Rise of NIM: a new phase
Structural rise of NIM
We believe banks’ NIMs will now stay elevated through out 2010 given:
1) low competitive environment for banks with less focus on market
share growth, 2) rebound of NIM in 2H09 mostly due to large funding repricing
relative to assets, 3) greater probability of BOK policy rate hikes
either in 4Q09 or 1H10 that will benefit NIMs, and 4) banks’ focus on
profitability given the lack of opportunities to significantly raise their loan
books. We now believe the average NIS of commercial banks under our
coverage will most likely hover in the range of 2.0% to 2.2% against
0.5% to 1.8% realized from 2007 to 2008.
Raise 2010 earnings estimates by 17-44%
We believe banks are going through a structural shift to capitalize on
elevated NIM throughout this year and next. On the back of this thesis,
we raise our 2010 earnings by 17-44%. We also raise target prices to
reflect better visibility of 2010 earnings and ROEs. We now believe
commercial banks’ ROE can be sustainable at 12% for 2010 compared
to the previous estimate of 9%, and regional banks’ at 14% compared to
their 12% previously. As our earnings forecasts are highest on the
Street, we believe consensus will catch up to our numbers. We upgrade
Woori Finance to BUY from Hold.
Valuation supportive; top pick – Hana Financial
Although the market may interpret future government regulatory
changes as negative to bank shares, we believe changes related to
LDR, TCE and leverage limits will actually help to preserve NIS/NIM for
banks. We should accumulate bank shares on dips. Valuation wise,
banks are trading at 1.1x 2010 P/BV, which is the historical average.
Our average target P/BV multiple is 1.3x which is +1 standard deviation
from the mean. With continued improvements in macro economy, asset
quality, strengthening KRW and banks’ earnings visibility into 2010, we
are a long-term holder of banks. Our top pick is Hana Financial due to:
1) its higher sensitivity to NIM change, 2) strong KRW, and 3) biggest
upside to our target price.