Turning positive on Korean banks: We upgrade our view on Korean
banks/bank-centric FHCs from neutral to overweight relative to the
KOSPI and MSCI Korea benchmark, based on: (1) our estimate of a
double-digit growth in PPOP for the next three years; and (2) growing
confidence that the recent credit down-cycle has hit bottom, and the
credit cycle will gradually improve over the next couple of years. Our
top picks in our universe are SFG (Jun-10 PT of W44,000, implying
34% upside) and SSC (Jun-10 PT of W54,000, implying 32% upside).
• PPOP likely to grow by 13-14%: We believe the earnings visibility
part of the equation is quite important for taking long-term positions in
Korean banks. We expect the aggregate PPOP of banks to grow by 13-
14% in 2010E and 2011E. A gradual recovery (7bp/year) in NIM across
the industry (due to the upward trajectory of market-prevailing interest
rates) as well as more prudent control of overhead costs by banks
(industry-average cost-to-income ratio to come down to the 51%-level in
2011E from the 56%-level in 2009E) will lead to double-digit growth in
PPOP for Korean banks, in our view.
• End of the credit down-cycle: We forecast Korean banks’ aggregate
credit costs (measured by provision/loan ratio) to peak in 2009 at 129bp
and to hover around 100bp in 2010 and 2011 (compared with 90bp for
2008 and 45bp for 2007). Unsatisfactory deleverage by households as
well as corporates during the recent down-cycle will be a stumbling
block for further decline in the credit costs of Korean banks, in our view.
• Top picks: Together with a pre-emptive capital increase in March this
year, SFG’s diversified/balanced business portfolio should allow the
group to keep its leadership position in the industry, and to continue to
deserve a valuation premium over its peers, in our view. We believe
Samsung Card’s strategic focus on margin improvement through asset
re-balancing in the near term and growth in the long term should
accelerate earnings momentum over the next two years.
Table of Contents
Turning positive on Korean banks..........................................2
Double-digit growth in PPOP for 2010-11...............................7
Net interest margin...................................................................7
Operating cost ..........................................................................9
Credit cycle bottoming out ....................................................11
Yet, the pace of the credit cycle recovery to be modest...........12
Risks to our view....................................................................14
Recapitalization jitters for FHCs are not fully eased yet.........14
Renewing volume competition might put downward pressure on loan spreads ...15
Companies
KB Financial Group................................................................18
Shinhan Financial Group.......................................................23
Woori Financial Group...........................................................28
Hana Financial Group ............................................................33
Industrial Bank of Korea ........................................................38
Korea Exchange Bank............................................................43
Korea regional banks .............................................................48
Samsung Card ........................................................................60
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