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We recently upgraded the banking sector to Overweight considering NIM
recovery and consequent earnings growth while we had reiterated a
conservative stance for the past one-and-a-half years. To change our view, we
take into account a variety of factors that will affect banking operations, which
include better economic indicators at home and abroad, effects of the
government’s “carrot measures” on the real economy side, stronger- thanexpected
SME lending growth, falling KRW/USD rate and steeper interest rate
curve.
In terms of the earnings cycle, we believe a bottom has been reached by
banks while insurers have passed a peak. A short-term bottom is imminent for
brokerages. The long-term earnings growth curve is steepest in the order of
insurers, brokers and banks. We still like insurers in terms of valuations
although earnings have peaked. We and the KIS Research Center overall
stay conservative toward the market and the global economy is unlikely to
soon enter a long-term virtuous cycle. Nonetheless, we believe that Korea’s
financial sector beats others in terms of the visibility of earnings cycle.
Market participants have always had wild enthusiasm for M&As. As the Capital
Market Consolidation Act is in force, the M&As among companies in the same
or different sectors will remain an issue in the market. It will not be pointless to
review possible M&A scenarios and candidates and judge the visibility.
Restructuring is inevitable particularly for the banking sector (including
financial holding companies).
Banking (Overweight): Earnings growth to continue into 2010
Both NIM and PBR will expand for the next one year.
1) NIM should slip below 2% in 2Q09F but then gain to 2.6% in 2Q10F, on par
with the 2007 level
2) NIM should expand more if the interest rate keeps climbing into 2010
3) Chances are very slim that credit costs will exceed the average of the
preceding three quarters
Brokerages (Neutral): Amid the ongoing stock market correction,
liquidity policy is the key
Momentum will remain absent with the trading value staying at around the
W6.3trn level.
1) Trading values and the stock market are both undergoing corrections,
while direct and indirect investment momentum should be absent.
2) On the back of expectations for better 2H09 earnings of listed companies
and after corporate bond price corrections, money may flow back into the
stock market.
3) A check-up is required on whether liquidity will shift from the real estate
market to the stock market, affected by the government’s real estate policy
and the non-tax measure on overseas funds
Non-life Insurance (Overweight): Something is missing
1Q09 earnings appear satisfactory but we remain cautious given seasonality
and growing regulatory risks. Concerns still linger that reduced coverage of
real-loss protection insurance may intensify competition among life insurers.
Since the implementation is scheduled in October, it will take time to see
whether those worries will materialize but we do see no cause for concern. We
lowered 2QFY09 earnings as long-term insurance policy sales will probably
surge before coverage reduction takes effect. But 3QFY09 earnings are likely
to be raised.
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