20150819-三星证券-Internet-primary_bank_update_22页_1mb

Sector Update Summary: Banking and Internet-Primary Banks (2015.8.19)

Core Content Overview

This document provides an update on the development of internet-primary banks in South Korea, focusing on the regulatory environment, consortium formations, and potential business models. It also outlines the investment strategy for domestic banks in light of the competition from new entrants.

Key Developments and Trends

• Government Guidelines and Regulations:
  In late July 2015, the South Korean government introduced additional guidelines for the preliminary approval of internet-primary banks. These guidelines favor non-banking financial and ICT firms by:

  • Prohibiting banks from leading consortiums.
  • Allowing industrial capital to increase their stakes if the Banking Act is revised.
  • Granting ICT firms more flexibility in lending screening, identity checks, and use of customer data.

• Consortium Formations:
  Several ICT and non-banking financial firms have formed consortiums to secure approval for internet-primary banks. Notable examples include:

  • KIH-Daum Kakao alliance, which has drawn the most attention.
  • KB Kookmin Bank joining the KIH-Daum Kakao consortium with a 10% stake.
  • Interpark planning to contribute KRW300b to a consortium and apply its e-commerce and payment gateway experience to banking.

• Regulatory Framework:
  Under the current Banking Act, internet-primary banks must meet strict requirements, including:

  • Minimum capital of KRW100b (vs KRW25b for regional banks).
  • Shareholder eligibility: Non-financial firms can hold up to 10% of shares with voting rights, while banks are restricted to 10% stakes and cannot become the largest shareholders.
  • Approval is contingent on establishing a robust financial system and launching full operations within five months of approval.

• Potential Revisions to Banking Act:
  If the National Assembly passes the proposed revision, non-financial firms could hold up to 50% of shares, and minimum capital requirements could be reduced to KRW50b. However, the passage is uncertain due to political conflicts.

Most Promising Business Model

• Microloan Focus:
  The microloan model is expected to be the most attractive for Korean internet-primary banks. This is due to:

  • Commercial banks' reluctance to engage in microloans due to reputational risks.
  • ICT firms' ability to use big data to assess credit risk more accurately.
  • The potential to target SMEs and households, which are underserved by traditional banks.

• Examples of Successful Models:

  • WeBank (China): Launched by Tencent in 2014, it uses WeChat's payment data to assess credit risk for SME loans.
  • Alibaba's Microloan Model: Through Ant Financial, Alibaba offers loans to Taobao and Alibaba merchants, leveraging its vast customer data and real-time credit assessment.
  • KG Inicis: Launched a shopping mall loan program using its own platform and customer base.

Investment Strategy for Banks

• Discounts in Valuation:
  Domestic banks have traded at discounts due to prolonged low interest rates, but these discounts are expected to ease as:

  • Core earnings and credit costs improve.
  • There is increased buying activity in banking shares.

• Top Picks:

  • KB Financial Holdings
  • BNK Financial Group

• Challenges for Banks:
  Banks are unlikely to benefit significantly from the new sector due to:

  • Limited consortium participation (max 10% stake).
  • The potential for non-banking firms to lead the market with better access to big data and customer bases.

Comparison with Japanese and Korean Players

• Japanese Firms:

  • 21 firms with total assets of KRW4.97t.
  • Market share: 56.2%.
  • Funding rates: 1-4%.
  • Lending rates: 36.8%.

• Korean Firms:

  • 74 firms with total assets of KRW3.56t.
  • Market share: 40.2%.
  • Funding rates: 8-12%.
  • Lending rates: 27.8%.

• Key Korean Players:

  • KIH (Korea Investment Holdings): Strong in forming consortia and has the potential to lead with 50% stake.
  • Mirae Asset Securities: A non-banking financial firm with no industrial capital ties, capable of leading consortiums.
  • Kyobo Life: A life insurer with experience in digital financial services, interested in expanding into microloans.

Key Information and Insights

• ICT Firms Lead the Way:
  ICT companies like Daum Kakao and Interpark are at the forefront of forming consortia and are expected to leverage their platforms and data for lending services.

• Regulatory Uncertainty:
  The revision of the Banking Act is still pending, and its passage will significantly affect the structure and ownership of internet-primary banks.

• Big Data Advantage:
  ICT firms have a clear edge in credit risk assessment due to their access to large datasets, making them more attractive for microloan operations.

• Market Potential:
  Microloans to SMEs and households are highly profitable and underpenetrated. The success of similar models in China and other markets suggests strong potential for Korean internet-primary banks.

• Timeline for Approval and Operations:

  • Preliminary Authorization: Expected by end-2015.
  • Full Authorization: Likely by 1H16.
  • Full Operations: Should begin within five months of approval.

Conclusion

The establishment of internet-primary banks in South Korea is expected to be led by ICT and non-banking financial firms, leveraging big data and customer bases to offer microloans at competitive rates. While the sector is still in its early stages, the potential for growth and innovation is significant. Traditional banks, despite their long-standing presence, are at a disadvantage due to regulatory restrictions and limited stake in consortia. The outcome of the Banking Act revision will be crucial in shaping the future landscape of the sector.