20150716-三星证券-Conditions_for_alpha_29页_760kb

Sector Update Summary

Core Content

This document provides a detailed analysis of the Korean banking sector, focusing on the performance of major banks in the second quarter of 2015 (2Q15), their valuations, and future outlook for the second half of the year (2H15). The key areas covered include:

• Earnings performance: Banks' combined net profit for 2Q15 fell 20.8% quarter-over-quarter and 6.2% year-over-year, but still outperformed expectations.
• Valuation: Banking shares have declined to near 5-year valuation lows, with P/B ratios at 0.50x, below the 2013 level of 0.54x.
• Interest income and NIM: Net interest income declined due to the NIM squeeze, caused by the March policy rate cut, relief loan origination costs, and slowed loan growth.
• Loan growth: Loan growth dipped in 2Q15, mainly due to relief loan securitization, but is expected to rebound in 3Q15.
• Provisioning costs: One-off provisioning costs related to Posco Plantec and Moneual negatively impacted some banks, but were offset by gains from the disposal of investment securities.
• G&A costs: Early-retirement programs and bonus payments led to a rise in G&A costs for some banks.
• Valuation losses: Banks holding stakes in Posco experienced valuation losses due to the stock price decline.
• Investment securities disposal: Gains from the sale of investment securities, such as shares in SK Hynix and Visa/MasterCard, offset some of the losses.
• Market outlook: The sector is expected to recover in 2H15 due to improving fundamentals, potential interest rate hikes, and structural changes in banks like KBFG and BNKFG.

Main Points

2Q Performance

• Net profit: Combined net profit of covered banks fell 20.8% q-q and 6.2% y-y to KRW1.77t, but still beat consensus.
• Interest income: Declined due to NIM squeeze, with a notable drop in net interest margin (NIM) from the March rate cut and relief loan origination costs.
• Credit costs: Held steady q-q due to one-off provisioning from previous quarters and a drop in new NPLs.
• G&A costs: Increased due to early-retirement programs and bonus payments.
• One-offs: Some banks faced additional provisioning costs, but gains from investment securities disposal helped offset these.

Valuation and Market Trends

• Valuation: Banking shares have fallen to 5-year lows, with P/B ratios at 0.50x.
• Cost of equity: Implied cost of equity is high, not reflecting the drop in the risk-free rate.
• Valuation gaps: Banking sector is undervalued compared to other sectors.
• Market sentiment: Concerns over DSME and interest rate direction have led to sector corrections, but these are expected to ease in 2H.

2H Outlook

• Recovery expected: With valuations near 5-year lows, the time is ripe for accumulating banking shares.
• Interest income recovery: NIM is expected to rebound in 3Q15 due to deposit rate reductions and no relief loan write-offs.
• Loan growth: Expected to improve in 3Q15 as the impact of relief loan securitization wanes.
• Key factors: Interest rate direction, structural changes, and resolution of company-specific issues will be critical for share performance.

Key Information

Top Picks

• KB Financial Group (KBFG): Expected to benefit from structural changes and improved earnings.
• BNK Financial Group (BNKFG): Acquired Kyongnam Bank, leading to potential earnings improvement.

Target Prices

• KBFG: KRW49,000 (+34.1%)
• SFG: KRW55,000 (+34.6%)
• HFG: KRW43,000 (+39.4%)
• BNKFG: KRW22,000 (+53.3%)
• DGBFG: KRW17,000 (+50.4%)

Factors Affecting Share Performance

• Interest rate direction: Expected to ease concerns and lead to NIM recovery.
• Company-specific issues: Integration of Hana Bank and Korea Exchange Bank, and the takeover of KDB Daewoo Securities may impact KBFG and Hana Financial Group.
• Valuation: Banks are undervalued, with P/B ratios at 0.50x and a wide valuation gap with other sectors.

Investment Securities Disposal Gains

• KBFG: Gains of KRW135.8b from disposal of KHGC shares.
• SFG: Gains of KRW50.0b from Visa/MasterCard stake sales.
• HFG: Gains of KRW50.0b from SK Hynix share sales.

Additional Provisioning

• Posco Plantec: Banks assumed 100% additional provisioning due to unsecured loans.
• Moneual: Assumed 50% additional provisioning due to legal issues.
• IBK: Additional provisioning of KRW35.0b.

Early Retirement Programs

• KBFG: Estimated cost of KRW300b due to early retirement of 1,121 employees.
• SFG: Incentive payments of KRW60b expected in 2Q15.

Market Impact

• Macro environment: Adverse conditions such as MERS outbreak, weak yen, and Brexit concerns have weighed on the sector.
• Earnings momentum: Perceived lack of momentum in 2Q15 due to one-off factors.
• Relative unattractiveness: Korean banks are less appealing to investors compared to other sectors, especially cosmetics and biopharmaceuticals.

Conclusion

The banking sector is expected to recover in 2H15, driven by improved interest income, potential rate hikes, and structural changes. While 2Q15 results were lackluster, they beat consensus, and valuations are at 5-year lows, making the sector an attractive investment opportunity. The key drivers for recovery include NIM improvements, loan growth rebound, and the resolution of company-specific issues. The document highlights KBFG and BNKFG as top picks due to their structural changes and potential for earnings improvement.