Banks – Disintermediation: Global Lessons for Korean
Banks
 An ongoing increase in customer assets — Amid financial disintermediation,
which is a structural trend, we think banks could eventually benefit through
fee income generation unless there is customer asset erosion. Banks’
customer asset balances have followed an upward trend over the past several
quarters.
 NIM downside mostly addressed — NIM for the sector has declined more
than 40bps for the past two-and-a-half years. Current sector NIM stands at
2.25%, slightly higher than APAC-ex peers, but considering higher credit cost
and a bigger portion of corporate loans, we believe downside is limited.
 Lower portion of non-interest income — Non-interest income represents 26%
of total operating income for Korea banks, lower than 30–40% for most AP
banks on lower trading/dealing income and non-bank contribution, although
credit card income is more sizable. Banks with higher non-interest income
contribution deserve valuation premium thanks to earnings stability and
absence of credit risk.
 Aussie banks are a good role model — Given domestically skewed portfolios,
the current state of the financial markets and capital adequacy levels, we
view Aussie banks as likely role models for Korean banks. ROAA
decomposition suggests upside in fee income generation, sustained low credit
cost and a more efficient capital management including dividend payouts.
 Cross-border comparison in fee income — Fee income breakdown
comparison with other regional banks indicates larger credit card fee income
for Korea banks, while there is upside potential from mutual fund sales fee
and non-bank earnings contribution.
 FHCs are better positioned — We believe financial holding companies are
better positioned to manage financial disintermediation with better crossselling
and non-bank presences. SOP valuation, a bottom-up approach to
look at each subsidiary base, suggests upside to our target prices.
 Top-picks in the sector — We have a bullish view on Korea banks and
recommend investors buy into recent weakness on cheap valuations, possible
regulatory easing and earnings stability. Our top picks are Shinhan FG, Hana
FG and Woori FH.

Contents
Banks – Disintermediation: Global Lessons for Korean Banks 3
Don’t throw in the towel yet, it’s actually a good buying opportunity 4
Structural impetus behind financial disintermediation 6
Proper comparison base 6
Financial disintermediation and margin pressure 9
ROAA decomposition and strategic implications 13
Fee income – A cross-border comparison 17
Financial holding companies 20
Advantages of financial holding companies 20
Change in bank strategies 20
FHC market share gains in non-bank segments 21
Credit cards – Late comers’ market shares catching up 23
CMA- Integrated service by FHCs 24
Higher contribution from non-bank subsidiaries, upside to fee income 25
SOP valuation for FHCs and upcoming strategy 25
APPENDIX: Data Book 30
Appendix A-1 36