KB Financial: Poised For A Re-Rating (NYSE:KB)

Elevator Pitch

A Buy rating is warranted for KB Financial Group Inc.’s (NYSE:KB) [105560:KS] stock in my opinion. There is a good chance that KB’s shares could witness a positive re-rating in the near future. KB Financial’s stock price has declined to a larger extent as compared to its peers, and there are visible catalysts to provide an uplift for its shares.

KB’s Shares Have Underperformed In 2022

In 2022 year-to-date, KB Financial’s stock price fell by -13.3%. As a comparison, KB’s Korean banking peers experienced milder share price declines over the same period. Specifically, Shinhan Financial Group Co., Ltd. (SHG) [055550:KS] and Woori Financial Group (WF) saw their stock prices decrease by -7.3% and -7.8%, respectively, in this year thus far.

Dividends And Share Repurchases

In my earlier October 14, 2022 write-up for KB Financial, I highlighted that KB’s shareholder capital return had disappointed investors. This is one of the key factors which contributed to KB’s stock price underperformance this year.

KB’s shares have the potential to rise, if the company’s actual 2023 dividends turn out to be higher than anticipated, and it initiates a new share repurchase plan.

As per the sell-side analysts’ consensus financial estimates taken from S&P Capital IQ, KB Financial’s dividend per share is projected to increase by +8% to KRW3,521 based on assumptions of a 28% payout ratio. If KB Financial’s actual dividend payout ratio can rise to the targeted 30% (short-to-medium term goal as previously guided by management) in 2023, this will be a positive surprise and act as a re-rating catalyst for the stock.

Also, it is time that KB Financial sends a strong signal about the undervaluation of its shares with a new share buyback program. With the stock trading at just 4 times consensus forward next twelve months’ normalized P/E as per S&P Capital IQ, an announcement of a massive share buyback is likely to be the catalyst that the market needs to regain confidence in KB Financial.

Spotlight On Net Interest Margin And Non-Life Insurance Business

Another factor that might have affected KB Financial’s share price performance in 2022 was its weaker-than-expected net interest margin expansion.

According to S&P Capital IQ’s financial data, KB’s net interest margin improved by +13 basis points from 1.85% for the fourth quarter of 2021 to 1.98% in the third quarter of this year. During this time frame, Shinhan Financial’s net interest margin expanded by +34 basis points from 1.69% to 2.03%. Separately, Woori Financial’s net interest margin widened by +22 basis points from 1.48% in Q4 2021 to 1.70% for Q3 2022.

The numbers presented above suggest that KB’s was relatively less sensitive to rate hikes as compared to its peers. In other words, KB Financial wasn’t the best investment candidate for investors seeking a play on the rise in Korea’s interest rates.

Moving ahead, KB Financial’s share price performance in 2023 should be better, as the market shifts its attention away from rate hikes and KB’s non-banking businesses deliver superior results.

There are expectations that interest rates in Korea should peak in 2023, which means that investors will be less focused on net interest margin expansion as a share price driver for Korean banks.

Separately, KB Financial’s diversification into non-banking businesses should pay off in the form of higher-than-expected non-interest income for 2023. Previously, I noted that non-banking businesses account for close to half of KB’s bottom line.

In the next year, KB Financial’s non-life insurance business should support the company’s overall non-interest income growth. According to a November 24, 2022 Business Korea article citing research from NH Investment & Securities, non-life insurance companies in Korea might possibly see a “30%-80%” growth in 2023 earnings due to “long-term risk loss ratio improvement” and “transition to IFRS17 (International Financial Reporting Standard 17 on Insurance Contracts).” This points to a favorable outlook for KB’s non-life insurance business.

KB Is The Digital Banking Leader Among Traditional Banks

The biggest threat for traditional banks is the potential disruption posed by digital-only upstarts, and KB Financial has done well in mitigating such risks.

Based on data taken from an August 15, 2022 Korea JoongAng Daily news article, KB Financial’s KB Star Banking was the third most popular digital banking mobile application in South Korea with around 11.5 million monthly active users in July 2022. Digital banks, Toss Bank and Kakao Bank, had the top two banking mobile apps in the country with 13.9 and 13.1 million active users, respectively, in the same month.

It is noteworthy that KB Financial is way ahead of its traditional banking peers in attracting digital-savvy consumers. As a comparison, SHG’s Shinhan SOL and WF’s Won Banking apps boasted much lower monthly active users of 9.1 million and 6.3 million, respectively.

Concluding Thoughts

I retain a Buy rating for KB Financial. KB’s shares could play catch-up with its peers in time to come, when the multiple catalysts for the stock as discussed above are realized.