KB Financial Earnings: Korean Bank Brushes Off Sector Headwinds With Strong Q2

We maintain our fair value estimate of KRW 75,000 for KB Financial 105560, equivalent to 0.6 times book value as of June 2023 and 57% above the current share price, after its second-quarter earnings. Korean bank shares have languished in 2023 as investors worry about the effects of the domestic property price correction since last summer, which has reduced household loan growth and increased credit costs such as in the card business. Other fears included possible exposures to other risks overseas, such as office properties in developed markets. However, we think KB’s results, the first from Korean banks this quarter, show the earnings impact will be smaller than some perhaps fear.

KB’s annualized return on equity for the second quarter was 11.3%, almost as high as the 11.5% posted in the first quarter and well above our full-year forecast of 8.9%. From KB’s bottom line, almost no impact of the headwinds facing the sector can be discerned. The group also announced another KRW 300 billion buyback, its second repurchase of more than 1% of shares outstanding this year.

Although KB’s bottom-line profit and ROE are as high as they would likely be if the operating environment for Korean banks were stronger than it is now, some details above the bottom line do show some stresses present. Household loans were down by 1.8% since the end of 2022 (though they appear to be bottoming out now), and annualized credit costs were 60 basis points of loans, similar to what KB posted in the first quarter. Still, the delinquency ratio at KB Card improved slightly from last quarter’s high level. Meanwhile, the nonperforming loan ratio at KB Kookmin Bank rose 2 basis points from last quarter to 0.25%, a bit higher than in the past three years but still well below what the bank had usually seen until 2019.