Korea / Special Sits, Pairs, Index Rebalancing, Clepsydra Capital

Sanghyun Park

Korea / Special Sits, Pairs, Index Rebalancing

Clepsydra Capital

Investigate special situations, pairs, and index rebalancing trades in Korea.

Event-Driven

Korea's financial regulators, the Financial Services Commission, had advised the local banks and bank holding companies to keep a dividend payout ratio below 20%. The purpose was clear. It was to secure a sufficient capital buffer to absorb potential losses resulting from COVID-19.This recommendation for the 20% cap is effective until the end of this month.The market widely expects the FSC to not renew this 20% dividend cap after this month amid the fast-rebounding economy.

Korea's financial regulators, the Financial Services Commission, had advised the local banks and bank holding companies to keep a dividend payout ratio below 20%. The purpose was clear. It was to secure a sufficient capital buffer to absorb potential losses resulting from COVID-19.This recommendation for the 20% cap is effective until the end of this month.The market widely expects the FSC to not renew this 20% dividend cap after this month amid the fast-rebounding economy.

Korea Banks 20% Dividend Cap Scrapping: Projected Div Payout & Yield of 8 Bank Stocks

Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

This year, we have written about KB Financial and Hana Financial in South Korea. Today is the turn of a smaller lender, the underrated JB Financial Group.<a href="https://www.smartkarma.com/entities/jb-financial-group-co-ltd" target="_blank" data-smartkarma-citation="entities:16104:1" rel="noopener">Jb Financial Group (175330 KS</a> is primarily a SME lender (44% of portfolio). Mortgages make up 23% of loans and other retail (including personal credit and auto financing, especially used cars) account for 27%. JB Financial Group incorporates Jeonbuk Bank (JB), Kwangju Bank (KB), JB Woori Capital (JBWC), Phnom Penh Commercial Bank, and JB Asset Management.JB Financial Group results at Q320 were generally highly constructive. Our PH Score™ shows that the bank is making headway on Profitability, on Efficiency, on Liquidity (LDR) and on headline Asset Quality. Capital Adequacy, as with Provisioning, reveals a mixed picture with Equity/Assets showing some erosion while CET1, Tier1, and TCR all moving higher. While the top-line shows a flat Net Interest Income, supported by much lower Interest Costs, non-interest Income (fees &amp; commissions, securities, leases, cards) was vibrant. Expansion of Comprehensive Income and Net Profit was solid, if not unspectacular, though given the context was not at all discouraging. In general, we have a broadly positive picture though we are mindful of some Balance Sheet risks relating to a still high Debt/Equity and a relatively shallow Liquid Asset ratio.<div class="content-highlight">A FV of 3%, a PBV of 0.32x, an Earnings Yield of 29.5%, and a Dividend Yield of 5.4% are certainly not unappealing. The bank comfortably passes our theoretical threshold of a FV of 10% and a PBV of &lt;1x. A PH Score™ of 9.1 is in the top decile globally. According to our VFM system (Valuation, Fundamentals, Momentum), JB Financial resides in the top decile of our global universe along with one of our favoured lenders, KB Financial.</div>

This year, we have written about KB Financial and Hana Financial in South Korea. Today is the turn of a smaller lender, the underrated JB Financial Group.Jb Financial Group (175330 KS is primarily a SME lender (44% of portfolio). Mortgages make up 23% of loans and other retail (including personal credit and auto financing, especially used cars) account for 27%. JB Financial Group incorporates Jeonbuk Bank (JB), Kwangju Bank (KB), JB Woori Capital (JBWC), Phnom Penh Commercial Bank, and JB Asset Management.JB Financial Group results at Q320 were generally highly constructive. Our PH Score™ shows that the bank is making headway on Profitability, on Efficiency, on Liquidity (LDR) and on headline Asset Quality. Capital Adequacy, as with Provisioning, reveals a mixed picture with Equity/Assets showing some erosion while CET1, Tier1, and TCR all moving higher. While the top-line shows a flat Net Interest Income, supported by much lower Interest Costs, non-interest Income (fees &amp; commissions, securities, leases, cards) was vibrant. Expansion of Comprehensive Income and Net Profit was solid, if not unspectacular, though given the context was not at all discouraging. In general, we have a broadly positive picture though we are mindful of some Balance Sheet risks relating to a still high Debt/Equity and a relatively shallow Liquid Asset ratio.A FV of 3%, a PBV of 0.32x, an Earnings Yield of 29.5%, and a Dividend Yield of 5.4% are certainly not unappealing. The bank comfortably passes our theoretical threshold of a FV of 10% and a PBV of &lt;1x. A PH Score™ of 9.1 is in the top decile globally. According to our VFM system (Valuation, Fundamentals, Momentum), JB Financial resides in the top decile of our global universe along with one of our favoured lenders, KB Financial.

Thematic (Sector/Industry)

South Korea's Banking Sector has made more progress fundamentally over the last five years versus say a market such as Taiwan, even China, or Thailand.Q120 data though show some mixed signals with a differentiated performance across banks as evidenced by their respective PH Scores.The space still resonates with value by global comparisons.We would follow the Carlyle lead by highlighting  <a href="https://www.smartkarma.com/entities/kb-financial-group-inc-adr" target="_blank" data-smartkarma-citation="entities:6238:1" rel="noopener">Kb Financial Group Inc Adr (KB US)</a> , endorse <a href="https://www.smartkarma.com/entities/hana-financial-group" target="_blank" data-smartkarma-citation="entities:12843:1" rel="noopener">Hana Financial (086790 KS)</a> on any pullback, while pinpointing overlooked stocks such as <a href="https://www.smartkarma.com/entities/bnk-financial-group-inc" target="_blank" data-smartkarma-citation="entities:386:1" rel="noopener">Bnk Financial Group (138930 KS)</a> and <a href="https://www.smartkarma.com/entities/jb-financial-group-co-ltd" target="_blank" data-smartkarma-citation="entities:16104:1" rel="noopener">Jb Financial Group (175330 KS)</a> .

South Korea's Banking Sector has made more progress fundamentally over the last five years versus say a market such as Taiwan, even China, or Thailand.Q120 data though show some mixed signals with a differentiated performance across banks as evidenced by their respective PH Scores.The space still resonates with value by global comparisons.We would follow the Carlyle lead by highlighting  Kb Financial Group Inc Adr (KB US) , endorse Hana Financial (086790 KS) on any pullback, while pinpointing overlooked stocks such as Bnk Financial Group (138930 KS) and Jb Financial Group (175330 KS) . 

South Korean Banks: Continuing Systemic Improvement Though It Pays to Be Selective

Quantitative Analysis

What are the local institutions buying in KOSPI? Below is the top 20 list of the most purchased stocks (in terms of net bought value as a % of market cap) in KOSPI last week (March 30 to April 3). I screened out those whose market cap is less than ₩100bil. Cosmax tops the list, followed by HDC-OP and Cheil Worldwide.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/582/original/1.png?1586135983" class="editor-image img-responsive" data-smartkarma-image-id="126582"></figure>On the other hand, below are the 20 most sold KOSPI stocks of last week by the local institutions (again in terms of net sold value as % of market cap). Hotel Shilla sits in the first place, followed by Shinsegae and Doosan Corp.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/583/original/2.png?1586135995" class="editor-image img-responsive" data-smartkarma-image-id="126583"></figure>

What are the local institutions buying in KOSPI? Below is the top 20 list of the most purchased stocks (in terms of net bought value as a % of market cap) in KOSPI last week (March 30 to April 3). I screened out those whose market cap is less than ₩100bil. Cosmax tops the list, followed by HDC-OP and Cheil Worldwide.On the other hand, below are the 20 most sold KOSPI stocks of last week by the local institutions (again in terms of net sold value as % of market cap). Hotel Shilla sits in the first place, followed by Shinsegae and Doosan Corp.

What Local Institutions Buy in KOSPI: Screening Low Capital Risk & High Div Stocks

Mark Artherton, CFA

Inteqres

Several countries are pushing for more M&amp;A in Asian banking as a way to ameliorate risks (India) or to possibly compete more regionally (Malaysia), with even some rumours resurfacing of further activity in Australia. We have reviewed all major banking transactions in the Asia Pacific region over the past 10 years which involved consolidation and we summarise our findings below.Summary findingsWe find that most banks lose market share after a merger when we consider total assets.  This is usually due to depositors moving to reduce concentration risk and loan rationalisation by the merged entity. Overlapping banks allow for more synergies and there tends to be better performance, especially if management is able to achieve the synergistic gains quickly.  Mergers aimed more at revenue synergies or entering new markets appear to have lukewarm benefits.A long drawn out merger process with unambitious long term synergistic benefits are penalised by markets.  Delays can be cultural, labour union led, government led or legal.Clearly the lead in any transaction tends to impose their will on the combined entity.  We find that performance suggests that investors are better owing targets rather than acquirers.

Several countries are pushing for more M&amp;A in Asian banking as a way to ameliorate risks (India) or to possibly compete more regionally (Malaysia), with even some rumours resurfacing of further activity in Australia. We have reviewed all major banking transactions in the Asia Pacific region over the past 10 years which involved consolidation and we summarise our findings below.Summary findingsWe find that most banks lose market share after a merger when we consider total assets.  This is usually due to depositors moving to reduce concentration risk and loan rationalisation by the merged entity. Overlapping banks allow for more synergies and there tends to be better performance, especially if management is able to achieve the synergistic gains quickly.  Mergers aimed more at revenue synergies or entering new markets appear to have lukewarm benefits.A long drawn out merger process with unambitious long term synergistic benefits are penalised by markets.  Delays can be cultural, labour union led, government led or legal.Clearly the lead in any transaction tends to impose their will on the combined entity.  We find that performance suggests that investors are better owing targets rather than acquirers.

South Korea

JB Financial Group Co. Ltd., a holding company, provides a full range of consumer and commercial banking-related financial services.

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Jb Financial Group (175330 KS)

Korea Banks 20% Dividend Cap Scrapping: Projected Div Payout & Yield of 8 Bank Stocks

Korea's financial regulators will likely scrap the 20% dividend payout ratio cap this month. This post investigates the projected dividend payout...

Sanghyun Park

JB Financial: Underrated

JB Financial Group shows strong fundamental momentum at a cheap price. We like SK lenders and JB is slightly "off radar" despite having some...

Paul Hollingworth

South Korean Banks: Continuing Systemic Improvement Though It Pays to Be Selective

South Korea's Banking Sector has made more progress fundamentally over the last five years versus say a market such as Taiwan, even China, or...

Paul Hollingworth

What Local Institutions Buy in KOSPI: Screening Low Capital Risk & High Div Stocks

What are the local institutions buying in KOSPI? Below is the top 20 list of the most purchased stocks (in terms of net bought value as a % of...

Sanghyun Park

Bank M&A in Asia – a Decade in Review

Several countries are pushing for more M&A in Asian banking as a way to ameliorate risks (India) or to possibly compete more regionally...

Mark Artherton, CFA

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