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Financials Focus
Seoul searching
 Although our call to keep Korean banks among our preferred list in the region
has not played out as expected, we think now is not the time to capitulate. In
fact, the sector has done better of late. Post my visits to Korean banks, I came
away more positive than negative.
 On a regional sector basis, we‟ve been pushing Korean banks since the start
of the year on the notion that they were cheap, had lagged, and were
expected to post strong earnings growth this year. This argument remains. I
reckon there‟s limited downside from the PF situation at this stage, and as
such, will keep Korea within our preferred list. Our Head of Korea Research
and banks analyst, Chan Hwang, has Woori and Shinhan as his top picks.
Immediate overhangs
 The more immediate overhang on the sector seems to revolve around three
old issues: project finance (PF) loans, the mutual savings banks (MSB)
situation, and consolidation. Among these, I see PF as the bigger overhang
for investors.
I‟m less worried about the PF problem than I was prior to the trip. This is
not to say that the PF problem has gone away. On the contrary, I believe
it will still be another year or two before the risk to this segment can be
deemed tolerable. However, it does seem that the bottom has already
been touched and that things are on the mend. In this report, I cite the
reasons for my optimism including the fact PF loans for banks and
construction companies continue to come off.
On the savings banks situation, the potential MSB acquisitions may raise
questions about the ability of the major banking groups to act
independently of regulatory pressure. I can accept the arguments being
cited for why banks would buy the MSBs, but I don‟t have to like it.
Regardless, I think the MSB situation will have less bearing on share
price direction.
I‟m not holding my breath on consolidation (outside the MSBs). The
Hana-KEB saga continues to unfold poorly. The absence of M&A may not
be bad, since I remain sceptical that shareholder value is ever created
with mergers involving Korean banks.
Keeping Korea on our preferred list
 My guarded stance on Korean banks on a longer term basis remains, and I
still approach the sector as a trade. However, the immediate outlook on the
Korean banks behind their traditionally low price, but against a strong 147%
estimated EPS average growth this year, makes it more compelling at this
juncture, in my view. The sector is trading on a PER of 6.5x and a P/BV of
0.9x on FY11E ROE of 15.5%. Dividend yield support of 3.8% also creates
allure.