20171115-三星证券-Rise_in_Cofix_rate_to_spur_NIM_improvement_5页_303kb

Sector Update Summary: Banking (OVERWEIGHT)

Core Content

This report, dated 2017.11.15, provides an update on the Korean banking sector, with a focus on three major financial groups: KB Financial Group, Shinhan Financial Group, and Hana Financial Group. The analysis highlights the potential for improved net interest margins (NIMs) due to rising market interest rates and the impact of the cost of funds index (Cofix) rate on bank earnings.

Key Trends and Insights

• Cofix Rate Increase:
  The Cofix rate on new funds in October 2017 increased by 10 basis points (bps) from September and 15 bps from August, reaching 1.62%. With 1-year KTB yields rising by 32 bps from September, the Cofix rate is expected to continue climbing in November.

• NIM Improvement:
  Rising market interest rates are anticipated to drive NIM growth starting from 4Q 2017. The report cites historical data from 2016, where a 32 bps increase in KTB yields led to a 24 bps rise in the Cofix rate, which in turn boosted NIMs for KB Financial Group and Hana Financial Group by 13 bps and 14 bps, respectively, over 1Q-3Q17.

• Focus on Big Three:
  The report recommends focusing on the three largest Korean financial groups (KB Financial Group, Shinhan Financial Group, and Hana Financial Group) due to their larger low-cost deposit portions and higher household loan exposure, which are more sensitive to interest rate changes. Additionally, these groups are expected to see faster SME loan growth as their CET-1 ratios already exceed regulatory requirements.

• Target Prices and Performance:

  • KB Financial Group (105560 KS): Target price is KRW75,000, representing a 30.9% increase from current levels.
  • Shinhan Financial Group (055550 KS): Target price is KRW64,000, a 32.1% increase.
  • Hana Financial Group (086790 KS): Target price is KRW62,000, a 35.2% increase.

  Hana Financial Group is noted for its high earnings sensitivity to interest rate hikes and potential for cost reduction due to previous IT integration. KB Financial Group is the top pick due to its strong NIM growth and larger scale of operations.

• NIM Improvement Analysis:
  The report includes a table showing NIM trends for major Korean banks, indicating that KB Financial Group, Shinhan Financial Group, and Hana Financial Group have all experienced NIM improvements over 4Q16 to 3Q17. KB Financial Group shows the highest growth with a 13 bps increase, followed by Hana Financial Group with a 14 bps increase.

• Net Interest Income Projections:
  A table projects 2018E net interest income growth based on a 10 bps increase in NIM. KB Financial Group is expected to see the highest net interest income growth at 6.7%, followed by Hana Financial Group at 10.6% and Shinhan Financial Group at 7.1%.

Main Views

• The rise in the Cofix rate is a key driver for NIM improvement in the banking sector.
• Historical trends indicate that interest rate hikes can significantly boost NIMs and overall bank earnings.
• The report emphasizes the importance of focusing on the big-three financial groups for better growth prospects in the interest income segment.
• Hana Financial Group is highlighted for its strong earnings sensitivity and potential cost savings.
• KB Financial Group is the top recommendation due to its strong NIM growth and larger market presence.

Key Information

• Cofix Rate and Market Yields: The Cofix rate is closely tied to 1-year KTB yields, and the recent jump in yields is expected to continue pushing the Cofix rate higher.
• Loan Exposure: Approximately 45% of household loans at the four major banks are linked to the Cofix rate, and these are typically reassessed every six months, leading to gradual impact on NIMs.
• Deposit Costs: Low-cost deposits account for 41.9% of total deposits at the four major banks, making funding rates less elastic to market changes.
• Investment Ratings: The report uses a rating system with BUY, NEUTRAL, HOLD, SELL, OVERWEIGHT, and UNDERWEIGHT. The banking sector is rated as OVERWEIGHT, indicating it is expected to outperform the market by 5% or more within 12 months.
• Compliance and Disclaimers: The report includes several compliance notices and disclaimers, emphasizing that the information is for general informational purposes only and does not constitute investment advice. It also highlights that the analysts are not registered as research analysts under U.S. rules and that the report is subject to distribution restrictions in various jurisdictions.

Conclusion

The report suggests that the Korean banking sector, particularly the big-three financial groups, is well-positioned to benefit from rising interest rates. KB Financial Group is the top recommendation, followed by Hana Financial Group, due to their strong NIM growth potential and earnings sensitivity to rate changes. The analysis is based on historical performance, current market conditions, and projected future earnings, with clear emphasis on the importance of the Cofix rate in driving profitability.