Higher NIM + lower NPL = POSITIVE
Expect NIM recovery; sector raised to POSITIVE
We upgrade the banks sector to POSITIVE from Neutral and upgrade
both Hana Financial and IBK to BUY from Hold. We expect NIM to
reverse course starting in 2H09 due to liability yields to decline post
asset re-pricing that was completed as of 2Q09. According to our
analysis, IBK, Hana and Shinhan should show +30bp (h-h) improvement
in 2H09. KB, on the other hand, should show less than 30bp and is one
of the reasons for our downgrade to Hold on 31 July 2009.
Gross NPLs to stabilize starting in 3Q09
Regardless of NPL sales as ordered by the government, we think banks
are improving fundamentally judging from the decline in new gross NPL
formation (pre-NPL sales). Although reported NPL ratio has been on a
declining trend for the majority of the banks, gross NPLs (pre NPL sales)
on average have been stabilizing for banks under our coverage. We will
most likely see a decline in overall gross NPLs starting in 3Q09 on the
back of declining SME bankruptcies that have peaked in 1Q09,
continued marginal improvements in the Korean macro economy and
government’s push to pare back loan growth to focus on higher-quality
credit. As for reported NPL, we expect the government to manage
banks’ NPL ratio to less than 1.0% by the year end. We think gross NPL
will stabilize down to 1.2% in 2010 with reported NPL well below 1.0%.
Upgrade Hana Financial and IBK
We have upgraded both Hana and IBK to BUY from Hold ratings on the
back of adjustment to our earnings from the expected NIM recovery.
Hana’s revised target price is KRW47,000 based on 1.0x 2010 P/BV
target multiple assuming 10% ROE, 10% COE and 3% growth. IBK’s
revised target price is KRW17,500 based on 1.0x 2010 P/BV assuming
13% ROE, 13% COE and 3% growth. Both these banks trade below
historical average of 0.9x P/BV and we expect the shares to go beyond
mean reversion.