NoonBuSin/iStock via Getty Images
Elevator pitch
KB Financial Group Company (New York Stock Exchange: KB) (105560:KS) The stock has been given a Buy investment rating. I previously wrote about the appointment of KB’s new CEO and regulatory developments related to the financial services industry in South Korea in my October 5, 2023 update.
this The latest articles highlight a potential rerating for KB Financial that supports a Buy rating on the stock. Investors are becoming more interested in Korean banks, and KB intends to unveil its value enhancement plan in the fourth quarter of 2024. These could serve as catalysts for a significant expansion in KB Financial’s valuation multiples.
South Korean banks attract investors’ attention
There are media articles and sell-side reports indicating that institutional investors have a growing interest in Korea’s banking sector. This means that KB shares have the potential to trade higher, assuming more investors start to notice the decline in the value of South’s listed shares. Korean banks like KB Financial.
Earlier February 20, 2024 Seeking Alpha News The article touched on “Korea’s new initiative to boost shareholder returns and improve local company valuations” which is referred to as the “Value Uplift” plan. This has become a major factor pushing investors to increase their interest in Korean stocks as a whole and South Korean banks as well.
Goldman Sachs (GS) recently published a research report (not publicly available) titled “Korea Financial Data – EU Marketing Comments” on June 2, 2024. In its latest report, A It noted that its institutional clients from the European Union are “more on board with the South Korean value program and its positive impact on shareholder return policies” for South Korean banking names. Specifically, European investors Goldman Sachs’ The analysts who spoke to them believe that the prospects for Korean banks “to raise total shareholder returns” have improved.
Separately, on June 3, 2024 Bloomberg The commentary noted that a growing number of fund managers “are betting that South Korean banks will remain star performers.” These investors have become bullish on listed Korean financial institutions due to “cheap valuations” and “signs that banks are responding to the corporate value initiative” as stated in Bloomberg Early June article.
According to the evaluation data sourced Standard & Poor’s Capital IQKB Financial is currently trading at a P/B ratio of 0.59x and a consensus trailing-twelve-month normalized P/E of 5.8x. It’s reasonable to say that KB shares are attractively valued, considering the single-digit P/E and the 41% discount to book value. Notably, KB’s CFO also highlighted in his Q1 2024 analyst briefing in early April that the company’s shares are “at the lower end of our valuation in absolute terms.”
In short, a growing number of investors are focusing their attention on listed Korean banks due to their lenient valuations and the possibility of a valuation re-rating as part of the country’s higher value plan. In this section, I outline KB Financial’s key valuation metrics. My attention turns to KB’s potential value-enhancing initiatives in the next section.
Leading the way in enhancing shareholder value
In the company’s investor presentation slides, KB Financial emphasized that it was the first among its Korean banking peers to begin share buybacks, cancellation of treasury shares, and distribute quarterly dividends in equal amounts in 2016, 2019, and 2024, respectively.
On May 27, 2024, KB Financial issued a 6-K filing announcing that a “Corporate Value Enhancement Plan” related to “ways to increase company value” will be “disclosed during the fourth quarter of 2024.” Korea Times A news report on the same day highlighted that KB “became the first publicly traded (South Korean) company to formally announce a plan to reveal company value-enhancing moves.”
KB Financial’s value enhancement plan, which will be unveiled in the fourth quarter of 2024, is likely to include initiatives related to both corporate restructuring and shareholder capital return.
Last year, KB distributed 37.7% of the company’s profits to its shareholders either in the form of dividends or buybacks. Specifically, KB Financial’s effective dividend payout ratio for fiscal year 2023 was 25.4%, while the amount of capital allocated to buyback its shares for the previous year represented about 12.3% of its net earnings.
In absolute terms, KB Financial’s dividend payout ratio of 25.4% is good, but there is definitely room for the company to pay out a higher percentage of net profit as dividends. By comparison, the average dividend payout ratio for listed companies worldwide is 48% higher according to research from asset management firm Fidelity. On the company’s first-quarter analyst call, KB indicated that it “may increase the total amount of our annual dividends” going forward.
Separately, the company also indicated in its most recent quarterly earnings call that it wants to “gradually increase its shareholder return rate through share repurchases and share cancellations.” In the previous section, I touched on KB Financial’s attractive P/E valuation metrics and book value. KB should be incentivized to return a greater proportion of its net income to shareholders in the form of repurchases, as repurchases of its undervalued shares at current price levels would likely be value accretive.
On the other hand, there are opportunities for KB Financial to create value by restructuring its business operations.
KB announced on May 30, 2024 that its banking arm, Kookmin Bank, had received regulatory approval to “split its fund services business.” In a previous announcement dated July 5, 2023, KB explained that this proposed corporate action will enhance the “management efficiency” of its fund services business as an independent entity, and improve the “profitability” of Kookmin Bank which can focus “on its existing business operation.”
As a financial services holding company with businesses as diverse as insurance, credit cards and stock brokerage, it’s reasonable to believe that KB has a lot of potential restructuring opportunities. For example, it may be beneficial to simplify KB Financial’s corporate structure by dividing certain businesses, or achieve synergies by combining other businesses.
In summary, KB Financial has consistently led the way in shareholder value creation among its Korean peers, and the disclosure of a value enhancement plan in Q4 2024 could serve as a catalyst for a rerating of the stock.
Variable width
Investors should consider two key risk factors associated with KB.
First, KB’s valuations may remain low, if investors shift their attention away from Korean banks due to push or pull factors. One of the driving factors may be negative regulatory developments for the financial services industry in Korea. The attraction may be more attractive investment opportunities arising in other sectors or geographical markets.
Second, KB Financial could disappoint the market if the value-enhancing initiatives it announced in the fourth quarter of this year are not as exciting as a modest increase in its dividend payout ratio.
Final thoughts
KB shares are inexpensive, and there are potential catalysts that could lead to a positive rerating of their valuations. Therefore, I have chosen to maintain my Buy rating on KB Financial.
