20170529-三星证券-Capital_is_everything_88页_2mb

Sector Update Summary

Core Content

This document provides an in-depth analysis of the financial sector, focusing on the impact of capital regulations on valuations, market share, and business strategies. It emphasizes the importance of capital adequacy in differentiating financial institutions and driving long-term value creation, especially in the context of regulatory changes and economic recovery.

Main Views

• Capital is everything: Capital leverage is a key factor in the financial sector's performance. Financial firms are heavily regulated on capital, and the ability to maintain high capital ratios allows them to gain market share, execute M&A strategies, and achieve better valuations.
• Regulatory shifts drive valuation recovery: The tightening and loosening of capital regulations have historically influenced financial sector valuations. The recent expectation of deregulation, along with interest rate hikes, has contributed to a recovery in financial stock valuations.
• Deregulation leads to industry polarization: As regulations ease, better capitalized firms are likely to outperform, leading to a more polarized industry landscape. This is evidenced by historical trends where well-capitalized institutions gained dominance through M&A and operational efficiencies.
• Focus on fundamentals: Investors should prioritize financial players with strong capital adequacy and execution capabilities over those with low valuation multiples. High capital ratios enable firms to leverage economies of scale and outperform weaker competitors.

Key Information

Capital Regulations Overview

• Banks: Governed by BIS capital rules and CET-1 ratios. Post-2008, they faced stricter regulations, leading to deleveraging and capital injections.
• Insurers: Subject to RBC (Risk-Based Capital) rules. The introduction of IFRS 17 is expected to ease capital requirements.
• Securities Brokers: Governed by net capital rules. Brokers are seeking to better utilize capital through business model differentiation and M&A.

Impact of Capital on Valuation and Market Share

• Deleveraging effects: Tighter regulations caused financial firms to reduce leverage, leading to lower ROE and valuations. This was particularly evident in the US, where banks like Bank of America and Citigroup saw significant declines in P/B ratios.
• Capital adequacy and performance: Firms with higher capital ratios, such as JP Morgan, were able to grow their assets and earnings more effectively than those with lower ratios, like Citigroup and Bank of America.
• M&A activity: Post-crisis, M&A activity was driven by firms seeking to strengthen their capital positions and expand market share. Larger banks were more active in acquiring weaker players, while smaller banks focused on niche markets.

Historical Examples

• US banks: After the 2008 crisis, banks like JP Morgan and Citigroup underwent significant changes through mergers and acquisitions. JP Morgan acquired Bear Stearns and Washington Mutual, becoming the world's leading bank. Citigroup sold off non-core assets and dropped in global rankings.
• Korean banks: Post-2008, Korean banks like KB Financial Group and Samsung Life benefited from capital injections and rights offerings, which helped them recover from the crisis and improve their capital ratios.

Valuation Trends

• P/B ratios: US banks saw a significant drop in P/B ratios post-crisis but have since recovered as regulations eased and profitability improved.
• Valuation recovery: With the easing of regulations, financial stocks have rallied, particularly in the US and Korea, where banks and insurers have shown signs of recovery and increased market confidence.

Recommendations

• Investor focus: Investors should focus on firms with strong capital positions, flexible strategies, and the ability to capitalize on M&A opportunities.
• Top picks: KB Financial Group, Samsung Life, Samsung Fire & Marine, and Korea Investment Holdings are highlighted as top financial sector picks due to their capital strength and potential for growth.

Conclusion

The financial sector is undergoing significant transformation due to regulatory changes and economic conditions. Capital adequacy is a critical differentiator, and firms with strong capital positions are poised to lead in the evolving market landscape. As regulations ease, the focus should shift from mere valuation multiples to the underlying fundamentals and strategic capabilities of financial institutions.