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Korean Banks at Turning Point; Which Stocks to Buy -- Barron's Blog

13 Apr 2017 5:22 am

By Isabella Zhong

Korean bank stocks have been paring gains in recent weeks as investors took profit following the sector's strong performance over the past year and amid concerns about troubled shipbuilder Daewoo Shipbuilding & Marine Engineering (042660.KR).

But Nomura analyst Michael Na argues the sector has consolidated enough and that upcoming first quarter results announcements should remind investors of the cyclical recovery that has fueled the rally in Korean bank stocks.

We expect Korea banks under our coverage to beat or at least meet market expectations in 1Q17F despite additional provisioning expense for DSME. We expect the banks to set aside an additional 10-20% of DSME exposure in 1Q17F because the restructuring plan will likely take a bit longer to finalise.

Daewoo Shipbuilding & Marine Engineering (DSME) currently hangs in the balance of survival and bankruptcy as creditors debate whether or not to support its debt restructuring plan.

While loan growth for Korean banks is likely to have slowed in the first quarter due to weaker activity in the housing market, Na expects stronger net interest margins.

Given the recent trend in new loan spreads and market rates, we expect a solid recovery in NIM for all banks. We think Woori Bank will show the most improvement in NIM, with 6bps q-q improvement vs roughly 3bps for other banks. Excluding DSME-related provisioning expenses, we expect credit cost to fall further given that the restructuring of cyclical sectors has been completed and we see a mild recovery in global demand that should be positive for the export-oriented Korean economy. We continue to believe that DSME is a legacy issue that marks the end of shipbuilding sector restructuring.

Na's top picks among Korean banks are Woori Bank (000030.KR) and Hana Financial Group (086790.KR).

We prefer Woori Bank and Hana Financial Group (HFG) among Korea banks. We think Woori does not deserve to trade at a discount anymore, since it is no longer a policy bank and it is now sufficiently capitalised. HFG shares fell the most recently due to substantial DSME exposure. But we think HFG will meet our 2017F annual net profit estimate thanks to one-off positives gains.

Hana Financial shares are down 10% from their recent peak in mid-March. The stock trades at 0.5 times book value and pays a 2.9% dividend yield.

Woori Bank shares are roughly flat to their levels in mid-March and trade at 0.5 times book value. The stock also pays a 2.9% dividend yield.
 More at Barron's Asia Stocks to Watch blog, http://blogs.barrons.com/asiastocks/ 

(END) Dow Jones Newswires

April 13, 2017 01:22 ET (05:22 GMT)

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