[Click eStock] Korea Financial Group, Earnings Shock, Recovery Starting from Q3

[Asia Economy Reporter Lee Seon-ae] Daishin Securities announced on the 3rd that it maintains a buy rating and a target price of 96,000 KRW for Korea Financial Group.

Park Hye-jin, a researcher at Daishin Securities, stated, "With interest rates declining from July, the bond management environment is judged to have passed its worst phase, and along with this, earnings are expected to improve from the third quarter after hitting the lowest point in the second quarter."

In June, interest rates not only surged but also experienced many sharp declines. Days with daily volatility exceeding ±10bp accounted for nearly 30% of all business days. Consequently, bond management losses were inevitable. Losses occurred across various assets including investment associations, funds, and issued promissory notes, causing earnings to fall significantly short of consensus.

Net profit in the second quarter recorded an earnings shock, falling more than 50% below consensus. The cause of the poor performance was bond management losses. Trading losses including bond management losses expanded significantly to 232.9 billion KRW. The surge in interest rate volatility in June made bond management losses unavoidable. Approximately 100 billion KRW in losses occurred, with valuation losses of 35 billion KRW due to a decline in asset values in which Korea Financial Group had equity investments such as investment associations and funds, and foreign exchange losses of 33.5 billion KRW from dollar bonds issued for securities capital increase, totaling 168.5 billion KRW in losses. The effect of the first quarter dividend (116 billion KRW) disappeared, greatly expanding the scale of product management losses.

Concerns recently highlighted about savings banks showed a delinquency rate of 2.1% in the second quarter (QoQ -0.3%p), and the non-performing loan ratio also fell from 2.2% to 1.84% despite an increase in total balance. However, some delinquencies occurred in general unsecured loans, leading to a provision of 40 billion KRW in the quarter (36 billion KRW in the first quarter). Nevertheless, the performance of savings banks and capital companies was quite favorable.

IB income reached 173.1 billion KRW (a 25.9% increase year-on-year), marking the highest quarterly performance ever. This was due to increased interest income related to IB, debt guarantees, and underwriting fees, as well as the execution of numerous IPOs and public capital increase deals despite a challenging business environment. Although the outstanding balance of ELS issuance slightly decreased, operations are estimated to have been favorable. The decline in BK fee income was relatively moderate. Asset management fee income recorded 39.1 billion KRW (a 3.5% increase), and BK fee income was 88.3 billion KRW (a 26.9% decrease).

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