Q1 Earnings Review: KB Financial Misses

| About: KB Financial (KB)

By Ann Heffron, CFA

We are maintaining our Hold rating on KB Financial Group Inc. (NYSE:KB). KB reported first quarter net earnings of KRW771 billion, down 65% year over year and below our estimate, primarily due to higher loss provisions that rose 151% year over year and flat net interest income, hurt by a 38 basis-point year-over-year decline in the net interest margin to 2.70%.

Total noninterest income dropped 13% relative to the year-ago period to KRW265 billion, largely due to a KRW67 billion, or 31%, decrease in other commissions to KRW152 billion. This was partly offset by a KRW119 billion, or 122%, increase in the gain on securities to KRW217 billion from KRW97 billion in the prior-year quarter.

Total noninterest expense declined 2% year over year to KRW910 billion due to tight control over costs, particularly compensation expense.

The loss provision jumped 151% year over year to KRW685 billion from KRW273 billion, reflecting the effect of the recession on asset quality. Deteriorating asset quality contributed to the rise in nonperforming loans to total loans, which increased to 1.45% at March 31, 2009 from 1.32% at December 31, 2008 from 0.83% at the end of the year-ago quarter. Reserves to nonperformers also worsened, dropping to 127% from 130% and 175%, respectively.

We are reducing our 2009 EPADS estimate to $2.36 from $2.50 due to the first quarter shortfall. We expect results to reflect weaker revenues due to the economic slowdown and higher loss provisions from deteriorating asset quality.

Our initial 2010 estimate is $3.14 per share.

The current Zacks rank for KB is 5, indicating near-term selling pressure on the stock. KB shares were down 3.0% to close at $37.50 on Wednesday.

(US$1 = KRW1248.28; 1 ADS = 1 share)

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Tagged: , Foreign Regional Banks, Earnings, Korea
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