Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

Industrial Bank Of Korea / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/27498" target="_blank" data-smartkarma-citation="entities:27498:1">Industrial Bank of Korea (IBK LX)</a> looks relatively cheap and scores well on our VFM (Valuation, Fundamentals, Momentum) system.The trademarked PH Score comes in at 8.2. P/Book is a lowly 0.42x. Earnings Yield stands at 20%. Franchise valuation is 7%. Total return Ratio lies at 1.4x. RSI is low.2018 numbers were solid enough though deeper analysis shows that they were not as good as they seem to be:<ul>
<li>The specific IBK model is reliant on debt to fund SME growth and interest expense growth is running well ahead of expansion in interest income.</li>
<li>The squeeze on the top-line, despite firm fee income growth, means that "underlying jaws" were negative. The CIR may be declining but OPEX growth remains somewhat elevated, and in excess of "underlying" income.</li>
<li>PT Profit expansion of 23% YoY is flattered by high contributions from "other non-interest income" and gains on securities. Combined, these lower quality income streams make up 40% of PT Profit. This means that Profitability metrics (which are in excess of the Asian median) may not be as benign as they seem. In fact, we would argue that when one takes the aforementioned items into consideration, PT Profit was essentially flat at best.
</li>
<li>Insurance operations again reported a negative result.</li>
<li>While Asset Quality looks relatively respectable, we note a 17% increase in "precautionary" or SMLs which were in excess of impaired loans or even NPLs. Regarding the latter, there may be some bad asset migration into the "loss" category: up 12% YoY.</li>
</ul>

Industrial Bank of Korea (IBK LX) looks relatively cheap and scores well on our VFM (Valuation, Fundamentals, Momentum) system.The trademarked PH Score comes in at 8.2. P/Book is a lowly 0.42x. Earnings Yield stands at 20%. Franchise valuation is 7%. Total return Ratio lies at 1.4x. RSI is low.2018 numbers were solid enough though deeper analysis shows that they were not as good as they seem to be:
The specific IBK model is reliant on debt to fund SME growth and interest expense growth is running well ahead of expansion in interest income.
The squeeze on the top-line, despite firm fee income growth, means that "underlying jaws" were negative. The CIR may be declining but OPEX growth remains somewhat elevated, and in excess of "underlying" income.
PT Profit expansion of 23% YoY is flattered by high contributions from "other non-interest income" and gains on securities. Combined, these lower quality income streams make up 40% of PT Profit. This means that Profitability metrics (which are in excess of the Asian median) may not be as benign as they seem. In fact, we would argue that when one takes the aforementioned items into consideration, PT Profit was essentially flat at best.

Insurance operations again reported a negative result.
While Asset Quality looks relatively respectable, we note a 17% increase in "precautionary" or SMLs which were in excess of impaired loans or even NPLs. Regarding the latter, there may be some bad asset migration into the "loss" category: up 12% YoY.


Industrial Bank of Korea: Uninspiringly Cheap