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

KB: The Dichotomy Between Valuation and Earnings Quality

South Korean Banks: You Back the Big Prices, Not the Favourites

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> <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