The combined net income in 2Q18 of eight banks in our coverage is estimated at KRW3.78tn (+6.2% YoY), 5.9% higher than the consensus. In 1H18, a hiring scandal, regulatory risks, and preference to growth stocks over value stocks created an unfavorable environment for bank shares. However, in 2H18, banks’ solid fundamentals and attractive dividends will be highlighted again, resulting in banking stocks outperforming the broader index. We also expect regulatory noise to die down after the June 13 local elections. We maintain Overweight on the banking sector as valuations have become more attractive (0.61x 2018F P/B, 6.5x P/E, 3.8% dividend yield, 9.7% ROE) after corrections since the beginning of the year.
In April and May, NIM improved by 1-2bps vs. 1Q18 and loans grew 1.3%. As such, we forecast 2Q18 NIM to rise by 2bps QoQ and loan amount to increase 1.6% QoQ, driving the top line higher. Further helped by one more business day, net interest income should expand 2.5% QoQ. Commission income should also come in steady thanks to stable financial market conditions.
With a lack of notable credit events during the quarter, we expect credit costs to remain low. Several banks may even enjoy a provision writeback. In all, 2Q18 results will likely display improvements in revenue and costs, confirming banks’ stronger earnings generation abilities.
By company, larger banks should show stronger performances vs. smaller banks. Among national banks, Woori Bank (NYSE:WF) is set to beat the consensus by the widest margin thanks to a provision writeback. Among regional banks, JB Financial is expected to report solid numbers thanks to an additional NIM increase and credit cost declines.
Meanwhile, regulators will review credit card merchant fees in 2H18 (the review takes place every three year). Given the circumstances we believe the likelihood of a merchant fee decrease is most the likely outcome but the scale will be smaller than the previous year for the following reasons: 1) credit card merchant feels were already lowered once prematurely last year; 2) credit card companies already face cost increases because of interest rate hikes; and 3) the fees are not very high compared to other benchmark countries.
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