By Scott Martin
Three of the nine most liquid Korean stocks traded in the United States are banks. All three suffered massive losses in the selling of August and all have regained much of their footing. Is the rally over or just getting started?
Woori Financial (WF), the smallest of the trio at $8 billion in market cap, plunged the farthest and has so had the most ground left to recover.
Before the August sell-off, WF spent about a year grinding in a $33 to $43 range, only to have half its value disintegrate over the next three months.
Even now, after a 50% rally, we’re still only back at the bottom of the 2010-11 channel, with another 30% or so of room on the chart before WF even challenges the old ceiling.
And the damage has left WF looking deeply distressed. This powerhouse lender currently brings barely 4.5 times earnings or 0.5 times book value — and unlike a lot of other banks we could mention, that lending book looks good.
Non-performing loans on Woori’s balance sheet have dropped below 2% of the portfolio. That’s still high for Korea, but U.S. investors will find it remarkably solid by Western standards.
Shinhan Financial Group (SHG) was on a more straightforward upward track before the markets turned in April, and its 17% bounce off last fall’s lows looks a lot more restrained.
Like WF, SHG looks cheap at just under 7 times earnings and 0.80 of book value, but the technical picture is less flattering. WF has plenty of support under it. SHG starts to run into resistance if it moves up even 7% from here to $76.88.
For a stock that was well above $100 a share two years ago, that ceiling seems awfully close.
Likewise, KB Financial (KB), by far the biggest financial conglomerate on the peninsula, has run up 29% over the last six months but is now hitting its head on long-term resistance at $37.30.
Before last summer, this stock was trading comfortably between $44 and $55, so a successful break out should open up plenty of upside.
Similar to WF and SHG, KB looks fundamentally cheap enough to give valuation-driven traders a reason to jump in. P/E is 6.3 and at current stock prices, the entire company is trading at a 30% discount to book value.
Local analysts still think all three of these names will expand their loan portfolios by 5% to 6% this year, with even faster growth a possibility if the Seoul real estate market kicks into high gear as expected.
If anything like that level of growth factors into SHG and KB in particular, the near-term technical overhang will be a memory in the foreseeable future.
From there, with shares at discounts deeper than anything the sector has seen since the depths of the 2008-9 credit crunch, an even bigger rally could be in store.
The analysts at Daiwa did the math and noted that in the post-credit-crunch recovery, Korean banks not only led the broad market back up, but did so by nearly 60 percentage points.
Despite their massive footprint in the Korean economy, these three stocks together only account for 6% of EWY’s holdings. If you think they’re itching to outperform — as WF already has — then it might be worth an overweight.