Industry Top Pick
The author is an analyst of KB Securities. He can be reached at cygun101@kbfg.com. -- Ed.
Sharp increase in IB commission income, stronger-than-expected trading income
— KIH reported 1Q22 NP (attributable to controlling interests) of KRW307.6bn, which is 21.2% above our estimate and 11.2% above the market consensus.
— We view the results as robust given lower trading value and deteriorating asset management conditions. We attribute the earnings beat to the following:
(1) IB commission income rose 28.8% QoQ on a sharp increase in project finance advisory fees.
(2) Trading & Products income came in stronger than expected despite higher bond yields and higher HSCEI volatility.
KIH reduced negatives on valuation and disposal income by expanding the balance of issued notes (KRW1.8tn→KRW10.14tn) and enhancing interest/dividend income via expansion of corporate loans.
— Amid concerns over monetary tightening by central banks and geopolitical risk triggered by the Russia-Ukraine war, brokerages’ decisions on portfolio rebalancing and management strategy should have a critical impact on earnings. We have a positive view on strategies that bolstering interest income by sharply increasing the balance of note issuances amid the interest rate uptrend as well as expanding IB earnings contribution. We maintain KIH as our industry top pick.
1Q22 consolidate NP (attributable to controlling interests) declined 0.3% QoQ to KRW307.6bn
— For Korea Investment & Securities (KIS), 1Q22 consolidated NP declined 0.3% QoQ to KRW307.6bn but standalone NP climbed 56.7% QoQ.
— In 4Q21, KIS reported relatively disappointing standalone NP on conservative asset valuation related to issued notes. However, in 1Q22, it recorded solid consolidated NP thanks to reflection of valuation gains on consolidated funds at KIS and robust earnings at consolidated subsidiaries. Although KIS saw a steep increase in standalone NP in 1Q22 largely on a favorable comparison base, we note that it maintained consolidated NP at its 4Q21 level.
— KIS brokerage income contracted 17.4% QoQ on lower trading value.
— However, IB commission income expanded 28.8% QoQ/10.9% YoY to KRW185.4bn. Of note, M&A and financial advisory fees jumped 59.9% QoQ/20.2% YoY to KRW123.9bn, which could be attributed to KIH’s active response to the booming project finance market.
— Trading & Products income slid 26.6% YoY to KRW175.5bn but improved sharply QoQ compared to a KRW13.9bn loss in 4Q21. Despite rising yields, bond valuation gains grew over KRW10.0bn (incl. expenses) thanks to active duration management. KIH also reported solid DLS management gains. In addition, the issued note balance climbed KRW1.8tn QoQ from KRW8.4tn in 4Q21 to KRW10.1tn in 1Q22, reducing volatility in management income.
— Other subsidiaries (excl. Korea Investment Capital) reported relatively weak results. Korea Investment Capital has been steadily expanding assets since its KRW50.0bn increase last December; the company is actively responding to the booming project finance market. In fact, its 1Q22 earnings surged 65.2% QoQ/52.3% YoY to KRW37.0bn.