20160128-三星证券-Valuations_pricing_in_overblown_concerns_26页_1mb

Sector Update Summary: Banking Sector in 2016

Core Content

This document provides a comprehensive analysis of the Korean banking sector, focusing on the performance and outlook for 2016. It outlines the impact of credit costs, interest income, loan growth, and regulatory changes on bank profits and valuations.

Main Points

4Q 2015 Performance

• Net Profit Decline: Banks under analysis saw weaker net profits in 4Q 2015 due to rising credit costs and G&A expenses.
• Credit Costs: Credit costs increased by 70.6% q-q, driven by conservative provisioning for corporate restructuring and year-end asset-quality control, not by restructuring itself.
• Interest Income: The sector's interest income rose 3.6% q-q, supported by loan growth and stable net interest margins (NIM).
• G&A Costs: Seasonal factors like early-retirement programs and end-of-year bonuses caused a rise in G&A costs.
• One-offs: Banks experienced one-off gains from the sale of Kumho Industrial stakes and disposal gains on SK Holdings shares, along with negative goodwill from the KB Insurance takeover.

Earnings Forecast Cuts

• Earnings Forecast: Forecasts for 2015 and 2016 were cut by 2% and 6.2%, respectively, due to:
  • Lower loan growth from more conservative lending attitudes
  • Higher credit costs from potential loan defaults and tighter risk controls
  • Lower ELS fee income due to losses on ELS products
• Target Price Revisions: Target prices were cut by an average of 14.3%, offering an average upside of 26% following recent corrections.

2016 Outlook

• Net Profit: Net profit is expected to fall below recurring levels due to credit costs, but macroeconomic risks are easing, which could support a rally in banking shares.
• NIM Trends: NIMs are expected to improve in 2016, but more slowly than previously forecast, due to rising funding costs and conservative lending.
• Loan Growth: Loan growth is expected to slow in 2016 but remain in the mid-single digits. Group loans and household loans are likely to grow, while SME loans may stagnate.
• Credit Costs: Credit costs are expected to stabilize in 1Q 2016 but may rise in 2H due to corporate restructuring and higher market interest rates.

Key Information

Target Price Revisions

Loan Growth in 4Q 2015

• Overall: Loan growth was estimated at 2% q-q.
• Segment Growth:
  • Corporate: 0.5% q-q
  • Large: -0.7% q-q
  • SME: 0.9% q-q
  • SOHO: 2.7% q-q
  • Household: 3.8% q-q
  • Mortgage: 4.2% q-q
  • General: 2.7% q-q

Provisioning and Credit Costs

• Provisioning Estimates:
  • KBFG: 45.1 KRWB
  • SFG: 67.4 KRWB
  • HFG: 142.2 KRWB
  • IBK: 2.6 KRWB
  • BNKFG: 3.0 KRWB
  • DGBFG: 1.6 KRWB
  • JBFG: 0.6 KRWB
• Credit Costs as % of 2016E Pre-Tax Profit:
  • KBFG: 4.4%
  • SFG: 4.0%
  • HFG: 11.3%
  • IBK: 6.5%
  • BNKFG: 4.3%
  • DGBFG: 3.8%
  • JBFG: 5.0%

Corporate Restructuring

• Firms in Restructuring: 19 companies were listed, including 2 shipbuilders, 3 steelmakers, 1 constructor, and 1 electronics firm.
• C-rated Firms: 16 in 2015, with a focus on construction, steel, and shipbuilding.
• D-rated Firms: 19 in 2015, with a similar industry distribution.
• State-Owned Banks' Exposure: Accounted for 92.4% of total exposure to firms in restructuring, with a portion of 81.4% in 2015.

Exposure to Specific Firms

• Donga One Exposure:
  • Total: 281.1 KRWB
  • Loan: 268.4 KRWB
  • Other: 12.7 KRWB
• STX O&S Exposure:
  • Total: 7,610.6 KRWB
  • Loan: 3,935.3 KRWB
  • Other: 3,675.3 KRWB
• SPP Shipbuilding Exposure:
  • Total: 2,108.9 KRWB
  • Loan: 982.3 KRWB
  • Other: 1,126.6 KRWB

Conclusion

The banking sector is expected to face challenges in 2016 due to rising credit costs and slower loan growth. However, with easing macroeconomic risks, there may be a rally in banking shares. The sector's valuations are currently pricing in overblown concerns, and a trading buy approach is considered valid for now.