Korean Bank Earnings: ROEs Stable Above 9% Despite Credit Headwinds; Shares Cheap

We maintain our fair value estimates for Shinhan Financial 055550, Hana Financial, and Woori Financial after their third-quarter earnings announcements. We continue to view all the Korean banks in our coverage as significantly undervalued. Shinhan, Hana, and Woori trade at 0.36 times, 0.34 times, and 0.31 times book value respectively, which imply earnings multiples of only 3 to 4 times given their returns on equity of 9%-10% and dividend yields of 6.5% to 8.5% given payout ratios of around 26%. Our estimates of KRW 54,000 for Shinhan, KRW 65,000 for Hana, and KRW 18,000 for Woori put their fair price/book ratios at 0.56 times book value for Shinhan, 0.54 times for Hana, and 0.47 times for Woori, representing around 50% upside to our fair values for all three.

The problem for Korean bank shares, in our view, has been the absence of a catalyst for a move higher. Our earnings forecasts are for each of the Korean banks’ 2025 net profit to be roughly flat with 2023 net profit, meaning almost no earnings growth and EPS growth mostly relying on the denominator through share buybacks. The global trend of “higher rates for longer” is helping to maintain net interest margins at wider levels than prevailed in 2019-21, but the same higher rates are also leading to credit stresses for borrowers that are elevating provisions to around 45 basis points of loans on average from around 30 basis points previously. We think the nascent bottoming in housing prices—which were up slightly month on month in September after having declined around 8% nationwide since the peak in mid-2022 (or 10% for jeonse prices)—could be a catalyst if it results in a recovery in loans to households next year, but our base case is for only a modest recovery in overall loan growth. We think currently low valuations provide an attractive entry point for investors who can afford to be patient.