KB Financial: Market Focuses on Stock Cancellations and Rate Hikes

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Summary in seconds

I still have a buy investment rating assigned to KB Financial Group Inc. (NYSE:KB) [105560:KS]. My previous article for the Korean financial services company was written on November 18, 2021.

KB Financial recently released the company’s fourth quarter 2021 financial results on February 8, 2022, and the market is focused on the company’s treasury stock cancellation plans and the positive impact of rate hikes.

The cancellation of KRW 150 billion of KB Financial’s own shares sends a strong signal to investors that the company is very serious about improving the capital returned to shareholders. The next catalyst for KB Financial is an increase in the company’s dividend payout ratio to 30%.

Furthermore, KB Financial’s good financial results in the 4th quarter of 2021 suggest that it benefited from the recent rate hikes initiated by the Bank of Korea. Given the January 2022 rate hikes and expectations of a further increase in the benchmark interest rate before the end of this year, KB Financial should see a decent net interest margin expansion, which will support an expected teen percentage profit growth in 2022.

I maintain my Buy rating for KB Financial as its valuations remain undemanding despite positive factors such as improving capital yields and rising interest rates.

Cancellation of own shares and dividends

I noted in my previous November 18, 2021 update for the company that “KB Financial appears to be hinting at further share repurchases, as well as the cancellation of existing shares that were repurchased earlier ( i.e. treasury stock)” during its Q3 2021 earnings call. It turned out I was right, and that’s good for the company.

At the company’s latest Q4 2021 earnings briefing, held on February 8, 2022, KB Financial disclosed that it “will be canceling KRW 150 billion of treasury shares”. Specifically, the company explained that this decision was part of “our commitment to improving shareholder value”, and it stressed that it “will continue to explore a wide range of options for a policy of shareholder return more progress and will do what we must to increase it”. to the world standard.”

This cancellation of own shares must be placed in the context of the Korean market, in order to better appreciate the importance of KB Financial’s decision.

A press article from May 7, 2017 published by Yonhap News Agency pointed out that publicly listed Korean companies “tend to hold or resell treasury shares instead of canceling them in order to help controlling shareholders strengthen their managerial control.” In other words, unlike companies listed in many other developed markets, it is not normal for Korean companies to cancel the shares they buy back.

In the case of KB Financial, 3,455,426 treasury shares will be canceled on February 14, 2022, which is equivalent to 0.83% of its outstanding shares and approximately 3% of its 2021 results.

Separately, KB Financial has declared a final dividend per share of KRW 2,190 for fiscal year 2021, bringing the company’s dividend payout ratio to 26%, in line with market expectations according to S&P Capital IQ The data. Market consensus expects KB Financial to gradually increase its payout ratio to 27.8%, 28.6% and 30.4% for fiscal years 2022, 2023 and 2024, respectively.

KB Financial could even increase the company’s dividend payout rate to 30% in a shorter timeframe than the market currently expects. KB Financial mentioned on the company’s fourth quarter earnings call that it was aiming to “very quickly normalize to the 30% (dividend payout) level”, given that “KB has a cushion of sufficient capital” and “we believe we have the ability to pay at this level.”

In a nutshell, KB Financial has clearly signaled its intention to be more shareholder-friendly when it comes to its shareholder return policies, and this should play a major role in the revaluation of the company’s shares going forward.

Rising rates and net interest margin

KB Financial achieved a decent set of financial results in the fourth quarter of fiscal 2021. As highlighted in the company’s fourth quarter 2021 results presentation slides, net interest income and net income attributable to shareholders of KB Financial were up +15% YoY and +10% YoY. to KRW 2,974.2 billion and KRW 637.2 billion, respectively in the last quarter.

The main driver of KB Financial’s strong performance over the past quarter is an expansion of its Net Interest Margin or NIM as per the chart below.

Historical net interest margin of KB Financial or NIM

KB Financial

Presentation of KB Financial’s fourth quarter 2021 results

The Bank of Korea made three rate hikes between August 2021 and January 2022 to raise the benchmark interest rate to 1.25%. Current market expectations are that there should be at least one more rate hike (+25 basis points) in the second half of 2022. KB Financial, guided by the company’s fourth quarter results, expects a “increase of 7 to 8 basis points”. in NIM for fiscal year 2022, assuming “an increase in policy rates in the fourth quarter (2022)”. He further added that “if the policy rate moves faster and with a greater margin”, his NIM has “room to increase further”.

Based on forward-looking financial estimates obtained from S&P Capital IQ, sell-side analysts estimate that KB Financial’s NIM will rise +11 basis points from 1.83% in FY2021 to 1.94% for fiscal year 2022. This will in turn help drive +10.9% growth in normalized net profit attributable to shareholders of KB Financial from KRW 4,409.6 billion last year to KRW 4,889 .8 billion KRW this year.

Evaluation and Final Thoughts

The market currently values ​​KB Financial at consensus normalized P/E multiples for fiscal years 2022 and 2023 of 5.3 times and 5.1 times, respectively, in accordance with S&P Capital IQ The data. KB Financial is also trading at a substantial 44% discount to its book value.

KB Financial is expected to post a double-digit increase in normalized earnings in fiscal 2022, driven by NIM’s expansion which is expected to be driven by rate hikes. At the same time, the company is returning more excess capital to its shareholders through share buybacks/treasury share cancellations and increasing its dividend payout ratio. Despite these positives, KB Financial’s current valuations remain attractive, warranting a Buy rating.