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Industrial Bank of Korea Industrial Bank of Korea (024110 KS ) More exposed to low interest rates than peers due to lack of portfolio diversification Banks 4Q19 preview: Above-consensus net profit of W339.3bn Company Report For 4Q19, we project Industrial Bank of Korea (IBK) to post consolidated net profit of February 4, 2020 W339.3bn (+12.3% YoY, -10.9% QoQ), which is 2.5-6.2% above the recently lowered consensus (W319.3bn based on Bloomberg; W330.9bn based on FnGuide). Other than seasonal factors, we do not believe there were any major one-off items. We believe total loans grew 0.8% QoQ (+6.8% YTD), with SME loans likely growing 0.9% (Maintain) Buy QoQ (+7.3% YTD). We estimate net interest margin (NIM) slipped 6bps QoQ to 1.75%, hurt by the sharp decline in market interest rates and ultra-low-rate loan programs for Target Price (12M, W) ▼▼▼ 14,000 self-employed borrowers. We expect net interest income of W1.42tr (-1.9% YoY, -1.8% QoQ) and net commission income of W113.1bn (-4.0% YoY, +0.2% QoQ). Share Price (01/31/20, W) 10,750 For 2020, we forecast loan growth of 6.3% and NIM of 1.74% (-10bps YoY). We expect net interest income to remain flat YoY amid an increase in SG&A and provisioning Expected Return 30% expenses, leading to a 5.0% YoY fall in net profit (to W1.62tr). We believe IBK is more exposed to the current ultra-low interest rate environment NP (19F, Wbn) 1,700 than its peers, which have more diversified portfolios and are able to defend their Consensus NP (19F, Wbn) 1,681 group-level earnings through the strengths of their non-banking sub sidiaries (solid fundamentals, ownership expansion, M&As, overseas expansion, etc.). EPS Growth (19F, %) -4.5 Market EPS Growth (19F, %) -34.6 Dividends: Once unrivaled, but not anymore P/E (19F, x) 4.2 Based on the current share price, we estimate DPS at W690 in 2019, W700 in 2020, and Market P/E (19F, x) 14.8 W730 in 2021, which translate into dividend yields of 6.4%, 6.5%, and 6.8%, KOSPI 2,119.01 respectively. While still attractive, the yields are not as high as they once were, when Market Cap (Wbn) 6,204 IBK’s dividend yields were unrivaled among peers. Shares Outstanding (mn) 675 Cut TP to W14,000 Free Float (%) 46.6 Foreign Ownership (%) 19.5 We lower our net profit forecasts for 2019, 2020, and 20 21 by 3.5%, 7.20%, and 9.2%, Beta (12M) 0.76 respectively, in light of: 1) the record-low base rate; 2) the sharp decline in market 52-Week Low 10,700 interest rates; and 3) increased SME loan provisioning amid an economic downturn. As 52-Week High 14,700 IBK generates 93% of its core earnings from net interest income, it is more difficult for the bank to defend earnings amid falling interest rates compared to its peers. We also (%) 1M 6M 12M believe the public nature of the bank’s business and the recent equity issue to the Absolute -8.9 -18.3 -24.6 government should be viewed as discount factors. We thus cut our target price from Relative -5.5 -21.9 -21.5 W16,000 (target P/B of 0.47x) to W14,000 (target P/B 0.41x). 110 Industrial Bank of Korea KOSPI 100 90 80 70 60 1.19 5.19 9.19 1.20 Mirae Asset Daewoo Co., Ltd. Fiscal year-end 12/16 12/17 12/18 12/19F 12/20F 12/21F Net interest inc. (Wbn) 4,876 5,260 5,632 5,745 5,754 6,035 [ Banks/Credit Cards ] Net non-interest inc. (Wbn) 64 340 626 544 592 604 Operating profit (Wbn) 1,533 2,028 2,396 2,310 2,230 2,294 Heather Kang +822 -3774 -1903 Net profit (Wbn) 1,158 1,501 1,754 1,700 1,615 1,668 [email protected] EPS (W) 1,763 2,282 2,666 2,546 2,393 2,471 EPS growth (%) 0.7 29.4 16.8 -4.5 -6.0 3.3 P/E (x) 6.1 4.7 4.0 4.2 4.5 4.4 P/PPOP (x) 2.2 1.8 1.6 1.6 1.6 1.5 P/B (x) 0.39 0.36 0.34 0.32 0.30 0.28 ROE (%) 6.6 8.0 8.6 7.7 6.8 6.7 Dividend yield (%) 4.5 5.7 6.4 6.4 6.5 6.8 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 February 4, 2020 Industrial Bank of Korea 4Q19 preview: Above-consensus net profit of W339.3bn We estimate SG&A expenses were well-controlled at W621.3bn (+2.7% YoY, +10.9% QoQ), leading to a cost-to-income ratio of 39.8% (+0.4%p YoY, +2.9%p QoQ). We estimate credit costs at W460.4bn (-11.8% YoY, +2.3% QoQ), or 59bps (annualized; -13bps YoY, +1bp QoQ) of total assets. Table 1. 4Q19 preview YoY QoQ (Wbn) 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19F (%, %p) (%, %p) Net interest income 1,401.3 1,429.3 1,448.6 1,406.6 1,470.5 1,446.8 1,421.1 -1.9 -1.8 Net fee & commission income 128.0 96.2 117.8 110.5 128.2 112.9 113.1 -4.0 0.2 Net other income 36.4 67.8 -32.7 91.2 0.2 -39.3 27.0 TTB TTB Total net operating income 1,565.7 1,593.4 1,533.7 1,608.3 1,598.9 1,520.3 1,561.2 1.8 2.7 SG&A expenses 623.6 529.7 604.9 580.3 653.7 560.4 621.3 2.7 10.9 PPOP 942.1 1,063.6 928.7 1,028.0 945.2 959.9 939.9 1.2 -2.1 Provisions 351.9 361.7 522.1 283.6 368.4 450.2 460.4 -11.8 2.3 Operating profit 590.2 701.9 406.6 744.4 576.8 509.7 479.5 17.9 -5.9 Non-operating income -2.7 -1.3 6.4 13.3 14.9 8.9 -9.0 TTR TTR Pretax profit 587.5 700.7 413.0 757.7 591.7 518.6 470.5 13.9 -9.3 Net profit 421.6 520.3 302.1 553.4 427.0 380.7 339.3 12.3 -10.9 Total assets 282,923 285,667 289,509 299,229 305,221 311,614 313,328 8.2 0.5 Total loans & receivables 211,318 212,660 214,523 220,723 224,872 230,102 231,137 7.7 0.4 Won-denominated loans (bank) 188,701 192,097 192,989 197,421 201,617 204,555 206,191 6.8 0.8 Total credit 201,859 204,765 206,226 209,972 214,782 218,399 220,146 6.8 0.8 Total deposits 110,275 106,135 109,556 109,611 112,292 112,112 112,448 2.6 0.3 Total shareholders' equity 20,370 20,836 21,094 21,834 22,291 22,749 23,090 9.5 1.5 (%) NIM (bank) 1.96 1.95 1.95 1.90 1.89 1.81 1.75 -0.20 -0.06 Cost-to-income ratio 39.8 33.2 39.4 36.1 40.9 36.9 39.8 0.4 2.9 NPL (sub-standard & below) ratio 1.36 1.34 1.32 1.30 1.26 1.36 1.24 -0.08 -0.12 NPL coverage ratio 166.3 170.2 167.6 169.8 173.8 166.9 174.0 6.4 7.1 RoAE 0.15 0.18 0.11 0.19 0.14 0.12 0.11 0.00 -0.01 RoAA 2.10 2.54 1.45 2.59 1.95 1.70 1.49 0.04 -0.21 Credit cost ratio 0.12 0.13 0.18 0.09 0.12 0.14 0.15 -0.03 0.00 BIS ratio 14.23 14.57 14.50 14.55 14.50 14.77 14.89 0.39 0.11 Tier 1 ratio 11.95 11.96 11.90 12.23 12.23 12.18 12.31 0.41 0.13 Note: ROA, ROE, and credit cost data are non-annualized. Source: Company data, Mirae Asset Daewoo Research estimates Mirae Asset Daewoo Research 2 February 4, 2020 Industrial Bank of Korea Table 2. Earnings forecast revisions Revised Previous % chg. (Wbn) 2019F 2020F 2021F 2019F 2020F 2021F 2019F 2020F 2021F Net interest income 5,745 5,754 6,035 5,753 5,788 6,039 -0.1 -0.6 -0.1 Net non-interest income 544 592 604 580 647 662 -6.2 -8.6 -8.7 Total net operating income 6,289 6,346 6,639 6,333 6,436 6,701 -0.7 -1.4 -0.9 SG&A expenses 2,416 2,532 2,633 2,401 2,449 2,498 0.6 3.4 5.4 PPOP 3,873 3,814 4,006 3,932 3,987 4,203 -1.5 -4.3 -4.7 Provisions 1,563 1,585 1,712 1,522 1,597 1,686 2.6 -0.8 1.5 Operating profit 2,310 2,230 2,294 2,410 2,390 2,517 -4.1 -6.7 -8.9 Non-operating income 28 10 19 25 25 32 10.8 -59.5 -41.4 Pretax profit 2,338 2,240 2,313 2,435 2,414 2,549 -4.0 -7.2 -9.3 Net profit 1,700 1,615 1,668 1,763 1,740 1,838 -3.5 -7.2 -9.2 Source: Mirae Asset Daewoo Research estimates Figure 1.
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