Sharp Improvement in Earnings Generation Capability
The author is an analyst of Shinhan Investment Corp. He can be reached at sh.kim@shinhan.com. -- Ed.
1Q21 surprise: NP of controlling interests at KRW1.27tr (+74.1% YoY)
KB Financial Group’s 1Q21 net profit of controlling interests of KRW1.27tr beat the market’s and our estimate of KRW1.08tr by 17%. Net interest margin (NIM) gained 7bpQoQ, driven by KB Kookmin Bank’s 5bp QoQ improvement. Funding costs dropped 7bp QoQ on a decline in the portion of time deposits and inflow of low-cost deposits that were also witnessed at other banks.
Investment yield fell 1bp QoQ. The group’s credit cost ratio came in at 0.20%,far better than the guidance of 0.30%. Credit costs should be maintained at a stable level this year with KRW377bn in provisions set against COVID-19 impact in 2020.
A level-up in fundamentals; ordinary NP estimated at KRW1.1tr
Loan growth in the first quarter was weak at 0.4% QoQ, but growth of around 5% will likely be achieved for the full year. NIM should continue to improve in 2Q on a decline in funding costs, and grow further in the second half backed by improvement in investment yield. Nominal net profit stood at KRW1.27trin 1Q. Ordinary net profit is estimated to have come to about KRW1.1tr. KB Card reported net profit of KRW141.5bn, but ordinary net profit should have been around KRW100bn given that provisioning was lower than quarterly average levels. Prudential Life Insurance posted net profit of KRW112.1bn, but ordinary net profitis likely to be in the KRW80bn-90bn range considering one-off factors such as the sale of securities.
Sharp improvement in earnings generation capability of banking and other subsidiaries
KB Financial Group’s revenue diversification efforts are paying off. Earnings generation capability is improving visibly at KB Kookmin Bank and other subsidiaries. In particular, KB Securities posted record earnings for1Q with ROE of 17.6% and net profit of KRW221.1bn, backed by solid commission income across divisions and increase in trading gains.
From 2H21, we expect changes in KB Financial Group’s shareholder return policy based on the revised articles of incorporation, whether on a semi-annual or interim basis. The group is also likely to consider the need for retained earnings for M&A opportunities. We upgrade our target price by 6.2% to KRW69,000 with upward revision of 2021 net profit forecast from KRW3.75tr to KRW3.97tr.