"South Korean Banks Severely Undervalued in Market Value"… Ranked 21st out of 22 Countries

Korea Institute of Finance Report
Lowest Among Countries of the World's Top 100 Banks
Urgent Need to Improve Management Culture Beyond Profitability Enhancement

[Asia Economy Reporter Minwoo Lee] The domestic financial industry, especially banks, has been found to have a low market value even compared to major overseas banking groups. To resolve this situation, it is pointed out that not only improving the profitability of individual financial companies and adopting shareholder-friendly dividend policies but also urgently establishing internal control and regulatory compliance systems and improving the overall management culture are necessary.

On the 9th, Junhee Kwak, a research fellow at the Korea Institute of Finance, revealed this in a report titled "The Current Status and Implications of Stock Undervaluation in Korea's Financial Industry." According to the report, using figures from Orbis BankFocus to analyze the financial statements of the world's top 100 banking groups, the average price-to-book ratio (PBR) of domestic banking groups as of last year was 0.36. This ranked 21st out of 22 countries with top 100 banks worldwide. It was lower than the United States (1.61), which is among the world's top tier, and even below China (0.42), which has many state-owned banks. The median PBR of domestic banking groups from 2011 to 2021 was even below the bottom 25% of global banking groups' PBRs.

The price-to-earnings ratio (PER) was also sluggish. The average PER of domestic banking groups was 4.0, ranking 21st among 22 countries. This was about one-third of Germany (16.4), Finland (11.4), Singapore (11.2), and the United States (10.3). It was even lower than Brazil (4.2) and China (4.1). The only country with a banking group PER lower than Korea was Russia (3.6).

Source=Korea Institute of Finance

Compared not only to overseas peers but also to other domestic industries, the sluggishness of the banking sector was pronounced. As of the end of March, the PBR of the banking sector was 0.32, which was only 28.3% of the overall KOSPI market PBR of 1.13. This was notably distinct even within the "Korea Discount" (domestic stock undervaluation compared to developed countries) of the KOSPI. Furthermore, the trend of worsening undervaluation was evident. Kwak explained, "In 2019, the PBR of the overall financial industry and banking sector was 39.8% and 67.3% lower than the securities market PBR, respectively," adding, "By the end of March this year, the degree of undervaluation expanded to 52.5% and 72.9%, respectively."

The Korea Institute of Finance analyzed that the undervaluation occurred due to inherent factors such as the rigid management culture of the domestic banking industry. Simply increasing profitability and establishing shareholder-friendly dividend policies are insufficient to resolve the issue. In particular, cases like the recent embezzlement incident involving 60 billion KRW at Woori Bank reveal a facet of the undervaluation of the domestic banking sector. Kwak pointed out, "The financial industry as a whole needs to improve its management culture through establishing internal control and regulatory compliance systems, smooth communication with financial authorities, flexible responses to regulations, streamlining decision-making processes within organizations, and introducing reasonable consumer protection policies."

He also emphasized that the authorities must fulfill their roles. He analyzed, "While sparing no institutional support for the overall structural improvement of the financial industry, it is necessary to actively gather investors' opinions and devise improvement measures for parts of the regulatory and supervisory system that are judged to cause market inefficiencies."

This content was produced with the assistance of AI translation services.