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1、,FIGKorea BanksKorean banksWell-flagged earnings miss in 4Q1225 January 2013Todd Dunivant*Head of Banks Research,Asia-PacificThe Hongkong and Shanghai Banking Corporation Limited,abcGlobal Research One-off provisioning expenses andequity impairment losses to push 4Qprofits below consensus Expect no
2、top-line surprises givencontinued NIM compression,flat loangrowth;core earnings to remain weak Weak trends likely to continue in 1H13;prefer Shinhan FinancialExpect 4Q12 earnings miss due to one-off costs.Banks underour coverage will release 4Q12 results on 6-7 February.Weexpect there to be no big s
3、urprises in top-line growth,with tameloan growth and falling net interest margins,as anticipated bythe market.However,the bottom line is more uncertain,as one-off losses remain a swing factor.Losses on securities(Table 1)and provisions for shipbuilders(Table 2)should push 4Q profitbelow consensus;wo
4、rst case 46%below for Woori FHC.,+852 2996 6599,.hk,We expect the weak trend to persist until a turnaround,Sinyoung Park*AnalystThe Hongkong and Shanghai Banking Corporation Limited,Seoul Securities Branch,in 2H13.The outlook for core operating metrics remainsunexciting going into 1H13(1)NIM compres
5、sion:Weexpect 4Q NIMs to decline 9bp q-o-q on average,on the back,+822 3706 8770,of the Bank of Korea(BOK)rate cuts(Jul/Oct 2012)and due,Sojung Park*AnalystThe Hongkong and Shanghai Banking Corporation Limited,Seoul Securities Branch,to the ongoing regulatory pressure on loan spreads(Table 2).NIM co
6、mpression is unlikely to stop in 1H13 until we see arate hike in 3Q13.(2)Lacklustre loan growth:Loan growth,+822 3706 8756,should slow in 4Q12(0.5-1%q-o-q)for the sector due to adelayed recovery in the domestic property market,tightenedrisk management,and corporates looking to strengthen theirbalanc
7、e sheet at the year-end.(3)Costs seasonally higher in4Q:Credit costs and SG&A expenses are seasonally higherin 4Q.As the Financial Supervisory Service(FSS)has guidedthat banks should apply more stringent provisioning criteriafor shipbuilders,higher provisioning is likely,and Woorishould be hit the h
8、ardest.,View HSBC Global Research at:http:/*Employed by a non-US affiliate of HSBC Securities(USA)Inc,and is not registered/qualified pursuant to FINRA regulationsIssuer of report:The Hongkong and Shanghai BankingCorporation Limited,Seoul Securities BranchDisclaimer&DisclosuresThis report must be re
9、ad with thedisclosures and the analyst certificationsin the Disclosure appendix,and with theDisclaimer,which forms part of it,Prefer Shinhan 055550 KS,OW,TP KRW50,000.Korean bank share prices are up c14%since mid-November2012.Asian economic data look increasingly positive,and themarket has begun to
10、understand the scale of 4Q provisioningby Korean banks.Shares have risen to 0.65x the 1yr forwardbook from 0.57x in this period.Higher-beta names Hana andWoori have outperformed.We believe Shinhan offers morecore earnings stability;with a muted 2013 growth outlook,itappears the best longer-term opti
11、on at this point.,(KRWbn),FIGKorea Banks25 January 20134Q earnings preview One-off costs from equity impairment losses on securities andprovisions for shipbuilders push 4Q profits below consensus Expect no top-line surprises on lacklustre loan growth andcontinued NIM compression;core earnings remain
12、 weak Weak operating trends likely to continue in 1H13,abc,Expect 4Q12 earnings missdue to one-off costs andseasonalityWe expect Korean banks to post lacklustreearnings in 4Q(20%lower than consensus),primarily because of one-off costs and seasonality.Provisioning hike on shipbuildersWe expect anothe
13、r quarter of high provisioningfor Korean banks in 4Q12,which is likely todisappoint the market.This is due mainly tofinancial regulators pressure to set aside furtherprovisions on the shipbuilding sector.There aresome shipbuilders with impaired shareholdersequity(e.g.SPP Shipbuilding and Sung DongSh
14、ipbuilding),and the FSS has guided that banksFig 1.Net profit in 4Q12e:HSBC vs consensus500,should apply more stringent provisioning criteriabased on individual credit evaluation rather thanpreviously held group evaluation.Woori Finance Holdings is known to have thelargest exposure to those shipbuil
15、ders,and otherlarge-cap banks also have exposures of more thanKRW200bn each.Thus,the additional provisioningimpacts 4Q earnings by 10-60%across the sector.Equity impairment lossesIn 3Q12,Korean banks earnings were hit by theequity impairment losses on securities(POSCOand Kumho Industrial).Under IFRS
16、,banks arerequired to realize equity impairment losses on theincome statement if the share price falls below30%of the purchase price.As those stocks fellFig 2.Net profit in 4Q12e:HSBC vs consensus0%,400300,400,300,-10%-20%,200100-,165,130,120,60,40,-30%-40%,Shinhan KB,IBK,Woori Hana,BS,DGB,-50%,DGB,
17、BS,Shinhan IBK,KB,Hana,Woori,2,HSBCNote:Consensus as of 12-Jan-2013Source:Bloomberg,HSBC estimates,Consensus,Note:Consensus as of 12-Jan-2013Source:Bloomberg,HSBC estimates,FIGKorea Banks25 January 2013Table 1.Korean banks:Impairment losses on securities holdings in 4Q12e,abc,(KRWbn),_ Impairment lo
18、sses _ _ Additional provisioning _POSCO Kumho Hyundai MM Taesan LCD Shipbuilders KEB severanceIndustrialbenefits,Total,KBHana,2614,77,40,30,10025,49,50,173175,Shinhan,0,IBK,7,7,WooriBSDGB,12,240,25200,Source:Company data,HSBC estimates,further in 4Q12,we expect Korean banks to seeadditional write-of
19、fs.Details in Table 1.Weak core earningsWe expect lacklustre loan growth and continuedNIM compression;the core earnings driversremain muted for the banks.However,thesefactors should not surprise to the market.1.NIM compressionWe expect 4Q NIM to decline 9bp q-o-q onaverage,on the back of two BOK rat
20、e cuts(Julyand October 2012)and ongoing regulatorypressure on loan spreads(Table 2).NIM compression is unlikely to stop or reverse in1H13 until we see a rate hike in 3Q13,whichcould be a potential catalyst for NIM recovery.According to HSBC economist,Bank of Koreawill keep rates low to support growt
21、h and it willrestart its rates normalisation process by graduallyraising rates from 3Q13 to 3.75%by 4Q14.Among banks,we think IBKs NIM will be hit thehardest in 4Q,by-10bp(Shinhan has a high baseTable 2.Korea banks:HSBC projections for 4Q12e NIM,effect).We believe IBKs NIM is unlikely to recovereven
22、 in 2014,despite the rate hikes expected in3Q13,as it has lowered its SME lending ratessince January 2012,as suggested by regulators.2.Lacklustre loan growthWe expect the loan growth to further slow downin 4Q12(0.5-1%q-o-q)for the sector.We believethat the trend will persist through 2013 due to adel
23、ayed recovery of the domestic property market,and tightened risk management.As shown in Figures 3-4,in terms of corporateloans,we expect Korean banks lending attitudesare expected to turn more conservative,while theloan demand remains high,especially from theSMEs,according to the BOKs survey on bank
24、lending practices.Also,on the household loanside,lenders attitudes are improving after 2011,but still weaker than corporate loans.Moreimportantly,the trajectory of loan demands has adownward slope due to delayed recovery of thedomestic property market.,(%)KBHanaKEBShinhanIBKWooriBSDGBAverage,4Q112.3
25、91.742.522.102.392.482.883.022.44,1Q122.271.722.472.092.372.512.842.932.40,2Q122.231.792.422.022.182.362.792.842.33,3Q122.121.702.302.002.082.292.702.702.24,4Q12e2.081.642.261.861.982.252.612.652.17,Q-o-q(bp)-0.04-0.06-0.04-0.14-0.10-0.04-0.09-0.05-0.07,Source:Company data,HSBC estimates3,IBK,FIGKor
26、ea Banks25 January 2013Fig 3.Korean Banks:Loan Demand Index,Fig 4.Korean Banks:Lending Attitude Index,abc,50403020100-10-20,4Q07,4Q08,4Q09,4Q10,4Q11,4Q12,3020100-10-20-30-40,4Q07,4Q08,4Q09Total,4Q10,4Q11,4Q12,TotalLarge corpSMEHousehold(ex-mortgage)Household(mortgage)Source:Survey on Bank Lending Pr
27、actices(BOK),HSBCAs asset growth slows across the sector,focus willshift to liability structure and difference betweenthe banks deposit mix.Earnings previews,by bankHana FinancialWe expect Hana Financial to report(7-Feb-2013)KRW120bn in net profit for 4Q12(down 82%q-o-q).Our 16%lower-than-consensus
28、earningsforecast is based mainly on projected one-offcosts for(1)severance benefits(-KRW50bn),expected(2)impairment losses on securitiesholdings(-KRW44bn),and(3)our forecast ofKRW49bn in additional provisioning on itssubsidiary KEB to match the provisioningstandards to Hana Bank.KB FinancialWe expec
29、t KB Financial to report(7-Feb-2013)KRW300bn of net profit in 4Q12(-32%q-o-q).Our 16%lower-than-consensus earnings forecastis driven by(1)projected impairment losses onsecurities holdings(-KRW66bn)and(2)expectedadditional provisioning expenses on shipbuilders(-KRW100bn),as per the regulators request
30、.We expect IBK to report(7-Feb-2013)KRW165bnin net profit for 4Q12(15%lower than consensus).This is due mainly to a projected decline in NIM(down 10bp versus the sector down 7bp q-o-q),4,Large corpSMEHousehold(ex-mortgage)Household(mortgage)Source:Survey on Bank Lending Practices(BOK),HSBCled by con
31、tinued loan yield cuts for SMEs.Weexpect KRW7bn in impairment losses onsecurities holdings to drag down the bottom lineearnings further.Shinhan FinancialWe expect Shinhan Financial to report(7-Feb-2013)KRW400bn in net profit for 4Q12.Thiswell-rounded number is 11%lower than theconsensus.We expect no
32、 one-off factors inShinhan Financial to drag down earnings in 4Q.Note that Shinhan will post the largest contractionin NIM in a q-o-q basis,but this is attributablemainly to high base effect.(3Q NIM:Shinhan-2bpvs sector-9bp q-o-q).Woori Finance HoldingsWe expect Woori Finance to report(7-Feb-2013)KR
33、W130bn in net profit for 4Q12,which is likelyto miss the consensus estimate(by-46%).Thelacklustre earnings are due to the additionalprovisioning on shipbuilders(-KRW240bn).BS FinancialWe expect BS Financial to report(6-Feb-2013)KRW60bn in net profit for 4Q12,lower thanconsensus(7%loss).Loan growth s
34、hould remainrobust at 2%q-o-q,but we expect NIM to fall by9bp q-o-q.,FIGKorea Banks25 January 2013DGB Financial,Shinhan Financial Group:SOTP valuation,abc,We expect DGB Financial to report(6-Feb-2013)net profit of KRW40bn in 4Q12,in line withconsensus.Loan growth should remain robust at,(KRWbn)Shinh
35、an BankCard subsidiaries,Valuation Impliedmethod PB(x)PB 0.849x PE,Equity20,860,Adj.Fairequity value15,215 12,7296,995,1.5%q-o-q,and we expect NIM to fall by 5bp,Shinhan Inv CorpShinhan Life,PB10 x PE,0.80,2,119,2,119 1,6952,369,q-o-q.Valuation and risksValuation methodologyWe use ROE and price-to-b
36、ook-based valuationsfor the banks under our coverage and sum-of-the-parts valuations for the diversified bank holdcos(Shinhan and Woori Financial Group).For ourROE/PB method,we value the main subsidiariesusing PB and ROE,with our target PB derivedfrom the equation(ROE g)/(COE g),whereROE stands for
37、normalised return on equity,gstands for the long-term growth rate and COEstands for cost of equity.Although Hana Financialis strictly a financial holdco,we also value itbased on ROE and PB,as it accounts for morethan 90%of group earnings.Under HSBCs Equity Research model,theNeutral rating band equal
38、s the local hurdle rate(average cost of equity)set by our Global EquityStrategy Team(10%for South Korea),plus orminus 10ppt for volatile stocks or 5ppt for non-volatile stocks.At the time we set our target prices,they implied potential returns above,below,orwithin these bands;accordingly,we rate the
39、 stocksOverweight,Underweight,or Neutral,with a(V)if the stock is volatile(see Disclosure appendix forHSBCs definition of volatility).Potential returnequals the percentage difference between thecurrent share price and the target price,includingthe forecast dividend yield when indicated.Shinhan Finan
40、cial Group055550 KS KRW40,150;OW,TP:KRW50,000We value Shinhan on a sum-of-the-parts analysis.,Consolidated EV 23,788Shares outstanding 0.474Target price(KRW)50,000Notes:(1)We calculated adjusted equity by subtracting reserves for credit losses and PFexposures are net of provisions from the BV;(3)We
41、calculated banks implied PB with thefollowing assumptions(COE of 12.55%,ROE of 10.5%,growth rate of 0%)Source:HSBC estimatesHana Financial Group086790 KS KRW39,350;N(V),TP KRW39,000We value Hana Financial on a PB and ROEmethodology,as bank subsidiaries(Hana Bankand KEB)take up more than 95%of groupe
42、arnings.Our key assumptions are as follows:COE of 14.3%(unchanged)calculated from arisk-free market rate of 3.0%,a market riskpremium of 7.5%,and a beta of 1.5;Sustainable ROE of 9%,based on our 2013eROE estimate for Hana(unchanged)Terminal growth rate of 0%(unchanged)KB Financial Group105560 KS KRW
43、39,400;OW,TP:KRW45,000We value KB Financial using PB and ROE basedon a 2013e adjusted book value.Our valuationassumptions are as follows:COE of 14.1%calculated from a risk-freemarket rate of 3.0%and a market riskpremium of 7.5%,and a beta of 1.5 Sustainable ROE of 9.7%derived by ourFY14 ROE estimate
44、 of 8.8%plus 80bp toreflect potential ROE accretion viacapital management Terminal growth rate of 0%PB of 0.75x,derived from the equation(ROE g)/(COE g),Our assumptions are shown in the following table.5,FIGKorea Banks25 January 2013BS Financial Group138930 KS KRW14,050;N(V);TP:KRW14,500We value BS
45、Financial using PB and ROE basedon 2013e adjusted book value,with our target PBderived from the equation(ROE g)/(COE g).Our valuation assumptions are as follows:COE of 10.6%calculated using a risk-freemarket rate of 3.0%,a market risk premiumof 7.5%,and a beta of 1.0 Sustainable ROE of 12.0%based on
46、average ROE of 2012 and 2013e;terminalgrowth rate of 2%DGB Financial Group139130 KS KRW14,150;N(V),TP:KRW16,300We value DGB Financial using a simple growthmodel.Our target PB is set using the equation(ROE g)/(COE g),as the majority ofearnings are driven by the bank subsidiary(DaeguBank).Our valuatio
47、n assumptions are as follows:Sustainable ROE of 12.3%,terminal growthrate of 0%COE of 11.2%,based on a risk-free rate of 3%,equity risk premium of 7.5%,and beta of 1.1 End-2013e adjusted book value ofKRW2,004bnWoori Finance Holding053000 KS KRW12,200;N,TP KRW11,300See sum-of-the-parts valuation tabl
48、e below.Woori Finance Holdings:SOTP valuation,Industrial Bank of Korea(IBK)024110 KS KRW11,800;N,TP:KRW13,600Our valuation is based on FY13e PB and ROE,with assumptions are as follows:COE of 14.4%calculated from a risk-freemarket rate of 3.0%,market risk premium of7.5%,and beta of 1.52 Sustainable R
49、OE of 9.8%,calculated from theaverage ROE of FY13-14e;terminal growthrate of 0%End-2013e adjusted book value ofKRW12,035bn,abc,(KRWbn)Woori BankKyongnam BankKwangju BankWoori I&S,Valuation methodpostPBPBPBPB,Implied PB(x)post0.460.460.460.80,Equitypost19,8372,1391,4763,480,Adj.equitypost15,5001,1771
50、,017,Fair valuepost7,143542468973,ConsolidatedShares outstandingTarget price(KRW),9,1260.80611,300,Notes:(1)As of 2013e;(2)We calculated adjusted equity by subtracting reserves for credit losses and PF exposures are net of provisions from the BV;(3)We calculated banks implied PB withthe following as
