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Credit card delinquency ratios of domestic banks

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Credit card delinquency ratios of domestic banks Powered By Docstoc
					                     Sector Focus
                     Korea Equity Research                                                                                             13 January 2004
www.dbsvickers.com




                                                                                                                                   Banks - OVERWEIGHT
                     Korean Banks
                     After the storm
                      Overall Review:                                                                                             At a Glance

                     - We recommend Overweight for bank stocks in 2004.                                                            Sector: Retail banking
                     - Our top picks for banks stocks are Kookmin Bank, Shinhan Financial
                                                                                                                                   KOSPI: 848.43
                     Group (Cho Hung Bank included) and Industrial Bank.
                      Issue & Strategy:
                                                                                                                                   Reason for Report:
                     - We recommend investment into Industrial Bank of Korea based on high                                         Update
                     loan growth and Shinhan Financial (including Cho Hung Bank) based on
                     its successful merger with Cho Hung Bank.                                                                     Implications:
                                                                                                                                   Positive
                     -   Top Picks: Kookmin Bank, Shinhan Financial (including Cho Hung
                     Bank), Industrial Bank of Korea                                                                               Sector rating :
                                                                                                                                   Overweight



                      Deposit-loan spread is directly reflecting interest rate hike /
                     PBR positioned at the middle of valuation band, representing
                     significant upside.
                        (%)                                                    (x)
                      2.6                  Deposit-loan spread(LHS) 10   3.0
                                           Gov 't bond y ield                           Cho Hung Bank             Kookmin Bank
                      2.4
                                                                         2.5
                                                                   8
                      2.2
                                                                         2.0
                      2.0                                          6
                                                                         1.5
                      1.8

                      1.6                                          4
                                                                         1.0

                      1.4
                                                                   2     0.5
                                                                                                        PBR is locating at mid-point
                      1.2
                                                                           -
                      1.0                                          -            27- 27- 27- 27- 27- 27- 27- 27- 27-
                                                                               Jun- Feb- Oct- Jun- Feb- Oct- Jun- Feb- Oct-
                           00




                      M 01




                      M 02




                      M 03
                      Ja 0




                      Ja 1




                      Ja 2




                          03
                      Se 0




                      Se 1




                      Se 2




                      Se 3
                          0




                          0




                          0
                         -0




                         -0




                         -0




                         -0
                        n-




                        n-




                        n-




                        n-
                        p-




                        p-




                        p-




                        p-
                       ay




                       ay




                       ay




                       ay




                                                                                98   99   99   00   01   01   02   03   03
                     Ja
                          M




                      Investment recommendations and target prices
                      - Kookmin Bank: Buy, Target Price KRW60,000(revised up)
                      - Shinhan Financial: Buy, Target Price KRW24,500(revised up)
                      - Industrial Bank: Buy, Target Price KRW10,200(maintain)
                      - Cho Hung Bank: Buy, Target Price KRW5,100(revised up)
KOREA




                                                                                                                                                     1 of 20
Sector Focus                                                                        Korean Financial




               Contents


               1. Investment strategies for bank stocks in 2004 ............... 3

               2. Major factors forecast to affect bank stocks in 2004 ........ 5

                  (1) Issues related to credit card companies

                  (2) Delinquency ratios of household and corporate loans

                  (3) Credit card delinquency ratios of domestic banks


                  (4) Forecasts for trends in growth of loan accounts,
                  net interest margin and stock prices in 2004

               3. Major top picks    ......................................... 15

                  (4) Kookmin bank

                  (5) Shinhan Financial

                  (6) Industrial Bank of Korea




                                                                                              2 of 20
Sector Focus                                                                              Korean Financial




I. Investment strategies for bank stocks in 2004
We recommend Overweight for bank stocks in 2004. Although additional
financial support needed by LG Card and other ailing credit card
companies should continue to weigh on the banking sector, since the
possibilities of a financial crisis have largely subsided, we recommend
increasing   investment  into   bank  stocks.   Samsung  Credit   Card’s
performance is forecast to show signs of improvement from the increase
in capital and upcoming merger with affiliate company Samsung Capital.

Domestic credit card companies should start to report improvements in
asset stability based on the recovery of the economy, possible increase
in commission rates received from member stores and a reduction in SG&A.
Banks, on the other hand, should be able to improve the profitability
of their credit card sectors based on current stable and low borrowing
rates.

The fundamentals of domestic banks are forecast to improve in 2004 as
net interest margins widen, addition of loss reserves decline and the
asset quality of credit card accounts improves from massive write-offs
in 2003.

1) Our top picks for banks stocks are Kookmin Bank, Shinhan Financial
   Group (Cho Hung Bank included) and Industrial Bank. We recommend
   shifting focus from Kookmin Bank to Shinhan Financial Group, which
   has tremendously grown in size from the recent takeover of Cho Hung
   Bank, and Industrial Bank, which currently records high growth in
   loan accounts.

2) Kookmin Bank’s performance is forecast to turn around in 2004 as the
   economy starts to recover. Its delinquency ratios are beginning to
   stabilize. After completing privatization, we believe Kookmin proved
   its ability as the leading bank in the domestic market while dealing
   with the LG Card crisis, showing its influence over overall interest
   rates and financial policies.

3) As overall growth in loan accounts continues to slow, Shinhan
   Financial Group is finding additional momentum from its new holding
   company structure. The company currently ranks highest in risk
   management. Its new subsidiary Cho Hung Bank is forecast to record
   notable improvements in profitability as the economy starts to
   recover based on its large weight in economy-sensitive assets.

4) Following its move to the KSE and its subsequent share price drop,
   Industrial Bank stocks are the most undervalued among domestic bank
   stocks. While the growth in SME loans is forecast to remain steady,
   the improvement in exports is expected to help improve delinquency
   rates since most of Industrial Bank’s current SME loan accounts are
   held by manufacturing companies.

Recommendation and target prices for Korean financials
                          Share
                      price( 9                          Upside Previous
                           Jan) Rating TP            potential    TP      PE(x)      P/BV(x)
                     (KRW)                 (KRW)       (%)       (KRW) 2003E 2004E 2003E2004E
Kookmin Bank            47,600        BUY 60,000          26.0 51,500       -   10.9 1.6 1.4
Shinhan
Financial               18,450        BUY 24,500          32.7 20,500    19.9    8.0 1.6 1.4
Industrial Bank
of Korea                  7,330       BUY 10,200          39.1 10,200    13.1    5.8 1.0 0.8
Cho Hung Bank             4,100       BUY 5,100           24.3        -     -   36.8 1.5 1.5
                                                                                                    3 of 20
Sector Focus                                                                                               Korean Financial




While growth in loan accounts was the main factor affecting bank stocks
in the past, the slight adjustment in loan account growth rates
following the surge over the past 2~3 years and the merger of companies
creating massive banks with the power to control lending rates, are
starting to break traditional patterns in stock prices.

Kookmin Bank’s stocks are currently being re-evaluated reflecting the
completion of privatization, its status as the market leader, and the
possible increase in profits from a reduction in loss reserves, despite
still slow growth in loan accounts.

Kookmin Bank shows slow recovery but valuation will likely be re-rated

      (%)                                      Loan growth rate(LHS)                           (x)
     40                                        Kookmin Bank PBR                                      2.5

     35

     30                                                                                              2.0

     25

     20                                                                                              1.5

     15

     10                                                                                              1.0

      5                                                                        KB’s re-rating is
      -                                                                        occurring thanks
                                                                                         0.5
                                                                               to privatization,
     -5                                                                        profitability,
    -10                                                                        and complete
                                                                                         -
                                                                               leadership in
     27-Jun-98         27-Aug-99        27-Oct-00        28-Dec-01         28-Feb-03
                                                                               banking.

Source : DBS Vickers Research

Kookmin and CHB at middle levels of historical PBR


            (x)
     3.0

                                Cho Hung Bank                   Kookmin Bank
     2.5



     2.0



     1.5



     1.0
                                                                    PBR is locating at mid-point

     0.5



       -
      27-Jun-     27-Feb- 27-Oct-   27-Jun-   27-Feb- 27-Oct-   27-Jun-   27-Feb- 27-Oct-
         98          99     99        00         01     01        02         03     03

Source: DBS Vickers Research




                                                                                                                     4 of 20
Sector Focus                                                              Korean Financial




II. Major factors forecast to affect bank stocks in 2004

1.Issues related to credit card companies

 Banks focus on shareholder value. Domestic banks provided financial
support of KRW1.65tr into LG Credit Card, which saw its impaired
capital surge to KRW3.24tr at the end of October 2003. Although banks
suffered from the financial support given to LG Card, their efforts to
minimize losses and detach themselves from the government showed
increased focus on shareholder value, shedding new light on the
evaluation of domestic banks by both domestic and foreign investors.
Kookmin Bank’s strong performance after privatization is forecast to
significantly reduce discount factors affecting domestic bank stocks.

Decision to keep LG Card afloat to help improve delinquency ratios
Since a large portion of credit card holders have multiple loan
accounts, credit card delinquency ratios of banks would have surged if
domestic banks decided not to provide support into LG Card. According
to KNFA, multiple loan account holders currently total over 1m. We
believe the performance of LG Credit Card will show better-than-
expected improvements if commission rates received by member stores are
raised.

 Bank stock prices jump by 1.9% during LG Card crisis. From the start
of the LG Card crisis on November 13, 2003 to present, bank stock
prices have remained stable, increasing approximately 1.9% from
November. The strong net buy of foreigners, reflecting improvements of
the economy, supported stock prices during the crisis.

Compared to the first credit card crisis, recent bank stock prices
strongly reflect positive factors and improvements over negative
factors. The Korean banking industry index actually surged by 44%
between 30 May 2003, when major credit card companies increased their
capital and Kookmin Credit Card merged with Kookmin Bank on May 30, and
13 November 2003, the start of the liquidity crisis of LG Credit Card.

Bank stock prices are forecast to continue improving based on the
recovery of the economy, stabilization of delinquency rates and
improvement in profitability. We recommend focusing on the long-term
performance improvements of domestic banks over negative factors such
as the additional support into LG Credit Card and current losses
reported by banks.




                                                                                    5 of 20
Sector Focus                                                                                     Korean Financial




The historical rise of banking stocks following the settlement of crisis (LG Card liquidity
crisis is in resolution stage)


                  (pt)                                                      (KRW)
            200                     Korea Banking Index(LHS) The second        22,000
                                    Shinhan Financial        credit card
                                                             loans and LG
            180          SK Global and the 1st               Card liquidity    20,000
                         credit card liquidity               crisis
                         crisis resolved by                                    18,000
            160          capital increase and
                         merger
                                                                               16,000
                                                                         Korea Banking Index
            140                                                          up by 1.7% vs. market
                                                                         rise of 3.9%
                                                                               14,000
            120                                       Banking index
                                                      is up by 44%               12,000
                                                      up to Nov 13
            100                                       from end-May
                                                                                 10,000

             80                                                                   8,000
              2-Jan-03      14-Mar-03   28-May-03   8-Aug-03   24-Oct-03   7-Jan-04




Source: DBS Vickers Research

2. Delinquency ratios of household and corporate loans

 Gradual reduction in household loans. We believe both household loan
and corporate loan delinquency rates have reached peak levels and will
start to decline. Household loan amounts continued to fall since
hitting a peak in August 2003.

Households can choose to reduce consumption or repay debt by increasing
income to improve their financial status. As shown in the sharp
reduction in credit sales, domestic households are currently cutting
back on consumption. Without an actual improvement in income, however,
future improvement in household delinquency rates and their financial
status should be limited.

On the other hand, household debt/financial assets continue to record
gradual improvements, slightly dropping from 51.1% in 1Q03 to 50.8% in
2Q03 and 50.7% in 3Q03. Accordingly, we expect to see an increase in
repayment of debts and a subsequent drop in delinquency ratios of
household loans going forward. The recovery of the domestic economy is
forecast to accelerate the improvement in delinquency ratios.




                                                                                                           6 of 20
Sector Focus                                                              Korean Financial




Household debt levels off while banking stocks elevate

        (pt)              Korea Banking Index(LHS)                 (%)
  300                     Household debt ratio                       55

  250                                                                50
  200
                                                                     45
  150
                                                                     40
  100

   50                                                                35

    0                                                                30
     31-Mar- 31-Mar- 31-Mar- 30-Mar- 29-Mar- 31-Mar-
       98      99      00      01      02      03

Source: DBS Vickers Research


 Most household loans backed by mortgages. Household delinquency
ratios declined by 0.4%p to 2.1% at the end of November 2003 after
hitting a peak at 2.5% in August 2003. While rates are forecast to
further drop to 2.0% in December as households repay debts, delinquency
ratios are still significantly higher than the 1.5% recorded in
December 2002. We believe household delinquency rates will continue to
decline at a gradual pace as households work to improve their financial
status, pulling down total household loan amount, which reached a peak
at KRW6tr in late August 2003.

In contrast to credit card accounts, most household loans are backed by
mortgages. Household loans granted solely on credit average only 24%
(Kookmin Bank 19.5%, Shinhan Financial Group 30.7%, Hana Bank 21.3%,
KorAm Bank 14.0%) of total loans. Since banks currently maintain
reserve ratios near delinquency rates at 2.15% for household loans,
domestic banks are not expected to record large additional losses from
household loans.

Households are reducing debt by decreasing consumption

   (KRWbn)                   Inc(dec) in household loans

 30,000                      Inc(dec) credit sales

 25,000

 20,000

 15,000

 10,000
  5,000
        -
            1Q97   1Q98   1Q99    1Q00    1Q01       1Q02   1Q03
 -5,000
-10,000
Source: Bank of Korea, DBS Vickers Research




                                                                                    7 of 20
Sector Focus                                                                          Korean Financial




SME loan delinquency rates to drop as exports increase
Domestic banks are forecast to benefit from the recovery of the economy
as the increase in overall export levels pull down SME loan delinquency
ratios. However, the asset quality of SOHO loans may not improve
immediately, since the performance of those companies mainly depend on
domestic sales, which are expected to improve in 2H04.

With reserve ratios for SME loans currently recording near delinquency
ratios at 2.5%, banks are not expected to record large additional
losses from SME loans.

August 2003 was the peak for household loan delinquency

     (KRWbn)                  Delinquent amount(LHS)                          (%)
  7,000                       Delinquency ratio                                 3.0

  6,000                                                                        2.5

  5,000
                                                                               2.0
  4,000
                                                                               1.5
  3,000
                                                                               1.0
  2,000

  1,000                                                                        0.5

      -                                                                        -
           12 3 6 9 12 3 6 9 12 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 1011

          1999 2000    2001           2002                   2003



Source : DBS Vickers Research


SME loan delinquency ratio settles after peaking in August

 4.0%

 3.5%

 3.0%

 2.5%

 2.0%

 1.5%

 1.0%
  FY2000 FY2002 Feb-03 Apr-03 June-03 Aug-03                  Oct-03

Source : Financial Supervisory Service




                                                                                                8 of 20
Sector Focus                                                                           Korean Financial




3. Credit card delinquency ratios of domestic banks

 Credit card delinquency ratios to stabilize around 2Q04 or 2H04. With
a large part of cash advances granted to clients in the low income-
bracket, credit card companies are presently facing difficulties in
retrieving loans from individuals. Even if the economy continues to
recover, it will take some time for the effects to reach people in the
low income-bracket. Accordingly, delinquency ratios of corporate loans
will first start to recover, with household loan and credit card
delinquency ratios following behind. To further improve delinquency
ratios, domestic banks will continue to write off bad credit card
accounts in 1H04.

Delinquency ratios of credit card accounts have started to increase
once again after slightly decreasing since hitting a peak in June~July.
We believe credit card delinquency rates will start to stabilize around
2Q04 or 2H04.

Another factor causing the delay in improvement of credit card
delinquency ratios is the reduction in credit limit, pulling down the
total amount of credit card assets. Since delinquency ratios are the
amount of overdue accounts over total credit card assets, the reduction
in total asset amount pushes up delinquency ratios. In short, for
delinquency ratios to rapidly decline, banks must increase their credit
card asset amount by securing new clients while reducing overdue
accounts.

Bank credit card delinquency ratio rising slightly but new delinquency decreasing


     (%)
   18.0             delinquency ratio(1-day plus)
                    deinquency ratio(1-month plus)
   16.0
   14.0
   12.0
   10.0
    8.0
    6.0
    4.0
    2.0
      -
                                      11                    11                    11
           123 6 9121 2 3 4 5 6 7 8 910 121 2 3 4 5 6 7 8 910 121 2 3 4 5 6 7 8 910

           99 00             01                    02                   03


Note) Included old Korea Credit Card Service asset from October
Source : DBS Vickers Research




                                                                                                 9 of 20
Sector Focus                                                                                                                            Korean Financial




 Increase in bad debt reserves for credit card assets. Banks raised
credit card bad debt coverage ratios to 90~140% for accounts overdue
more than one month. Accordingly, credit card accounts will cease to
substantially affect the overall performance of domestic banks in 2004
(KRW5tr, or 40% of the KRW12.2tr in total bad debt reserves, were for
credit card accounts in 2003, other SK Global related reserves recorded
KRW2tr). A reduction in credit card losses will directly increase
profits for banks as a result.
Taking into consideration credit card accounts that are forecast to
become overdue, total delinquent accounts should start to decline as
the economy recovers and credit card companies record in the black in
monthly performance around 2H04. Among domestic banks, KorAm Bank and
Hana Bank currently record lowest in credit card loan amount with high
coverage ratios.

Bank credit cards
                                 KorAm                             Shinhan     Shinhan                                Kookmin
(Unit;KRWbn,%)                   Card           Hana Card CHB Card Card        Total            Old     KCCKookmin BC Total         Woori     KCC     Total

Credit card assets                       1877      1693.5   4066.4     2356.4       6422.8       13467.2       4619.2    18086.4    5036    5759.3   38875
Provision balance                    216.9          121.7    393.3      128.5        521.8        1957.6        386.7     2344.3     560     419.2   4183.9
(reserve ratio)                          11.6         7.2      9.7           5.5          8.1         14.5        8.4       13.0    11.1      7.3      10.8
Delinquent amount( 1-day plus)       222.4          118.4    587.7      215.4        803.1        3692.1        552.3     4244.4   1334.7   1378.0   8101.0
(delinquency ratio)                      11.8         7.0     14.5           9.1         12.5         27.4       12.0       23.5    26.5      23.9     20.8
Coverage ratio                           97.5       102.8     66.9       59.7            65.0         53.0       70.0       55.2    42.0      30.4     51.6
Delinquent amount( 1-day plus)       163.3           83.5    391.9      145.4        537.3        2163.5          401     2564.5   1055.2    515.8   4919.6
(delinquency ratio)                       8.7         4.9      9.6           6.2          8.4         16.1        8.7       14.2    21.0      9.0      12.7
Coverage ratio                       132.8          145.7    100.4       88.4            97.1         90.5       96.4       91.4    53.1      81.3     85.0


To benefit from reduction in bad credit card accounts in 2004
As banks maintain their focus on reducing bad credit card accounts held
by clients with multiple overdue accounts, risks levels are forecast to
continue declining. Due to a major write-off of bad debts, the weight
of credit card assets fell from 7.4% of the total assets of domestic
banks in September 2002 to 5.3% in September 2003. Kookmin Bank was
able to reduce credit card accounts held by clients with multiple
accounts (users of more than four cash advance services) by 57% from
KRW3.2tr in December 2002 to KRW1.38tr in September 2003.

Banks’ total credit card assets on declining trend
     (KRWtr)                                                                                (%)
   50                                                                                             8.0
                      Credit card asset(LHS)
                      Ratio
                                                                                                  7.0
   40
                                                                                                  6.0


   30                                                                                             5.0


                                                                                                  4.0
   20
                                                                                                  3.0


   10                                                                                             2.0
        Mar 00      Sep    Mar 01        Sep       Mar 02     Sep     Mar 03       Sep
                     00                   01                   02                   03


Source : DBS Vickers Research, the companies
                                                                                                                                                     10 of 20
Sector Focus                                                                             Korean Financial




4. Forecasts for trends in growth of loan accounts, net interest margin,
and stock prices in 2004

 Stock prices rapidly reflecting improvement in business conditions.
Profitability affected by increase in loans and net interest margin
Profitability levels of banks are closely related to growth in assets
and net interest margins. Apart from profits secured from securities
management, banks mostly generate their profits by lending to
individuals and corporations. Accordingly, profit levels of banks rise
when net interest margins remain high while loan accounts increase. An
improvement in profitability normally causes stock prices of domestic
banks to increase as well. In the past, as seen in the chart below,
stock prices of banks moved one month in advance to changes in loan
increase rates.

Banks’ share price movement one quarter ahead of loan growth rate; but not so recently

   (%)                     Loan grow th rate(LHS)
                                                                        (pt)
   40
                           Korea Banking Index                                 300
   35
                                                                               250
   30
   25
                                                                               200
   20
   15                                                                          150
   10
                                                                               100
    5
    -
                                                                               50
   -5
  -10                                                                          -
        Jan- Jul- Jan- Jul- Jan-   Jul- Jan- Jul- Jan- Jul- Jan- Jul-
         98   98   99   99 00       00 01     01   02   02   03   03



Source : DBS Vickers Research, Bank of Korea


 SME loans to continue increasing at stable pace. Based on the surge
in household and SME loans, the loan increase rate of banks jumped to
32% and 13% in 2002 and 2003, respectively. Outstanding loans surged
from KRW296tr in 2000 to KRW508tr in 2003, causing delinquency rates to
jump as well. With the growth of household loans curbing presently, we
expect the increase rate of loans to remain around 9%, near the GDP
growth rate forecast for 2004. The increase in loans in the US market
(5.73%) is also currently recording near the country’s nominal GDP
growth rate of 5.6%. The increase rate of SME loans, on the other hand,
is forecast to fall slightly to 14% in 2004, from the 18% recorded in
2003. Household loans are expected to record a notable drop from 14% in
2003 to 8% in 2004 as households focus on reducing debt. In short,
growth in total loans should be affected by the large decrease in
household loan growth while SME loans continue to gradually increase in
2004.




                                                                                                  11 of 20
Sector Focus                                                                        Korean Financial




Robust SME loan growth vs. sharply falling household loan growth

           (%)                                                     SME loan
                                                                   Household loan
 60
                                                                   Bank loan


 50



 40



 30



 20



 10



   -
             12                  11                     11
           11 1 2 3 4 5 6 7 8 910 12 1 2 3 4 5 6 7 8 910 12 1 2 3 4 5 6 7 8 91011

           2000            2001                    2002                 2003


Source : DBS Vickers Research, Bank of Korea


Performance of banks to depend on management of bad debts. As seen in
the below figure, banks’ stock prices are mostly affected by loan
increase rates. However, starting from 2H03, stock prices started to
break away from traditional patterns. The main cause is the recovery
from shock. The effects of the first credit card crisis on bank stocks
are wearing off, pushing up overall stock prices. In addition, since
the substantial increase in loans caused delinquency rates to surge,
banks should record improvements in asset quality from an adjustment of
loan increase rates. The average gross profit of domestic banks
increased by 114% from KRW8.3tr in 1999 to KRW18.0tr in 2002 and should
continue to grow as banks efficiently manage their bad debts.


Bad debt management is the key factor in maintaining steady NIM

 (%)                               Interest margin
                                   provision transfer ratio
  2.5                              ROA(RHS)                              2.5

  2.0                                                                    1.5

                                                                         0.5
  1.5
                                                                         -0.5
  1.0
                                                                         -1.5

  0.5                                                                    -2.5

       -                                                                 -3.5
                 95   96      97      98      99     00       01   02


 Source : DBS Vickers Research, Bank of Korea

                                                                                             12 of 20
Sector Focus                                                                              Korean Financial




 Nominal net interest margin to increase in 2004. Banks are forecast
to report an improvement in net interest margin in 2004. Since most
domestic loans are short-term (under three years), changes in interest
rates are swiftly reflected in the performance of banks.

With a limited number of banks dominating the domestic market, domestic
banks are in control of lending interest rates, and their net interest
margin is forecast to improve as they maintain financial support into
LG Card while reducing the burden of credit card reserves by raising
interest rates to high-grade clients. NIM should further improve as the
recovery of the domestic economy helps banks collect overdue payments.
Since interest-sensitive assets with maturities less than one year
exceed debts with the same maturity, an increase in interest rates will
directly lead to an improvement in the performance of domestic banks.
Assets with fluctuating interest rates amounted to 66% of total assets
in June 2003, largely exceeding the weight of debt with fluctuating
interest rates, which recorded 46% of total debt. 75% and 46% of all
household and corporate loans, respectively, are currently based on
fluctuating interest rates.

Expansion in nominal NIM, decrease in provision transfer ratio and increase in real NIM
expected in 2004

                    Nominal NIM                Provision transfer ratio
                    Asset expense ratio        Actual NIM
   (%)
    2.8
    2.3
    1.8
    1.3
    0.8
    0.3
   -0.2
   -0.7
   -1.2
            1999       2000       2001       2002       2003(E)     2004(E)


Source : DBS Vickers Research




                                                                                                   13 of 20
Sector Focus                                                                      Korean Financial




 Improvement in actual NIM. In addition to nominal NIM, we expect to
see improvements in actual net interest margin in 2004 as the addition
of bad debt reserves declines going forward. A 0.1% increase in nominal
NIM typically pushes up net profit of a bank by an average KRW600.0bn.

In short, despite the reduction in loan increase rate, stock prices of
banks are forecast to be revalued based on an increase in ROA and
valuation indices as NIM increases amid improvements in bad debt amount.

Banks’ deposit-loan spread immediately reflects interest rate rise

       (%)
 2.6                                              Deposit-loan spread(LHS)   10
                                                  Gov't bond yield
 2.4
                                                                             8
 2.2
 2.0                                                                         6
 1.8

 1.6                                                                         4

 1.4
                                                                             2
 1.2

 1.0                                                                         -
       Jan- May- Sep-   Jan- May- Sep-   Jan- May- Sep-   Jan- May- Sep-
        00   00   00     01   01   01     02   02   02     03   03   03

Source : DBS Vickers Research, Bank of Korea




                                                                                           14 of 20
Sector Focus                                                                                                                       Korean Financial




                                                                                                                             BUY
Kookmin Bank
Performance gradually improving; large potential                                                                             KRW49,050
for growth in profit in 2004
Leading bank in domestic market. After completing privatization in Dec 2003, Kookmin                                        At a Glance
Bank has assumed the role of the leading bank in the domestic market. We expect Kookmin
                                                                                                                             Price Target:
Bank to record net profit of KRW107.3bn in 4Q03. Although its overall 2003 performance is
                                                                                                                             KRW60,000
forecast to record in the red at –KRW274.9bn, Kookmin Bank continued to see
improvements from –KRW202.6bn in 4Q02, +KRW73.9bn in 1Q03, -KRW114.7bn in 2Q03                                               Stock Code:
and –KRW341.4bn in 3Q03. Most of the profit recorded in 4Q03 was from the sale of NPLs                                       Bloomberg: 060000 KS
and stocks, which shows that Kookmin Bank is capable of generating profits from its non -
operating sectors even in bearish conditions. Without the profits from the sale of NPLs and                                  Sector: Retail Banking
stocks, Kookmin Bank would have recorded net loss of KRW1tr in 4Q03, reflecting the
massive write-off of bad debts in 2003. Since most of its bad debts have already been                                        KOSPI: 848.43
written off, we expect Kookmin Bank’s performance to turn around in 2004.
                                                                                                                             Stock Rating:
Decrease in household delinquency ratios. Household delinquency ratios dropped by                                           Buy
0.46%p to 2.43% in 4Q03 as a part of bad accounts were repaid in 4Q03. The number of
multiple delinquent account holders continued to decline with the amount of new delinquent                                   Sector Rating:
accounts overdue more than one month dropping from KRW420.0bn in May to near                                                 Overweight
KRW100.0bn in October 2003. Maintain Buy at a target price of KRW60,000 based on the
2004F PB of 1.81x and PE of 13.7x.                                                                                           Consensus EPS:
                                                                                                                             FY04 KRW5,013
                                                                                                                             FY05 KRW6,459

                                                                                                                             DBSV vs Consensus EPS
                                                                                                                             (% variance):
                                                                                                                             FY04 -12.7%
                                                                                                                             FY05 -3.0%

Forecasts and Valuation                                                      General Data                                    Principal Business:
(KRWbn, KRW, %, x)              2002          2003E      2004E      2005E                                                    Retail banking
                                                                             Issued Capital (m shrs)               336.4     Bank credit card
Net interest income          4,333.3        4,924.4    5,173.8    5,409.3    Mkt Cap (KRWtr/US$bn)          16.5 / 14.0
  % growth                      12.4           13.6         5.1        4.6   Major Shareholders
Operating profit             2,265.8          335.8    2,068.4    2,847.0    Treasury stock                            9.1
Pre-provisioning profit     35,498.0        3,716.4    6,010.7    6,362.1    Free Float (%)                           85.6
Net profit                   1,310.3    -     274.9    1,471.9    2,107.5    Avg Daily Vol(m shrs)                     1.7
  % change              -       11.8             na         na       43.1
EPS                            4,137    -       830      4,376      6,265    Consensus Analyst Poll
BVPS                          30,614         29,866     33,202     38,409
                                                                                    Avg Rating        Buy Hold       Sell
P/E                             11.5               -      10.9         7.6
                                                                             3 Mth          3.94       10        5     1
P/BV                            1.55           1.59       1.43       1.24
ROE                             13.2    -        2.7      13.7       17.5
                                                                             6 Mth          3.95       12        6     1
ROA                             0.80    -      0.15       0.76       1.04
                                                                             12 Mth         4.05       14        6     1
Asset growth                      9.3          11.1         4.5        5.3   Market         3.85
NIM                             3.00           3.00       3.08       3.12    Sector         3.71
BIS                             10.4           10.3       10.3       10.6    Source: Bloomberg
Capital/Asset                     6.1            5.5        5.5        6.0   Avg Rating: 1 = Sell, 3 = Hold, 5 = Buy
Share Price Chart                                                            Share Price Performance
                                                                                               Share       Rel        Rel
    60000 KRW                 Kookmin Bank             100-Day MA                              Price     KOSPI     Sector
    40000
    20000
                                                                             Past 1 mth        11.2%       5.7%      3.2%
                                                                             Past 3 mths       12.0%      -0.1%     -2.7%
         0                                                                   Past 6 mths           na         na        na
 13-Jan-03      13-Apr-03        13-Jul-03       13-Oct-03   13-Jan-04       Past 12 mths      20.4%      -8.1%     -5.9%



                                                                                                                                              15 of 20
Sector Focus                                                                                                                        Korean Financial




                                                                                                                              BUY


Shinhan Financial                                                                                                             KRW19,100
Largest growth potential among Korean banks
                                                                                                                              At a Glance
 Strong performance in risk management. Kookmin Bank, Shinhan Financial Group,
Woori Financial Group, Hana Bank, Industrial Bank and foreign banks have survived the                                         Price Target:
hardships since the 1990s, and among these banks, only Shinhan Financial Group’s stock                                        KRW24,500
prices continued to remain steady based on its strong performance in risk management and
stable position as the second largest bank in the domestic market for the past 15 years.                                      Stock Code:
                                                                                                                              Bloomberg: 055550 KS
 Growth in size from takeover of Chohung Bank. Shinhan Financial Group shifted its
focus from giving out loans to investing in companies after experiencing limits in growth as                                  Sector: Retail banking
the market turned bearish. While taking over a foreign bank to diversify its operations,
Shinhan turned to other venues such as stock trading commissions, Bancassurance                                               KOSPI: 848.43
products for life insurance, fund management, and retail banking, to ensure c ontinuous
growth. It was also able to achieve growth in size from the recent takeover of Chohung Bank                                   Stock Rating:
(000010).                                                                                                                     Buy
 Write-off of Chohung’s MMS Loan bad debts almost completed. Like Kookmin Bank,                                              Sector Rating:
most of Chohung’s assets (household loans and credit card accounts) are highly sensitive to                                   Overweight
economic conditions. Since Shinhan’s stock prices are affected by the asset quality of its
subsidiaries, we expect the company to benefit from the large write -off of Chohung’s bad                                     Consensus EPS:
debts (mostly credit card accounts and MSS Loans), which caused the subsidiary to record                                      FY04 KRW2,560
KRW1.0tr in the red in 2003. The massive write-off lowered delinquency ratios of Chohung’s                                    FY05 KRW3,552
MSS Loans from 15.6% in September to below 10% in December. The remainder of
Chohung Bank’s bad MSS Loan accounts is forecast to be written off in 1Q04. Reflecting the                                    DBSV vs Consensus EPS
company’s strong performance in risk management and the turnaround in Chohung Bank’s                                          (% variance):
performance, we recommend Buy for Shinhan Financial Group with a target price of                                              FY04 -9.5%
KRW24,500, based on the 2004F PB of 1.81x and PE of 10.5x.                                                                    FY05 -3.0%

                                                                                                                              Principal Business:
Forecasts and Valuation                                                       General Data                                    Retail banking
(KRWbn, KRW, %, x)                2002        2003E    2004E         2005E                                                    Bank credit card
                                                                              Issued Capital (m shrs)               294.2
Net interest income            1,294.2     1,885.9    2,781.5       2,910.0
                                                                              Mkt Cap (KRWbn/US$m)            5.6 / 4.8
  % growth                        17.7          na          na          4.6   Major Shareholders
Operating profit                 938.5        449.3   1,085.6       1,621.0   Shinhan Bank                             10.2
Pre-provisioning profit        1,136.5     1,913.4    2,819.0       3,028.1   Free Float (%)                           85.8
Net profit                       602.2        314.8    785.4        1,167.9   Avg Daily Vol(m shrs)                     1.1
  % change                        20.8 -       47.7    149.4           48.7
EPS                              2,060         929     2,317          3,446   Consensus Analyst Poll
BVPS                            12,452     11,859     13,543        16,348
                                                                                     Avg Rating        Buy Hold       Sell
P/E                                9.0         19.9         8.0         5.4
P/BV                              1.48         1.56     1.36           1.13
                                                                              3 Mth          3.55        7        2     2
ROE                               17.1          6.3     12.5           17.1
                                                                              6 Mth          3.86       10        2     2
ROA                               0.98         0.30     0.54           0.78
                                                                              12 Mth         3.93       11        2     2
Asset growth                      18.5          na          3.6        10.0   Market         3.85
NIM                               2.32         2.30     2.40           2.45   Sector         3.71
BIS                               10.9         10.5     10.9           11.3   Source: Bloomberg
Capital/Asset                      5.9          4.2         4.5         4.8   Avg Rating: 1 = Sell, 3 = Hold, 5 = Buy
Share Price Chart                                                             Share Price Performance
              KRW                                                                               Share       Rel        Rel
      30000                    Shinhan Financial         100-Day MA                             Price     KOSPI     Sector
      20000
      10000                                                                   Past 1 mth         6.1%      0.8%       3.2%
                                                                              Past 3 mths        5.3%     -6.1%      -2.7%
         0
                                                                              Past 6 mths           na        na         na
 13-Jan-03         13-Apr-03      13-Jul-03     13-Oct-03         13-Jan-04   Past 12 mths      53.4%     17.2%      -5.9%

                                                                                                                                               16 of 20
Sector Focus                                                                                                                     Korean Financial




                                                                                                                              BUY
Industrial Bank of Korea
Highly attractive considering current investment                                                                              KRW7,600
indices
 SME loans account for 80% of total accounts. Loans to small-to-middle size enterprises                                      At a Glance
(SME) account for 80%, or KRW38tr, of Industrial Bank’s total assets (including credit card
                                                                                                                              Price Target:
accounts) of KRW47.6tr. 63.6% of SME loans are for manufacturing companies and, as the
                                                                                                                              KRW10,200
primary bank of most SMEs, Industrial Bank can claim precedence over the collateral of
most of the loans. In addition, its interest rates record 20~60bp above those of most banks                                   Stock Code:
at 6.4%.                                                                                                                      Bloomberg: 024110 KS
Top-tier in SME financing. Although slightly less than Kookmin, Industrial Bank currently
claims 15.3% of the domestic market for SME loans based on its strong competitive power                                       Sector: Retail banking
and stable growth. The bubble in small office/home (SOHO) loans had no effect on Industrial
                                                                                                                              KOSPI: 848.43
Bank, which should continue to see improvements in SME loans as the domestic economy
starts to recover this year.                                                                                                  Stock Rating:
 Performance to improve starting from 4Q03. After clearing off its credit card business in                                   Buy
3Q03, the performance of Industrial Bank started to improve in 4Q03 on the back of a
decline in SME loan delinquency ratios. The recent move to the KSE raised the liquidity of                                    Sector Rating:
the bank’s stocks and, after a slight drop from the overhang of shares, stock prices have                                     Overweight
rebounded, reflecting the company’s strong fundamentals. Accordingly, we maintain Buy at
                                                                                                                              Consensus EPS:
a target price of KRW10,200, based on the 2004F PB of 1.17x and PE of 8.1x. Although the
                                                                                                                              FY04 KRW1,194
fair value for Industrial Bank can be calculated at KRW10,500 applying the market average
                                                                                                                              FY05 KRW1,471
PB at 1.2, we maintain our current target price since the difference is slight.
                                                                                                                              DBSV vs Consensus EPS
                                                                                                                              (% variance):
                                                                                                                              FY04 +4.9%
                                                                                                                              FY05 +4.2%

Forecasts and Valuation                                                       General Data                                    Principal Business:
(KRWbn, KRW, %, x)                2002       2003E    2004E           2005E                                                   Retail banking
                                                                              Issued Capital (m shrs)            405.2        Bank credit card
Net interest income            1,266.1    1,554.2    1,613.8        1,743.9
                                                                              Mkt Cap (KRWbn/US$m)        3.10 / 2.6
  % growth                       27.5         22.8         3.8          8.1   Major Shareholders
Operating profit                691.8        200.3    716.9           894.6   Ministry of Finance & Economy       77.2
Pre-provisioning profit        1,392.0    1,713.7    1,600.8        1,736.8   Free Float (%)                      22.8
Net profit                      581.4        255.9    574.2           702.4   Avg Daily Vol(m shrs)                 3.8
  % change                       27.7 -       56.0    124.4            22.3
EPS                             1,269         558     1,253           1,533   Consensus Analyst Poll
BVPS                            7,349        7,621    8,724          10,106
                                                                                     Avg Rating        Buy Hold       Sell
P/E                                5.8        13.1         5.8          4.8
                                                                              3 Mth          5.00        1         -     -
P/BV                             1.00         0.96     0.84            0.73
ROE                              18.0          7.5     15.3            16.3
                                                                              6 Mth          5.00        1         -     -
ROA                              0.96         0.37     0.80            0.92
                                                                              12 Mth         4.33        2        1      -
Asset growth                     17.9          7.7         6.6          6.6   Market         3.85
NIM                              2.46         2.56     2.61            2.65   Sector         3.71
BIS                              10.4         10.4     11.0            11.8   Source: Bloomberg
Capital/Asset                      5.3         4.9         5.2          5.7   Avg Rating: 1 = Sell, 3 = Hold, 5 = Buy
Share Price Chart                                                             Share Price Performance
                                                                                                Share       Rel        Rel
          KRW              Industrial Bank            100-Day MA
      10000                                                                                     Price     KOSPI     Sector

       5000                                                                   Past 1 mth         0.1%      -4.9%      3.2%
                                                                              Past 3 mths        8.6%      -3.1%     -2.7%
             0
                                                                              Past 6 mths           na         na        na
  13-Jan-03        13-Apr-03     13-Jul-03     13-Oct-03         13-Jan-04    Past 12 mths      32.9%       1.5%     -5.9%



                                                                                                                                              17 of 20
Sector Focus                                                                        Korean Financial




Asian Equities Sales, Sales Trading and Research Contacts

                                                           Tel:                        Email:

Head Group Institutional BusinessCarol Fong      65-6398 6906        carolfong@dbsvickers.com
                            Sales Heads                    Tel:                        Email:

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                Sales Trading Contacts                     Tel:                        Email:

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                        Research Heads                     Tel:                        Email:

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                                                                                             18 of 20
Sector Focus                                                       Korean Financial




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                                                                            19 of 20
Sector Focus                                                                                     Korean Financial




DBS Vickers Research Star Rating System
     - Strong Buy (>30% upside over the next 6 months)
     - Buy (>20% upside over the next 12 months)
     - Hold (10-20% upside over the next 12 months)
     - Fully Valued (Trade within a +/-10% range over the next 12 months)
     - Sell (>10% downside over the next 12 months)
This document is published by DBS Vickers Research (Singapore) Pte Ltd
(DBSVR), a direct wholly-owned subsidiary of DBS Vickers Securities
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                                                      Timothy Wong
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                          Building, Singapore 048424
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