Chung Sung-Jun
Elevator Pitch
I continue to rate KB Financial Group Inc.’s (NYSE:KB) [105560:KS] shares as a Buy.
I highlighted that KB Financial’s shares were “too cheap to ignore” in my previous August 1, 2022 update for the stock. In this latest article, I turn my attention to KB Financial’s Q3 2022 earnings preview and the potential for a further improvement in the company’s shareholder capital return.
The sell-side is only expecting KB Financial to achieve a slight YoY increase in earnings for the third quarter, considering the more limited net interest margin expansion potential and the tough operating environment for the brokerage business. As such, the probability of KB Financial delivering in-line net income for Q3 is reasonably high.
Separately, KB Financial is likely to announce a new share repurchase program in the coming months. This will be perceived by the market as an improvement in KB Financial’s shareholder capital return, which is expected to be a re-rating catalyst for the stock. KB Financial’s current depressed valuations and its Korean financial peer’s new capital return initiative support the case for the company buying back its own shares.
Taking into account the various factors discussed in this article, I don’t see any reasons to change my Buy rating for KB Financial.
Preview Of KB Financial’s Third-Quarter Results
According to S&P Capital IQ, KB Financial is expected to announce the company’s financial results for the third quarter of 2022 in the following week on October 21.
Sell-side analysts are forecasting that KB Financial will generate a normalized net income of KRW1,304 billion in Q3 2022 as per S&P Capital IQ data. This is equivalent to a marginal +0.5% YoY increase in KB Financial’s bottom line as compared to its Q3 2021 net profit of KRW1,298 billion. This is lower than KB Financial’s actual Q2 2022 earnings growth of +8.2% on a YoY basis.
KB Financial is expected to register a slower pace of net interest income and non-interest income growth in Q3 2022. At its prior Q2 2022 earnings briefing in July 2022, KB Financial already acknowledged that “the NIM (Net Interest Margin) improvement range might be limited” for the third quarter due to “competition between the banks” and “policies to help the vulnerable borrowers.” Separately, KB Financial’s Q3 2022 non-interest income is likely to have been affected by weak equity markets which will be a drag on its brokerage business.
As such, I view the sell-side’s current third-quarter consensus financial estimates for KB Financial as fair. In other words, I think that expectations of a slowdown in the brokerage business’ growth and a more moderate increase in net interest margin should have been largely reflected in the consensus numbers for KB Financial.
In conclusion, KB Financial should be able to deliver in-line earnings for the third quarter. An absence of negative earnings surprises should limit the downside for KB Financial’s shares in the short term.
Improvement In Shareholder Capital Return
In my August 2022 update for KB Financial, I highlighted my positive view of the company’s “second KRW150 billion treasury stock cancellation for this year.”
Recent announcements by KB Financial’s peer Shinhan Financial Group Co., Ltd. (SHG) [055550:KS] suggest that there is room for KB Financial to do even better in the future in the area of shareholder capital return.
It is good to see KB Financial cancelling its existing treasury shares (which isn’t the usual practice for Korean companies) it holds on its books. But Shinhan Financial has outdone KB Financial with its decision to commence a new share buyback program in tandem with treasury share cancellation as per its 6-K filings in early-October 2022.
KB Financial appears to be much less aggressive with the company’s shareholder capital return initiatives. KB indicated at its second-quarter investor call that “once we reach the 30% (dividend payout ratio level)”, it “will focus more on share buyback.” As a point of reference, KB Financial boasted a dividend payout ratio of 26.0% for fiscal 2021.
KB Financial’s management comments at the Q2 2022 investor briefing appear to imply that the company will only initiate share repurchases after increasing its dividend payout to the targeted 30% level. This is something that KB Financial should seriously reconsider, taking into account its current valuations.
The company’s shares have dropped by close to -13% since my earlier article published on August 1. In the past two and a half months, KB Financial’s consensus forward next twelve months’ normalized P/E multiple has de-rated from 3.8 times to 3.5 times. In the same time frame, the trailing P/B multiple for KB Financial has compressed from 0.41 times to 0.38 times. This is certainly the best time for KB Financial to repurchase its own shares, rather than prioritize an increase in its dividend payout ratio.
On the flip side, this means that there is the potential for KB Financial to surprise investors in a positive manner with the announcement of a share repurchase plan in subsequent quarters. A key driver will be “peer pressure.” KB Financial is competing with Shinhan Financial for investors’ attention and their funds, so there will definitely be pressure coming from shareholders who will ask that KB Financial matches up to its peers in terms of capital returns.
Closing Thoughts
My Buy rating for KB Financial stays unchanged. The stock’s undemanding valuations and the potential for the company to commence a new share repurchase program justify my favorable view of KB Financial.
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