This Korean Bank Looks Strong

08/07/2012 10:30 am EST

Focus: GLOBAL

Yiannis Mostrous

Editor, The Capitalist Times

While Europe continues to reel from its economic woes, and the US financial sector continues to rebuild from its excesses, select Asian banks are looking very healthy, writes Yiannis Mostrous of Global Investment Strategist.

South Korea’s KB Financial Group (KB), the owner of South Korea’s largest lender, reported in late July that second-quarter 2012 earnings dropped 33% after booking more provisions for bad debt.

Net income fell to 547.5 billion won ($481 million) in the three months ended June 30, from 817.3 billion won a year earlier, when it booked gains from a stake sale. That said, earnings were in line with analysts’ estimates.
 
These results are relatively positive, given the overall economic slowdown in South Korea, where gross domestic product (GDP) growth is down to 2.4% year over year. Also keep in mind, the second quarter is traditionally a weak one for South Korean banks, as they purge their books of bad loans.

Net interest income declined by 0.5% quarter over quarter, while loan growth was up 2% on a quarterly basis. Loans to small businesses and retail customers were the stars of the quarter, rising 3% and 1.4% respectively. Management stated that loan growth for the second half of the year should remain relatively healthy, given the improving economic environment in Asia.

According to a statement made by KB Financial executives: “When it comes to asset growth, retail loans showed a meager growth during the first quarter, while it grew slightly in the second quarter. However, corporate loans are maintaining stable growth year-to-date. Considering the current real estate market and an uncertain variable macroeconomic environment, the current asset growth trend is likely to persist into the second half.

"Therefore, we are looking for a 2% to 3% growth in retail loans, but a 6% to 7% growth in corporate loans. All in all, we will be maintaining 4% to 5% of asset growth in total.”

The second quarter is when KB Financial conducts sales of non-performing loans (NPL). During the second quarter, KB Financial sold $246 million worth of NPLs, versus none in the first quarter of the year, producing a loss of $19.5 million. In addition, because of the weakness of the South Korean won against the US dollar, KB Financial also incurred a $3.5 million foreign-exchange loss.
 
KB Financial’s asset quality remains solid, with retail banking and credit card operations stabilizing. Provisions for credit losses dropped 6.5% quarter over quarter, while credit costs also fell. That said, corporate NPLs edged higher, to $452 million from $407 million.

KB Financial’s delinquency ratio increased in the second quarter to 1.38%, largely driven by the corporate segment. However, the delinquency ratio of credit card receivables declined to 2.4% from 2.7% in the first quarter of the year. If this trend continues, expect some recovery in its credit card business in the second half of the year.

Finally, KB Financial is trying to expand into the insurance business, and has been bidding for the assets of ING (ING) in South Korea.

KB Financial remains a good bet, with strong asset quality and an ongoing effort to lower costs. Its shares trade at 0.6 times book value and 5.5 times earnings. In 2008, the stock traded at 0.44 times book value. The bank’s Tier 1 ratio stands at 11%, among the highest of its peer group. The KB Financial Group is a buy up to $40.

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