KB Financial Stock: A Valuation Premium Is Warranted (NYSE:KB)

Elevator Pitch

I continue to assign a Buy rating to KB Financial Group Inc.’s (NYSE:KB) [105560:KS] stock.

With my earlier March 3, 2023 update for KB, I highlighted that a potential increase in capital returned to shareholders via dividends could act as a catalyst to push up KB Financial’s share price this year.

For this current write-up, my focus is on the comparison of KB’s key recent quarterly financial metrics with that of its peers. KB Financial, Shinhan Financial Group (SHG) [055550:KS], Woori Financial Group (WF) [316140:KS], and Hana Financial Group [086790:KS] are the four major players in the South Korean financial services industry.

The market currently values KB Financial at a discount as compared to its peer Shinhan Financial, and my view is that this is unwarranted. KB Financial has done better than Shinhan Financial in areas such as capital strength, non-banking business diversification, and net interest margin performance. In my opinion, KB Financial’s shares are undervalued and deserving of a Buy rating, as KB should be trading at a higher valuation multiple than SHG.

Earnings Resilience

KB Financial’s future earnings are expected to be more resilient than the company’s peers, based on a review of KB’s net interest margin performance and its income mix.

KB saw its net interest margin expand by +5 basis points QoQ from 1.99% in the fourth quarter of 2022 to 2.04% for Q1 2023, as indicated in its first quarter earnings presentation slides. In contrast, the net interest margins for Woori Financial, Shinhan Financial and Hana Financial contracted by -1 basis point, -4 basis points, and -8 basis points, respectively on a QoQ basis in the most recent quarter.

Most Korean financial services companies have registered lower net interest margins as rates peaked, as seen with net interest margin contraction for WF, SHG, and Hana in the first quarter of this 2023. But KB Financial has been an outlier among its peers, having delivered net interest margin expansion for Q1 2023.

In the company’s Q1 2023 results presentation slides, KB noted that “flexible funding portfolio management” and a positive “asset repricing effect” have allowed it to generate a higher net interest margin. Earlier, KB Financial has also guided at the FY 2022 earnings briefing on February 7, 2023 that its net interest margin should rise for full-year 2023 as a result of “steady loan asset repricing” driven by “profitability centered loan portfolio management.”

Separately, KB Financial’s diversification into non-banking businesses is another key factor that contributes to its earnings resilience for the future, because KB is less reliant on net interest income growth led by rate hikes as compared to its peers.

KB Financial boasts the highest proportion of non-interest income contribution among its peers. Approximately 36% of KB’s Q1 2023 operating revenue is derived from non-interest income. In comparison, Woori Financial, Hana Financial, Shinhan Financial derived 13%, 26%, and 29% of their operating revenues from net interest income, respectively in the first quarter of 2023. Assuming that there is a pause in rate hikes (or even a decline in interest rates) for South Korea, the negative impact on KB Financial’s earnings will be relatively more muted as compared to that of peers, given the success of KB’s non-banking diversification efforts which is reflected in its favorable income mix.

Capital Strength

Capital strength has become an increasingly important attribute for Korean financial services companies in view of recent regulatory developments, and this is an area where KB Financial stands out from its peers.

As per the Financial Service Commission’s March 16, 2023 announcement, the Korean financial regulators are thinking of tightening capital requirements for domestic financial institutions. This implies that the listed financial services companies in South Korea with relatively greater capital buffer will gain favor with investors, as they are better positioned than their peers to sustain or even increase shareholder capital return.

KB Financial’s Common Equity Tier 1 or CET1 ratio was 13.7% for Q1 2023, and this was much higher than the other three major Korean financial services companies’ CET1 ratios. The CET1 ratios for Hana Financial, Shinhan Financial, and Woori Financial were 12.8%, 12.5%, and 12.1%, respectively in the first quarter of this year.

At the company’s most recent Q1 2023 earnings call on May 1, KB Financial committed to “continue to think of ways to further enhance shareholder value” and “implement such measures in a consistent manner.” Notably, KB raised its quarterly dividend payout per share from KRW500 in prior quarters to KRW510 for Q1 2023.

It is reasonable to assume that KB Financial is willing to return a larger proportion of excess capital to the company’s shareholders as evidenced by its recent dividend hike and management commentary. Considering that KB Financial’s CET1 ratio is significantly better than its peers, KB has the capital strength to maintain or expand its return of capital to shareholders going forward even if regulatory capital requirements are tightened.

Peer Valuation Comparison

KB Financial isn’t the most expensive stock in its peer group, despite the fact that it is better than its peers in terms of capital strength and earnings resilience as discussed above.

Key Valuation Metrics For KB And Its Peers

Click to enlarge

Source: S&P Capital IQ

As per the peer comparison table presented above, KB Financial trades at a discount to Shinhan Financial on key valuation metrics like forward P/E and trailing P/TBV, which I think is unjustified. As I highlighted earlier in this article, KB Financial has performed better than Shinhan Financial and other peers in the recent quarter considering financial metrics such as CET1 ratio and net interest margin expansion.

Concluding Thoughts

There is a mismatch between KB’s valuation multiples and the company’s financial metrics. Taking into account KB’s meaningful non-interest income contribution, net interest margin improvement, and high CET1 ratio, KB Financial should trade at a premium to all of its key peers. My Buy rating for KB stock is premised on the thesis that the market should value KB Financial at higher P/TBV and P/E multiples based on a peer comparison exercise.