KB Financial, With 33% Total Payout Ratio, Is Our Top Pick Among Korean Banks

We updated our forecast models for Korean banks following 2022 earnings reports. Our fair value estimates for KB Financial, Shinhan, and Woori are unchanged at KRW 75,000, KRW 54,000, and KRW 18,000 per share, respectively, with KB offering 35% upside, Shinhan 31% upside, and Woori 42% upside from Friday’s close. Our estimate for Hana has increased from KRW 62,000 to KRW 65,000 per share (33% upside) as we lift its long-term forecasts slightly.

All four banks are attractively valued versus their long-term intrinsic worth, trading below 0.5 times book value. KB and Shinhan are trading at 4.4 times PitchBook consensus earnings and yielding close to 6%, while Hana and Woori trade below 4 times earnings and yield at least 7%.

Although Woori offers the most upside to fair value, our top pick considering both upside potential and downside risks is KB, the largest by total assets and market cap. KB has the highest total shareholder return payout ratio of 33%, and its share price could benefit if the downturn in Korean real estate prices subsides.

Shinhan Financial is a similarly valued rival to KB, with a cost-efficient business and a growing overseas presence in Vietnam and Japan. However, Shinhan faces a headwind due to a past scandal around improperly sold investment funds that may increase operational risk-weighted assets and lower its capital ratios.

Hana may see a further rerating upward closer to KB and Shinhan, but still deserves a valuation discount due to its less diversified earnings structure. Woori has improved its weak capital ratios, but still lacks the buffers to rebuild its nonbank businesses and increase dividends in line with peers.

Our key assumptions for 2023 are loan growth of 5%-7%, contraction in net interest margins by 3 basis points, and credit costs of 35 basis points of loans for the sector as a whole. We assume all four banks pay out 26% of earnings as dividends, that KB and Shinhan repurchase 1.4% of their shares, and Hana repurchases 1.0%.