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Financials Equity Korea 25 March

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									Equity | Korea


                 25 March 2010                                                                                                     Produced by: RBS Asia Limited (Seoul) Branch



                                                               Financials
                                                               Value accretion on pension plans
                                                               We see retirement pensions as the new growth engine for financial companies for
                                                               the next 20 years; we estimate reserves of W154trn by 2020 and we see strong
                                                               long-term value accretion potential. Banks look best placed to benefit, then
                                                               brokers and insurers. Buy SFG, IBK, Mirae, KIH, Samsung FM and LIG Ins.

                                                               Key recommendations & forecasts

                                                                                            Reuters      Year end       Recom                Price     Target     EPS      PE
                                                                                                                                                        price    1fcst   1fcst
                                                               Shinhan Finl¹             055550.KS       Dec 2010           Buy           W43150     W47500      4,179   10.3
                 Sector performance
                                                               IBK¹                      024110.KS       Dec 2010           Buy           W13800     W18600      2,184     6.3
                                        (1M)   (3M)    (12M)   Samsung F&M Ins           000810.KS       Mar 2010           Buy           W190000    W234000    12,568   15.1
                 Absolute               11.1   -31.2   145.7   LIG Insurance             002550.KS       Mar 2010           Buy           W22400     W30000      2,544     8.8
                 Absolute (%)            2.3    -6.0    42.4
                                                               Mirae Asset¹              037620.KS       Mar 2010           Buy           W59300     W81000      4,395   13.5
                 Rel market (%)         -1.8    -5.9     3.5
                                                               Korea Invt¹               071050.KS       Mar 2010           Buy           W32700     W40000      3,887     8.4
                 Korea Composite: 1681.01
                 Korea SE Fin Svcs: 488.81                     1. Normalised EPS - Post-goodwill amortisation and pre-exceptional items
                 Source: Bloomberg                             Source: Company data, RBS forecasts




                                                               New growth engine ignited, with 2020 pension reserves estimated at W154trn
                                                               Regulatory support, an ageing population and changing social needs are key catalysts we
                                                               see driving growth in retirement pension reserves over the next 20 years. We forecast
                                                               retirement pension reserves will soar to W154trn in 2020, from W14trn in 2009, which seems
                                                               sufficient to create significant changes in cash flow and investment behaviour and, eventually,
                                                               to improve the capital market. This may strengthen the net financial asset position at
                                                               households and improve the loan-to-deposit ratios at banks (down 8.6ppt by 2020F).

                                                               Strong value-accretion potential, although losses may continue in 2010-11
                                                               We believe initial set-up costs, a lack of scale and excessive competition will leave those in
                                                               the pensions business making losses in 2010-11. Brokers are the most aggressive, offering
                                                               guaranteed high-return pension plans. In the long term, however, we foresee significant
                                                               value accretion from the pensions business, likely benefiting banks most, followed by brokers
                                                               and insurers.

                                                               Banks look the best positioned to benefit
                                                               The retirement pensions market is already crowded and competition seems overheated.
                                                               Nonetheless, we foresee no losers. We foresee industry consolidation by 2015. We also
                                                               expect market-share concentration among top 15 players to reach 95% in 2020. We believe
                                                               banks (and bank-led financial holding companies) are best positioned to dominate in the
                 Analysts                                      retirement pension market in Korea, followed by brokers and insurers.

                 Y C Mok                                       Looking too long-term; but optimism may appear much earlier
                 South Korea
                 +82 2 2131 6451
                                                               The retirement pension theme looks too long-term to play now, but we expect to see more
                 yc.mok@rbs.com                                tangible evidence to justify our optimism. We expect significant money shift to pension plans
                 Young Bae Kwon                                and more regulatory support sequentially, which should be compelling enough to get traction
                 South Korea                                   from long-term investors. Potential major beneficiaries in terms of Korea’s retirement pension
                 +82 2 2131 6465
                 youngbae.kwon@rbs.com                         plays that we see include our preferred Buy picks: Shinhan Financial Group (SFG), Industrial
                                                               Bank of Korea (IBK), Samsung Fire & Marine, LIG Insurance, Mirae Asset Securities (Mirae)
                 6/F, Seoul Finance Center, 84,                and Korea Investment Holdings (KIH).
                 Taepyeogno 1-ga, Jung-gu, Seoul 100-
                 768, South Korea

                 http://research.rbsm.com                      Important disclosures can be found in the Disclosures Appendix.
                                                 Mirae Asset Securities: Most aggressive
                                                 Market position. Mirae Asset Securities (Mirae) is the largest retirement pension play among the
                                                 brokerage companies, with total pension reserves of W487bn (3.5% market share) as of January
                                                 2010, equivalent to 27% of shareholders’ equity vs the average of 12% for its major brokerage
                                                 peers. This implies that Mirae has the highest leverage within the retirement pension plan
                                                 business. Its market share has risen with its higher gearing to DC plans. Mirae Asset Life, an
                                                 affiliate of Mirae, had 1.7% market share as of January 2010.

                                                 Strengths. Mirae’s key competitive advantages are: 1) proven high returns on investment assets
                                                 like for the other brokers; 2) strong brand recognition of Mirae Asset Investment Management,
                                                 Mirae’s affiliate and Korea’s largest equity fund manager; 3) well-trained and experienced
                                                 employees; and 4) its risk-taking flexibility.

                                                 Weaknesses. No conglomerate connection implies limited captive demand potential. The limited
                                                 scope of its financial services and its risk-taking image are other weak points relative to competitors,
                                                 particularly the banks and insurers.

                                                 Risks. Competition over market share has significantly increased with the introduction of service
                                                 charge discounts and guaranteed high investment returns. The potential earnings contribution
                                                 from the retirement pension plan services business could be seriously hit in an equity market
                                                 downturn.

Chart 121 : Retirement pension reserves                                                     Chart 122 : Market share

 600        W bn                                                                      50%    3.4%                                                                               14%

                                                                                      45%
                                                                                             3.2%                                                                               14%
 500
                                                                                      40%

                                                                                      35%    3.0%                                                                               13%
 400
                                                                                      30%
                                                                                             2.8%                                                                               13%
 300                                                                                  25%
                                                                                             2.6%                                                                               12%
                                                                                      20%
 200
                                                                                      15%    2.4%                                                                               12%
                                                                                      10%
 100
                                                                                             2.2%                                                                               11%
                                                                                      5%

   0                                                                                  0%     2.0%                                                                               11%
       Jan-09           Apr-09         Jul-09             Oct-09             Jan-10                 Jan-09          Apr-09             Jul-09            Oct-09        Jan-10


                   Retirement pension reserves (LHS)              % MoM (RHS)                                            Mirae (LHS)            Broker average (RHS)


Source: Ministry of Labour                                                                  Source: Ministry of Labour


Chart 123 : Pension plan mix, 2009                                                          Chart 124 : Return on pension asset (annualised return,
                                                                                            2006-09)

   100%                                                                                      8%

     90%                                                                                     7%
     80%
                                                                                             6%
     70%
                                                                                             5%
     60%

     50%                                                                                     4%

     40%                                                                                     3%

     30%
                                                                                             2%
     20%
                                                                                             1%
     10%
                                                                                             0%
       0%
                                                                                                    Mirae Asset      Bank avg          Life ins avg     Non-life avg   Broker avg
                Mirae        Banks    Life ins     Non-life ins    Brokers      Total
                                                                                                        Sec
                                 DB         DC               IRA                                                                   DB                  DC


Source: FSS                                                                                 Source: FSS




Financials | Company Profiles | 25 March 2010                                                                                                                                       44
Chart 125 : Market share by plan type, 2009                        Chart 126 : Market share forecast by scenario

 7.0%                                                               5.0%

                                                                    4.5%
 6.0%
                                                                    4.0%

                                                                    3.5%
 5.0%
                                                                    3.0%

 4.0%                                                               2.5%

                                                                    2.0%
 3.0%
                                                                    1.5%

                                                                    1.0%
 2.0%
                                                                    0.5%

 1.0%                                                               0.0%
                                                                           2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

 0.0%
                                                                                            DC dominated         DB dominated       Base
                  DB          DC         IRA           Total

Source: Ministry of Labour                                         Source: Ministry of Labour


Chart 127 : Pension plan mix forecast – base                       Chart 128 : Pension plan mix forecast – DC dominated

 7                                                                  8
          W trn                                                              W trn

 6                                                                  7

                                                                    6
 5

                                                                    5
 4
                                                                    4
 3
                                                                    3

 2
                                                                    2

 1                                                                  1

 0                                                                  0
     2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020        2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

                             DB    DC   IRA                                                       DB        DC       IRA


Source: FSS, RBS forecasts                                         Source: FSS, RBS forecasts


Chart 129 : Pension plan mix forecast – DB dominated               Chart 130 : Pension reserve forecast (% CAGR), 2010-20

 5                                                                  29%
        W trn

                                                                    27%
 4

                                                                    25%
 3
                                                                    23%

 2
                                                                    21%


 1                                                                  19%


                                                                    17%
 0
     2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
                                                                    15%
                             DB    DC    IRA                                         Base                  DC dominated         DB dominated

Source: FSS, RBS forecasts                                         Source: RBS forecasts




Financials | Company Profiles | 25 March 2010                                                                                                  45

								
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