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Industrial Bank of Korea (024110 KS ) Public Role to Become More Prominent

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Industrial Bank of Korea (024110 KS ) Public Role to Become More Prominent Industrial Bank of Korea (024110 KS ) Public role to become more prominent Banks Lower TP to W11,500 (from W14,000) Company Report As growth fears intensify and bond yields rapidly decline amid the spread of COVID-19 , the US Fed announced on March 3rd an emergency rate cut of 50bps . Given downside March 6, 2020 risks to growth and expectations of a BOK rate cut, we think bond yields could decline further, increasing the likelihood that bank net interest margins (NIMs) will be weaker than previously expected. Industrial Bank of Korea (IBK) has a lower exposure to non- bank subsidiaries and a higher exposure to interest income than its peers, which we (Maintain) Buy believe makes it more vulnerable to profit pressures from lower interest rates. Furthermore, during times of heightened worries about growth, there tends to be increased awareness of the public role of banks. As a government-owned bank in ▼ Target Price (12M, W) 11,500 charge of supporting small/mid-sized businesses, IBK has a more public nature than its peers. This often leads to the bank issuing shares to the government, which can Share Price (03/05/20, W) 9,390 lessen its relative investment appeal. We forecast IBK’s NIM to fall 4bps, 4bps, and 3bps QoQ in 1Q20, 2Q20, and 3Q20, Expected Return 22% respectively, before picking up 2bps QoQ in 4Q20 and 1bp QoQ in 1Q21. For 2020 as a whole, we see NIM contracting 17bps YoY to 1.66%. As such, w e are revising down our 2020 and 20 21 net profit estimates by 6.4% and 5.5%, respectively, and reducing our NP (20F, Wbn) 1,512 target price by 17.9% from W14,000 to W11,500. With our target pri ce implying 22% Consensus NP (20F, Wbn) 1,606 upside to the current share price, we maintain our Buy rating. EPS Growth (20F, %) -9.1 W264bn share issue to the government Market EPS Growth (20F, %) 30.5 On March 4 th , IBK’s board approved the issuance of 29,379,034 new shares (4.4% of P/E (20F, x) 4.3 total shares outstanding) to the government for W264bn at W8,986 per share (5% Market P/E (20F, x) 11.1 discount to base price). Payment will be made on April 22 nd , and the new shares will be th KOSPI 2,085.26 listed on May 11 . IBK stated that the purpose of the share issue is to finance: 1) special programs for innovative growth and small businesses; and 2) the advancement Market Cap (Wbn) 5,420 of industrial structures and the operation of environmental/safety facility funds. The Shares Outstanding (mn) 675 issuance of shares to the government at a discount, which highlights IBK’s public role Free Float (%) 46.6 and has become a yearly occurrence, can hardly be seen a s positive to regular Foreign Ownership (%) 19.1 shareholders. IBK also announced that it was increasing the size of its ultra- Beta (12M) 0.57 low/preferential interest rate loan programs for small and self-employed businesses from W1.7tr to W4.2tr in order to provide financial aid in the wake of the COVID-19 52-Week Low 9,390 outbreak. We think the move could require further funds financed by the government. 52-Week High 14,700 2019 dividend: W670 for regular shareholders (%) 1M 6M 12M th Absolute -11.4 -24.3 -32.9 On March 4 , IBK’s board approved 2019 final dividends of W670 (vs. W690 in 2018) for regular shareholders and W472 (vs. W559 in 2018) for the government (IBK’s largest Relative -8.0 -27.2 -29.9 shareholder). On a consolidated basis, dividend payout was 23.6% (vs. 23.4% in 2018 ). 110 Industrial Bank of Korea For regular shareholders, payout was raised to 28% (vs. 25.7% in 2018). For the KOSPI government, payout was reduced to 19.7% (vs. 20.9% in 2018). 100 90 We forecast dividend yields of 6.4% for 2020, 6.8% for 2021, and 6.9% for 2022. While 80 such levels are certainly attractive, we believe IBK’s peers also offer compelling dividends. As such, we think the relative appeal of IBK , whose dividends were once 70 unrivaled in the sector, has somewhat diminished. 60 3.19 7.19 11.19 3.20 Mirae Asset Daewoo Co., Ltd. Fiscal year-end 12/17 12/18 12/19 12/20F 12/21F 12/22F Net interest inc. (Wbn) 5,260 5,632 5,752 5,583 5,804 6,060 [ Banks/Credit Cards ] Net non-interest inc. (Wbn) 340 626 578 619 673 670 Operating profit (Wbn) 2,028 2,396 2,246 2,088 2,168 2,176 Heather Kang +822 -3774 -1903 Net profit (Wbn) 1,501 1,754 1,618 1,512 1,576 1,587 [email protected] EPS (W) 2,282 2,666 2,423 2,203 2,237 2,253 EPS growth (%) 29.4 16.8 -9.1 -9.1 1.5 0.7 P/E (x) 4.1 3.5 3.9 4.3 4.2 4.2 P/PPOP (x) 1.6 1.4 1.4 1.5 1.4 1.3 P/B (x) 0.31 0.29 0.28 0.27 0.26 0.24 ROE (%) 8.0 8.6 7.4 6.5 6.3 6.0 Dividend yield (%) 6.6 7.3 7.1 6.4 6.8 6.9 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates March 6, 2020 Industrial Bank of Korea Table 1. IBK: Earnings forecast revisions Revised Previous % chg. (Wbn) 2020F 2021F 2020F 2021F 2020F 2021F Net interest income 5,583 5,804 5,754 6,035 -3.0 -3.8 Net non-interest income 619 673 592 604 4.6 11.5 Total net operating income 6,202 6,477 6,346 6,639 -2.3 -2.4 SG&A expenses 2,496 2,566 2,532 2,633 -1.4 -2.6 PPOP 3,706 3,912 3,814 4,006 -2.8 -2.3 Provisions 1,618 1,744 1,585 1,712 2.1 1.9 Operating profit 2,088 2,168 2,230 2,294 -6.4 -5.5 Non-operating income 10 19 10 19 0.0 0.0 Pretax profit 2,098 2,186 2,240 2,313 -6.3 -5.5 Net profit 1,512 1,576 1,615 1,668 -6.4 -5.5 Source : Mirae Asset Daewoo Research estimates Table 2. IBK: TP calculation Sustainable ROE 5.90% Growth 2.00% Cost of equity 13.60% Cost of equity 13.60% Risk-free rate 2.50% Beta 1.85 Market premium 6.00% Fair P/B (x) 0.34 2019F BPS (W) 34,171 TP (W) 11,500 Source: Mirae Asset Daewoo Research estimates Table 3. IBK: Valuation metrics at TP of W11,500 2017 2018 2019 2020F 2021F 2022F P/B (x) 0.38 0.36 0.34 0.34 0.32 0.30 P/E (x) 5.0 4.3 4.7 5.2 5.1 5.1 ROE (%) 8.0 8.6 7.4 6.5 6.3 6.0 EPS growth (%) 29.4 16.8 -9.1 -9.1 1.5 0.7 Dividend yield (%) 5.4 6.0 5.8 5.2 5.6 5.7 Source: Company data, Mirae Asset Daewoo Research estimates Mirae Asset Daewoo Research 2 March 6, 2020 Industrial Bank of Korea Figure 1. Bank debenture (AAA) rate trends Figure 2. SMIF bond (1Y) yield trends (%) Bank debentures (AAA, 3M) 2.4 Bank debentures (AAA, 6M) Bank debentures (AAA, 1Y) Bank debentures (AAA, 2Y) 2.2 2.0 1.8 1.6 1.4 1.2 1.0 Mar17 Aug17 Jan18 Jun18 Nov18 Apr19 Sep19 Feb20 Source: KOSCOM, Mirae Asset Daewoo Research Source: KOSCOM, Mirae Asset Daewoo Research Table 4. IBK: Deposit trends (low-cost core deposits) (Wbn, %, %p) 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 YoY QoQ Core deposits 52,025 51,312 53,650 54,986 56,148 56,702 61,246 61,991 64,611 15.1 4.2 MMDA 9,098 9,953 9,912 10,050 9,584 10,577 10,327 9,913 10,687 11.5 7.8 Other deposits 26,807 25,359 24,747 20,597 20,295 19,665 19,426 19,660 19,533 -3.8 -0.6 CD, covered bills, RPs 5,958 6,122 5,737 5,224 4,509 5,373 4,214 4,220 3,960 -12.2 -6.2 SMF bonds 88,005 89,642 91,581 97,833 103,143 106,594 108,240 109,689 115,360 11.8 5.2 Total deposits 181,894 182,387 185,627 188,689 193,678 198,911 203,454 205,473 214,152 10.6 4.2 Core deposits as % of total 33.6 33.6 34.2 34.5 33.9 33.8 35.2 35.0 35.2 1.2 0.2 Source: Company data, Mirae Asset Daewoo Research Table 5. IBK: Quarterly NIM (%, %p) 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20F 2Q20F 3Q20F 4Q20F 1Q21F 2Q21F 3Q21F 4Q21F Quarterly NIM 1.94 1.96 1.95 1.95 1.90 1.89 1.81 1.74 1.70 1.66 1.63 1.65 1.66 1.66 1.66 1.66 QoQ 0.01 0.02 -0.01 0.00 -0.05 -0.01 -0.08 -0.07 -0.04 -0.04 -0.03 0.02 0.01 0.00 0.00 0.00 Source: Company data, Mirae Asset Daewoo Research Table 6.
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