Financial Group’s key strengths including relatively lower risks from negative issues such as mismanagement of private equity funds, high capital adequacy levels, and strong earnings power. The company recently issued an additional KRW600bn in hybrid bonds, creating a buffer between its BIS and common equity tier-1 (CET1) ratios. We believe the buffer is aimed at preparing for contingencies, with no M&As likely planned at the moment. Expecting a possible rally to peak levels recorded around the rate hike of 2017, we raise our target price for KB Financial Group by 10% to KRW65,000.