[Korea] April 14, 2021

Banks recover amid continued strength of non- subsidiaries

Mirae Asset Securities Co., Ltd. Heather Kang [email protected]

1Q21 preview Banking sector in positive earnings revision cycle  For 1Q21, we forecast the seven financial holding companies under our coverage—including (IBK)—to post combined net profit of W3.9tr (+26% YoY).  Our estimate is 9% above the recently raised consensus.  We believe non-banking operations (securities, credit card, capital, etc.) continued strong earnings. Bank earnings also likely recovered on net interest margin (NIM) expansion.  Robust top-line growth combined with limited cost increases likely led to profit growth momentum.

Core indicators: Positive across NIM in early stages of rebound; also note solid loan growth and stabilizing credit costs the board  We estimate bank NIM gained 5bps on average in 1Q21, led by a decline in deposit rates due to repricing and portfolio improvements (a higher share of low-cost core deposits, such as demand deposits).  Given last year’s interest rate cuts, we expect NIM expansion driven by falling deposit rates to continue through 2Q21.  Once interest rates rise, higher lending rates should push up NIM. As such, we see upside to our forecasts and believe we are in the early stages of a NIM expansion cycle.  Last year’s loan growth (+10.6%) should lead to asset base expansion effects. For 2021, we look for solid loan growth of 6.6%.  Group interest income: We anticipate robust group interest income, driven by: 1) bank NIM expansion and solid loan growth; 2) healthy interest income from non-bank subsidiaries (credit card and capital); 3) global operations; and 4) inorganic growth.  Group commission income: We believe group commission income was supported by: 1) a diversified income base (securities, etc.); and 2) a recovery in banks’ commission income (low base effects), including trust commissions (from ELS early redemptions).  SG&A expenses: We believe SG&A efficiency saw further improvement thanks to cost structure improvements (early retirement programs) and cost-saving efforts.  Credit cost ratio: We forecast credit cost ratio to decline to 39bps in 2021, helped by last year’s preemptive provisioning related to COVID-19 (41bps).

Investment points and valuation Earnings normalization and strong dividend appeal  We expect NIM to serve as an upside catalyst to share prices. Expectations of higher interest rates in 2H21-2022 should have a positive impact on sentiment.  When interest rates rise, NIM should expand further on higher lending rates. (We have yet to model this in our earnings estimates.)  The banking sector looks broadly undervalued, trading at a 2021F P/B of 0.37x (vs. ROE of 8.4%) and a 2021F P/E of 4.7x.  Top picks: We recommend KB Financial Group (KBFG) and (HFG) as our top picks, given their strong earnings stability, cost efficiency effects, and steep undervaluation relative to fundamentals.  Banks also offer attractive dividends; we estimate the sector’s divided yields at 6.0% for 2021, 6.6% for 2022, and 7.3% for 2023 (simple averages).

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. April 14, 2021 Banks

Figure 1. Combined NP of banks (financial holding companies) under our coverage

(Wtr) 16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0 2013 2014 2015 2016 2017 2018 2019 2020 2021F 2022F 2023F

Note: Based on combined NP of KBFG, SFG, HFG, IBK, BNKFG, DGBFG, and JBFG Source: Company data, Mirae Asset Securities Re