KB Financial Earnings: Bank Reports Decent Quarter; Annualized ROE of 10.1%, but No Dividend Update

We maintain our fair value estimate of KRW 75,000 for KB Financial Group 105560, equivalent to 0.58 times the September 2023 book value and representing 35% upside. Third-quarter net income was KRW 1.37 trillion, representing an annualized return on equity of 10.1%, down slightly from the 11.5% and 11.3% posted in the first and second quarters respectively, but still a decent result in our opinion, clearing 10% and slightly above our assumed cost of equity for KB. Despite a 1.2% decline year to date in loans to households, KB’s net interest income was better than we had forecast as household loans were up slightly quarter on quarter and as net interest margins only declined by 1 basis point. KB attributed the resilience in its NIM, amid funding cost pressures, to its “sophisticated” loan pricing. Credit costs declined from the first half of the year when KB conducted preemptive provisioning. At 41 basis points of loans on an annualized basis, they were in line with our forecast for underlying credit costs in 2023 and 2024. KB’s expense controls also remained excellent with a cost/income ratio below 40% for the quarter, continuing the improvement KB has seen since the beginning of the year on this front. Notwithstanding the decent results, KB provided no update to its shareholder return policy, maintaining the KRW 510 quarterly dividend per share it paid in the previous two quarters. Given the current share price below 0.5 times book value, we think KB management is more eager to expand share buybacks than to expand dividend payouts aggressively, especially given uncertainties about future credit costs from risks such as exposure to overseas real estate. We await further buyback announcements in the near term and continue to see KB’s shares are significantly undervalued even at a time in the credit cycle when not much earnings growth can be anticipated in 2024 or 2025, with downside earnings risks likely larger than upside risks.