Chung Sung Jun
Summary in seconds
I have a buy investment rating for KB Financial Group Inc. (NYSE: KB) [105560:KS] Stock. I highlighted the “multiple tailwinds” for KB in my previous company stock article published May 2, 2022. I provide an update of my views on KB Financial in light of its recent Q2 2022 results with the current article.
I am encouraged by KB Financial’s above-expected earnings and strong NPL coverage ratio for the second quarter of 2022. KB’s second treasury cancellation for this year also gives investors confidence that the company will continue to return excess capital to its shareholders. KB Financial deserves a buy rating, as its valuations are now near historic lows comparable to where the stock traded during the 2008-2009 global financial crisis.
KB Financial Beat Q2 2022 Results
Net profit attributable to shareholders of KB Financial increased by +8.2% year-on-year from KRW 1.204 billion in the second quarter of 2021 to KRW 1.304 billion in the second quarter of 2022, as shown in its latest slides. presentation of quarterly results. KB’s second quarter net profit exceeded the consensus sell-side net profit projection of KRW 1.274 billion by +2% according to S&P Capital IQas its banking and non-banking businesses performed well in the last quarter.
The bank’s net interest margin or NIM increased from 1.56% in the second quarter of 2021 to 1.73% in the second quarter of 2022. KB Financial said on its second quarter earnings call that it “s ‘expects that in the second half of the year, we will have further improvement in the NIM’ of around ‘5 to 6 basis points (basis points)’. KB loans also increased by +1.2% year-to-date, from KRW 319 trillion as of December 31, 2021 to KRW 323 trillion as of June 30, 2022.
Elsewhere, KB Kookmin Card stood out among KB Financial’s non-banking business, with credit card business profit increasing by +14% year-on-year to KRW 127 billion in the second quarter of this year. KB Financial also sought opportunities to unlock value in the company’s non-banking subsidiaries; KB Insurance recorded a gain of KRW 169 billion related to the disposal of office buildings during the last quarter.
Cancellation of own shares
In its Q2 2022 financial results presentation, KB Financial disclosed that it is proceeding with its second KRW 150 billion treasury share cancellation for this year. This is an important decision for two main reasons.
First, there have been concerns in the past that financial regulators in South Korea won’t allow Korean banks to return more capital to shareholders in difficult times like these. However, the fact that KB Financial has just announced another cancellation of treasury shares supports the optimistic view that Korean banks in general are sufficiently capitalized and that regulators will not interfere to a large extent with their reimbursement decisions. of shareholders’ capital.
Second, KB Financial has a good idea of how capital allocation can be used as a tool to unlock value for its shareholders. KB Financial pointed out at the company’s second quarter 2022 investor briefing that “share buyback (and subsequent cancellation of treasury stock)” is “the (relatively) best way (compared to dividends) for us to go” in a “medium and long term perspective”. and given its current valuations. Given that KB Financial’s valuations are depressed, with the stock trading at a low single-digit forward P/E and a 60% discount to book value, it is logical to prioritize buybacks (and cancellation of treasury shares) over dividends on a relative basis.
KB Share Price Weakness and Valuations
Shares of KB Financial outperformed the S&P 500 in the first two months of 2022, but its stock began to underperform the broader market since late June, as shown in the chart below.
KB Financial’s Share Price Performance for 2022 Year-to-Date
Looking for Alpha
A July 4, 2022 comment published in local media, Korea timeattributed the weak share price performance of KB Financial and its Korean banking peers to “fears of a recession and increased exposure to risk from the strength of their assets.”
In my view, these concerns appear to be overstated and also fully incorporated into KB Financial’s valuations.
KB Financial’s bad debt coverage ratio, or calculated as loan loss reserves divided by non-performing loans, improved to 208.9% at December 31, 2021 and 217.7% at the end of from the first quarter of 2022 to 222.4% at the end of the second quarter of 2022. at the same time, the delinquency rates of the banking and card activities of KB Financial remained low at 0.13% and 0.78%, respectively as of June 30, 2022.
A recent July 20, 2022 Korean banking research report (not publicly available) titled “Almost At Bottoming Out Point” published by NH Investments & Securities also noted that “delinquency rates are at historic lows, while NPL ratios and NPL coverage ratios are at all-time highs” for South Korean banks as a group.
More importantly, KB Financial is already valued by the market at levels implying a financial crisis similar to the GFC (Global Financial Crisis which occurred during the period 2008-2009).
KB Financial is currently trading at 3.8 times the consensus next 12-month normalized P/E, based on valuation data obtained from S&P Capital IQ. KB also traded at less than 4 times the forward P/E at the end of 2008 during the GFC. Similarly, KB Financial is now valued by the market at 0.41x trailing P/B, which is worse than what the stock did during GFC when KB’s P/B valuation multiple bottomed out. by 0.5 times. Separately, KB offers a consensus dividend yield for the next twelve months of 6.9%; KB Financial’s forward dividend yield exceeded 7% towards the end of 2008 during the GFC period.
Final Thoughts
KB Financial is a buy. The stock’s valuations are back at crisis levels, even though it just beat second-quarter 2022 earnings and announced a second treasury write-off. While acknowledging that there is recession risk that could hurt bank performance, KB Financial’s most recent NPL coverage and delinquency ratios suggest that bears’ concerns may be grossly overstated. Additionally, KB Financial’s valuations have already priced in the worst-case scenario, so there could be some upside surprises if actual economic conditions turn out to be better than expected.
