20160912-三星证券-US_rate-hike_positives_need_time_to_pay_off__focus_on_valuation-gap_plays_19页_934kb

Banking Sector Update Summary

Core Content

This document provides an analysis of the Korean banking sector, focusing on the impact of US Fed rate hikes, global macroeconomic events, and the valuation dynamics of Korean banks in relation to their peers. It outlines the current market expectations, investment strategies, and key performance indicators for major banks in South Korea.

Main Points

• US Fed Rate Hike Impact: There is high expectation that a US Fed rate hike before the end of 2017 will positively influence domestic banking shares. This is due to the likely improvement in interest income and profitability for US banks, which could spill over to benefit Korean banks.

• Valuation Gap Plays: Despite recent gains, Korean banks are still expected to grow earnings slowly in 2017. Therefore, the focus should be on banks that can narrow valuation gaps with peers by improving their capital ratios and restructuring non-banking operations. KB Financial Group (KBFG) is highlighted as the top pick in the sector.

• Global Banking Correlation: Since the global financial crisis, banking stocks worldwide have increasingly moved in tandem. This is attributed to the correlation between central banks' interest rate policies and banks' interest income, as well as concerns over a global credit crunch and capital adequacy.

• Interest Rate Policy and NIM: Korean banks' net interest margins (NIM) are sensitive to domestic short-term interest rates, which are influenced by the cost of funds index and certificate of deposit rates. These are in turn affected by 1-year bond yields and the nation's key rate. The global interest rate environment is expected to eventually align, but this is unlikely in the short term due to differing policies.

• Capital Adequacy Concerns: Banks with low CET-1 ratios (e.g., KBFG and Shinhan Financial Group) have been trading at lower valuations. The document emphasizes the importance of capital ratios in determining share price performance, especially with the Bank of Korea (BOK) expected to keep its policy rate unchanged into 2018.

• Valuation Metrics: Korean banks are currently trading at a P/E ratio of around 7.13x and a P/B ratio of 0.48x, which are significantly below the multiples of other sectors and historical peaks. This suggests that the sector is still undervalued, but earnings growth is expected to be limited in the absence of a rise in short-term interest rates.

Key Information

Bank Valuation and Target Prices

Earnings Forecasts (2016E and 2017E)

Capital Ratio and NIM Trends

• CET-1 Ratios: KBFG has a CET-1 ratio of 13.34%, SFG at 11.08%, and HFG at 11.44%. These ratios are expected to improve, with Woori Bank and BNK Financial Group likely to surpass the 10% threshold.
• NIM Improvements: NIM is expected to improve slowly as the BOK keeps its policy rate frozen into 2018, and the yield curve is expected to steepen gradually.

Investment Focus

• Valuation-Gap Plays: Banks that can improve their capital ratios and narrow valuation gaps with peers are recommended.
• Non-Banking Operations: KBFG is expected to benefit from structural changes in its non-banking operations, including the full ownership of Hyundai Securities and increased contributions from KB Insurance and KB Capital.
• ROE Sensitivity: The document highlights the sensitivity of ROE to the ownership structure of subsidiaries, suggesting that full ownership could significantly improve profitability.

Market Outlook

• Moderate Valuation Recovery: Given the slow pace of earnings growth, a moderate recovery in valuations is expected rather than a strong rally.
• Sector Performance: The banking sector has outperformed other sectors recently, but the focus remains on individual bank performance rather than the sector as a whole.

Conclusion

The banking sector in South Korea is expected to benefit from a US Fed rate hike, but the timing and extent of this benefit are influenced by the domestic interest rate environment. The focus should be on valuation-gap plays and structural improvements in non-banking operations, with KB Financial Group (KBFG) being the top recommendation. Capital ratios and earnings growth are key factors in determining future share price performance.