Sale of KakaoBank Stake a Key Variable
The authors are analysts of Shinhan Investment Corp. They can be reached at heeyeon.lim@shinhan.com and tyc@shinhan.com, respectively. – Ed.
1Q22 NP of controlling interest reported at KRW306.8bn (-0.3% QoQ)
Korea Investment Holdings posted preliminary operating profit of KRW338.1bn (+23.0% QoQ) for 1Q22. Net profit of controlling interest came to KRW306.8bn (-0.3% QoQ) in line with our estimate (KRW309.5bn), proving its ability to generate stable profits even under unfavorable market conditions. Korea Investment & Securities, a key subsidiary, was solid with commission income growing 20.1% QoQ despite the sluggish stock market and weak trading volume. Investment banking commission jumped 27.1% QoQ amid a boom in the real estate project financing market, fully offsetting a 15.7% QoQ drop in brokerage commissions. Uncertainties intensified at home and abroad, but the securities subsidiary reported decent trading income thanks to its agile asset management strategy.
Earnings volatility was high when it came to other subsidiaries. Korea Investment Capital delivered a profit growth of 52.4% YoY based on steady asset expansion. Korea Investment Real Estate Trust turned positive YoY. Meanwhile, Korea Investment Savings Bank saw operating profit plunge 48.7% YoY due to loan loss provisions. Korea Investment Partners was hit hard by heightened stock market volatility, with profit down 79.3% YoY.
High ROE; sale of KakaoBank stake a key variable
We believe Korea Investment Holdings has the highest capital efficiency in the domestic financial sector. With its ROE standing at 18.0% for the current quarter and that of Korea Investment & Securities at 16.6%, expectations are low for further gains in ordinary ROE.
Going forward, a re-rating of share valuations will likely hinge on capital expansion and subsequent profit growth. The IPO lock-up period for KakaoBank shares expired on February 7. There is a high chance that the stake in the internet-only bank held by one of the subsidiaries will be sold off, but the timing is unclear due to recent share price correction. Investors need to pay attention to the developments of the stake sale and any dilution of ROE from the strengthening capital base.
Retain BUY at a target price of KRW105,000 for sector top pick
Due to the lack of momentum for the sector as a whole, we expect share price movement to be affected by the potential sale of KakaoBank stake in the near term. Despite steady profit growth over the past decade (KRW189.2bn in 2012 vs. KRW1.2tr in 2022F), share valuations have continued downward (PER 11.9x →3.1x, PBR 0.85x →0.45x). Even on a strictly conservative approach, we believe the shares deserve to trade at pre-pandemic levels (2019 PBR average of 0.74x). We maintain Korea Investment Holdings as our sector top pick with a BUY rating for a target price of KRW105,000.