KB Financial Group’s (KB) 2Q19 net income came in at KRW991.1bn, trouncing the consensus estimate of KRW929.6bn. Even without one-off provision writebacks (worth KRW81bn before tax), net income would still have grown 5.9% YoY to KRW932bn.
Earnings fundamentals have grown stronger, led by increased core income (+2.8% QoQ) and credit cost controls. Thanks to a superior CET1 ratio (14.1% group CET1 ratio), KB has more flexibility in terms of capital execution vs. peers, including dividend payouts, share buybacks, and M&As. We maintain BUY and our target price of KRW61,600.
Major issues and earnings outlook
2Q19 NIM slightly narrowed by 1bp at the bank and 2bps QoQ group-wise. This is a moderate decline, considering an interest rate cut that took place during the quarter. The Bank of Korea’s rate cut is already widely reflected into market interest rates so further impacts will likely be limited. KB aims to keep its annual NIM flat YoY.
Loan growth was slightly less than desirable at +0.9% YTD, owing to the company’s focus on soundness and profitability as well as intensifying competition in the market. We expect loans to recover in 2H19 on milder competition, to post 3% YoY growth for the full year.
Credit cost fell to KRW102.1bn on provision writebacks related with Hanjin Heavy Industries (KRW56bn) and Orient Shipyard (KRW25bn). The credit cost ratio also fell to 15bps; even without the one-offs, the ratio would still be kept low at 23bps. The new NPL ratio was also sound at 33bps. SG&A cost increased nearly 10% YoY due to: 1) the recognition of a year-end bonus (KRW32bn in 2Q) which is now recognized quarterly (vs. end of the year); and 2) one-offs including the wage negotiation cost at the non-life unit (KRW18bn) and bonus payment at the securities arm (KRW20bn). Barring one-offs, KB aims to contain its annual SG&A cost increase to within 3% despite escalating IT expenses caused by digitalization.
Earnings at major non-banking arms are fast pulling out of the bottom seen in 4Q18. KB Securities posted KRW168.9bn in 1H19 net income and KB Insurance KRW166.4bn, on pace to achieve combined net income of over KRW300bn for the full year. The loan-deposit ratio improved to 97.7% from 99.6% at end-2018. The number will rise to around 103% under a stricter loan-deposit ratio formula to be used from 2020. We expect KB to keep it under 100% through covered bonds and the proper pricing of loans and deposits.
Share price outlook and valuation
We applied 0.68x target P/B to 2019F BPS for our target price (COE 12%, adjusted ROE 8.2%).
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Hyundai Motor Company is a passive shareholder in our bank.