KB Financial: Market's Focus Is On Share Cancellation And Rate Hikes
Summary
- I am positive on KB Financial's plans to cancel treasury shares worth about KRW150 billion, and the company targets to raise its dividend payout ratio from 26% to 30%.
- The Bank of Korea's rate hikes are expected to be the key driver of KB Financial's net interest margin expansion and bottom line growth in fiscal 2022.
- KB Financial continues to be deserving of a Buy rating, given the substantial discount to book value and its mid-single digit forward P/E multiples.
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Elevator Pitch
I still have a Buy investment rating assigned to KB Financial Group Inc. (NYSE:NYSE:KB) [105560:KS]. My prior article for the Korean financial services company was written on November 18, 2021.
KB Financial recently reported the company's Q4 2021 financial results on February 8, 2022, and the market's focus is on the company's treasury share cancellation plans and the positive impact of rate hikes.
KB Financial's KRW150 billion treasury share cancellation sends a strong signal to investors that the company is very serious about improving capital returned to shareholders. The next catalyst for KB Financial is an increase in the company's dividend payout ratio to 30%.
Separately, KB Financial's good 4Q 2021 financial results suggest that it has been a beneficiary of the recent rate hikes initiated by the Bank of Korea. Taking into account the January 2022 rate hikes and expectations of another increase in the benchmark interest rate before the end of this year, KB Financial is expected to witness decent net interest margin expansion which will be supportive of an expected low-teens percentage earnings growth in 2022.
I am maintaining my Buy rating for KB Financial, as its valuations remain undemanding despite positive factors like improved capital return and interest rate hikes.
Treasury Share Cancellation And Dividends
I noted in my previous November 18, 2021 update for the company that "KB Financial seems to be hinting at further share repurchases, and also the cancellation of existing shares that were repurchased earlier (i.e. treasury shares)" during its Q3 2021 earnings call. I turned out to be right, and this is positive for the company.
At the company's most recent Q4 2021 results briefing held on February 8, 2022, KB Financial revealed that it will "cancel KRW150 billion worth of treasury shares." Specifically, the company explained that this move is part of "our commitment to enhance shareholder value," and it stressed that it "will continue to explore wide-ranging options for a more advanced shareholder return policy and do what we must to raise it up to the global standard."
This cancellation of treasury shares needs to be viewed in the context of the Korean market, so as to better appreciate the significance of KB Financial's decision.
A May 7, 2017 news article published by Yonhap News Agency highlighted that publicly-listed Korean companies "tend to hold or resell treasury shares instead of canceling them in order to help controlling shareholders strengthen their managerial control." In other words, unlike listed companies in many other developed markets, it is not the norm for Korean companies to cancel the shares that they repurchase.
In KB Financial's case, 3,455,426 treasury shares will be cancelled on February 14, 2022, which is equivalent to 0.83% of its shares outstanding and approximately 3% of its 2021 earnings.
Separately, KB Financial declared a final dividend per share of KRW2,190 for FY 2021, and this brings the company's full-year dividend payout ratio to 26% which is in line with market expectations as per S&P Capital IQ data. Market consensus expects KB Financial to gradually increase its dividend payout ratio to 27.8%, 28.6% and 30.4% for fiscal 2022, 2023 and 2024, respectively.
KB Financial might even raise the company's dividend payout ratio to 30% in a shorter period of time than what the market currently expects. KB Financial mentioned at the company's fourth-quarter results call that it aims to "very quickly normalize to the 30% (dividend payout) level," given that "KB has a sufficient capital buffer" and "we believe that we do have capability to pay out to that level."
In a nutshell, KB Financial has clearly signaled its intentions to be more shareholder friendly with respect to its shareholder return policies, and this should play a major role in the re-rating of the company's shares going forward.
Rate Hikes And Net Interest Margin
KB Financial achieved a decent set of financial results in the fourth quarter of fiscal 2021. As highlighted in the company's Q4 2021 earnings presentation slides, KB Financial's net interest income and net profit attributable to shareholders expanded by +15% YoY and +10% YoY to KRW2,974.2 billion and KRW637.2 billion, respectively in the recent quarter.
The key driver of KB Financial's good performance in the most recent quarter is an expansion of its net interest margin or NIM as per the chart below.
KB Financial's Historical Net Interest Margin Or NIM
KB Financial's Q4 2021 Results Presentation
The Bank of Korea has implemented three rate hikes in the August 2021 to January 2022 period to bring the benchmark interest rate to 1.25%. Current market expectations are that there should be at least one more rate hike (+25 basis points) in the second half of 2022. KB Financial guided at the company's fourth-quarter results call that it is expecting a "7 to 8 basis point increase" in NIM for FY 2022, assuming "a policy rate hike in Q4 (2022)". It added further that "if the policy rate moves quicker and by a larger margin," its NIM has "room to go up further."
Based on forward-looking financial estimates obtained from S&P Capital IQ, sell-side analysts estimate that KB Financial's NIM will expand by +11 basis points from 1.83% in full-year fiscal 2021 to 1.94% in FY 2022. This will in turn help to drive a +10.9% growth in KB Financial's normalized net income attributable to shareholders from KRW4,409.6 billion last year to KRW4,889.8 billion this year.
Valuation And Concluding Thoughts
The market currently values KB Financial at consensus forward fiscal 2022 and 2023 normalized P/E multiples of 5.3 times and 5.1 times, respectively as per S&P Capital IQ data. KB Financial also trades at a substantial 44% discount to its book value.
KB Financial is expected to record a double-digit increase in its normalized earnings in FY 2022, thanks to NIM expansion which is expected to be driven by rate hikes. At the same time, the company is returning more excess capital to its shareholders with share repurchases/treasury share cancellation and an increase in its dividend payout ratio. Notwithstanding these positives, KB Financial's current valuations remain appealing which justify a Buy rating.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.