Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/kb-financial-group-inc" target="_blank" data-smartkarma-citation="entities:718:1" rel="noopener">Kb Financial Group (105560 KS)</a> 
KB Financial combines a diversified operational profile (with increasing non-banking revenue streams), robust fundamental trends, with a low valuation and benign capital return potential in a market which has shown resilience and recovery this year, helped by existing Pandemic protocols.
Results are satisfactory given the low-margin environment. Our PH Score™ shows that the bank is making headway. The top-line shows vibrant growth of non-interest Income, which offsets a flat Net Interest Income result, slightly better Efficiency, while Liquidity (driven by core Deposits), Provisioning, and headline Asset Quality (as opposed to “reported investment of impaired Loans”) are improving somewhat. Capital Adequacy reveals some erosion, as does NIM, but still remains better than the system average. The bottom-line was impacted lower by modestly higher Credit Costs as elsewhere on a YoY basis though LLPs climbed this quarter while banks in other jurisdictions took lower costs QoQ. Comprehensive Income and Net Profit still showed moderate progression YoY which in today’s context is encouraging.
KB Financial targets a DPR to 30% in the medium term versus 26% at FY19. Korean bank DPR’s are low. In addition, KB Financial may pay dividends on a semi-annual basis in the future. Last year, the Group cancelled 8% of its total treasury shares. There may be more share buybacks and treasury share cancellations in 2021. With M&amp;A on the backburner, the Group will focus on integration of its existing asset base, freeing up space for dividends and share buybacks.
Earlier this year, The Carlyle Group invested in KRW240 billion worth of zero-coupon exchangeable bonds issued by KB Financial Group. Assuming the exchange price for the exchangeable bonds was a fair reflection of the KB Financial's intrinsic value, this transaction was a “no-brainer” for existing or new equity investors. There was no dilution for existing shareholders either as KB Financial set aside treasury shares for the exchange of shares as part of the deal.
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For such a solid, diversified, franchise, with enhanced capital returns ahead, valuations still appeal: a FV of 6%, a PBV of 0.45x, an Earnings Yield of 19.3%, a Dividend Yield of 4.8%, and a TRR (Total Return Ratio) of 2.85x. A PH Score™ of 8.5 is top quartile globally. According to our VFM (Valuation, Fundamentals, Valuation) model, KB Financial resides in the top decile globally, from over 1400 banks.
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Kb Financial Group (105560 KS) 
KB Financial combines a diversified operational profile (with increasing non-banking revenue streams), robust fundamental trends, with a low valuation and benign capital return potential in a market which has shown resilience and recovery this year, helped by existing Pandemic protocols.
Results are satisfactory given the low-margin environment. Our PH Score™ shows that the bank is making headway. The top-line shows vibrant growth of non-interest Income, which offsets a flat Net Interest Income result, slightly better Efficiency, while Liquidity (driven by core Deposits), Provisioning, and headline Asset Quality (as opposed to “reported investment of impaired Loans”) are improving somewhat. Capital Adequacy reveals some erosion, as does NIM, but still remains better than the system average. The bottom-line was impacted lower by modestly higher Credit Costs as elsewhere on a YoY basis though LLPs climbed this quarter while banks in other jurisdictions took lower costs QoQ. Comprehensive Income and Net Profit still showed moderate progression YoY which in today’s context is encouraging.
KB Financial targets a DPR to 30% in the medium term versus 26% at FY19. Korean bank DPR’s are low. In addition, KB Financial may pay dividends on a semi-annual basis in the future. Last year, the Group cancelled 8% of its total treasury shares. There may be more share buybacks and treasury share cancellations in 2021. With M&amp;A on the backburner, the Group will focus on integration of its existing asset base, freeing up space for dividends and share buybacks.
Earlier this year, The Carlyle Group invested in KRW240 billion worth of zero-coupon exchangeable bonds issued by KB Financial Group. Assuming the exchange price for the exchangeable bonds was a fair reflection of the KB Financial's intrinsic value, this transaction was a “no-brainer” for existing or new equity investors. There was no dilution for existing shareholders either as KB Financial set aside treasury shares for the exchange of shares as part of the deal.

For such a solid, diversified, franchise, with enhanced capital returns ahead, valuations still appeal: a FV of 6%, a PBV of 0.45x, an Earnings Yield of 19.3%, a Dividend Yield of 4.8%, and a TRR (Total Return Ratio) of 2.85x. A PH Score™ of 8.5 is top quartile globally. According to our VFM (Valuation, Fundamentals, Valuation) model, KB Financial resides in the top decile globally, from over 1400 banks.


2021 High Conviction - KB Financial Group: Buy Ahead of Initiatives to Galvanise Shareholder Value

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

Positive COVID vaccine news has since led to bullish inflections in a staggering number of countries, ACWI-US included. Our current outlook is bullish. Buy dips. In this report we outline key technical levels across markets and highlight actionable ideas within our Financials &amp; Energy Sectors.

Positive COVID vaccine news has since led to bullish inflections in a staggering number of countries, ACWI-US included. Our current outlook is bullish. Buy dips. In this report we outline key technical levels across markets and highlight actionable ideas within our Financials &amp; Energy Sectors.

In last Tuesday’s Compass (10/27/20) we noted the S&amp;P 500’s break below 3425 short-term support opened the door for potential visits to 3325 and 3200. Support at 3325 was violated by Wednesday, however the 3200-3230 level has held and remains important support moving forward.  In today’s report we highlight attractive Groups and stocks within Financials: Asian Banks, Puerto Rican Banks, Banks, Southwest, and Investment Banking &amp; Brokerage, Mid-Cap

In last Tuesday’s Compass (10/27/20) we noted the S&amp;P 500’s break below 3425 short-term support opened the door for potential visits to 3325 and 3200. Support at 3325 was violated by Wednesday, however the 3200-3230 level has held and remains important support moving forward.  In today’s report we highlight attractive Groups and stocks within Financials: Asian Banks, Puerto Rican Banks, Banks, Southwest, and Investment Banking &amp; Brokerage, Mid-Cap

U.S. Equity Strategy: Markets Bouncing off Key Support

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: We noted last weekend that Treasury yields could gap down as True-Blue election sweep expectations declined and that bank valuations would follow. Both outcomes took place during the first part of the week. President Trump has gained enough in polls for traders with bearish positions in long-dated Treasuries to start unwinding them.  If Republicans’ retain the Senate, then fiscal stimulus may be lower than currently expected.  The December VIX future may also underprice the risk of a contested election result while thin markets keep volatility elevated.On Wednesday, most US stock indices posted their biggest single-day drop since June while European shares met five-month lows. As such, implied equity volatility jumped to its highest readings in 6 weeks. The US dollar and commodities also exhibited risk-off behaviour. Soaring Coronavirus cases in the US and Europe added to market jitters on the eventual time to a US federal stimulus package. The lack of a strong bullish reaction in Treasuries while equities sold-off reinforced concerns that low yields significantly reduce hedging protection. Within this background, Asia’s Additional Tier 1 (AT1) bonds underperformed Tier 2 and Senior Unsecured securities, in concert with developed market risk-off sentiment. The top performing bonds were overwhelmingly short maturity Senior Unsecured in nature. Asia’s HY markets slightly outperformed the US’ as both indexes widened during the week. The relative outperformance of Asia versus the US resulted in slight spread compression between the two indexes, although the remain wide of last year’s average and this years’ tights.Financial institutions only issued US$4.5 billion in USD and Euros. Amongst Asia-headquartered banks, the <a href="https://www.smartkarma.com/entities/industrial-bank-co-ltd" target="_blank" data-smartkarma-citation="entities:19515:1" rel="noopener">Industrial Bank Co Ltd A (601166 CH)</a> and Kookmin Bank (<a href="https://www.smartkarma.com/entities/kb-financial-group-inc" target="_blank" data-smartkarma-citation="entities:718:1" rel="noopener">KB Financial Group (105560 KS))</a> were the only financial institutions to access global capital market during the week. The primary market issuance window may be closing very early this year.In terms of potential mergers and acquisitions, Bloomberg reported that <a href="https://www.smartkarma.com/entities/kotak-mahindra-bank-ltd" target="_blank" data-smartkarma-citation="entities:126:1" rel="noopener">Kotak Mahindra Bank (KMB IN)</a> is considering an offer for IndusInd Bank, which IndusInd subsequently denied. Please see <a href="https://www.smartkarma.com/insights/kotak-indusind-happy-indusind-bondholders-move-to-overweight" target="_blank" data-smartkarma-citation="insights:44542" rel="noopener">Kotak + IndusInd = Happy IndusInd Bondholders; Move to Overweight</a> for more details. On Friday, <a href="https://www.smartkarma.com/entities/indusind-bank-ltd" target="_blank" data-smartkarma-citation="entities:1558:1" rel="noopener">Indusind Bank (IIB IN)</a> reported a 53% year-on-year decline in second quarter net profit that missed average analyst estimates. Despite the earnings miss and acquisition dismissal, IndusInd’s 3 7/8% coupon bond rose in price during the week.Market Outlook: Market reactions to soaring Coronavirus contagion, underpriced election outcome risks and sidelined treasury investors may augment market illiquidity and impact bank valuation over the near term.

Executive Summary: We noted last weekend that Treasury yields could gap down as True-Blue election sweep expectations declined and that bank valuations would follow. Both outcomes took place during the first part of the week. President Trump has gained enough in polls for traders with bearish positions in long-dated Treasuries to start unwinding them.  If Republicans’ retain the Senate, then fiscal stimulus may be lower than currently expected.  The December VIX future may also underprice the risk of a contested election result while thin markets keep volatility elevated.On Wednesday, most US stock indices posted their biggest single-day drop since June while European shares met five-month lows. As such, implied equity volatility jumped to its highest readings in 6 weeks. The US dollar and commodities also exhibited risk-off behaviour. Soaring Coronavirus cases in the US and Europe added to market jitters on the eventual time to a US federal stimulus package. The lack of a strong bullish reaction in Treasuries while equities sold-off reinforced concerns that low yields significantly reduce hedging protection. Within this background, Asia’s Additional Tier 1 (AT1) bonds underperformed Tier 2 and Senior Unsecured securities, in concert with developed market risk-off sentiment. The top performing bonds were overwhelmingly short maturity Senior Unsecured in nature. Asia’s HY markets slightly outperformed the US’ as both indexes widened during the week. The relative outperformance of Asia versus the US resulted in slight spread compression between the two indexes, although the remain wide of last year’s average and this years’ tights.Financial institutions only issued US$4.5 billion in USD and Euros. Amongst Asia-headquartered banks, the Industrial Bank Co Ltd A (601166 CH) and Kookmin Bank (KB Financial Group (105560 KS)) were the only financial institutions to access global capital market during the week. The primary market issuance window may be closing very early this year.In terms of potential mergers and acquisitions, Bloomberg reported that Kotak Mahindra Bank (KMB IN) is considering an offer for IndusInd Bank, which IndusInd subsequently denied. Please see Kotak + IndusInd = Happy IndusInd Bondholders; Move to Overweight for more details. On Friday, Indusind Bank (IIB IN) reported a 53% year-on-year decline in second quarter net profit that missed average analyst estimates. Despite the earnings miss and acquisition dismissal, IndusInd’s 3 7/8% coupon bond rose in price during the week.Market Outlook: Market reactions to soaring Coronavirus contagion, underpriced election outcome risks and sidelined treasury investors may augment market illiquidity and impact bank valuation over the near term.

Bank Credit Weekly: Risk Reduction on Election and Virus Uncertainty

<a href="https://www.smartkarma.com/entities/kb-financial-group-inc" target="_blank" data-smartkarma-citation="entities:718:1" rel="noopener">Kb Financial Group (105560 KS)</a> <a href="https://www.smartkarma.com/entities/kb-financial-group-inc-adr" target="_blank" data-smartkarma-citation="entities:6238:1" rel="noopener">Kb Financial Group Inc Adr (KB US)</a> Perhaps KB management has seen the future of banking and is taking initiatives to diversify the Group’s operations away from traditional fractional reserve/banking intermediation/magic (depending on your philosophical bias) towards higher potential areas such as Insurance, Asset Management, IB, and fintech. As a supplier of credit for investment-led growth, the bank still maintains committed. (Countries need banks to grow! And more the better as testified by the high growth track records of Germany, China, and Japan prior to the bursting of the bubble).Results are satisfactory given the low-margin environment. Our PH Score™ shows that the bank is making marked headway on most fronts. The top-line shows vibrant growth of non-interest Income, which offsets a flat Net Interest Income result, better Efficiency, while Liquidity (driven by core Deposits) and Asset Quality are improving somewhat. Capital Adequacy reveals some erosion but still remains better than the system average. The bottom-line was impacted lower by higher Credit Costs as elsewhere on a YoY basis though LLPs climbed notably this quarter while banks in other jurisdictions took lower costs QoQ. Comprehensive Income and Net Profit still showed moderate progression YoY.Fee Income expanded forcefully at Q320LTM, reaching 20% of Operating Income. With the acquisition of Prudential Life, the 5th largest life insurance company, the bank shifts its focus away from net interest Income or banking even more.  In fact at 9M20, non-banking business reached 40% of Net Profit while Insurance commanded 12% of Assets and 11% of Net Profit. Prudential brings to the table higher-than-average investment yields and low loss ratios, cross-selling opportunity, ample synergies, and a stronger position in Asset Management.For such a solid, diversified, franchise, valuations are not stretched though South Korean banks are always battling against the “value trap” thesis. A FV of 5%, a PBV of 0.41x, an Earnings Yield of 21.2%, and a Dividend Yield of 5.2% are certainly not unappealing. A PH Score™ of 9.4 is top decile globally.<div class="content-highlight">The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was back tested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. </div>

Kb Financial Group (105560 KS) Kb Financial Group Inc Adr (KB US) Perhaps KB management has seen the future of banking and is taking initiatives to diversify the Group’s operations away from traditional fractional reserve/banking intermediation/magic (depending on your philosophical bias) towards higher potential areas such as Insurance, Asset Management, IB, and fintech. As a supplier of credit for investment-led growth, the bank still maintains committed. (Countries need banks to grow! And more the better as testified by the high growth track records of Germany, China, and Japan prior to the bursting of the bubble).Results are satisfactory given the low-margin environment. Our PH Score™ shows that the bank is making marked headway on most fronts. The top-line shows vibrant growth of non-interest Income, which offsets a flat Net Interest Income result, better Efficiency, while Liquidity (driven by core Deposits) and Asset Quality are improving somewhat. Capital Adequacy reveals some erosion but still remains better than the system average. The bottom-line was impacted lower by higher Credit Costs as elsewhere on a YoY basis though LLPs climbed notably this quarter while banks in other jurisdictions took lower costs QoQ. Comprehensive Income and Net Profit still showed moderate progression YoY.Fee Income expanded forcefully at Q320LTM, reaching 20% of Operating Income. With the acquisition of Prudential Life, the 5th largest life insurance company, the bank shifts its focus away from net interest Income or banking even more.  In fact at 9M20, non-banking business reached 40% of Net Profit while Insurance commanded 12% of Assets and 11% of Net Profit. Prudential brings to the table higher-than-average investment yields and low loss ratios, cross-selling opportunity, ample synergies, and a stronger position in Asset Management.For such a solid, diversified, franchise, valuations are not stretched though South Korean banks are always battling against the “value trap” thesis. A FV of 5%, a PBV of 0.41x, an Earnings Yield of 21.2%, and a Dividend Yield of 5.2% are certainly not unappealing. A PH Score™ of 9.4 is top decile globally.The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was back tested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. 

KB Financial : Diversifying into Higher Margin Areas

South Korea

KB Financial Group Inc. (the "Company"), in accordance with Financial Holding Companies Act, was established on September 29, 2008, through stock transfer with the former shareholders of its subsidiaries including Kookmin Bank in order to provide management services and financing to associated companies. The headquarters are located at Seoul, Korea

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KB Financial (105560 KS)

2021 High Conviction - KB Financial Group: Buy Ahead of Initiatives to Galvanise Shareholder Value

KB Financial Group combines positive fundamental trends with capital return potential in a market which shows resilience and recovery.

Paul Hollingworth

Bullish Inflections Around The World

In this report we outline key technical levels across markets and highlight actionable ideas within our Financials & Energy Sectors.

Vermilion Research

U.S. Equity Strategy: Markets Bouncing off Key Support

In today’s report we highlight attractive Groups and stocks within Financials: Asian Banks, Puerto Rican banks, Banks, Southwest, and Investment...

Vermilion Research

Bank Credit Weekly: Risk Reduction on Election and Virus Uncertainty

Market reactions to soaring Coronavirus contagion, underpriced election outcome risks and sidelined treasury investors may augment market...

Hank Calenti, CFA

KB Financial : Diversifying into Higher Margin Areas

A FV of 5%, a PBV of 0.41x, an Earnings Yield of 21.2%, and a Dividend Yield of 5.2% are certainly not unappealing. A PH Score™ of 9.4 is top...

Paul Hollingworth

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