Hana Securities projected that KB Financial Group(105560) will continue to deliver strong results in the third quarter. In particular, it said a drop in the won-dollar exchange rate has significantly improved the common equity Tier 1 (CET1) ratio, opening the door to additional shareholder returns.
Accordingly, Hana Securities maintained its "buy (BUY)" rating on KB Financial Group and raised its target price to 235,000 won from 220,000 won. The previous session's closing price of KB Financial Group was 177,900 won.
Choi Jeong-uk, an analyst at Hana Securities, forecast KB Financial Group's third-quarter net profit at 2.06 trillion won. That would be up 3.4% from the previous quarter, marking a record quarterly net profit.
The group's third-quarter net interest margin (NIM) is expected to fall 2 basis points (1 bp = 0.01 percentage point) from the previous quarter to 1.72%. However, with won-denominated loans growing about 1.7%, that growth is expected to offset profit erosion from the lower NIM. In addition, the roughly 130 billion won in fund noncontrolling interest expense that occurred in the second quarter will expire, and the group's net interest income is projected to rise more than 6% from the previous quarter.
With a decline in stock market transaction value, brokerage fees at subsidiary KB Securities are expected to decrease. Still, the group's third-quarter net fee and commission income is projected to grow to 1.45 trillion won, compared with 1.36 trillion won in the first quarter.
Cost pressures are also expected to ease. Selling, general and administrative expenses are likely to drop sharply from the previous quarter on lower performance bonuses in the securities institutional sector, and the group's credit cost is estimated at about 530 billion won, similar to the second quarter. However, as there was an additional provision of about 70 billion won in the second quarter related to a central media entity and Homeplus Co., the actual credit cost could decrease from the previous quarter.
The capacity for shareholder returns is expected to increase further. As the won-dollar exchange rate fell by about 200 won during the third quarter, the exchange-rate effect alone is estimated to lift the CET1 ratio by about 30–40 basis points. Accordingly, KB Financial Group's CET1 ratio at the end of the third quarter is projected at about 13.95%, up 20 basis points from the previous quarter.
Choi said, "A CET1 ratio approaching 14% is more than sufficient to expand the shareholder return rate," adding, "There is little room to interpret this negatively, as it could be a strategy to secure profitability going forward."
However, there are variables that could affect second-half results.
First, whether the penalty surcharge refund related to Hong Kong H-index equity-linked securities (ELS) will be recognized is a variable. Hana Securities assumed that about 110 billion won in Hong Kong ELS penalty surcharge refunds will be reflected in non-operating gains and losses in the third quarter. Choi explained, "If the Financial Services Commission's final decision does not come in the third quarter either, actual net profit will be around 2 trillion won, similar to the second quarter."
The possibility that the Korea Fair Trade Commission may impose a penalty surcharge for bid rigging among primary dealers (PDs) in government bonds is cited as a variable. Choi said, "It has not been finalized that a penalty surcharge will be imposed," and added, "Even if a penalty surcharge is imposed, it will be significantly smaller than the market fears."