20171019-三星证券-Focus_on_improving_recurring_earnings_32页_1mb

Sector Update Summary

Core Content

This document provides an analysis of the Korean banking sector, focusing on the performance and outlook of major financial institutions in the third quarter of 2017 (3Q17). It outlines key factors influencing earnings, interest income, and credit costs, and includes target price revisions and forecast adjustments based on current market conditions and regulatory developments.

Main Points

1. Recurring Earnings Improvement

• 3Q17 Performance: Domestic banks, particularly large players, saw improved recurring earnings due to:
  • Accelerating loan growth, especially in household and SME sectors.
  • NIM improvements from falling funding costs.
  • Below-normal credit costs due to stable asset quality.
• Earnings Outlook for 2018: Combined earnings forecasts for banks under coverage were raised by 8.5%, reflecting optimism about continued growth.
• Samsung Card Exception: Its 2018 earnings forecast was cut by 10% due to merchant expansion and capital utilization uncertainties.

2. Target Price Revisions

• The target prices for the listed financial institutions were adjusted as follows:
  • KB Financial Group: KRW75,000 (+5.6%)
  • Shinhan Financial Group: KRW64,000 (+1.6%)
  • Hana Financial Group: KRW62,000 (+5.1%)
  • IBK: KRW18,000 (+5.9%)
  • BNK Financial Group: KRW12,000 (-4.8%)
  • DGB Financial Group: KRW13,000 (-7.1%)
  • Jeonbuk Bank: KRW7,000 (-6.7%)
  • Samsung Card: KRW45,000 (-10.0%)

3. NIM Trends

• NIM Improvements: NIM (Net Interest Margin) is expected to improve slightly in 3Q, driven by rising short-term market yields and lower funding costs.
• Factors Influencing NIM:
  • Market yields are rising due to improved economic data and central bank exit strategies.
  • Banks benefit from NIM as it is closely tied to short-term yields, which are expected to continue rising.
• Key Insight: NIM is likely to be a key driver for profit growth in the second half of the year.

4. Loan Growth

• Overall Loan Growth: Domestic banks reported a 2.2% q-q loan growth in 3Q, similar to 3Q16.
• Segment Breakdown:
  • Household Loans: Grew 2.5% q-q, supported by seasonality, internet banks, and pre-real-estate regulation demand.
  • SME Loans: Rose 2.3% q-q, showing resilience despite regulatory risks.
  • Corporate Loans: Growth was modest, with a 1.9% q-q increase.
• Loan Growth Targets: Banks are expected to meet annual growth targets of 4-5%, driven by SME and household lending.

5. Credit Costs

• Credit Costs Stay Low: Credit costs remained below normal levels in 3Q, supported by stable asset quality and government support for mid-rate loans.
• Asset Quality: The delinquency ratio was 0.50% in August 2017, down from 0.82% in 2016. Fewer companies filed for bankruptcy, and NPL (Non-Performing Loan) ratios and formations were below normal.
• Credit Card Impact: Credit costs at credit card operations are expected to improve, with potential reductions in consolidated credit costs due to the performance of KB Card and Shinhan Card.

6. Provisioning and One-Time Gains

• Kumho Tire: Additional provisioning was expected due to its voluntary debt restructuring, with estimates of KRW31.2b for KBFG and KRW18.3b for HFG.
• DSME: Additional provisioning of KRW10.0b for SFG was anticipated.
• Disposal Gains: Banks are likely to defer significant disposal gains to 4Q due to IFRS 9 implementation in 2018. SFG is expected to recognize gains from Visa Card and SK Hynix.

Key Financial Institutions

Conclusion

The banking sector is expected to see continued improvement in recurring earnings, driven by solid loan growth, NIM enhancements, and stable credit costs. Regulatory risks are a concern, but the release of household debt measures should alleviate some of these. Post-regulatory clarity, attention will shift to interest rate movements and year-end dividends, with the top financial groups likely to outperform.