[Click eStock] "IBK, Low Possibility of Rights Offering for Dividends"

Hana Financial Investment Report

[Asia Economy Reporter Minji Lee] Hana Financial Investment maintained a buy rating and a target price of 14,500 KRW on the Industrial Bank of Korea (IBK) on the 9th, stating that the company's value is expected to rise once the risk of capital increase to secure dividend funds is resolved.

Net profit in the fourth quarter of last year surged 66.6% year-on-year to 596.2 billion KRW, significantly exceeding market expectations. Net interest margin (NIM) rose sharply by 6 basis points, leading to a 6% increase in net interest income. Although an additional provision of 63.8 billion KRW was made this year, loan loss provisions (255 billion KRW) decreased by 28% compared to the same period last year, resulting in relatively favorable performance. Jungwook Choi, a researcher at Hana Financial Investment, explained, “Due to the recent rise in short-term interest rates, most variable-rate loans have increased, causing a significant rise in NIM. Previously, IBK lagged behind commercial banks during the NIM increase period from 2017 to 2017, but this time it was different.”

However, recent reports that the Ministry of Economy and Finance is demanding national policy banks and other investment institutions to increase dividend payout ratios to expand tax revenue are analyzed to be damaging investor sentiment. In the market, there is speculation that IBK might need additional capital increases if the dividend payout ratio rises, leading to a decline in capital adequacy ratios. However, the additional capital required for a 1 percentage point increase in dividend payout ratio is estimated to be about 24 billion KRW, which would only affect the common equity tier 1 capital ratio by 2 basis points. Even with a 5 percentage point increase in dividend payout ratio, the impact would be limited to 10 basis points, meaning that a capital increase would not be necessary even if dividends are raised somewhat. Researcher Choi analyzed, “While the possibility of additional capital increases remains open for operating special support programs for small business owners in the future, the likelihood of capital increases due to dividend fund requirements is very low.”

Considering the restructuring of the COVID-19 quarantine system, COVID-19 financial support is expected to end in March this year. Accordingly, the company is expected to make additional loan loss provisions. However, assuming continued improvement in NIM, the annual net profit for this year is estimated to reach 2.5 trillion KRW. Researcher Choi added, “There is uncertainty due to the possibility of a 220 billion KRW reversal or loss recognition related to the regular wage lawsuit. If the risk of additional capital increases disappears, IBK’s price-to-book ratio (PBR), which is only 0.3 times, has significant room for improvement.”

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