KB Financial Group: Modest Results, Excluding One-Offs

About: KB Financial Group Inc. (KB)
by: Hyundai Motor Investment & Securities

4Q18 net income  was far below consensus, mainly due to massive one-offs.

Management plans to continue to boost dividends going forward.

Our rating remains unchanged at BUY, given the solid earnings prospects in 2019 and increasing dividend.

Investment highlights

KB Financial Group's (KB) 4Q18 net income of KRW200.1bn was far below the consensus estimate of KRW447.8bn, which was mainly due to massive one-offs. Without them, net income would have come to KRW574bn. Meanwhile, core income (interest income plus commission income) rose 4.3% YoY and 1.2% QoQ. Group NIM (net interest margin) slipped by 2bps QoQ. The decline in NIM has to do with a higher funding cost burden caused by an increase in term deposits. The funding cost burden is escalating as the company prepares for a regulatory change to the loan-to-deposit ratio in 2020, but management plans to keep its 2020 NIM flat or higher YoY. Loan growth was stellar at 2.1% QoQ, resulting in a 2.8% QoQ increase in net interest income. Full-year loan growth is projected at 9.6%, 5% higher than guidance. Management is targeting a 4-5% increase in loans in 2019 (household loans +3%, business loans +6%). Non-interest income fell sharply (-72% YoY) due to deteriorating earnings at the securities and non-life units. The securities arm was hit by a loss from derivatives-linked securities, whereas the non-life unit was hurt by a rise in the auto-loss ratio. However, we find it positive that credit card commissions rose 19% QoQ. This year, we expect both securities and non-life units to contribute to earnings as their businesses normalize.

Without a massive provision write-back, the credit cost ratio climbed by 13bps YoY to 30bps. Management plans to keep the credit cost ratio for 2019 at around 25bps. The Group CET1 (common equity tier 1) ratio dipped by 0.4%p QoQ to 14% but is still an industry-high. The DPS (dividend per share) in 2018 was KRW1,920, translating to a dividend propensity of 24.8% (+1.6%p). Management plans to continue to boost dividends further going forward. As interest rates and economic forecasts are likely to be lower than expected, we revise down our 2019- 2020 earnings forecasts and our target price, from KRW74,000 to KRW70,000. That said, our rating remains unchanged at BUY, given the solid earnings prospects in 2019 and increasing dividend.

Major issues and earnings outlook

Management strategies can be characterized by: 1) reinforcement; 2) innovation; 3) smart working; and 4) expansion. The company is especially focused on risk management, thus its priorities in its financial strategy are: 1) soundness; 2) profitability; and 3) growth, in order of importance. For 2019, management guides for: 1) 4-5% loan growth; 2) flat NIM; 3) 5% growth in commission income; 4) less than a 5% increase in SG&A cost; and 5) credit cost ratio of 25bps. For our target price, we applied 0.77x target P/B to 2019F BPS (COE 11.9%, ROE 9.2%).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Hyundai Motor Company is a passive shareholder in our bank.