KB - Earnings Beat And Buybacks Reinforce My Buy Rating For KB Financial

2023-07-27 11:06:45 ET

Summary

• KB Financial delivered an earnings beat for the second quarter of 2023, as its Q2 net income turned out to be +11% higher than the sell-side's consensus bottom line forecast.
• KB also revealed plans to repurchase KRW300 billion worth of the company's shares, and I expect buybacks to be value-accretive considering the stock's depressed valuations.
• I leave my Buy rating for KB Financial unchanged, taking into account its Q2 earnings beat and its latest share buybacks.

Elevator Pitch

My Buy rating for KB Financial Group Inc. ( KB ) [105560:KS] shares remains intact. In my prior article for KB Financial written on May 18, 2023, I did a comparison of KB Financial with its peers in various areas such as earnings mix, capital adequacy, and valuations.

In this latest update, I come to the conclusion that KB Financial is still deserving of a Buy rating. KB's most recently announced quarterly results were better than what the market had hoped for, while its proposed share buybacks will enhance shareholder value.

KB's Second Quarter Financial Performance Came In Above Expectations

KB Financial released the company's financial results for the second quarter of the current fiscal year on Tuesday, July 25, 2023.

KB's net profit grew by +24% YoY from KRW1,210 billion for Q2 2022 to KRW1,499 billion in Q2 2023. The company's actual second quarter bottom line was +11% better than the sell-side analysts' consensus earnings estimate of KRW1,348 billion as per data sourced from S&P Capital IQ .

Both KB Financial's banking and non-banking businesses performed very well in the most recent quarter.

Net interest income for KB increased by +5% YoY to KRW2,973 billion in the second quarter of this year. KB Financial's bank net interest margin was 1.85% for Q2 2023, which represented a significant improvement as compared to its bank net interest margins of 1.73% and 1.79% for FY 2022 and Q1 2023, respectively.

KRW-denominated loans for KB Financial also expanded by +1.1% QoQ to approximately KRW330 trillion as of the end of the second quarter. As a comparison, KB's KRW-denominated loan growth in Q4 2022 was flattish, and its KRW-denominated loans even contracted by -0.6% QoQ for Q1 2023.

With regards to its non-banking business, KB Financial's net non-interest income jumped by +152% YoY to KRW1,324 billion in the most recent quarter.

The securities and insurance businesses were the key contributors to KB's net non-interest income growth for the second quarter. At its Q2 2023 earnings call on July 25, 2023, KB Financial specifically highlighted that it witnessed "an increase in brokerage fees as well as expansion of IB (Investment Banking fees", and an "expansion of insurance income" for the recent quarter.

There are expectations that KB's financial performance for the second half of the year will be reasonably good, taking into account the company's credit cost guidance. KB mentioned at its second quarter results briefing that its cost of credit is expected to be "in the early to mid-40 basis points range" for FY 2023. Given that KB Financial's credit cost ratio was 0.59% in 1H 2023, KB's credit costs are likely to be lower HoH (Half-on-Half) for 2H 2023 as per the company's full-year guidance. As such, KB Financial's earnings for the second half of this year should benefit from more benign credit costs.

Investors were clearly impressed with KB Financial's above-expectations Q2 2023 earnings and its full-year credit cost guidance. KB's share price rose by +1.9% and +2.6% on July 25 and July 26, respectively.

Latest Share Buyback Announcement Is A Favorable Development For KB Financial

KB Financial disclosed that it will "buy back and cancel KRW300 billion worth of treasury shares" at the company's most recent quarterly earnings briefing. This recent disclosure implies that KB Financial's year-to-date share repurchases for 2023 will have gone up to KRW600 billion (prior KRW300 billion share buyback was revealed in February), or approximately $0.5 billion, which is equivalent to a meaningful 3.5% of KB's current market capitalization.

KB is doing the right thing by buying back the company's shares in an aggressive manner now. KB Financial's credit and capital metrics are sufficiently healthy to support share buybacks, and KB's shares are cheap enough to make share repurchases at current stock price levels attractive.

KB Financial's Non-Performing Loan (NPL) coverage ratio was an impressive 200.5% for the first half of this year. Separately, the CET1 (Common Equity Tier 1) ratio for KB improved from 13.24% at the end of last year and 13.66% as of end-Q1 2023 to 13.78% as of June 30, 2023.

Also, KB is now valued by the market a Price/Earnings-to-Growth or PEG valuation ratio of 0.43 times, based on the stock's consensus forward next twelve months' P/E metric of 3.8 times and the company's consensus FY 2022-2025 EPS CAGR of +8.8%. Typically, a stock is deemed to be trading at below fair valuation if its PEG multiple is below 1 times, and a PEG ratio of 0.5 times or lower implies significant undervaluation.

Therefore, it is fair to view KB Financial's new share repurchase announcement as a positive development for the stock.

Closing Thoughts

KB currently trades at below 0.5 times PEG, which is a clear indication of how undervalued the company's shares are. Moving forward, I expect a positive re-rating of KB Financial's valuations in time to come, as investors' attention are gradually drawn to its good financial performance and significant shareholder capital return moves (e.g. recent buyback disclosure).

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