1. finance
2. bank

Banks
Sector Report / Banks
May 7, 2012
How to adapt to Basel III
Overweight (Maintain)
Basel III will change how banks operate
Company
Rating
TP (KRW)
DGB Fin. Group
BUY
21,000
BS Fin. Group
BUY
19,000
Sector performance (12M)
(p)
Rel. to KOSPI (%p, R)
2,500
Bank sector index (pt, L)
(%p)
4
2,000
2
0
1,500
-2
-4
-6
1,000
-8
-10
500
-12
-14
-16
0
Apr-12
Mar-12 Jan-12 Nov-11 Sep-11 Jul-11
Source: WICS provided by WISEfn
Basel III will take effect from 2013. According to a 2010 Basel III impact
study, domestic banks will be able to manage their capital ratios without
much difficulty. However, the new liquidity and leverage ratio standards
introduced in Basel III will prompt banks to change their mid to long-term
asset management and funding strategies. Of note, in order to meet
minimum liquidity standards, domestic banks must increase the weighting of
high-quality liquid assets such as government bonds in their asset management
portfolio, as well as retail and SME deposits in their funding portfolio.
Impact of stricter capital definition on Korean banks’ dividend
payout: Minimal
Basel III strengthens capital requirements but it will not likely pull down the
already low dividend payout ratio of Korean banks. In Basel III, banks
need to hold capital buffers above the regulatory minimum capital
requirement as a cushion in case of stress. The minimum capital
conservation ratio varies by level of excess capital. Korean banks are
subject to a “0%” capital conservation requirement according to their
excess capital. The KIS Universe banks’ (except Korea Exchange Bank)
dividend payout ratio averaged 11% in 2011 and is very unlikely to fall
further. As banks introduce Basel III, we expect the standards for financial
holding companies will be upgraded to Basel II from Basel I. Basel II could
lift the financial holding companies’ BIS ratio, which may push up the
dividend payout ratio.
Top picks: Maintain BS and DGB Financial Groups
We maintain BS and DGB Financial Groups as our top picks.
Implementation of Basel III should highlight their value. With the new rules,
more emphasis will be placed on high-quality liquid assets and retail and
SME deposits. In that aspect, the two groups have an advantage over
commercial banks. Thanks to a high capital ratio, BS and DGB Financial
Groups will likely maintain their dividend payout at a higher level than
nationwide banks.
Korean banks’ dividend payout
(%)
Nationwide banks
40
Prov incial banks
35
30
25
20
15
Joanne Lee
82-2-3276-5956
[email protected]
10
Nationwide banks
ex-Korea Exchange Bank
5
0
02
03
04
05
Source: DART, Korea Investment & Securities
06
07
08
09
10
11
12F
Sector report focus
What is the report about?
• Give an outlook for Korean banks’ dividend policy changes and
mid to long-term responses to the introduction of Basel III
• Present the possibility that capital requirements in Basel III will
have a positive effect on Korean banks’ dividend payout ratio,
unlike the market’s concern
• With the introduction of a capital buffer, further downside for the
dividend payout ratio is limited.
• Israeli bank shares gained 7% for a day after the dividend
payment of excess capital was allowed
Israeli bank shares pre and post announcement of Basel III
adoption
(2011.05.01=100)
Key assumptions and valuation
110
• In Basel III, Korean banks would bear almost no burden in
managing capital ratios in the short-term and see some
changes to earning asset/funding composition over the mid to
long-term
100
90
80
70
Bank Leumi Le
Israel Discount Bank
Mizrahi Tefahot Bank
Bank Hapoalim
60
Sensitivity & scenario analysis
50
• The quantitative impact study (QIS) conducted in 2010 showed
that the downside in capital ratios for Korean banks would be
limited in the Basel III framework
• A 2%p rise in the portion of government bonds and a 2%p drop
in the portion of household loans in Korean banks’ interestearning assets compared to end-2011 would trim the bank
sector’s average ROE by 0.18%p
2010 QIS for Basel III introduction: Tier 1 ratio changes
(%)
Pre-Basel III
12
Post-Basel III
10
8
Basel lll rules announced
40
May-11
Aug-11
Nov-11
Feb-12
Source: Bloomberg, Korea Investment & Securities
2) Effects of liquidity ratio introduction
• Earning asset management: The portion of government and
municipal bonds to rise in an attempt to raise high-quality
liquid asset weighting
• Funding: Retail and SME deposits to gain importance
• The weighting of high-quality liquid assets that typically yield
low margins should grow in earning assets; But negative effect
on margins would be limited if banks’ exposure to large
company assets (typically narrower NIS) shrinks
6
High-quality liquid asset weighting (government/municipal)
4
2
8
0
(%)
7
Major banks (23
countries avg.)
Major banks
(Korean QIS banks)
Others (23
countries avg.)
Others (Korean
QIS banks)
Source: FSS, Korea Investment & Securities
6
5
4
3
2
KEB
Hana
IBK
Avg.
Shinhan
KB
Woori
0
Busan
• Korea’s Financial Supervisory Service plans to release the
guidelines to implement Basel III in 1H12
• If capital requirements turn out stricter than expected, it could
be a risk factor
1
Daegu
Risks/opportunities
Source: Company data, Korea Investment & Securities
Sector highlights
Peer comparison
1) Tighter capital requirements in Basel III framework
• Basel III rules should be phased in worldwide from 2013
• Korean banks have good capital adequacy and their dividend
payout ratios are already among the world’s lowest
Contents
I. Basel III: Implications of stricter capital requirements .................................................................... 2
1. Basel III: Stricter capital requirements and new regulations on leverage and liquidity ratios
2. Higher capital requirements affect dividend payout but impact limited on Korea banks
II. Basel III: Introduction of liquidity ratio............................................................................................................... 8
1. Liquidity requirements to change asset/funding composition
2. Earning asset management: Attempt to lift high-quality liquid asset weighting
3. Funding: Banks with early lead in retail and SME deposit markets to be winners
III. Waiting for FSS’ Basel III guidelines .............................................................................................................. 13
1. Subject to Basel III: Consolidated vs. stand-alone basis
2. Adoption of SIFI requirements
3. Adoption of contingent capital system
IV. Stock strategy ............................................................................................................................................................................. 14
Top picks: BS and DGB Financial Groups
Banks
I. Basel III: Implications of stricter capital
requirements
Global banks will adopt the Basel III rules starting in 2013. Basel III strengthens
capital requirements and introduces new regulatory requirements on bank liquidity
and leverage ratios.
The draft guidelines for Basel III were agreed by world leaders at the G20 summit
in Seoul, Korea, in Oct 2010 and according to the draft, each country will publish
its own Basel III text. Korea will have its detailed Basel III scope in 1H12. In this
report, we shall review possible changes to the banks’ asset growth and funding
structures in Basel III.
Progress of Basel III implementation in Asia
Draft published
Country
Draft published/
expected final rules
Final rules
Minimum common equity
Tier (CET) 1 ratio
Minimum Tier 1 capital
ratio
Total capital ratio
Implementation
Capital conservation
buffer
Australia
India
Singapore
Hong Kong
China
Philippines
Malaysia
Sep 2012
Sep 2011
Jan 2012
Dec 2012
Jan 2012
Nov 2011
By 1Q12
1Q12
Dec 10
Early 2012
Consultation
period ends
Feb 15
Consultation
period on MAS
ends Feb 17
2H12
By 3Q12
Mid-2012
4.5%
4.5%
5.5%
6.5%
4.5%
5.0%
6.0%
4.5%
6.0%
6.0%
7.0%
8.0%
6.0%
6.0%
7.5%
6.0%
8.0%
8.0%
9.0%
10.0%
8.0%
8.0%
10.0%
8.0%
Jan 2013
to Jan 2015
Jan-2013
Jan 2013
to Jan 2015
Jan 2013
to Jan 2015
Jan 2013
to Jan 2015
Jan 2012
By Jan 2014
Jan 2013
to Jan 2015
2.50%
2.50%
2.50%
2.50%
Implementation
Jan 2016
to Jan 2019
Jan 2016
Mar 2014 to Mar
2017
Countercyclical buffer
Up to 2.5%
Up to 2.5%
From Jan 2016
Decision by 2015,
Jan 2016
implemented
Implementation
Preliminary draft published
Basel
End-2012
2.50%
2.50%
Jan 2016
to Jan 2019
Jan 2016
to Jan 2019
By Jan 2012
To be announced
Up to 2.5%
Up to 2.5%
Up to 2.5%
To be announced
Jan 2016
to Jan 2019
Jan 2016
to Jan 2019
Jan 2012
2.50%
2.50%
By Jan 2014
Jan 2016
to Jan 2019
Under consideration
Under
consideration
Concept papers
outlining rules by
2014
Note: 1) Singapore: Starting at 4.5% CET1, 6% Tier 1 by 2013
2) Hong Kong: CET1 and T1 from 2013 to 2015; Already 8% minimum CAR
3) China: Grace period of 2 years for systemically important (SIFI) banks and 5 years for other commercial banks
Source: Each country, Press release, Korea Investment & Securities
Basel III: Stricter capital requirements and new
regulations on leverage and liquidity ratios
The main purpose of Basel II implemented in 2005 was to ensure supervisory
review by the authorities and continued oversight by market participants on banks’
minimum capital levels. But limitations of Basel II were demonstrated as some
banks suffered liquidity problems despite lofty capital ratios during the financial
crisis in 2008. Their liquidity risks quickly spilled over to other financial institutions
and became a trigger of systemic risks. As such, Basel III was drawn up to avoid a
repetition of the global financial crisis that Basel II was unable to prevent. Basel III
strengthens bank capital requirements and introduces new regulatory
requirements on liquidity and leverage. The higher capital requirements will be
implemented in the beginning of 2013. The liquidity and leverage ratio
requirements will be phased in 2015 and 2018, respectively, after a grace period.
2
Banks
Basel III capital structure
Source: Moody’s, Korea Investment & Securities
Higher capital requirements affect dividend payout but
impact limited on Korea banks
Basel III adopts stricter
capital definition and
raises minimum capital
requirements
Basel III introduces tougher capital rules by adopting: 1) the Core Tier 1 (common
equity Tier 1) capital requirement to encourage banks to secure quality capital and
2) raising the minimum requirements for the Tier 1 ratio and BIS ratio (Tiers 1 + 2).
The capital ratio is a ratio of a bank’s capital to its total risk-weighted assets (RWA).
As the Basel III definition of capital (numerator) is stricter while the scope of RWA
(denominator) is larger, it eventually lowers the banks’ capital ratios. In Basel II, the
minimum capital ratio requirement was 8% regardless of economic conditions. But
considering significant changes in RWA depending on the economy, Basel III
requires a minimum countercyclical buffer against RWA.
Basel III’s stricter capital requirements
Source:
Unlike European banks,
Korea banks have
already adopted
conservative capital
requirements → impact
of new definition of
capital is limited
Moody’s, Korea Investment & Securities
According to the European Banking Authority’s (EBA) report released in Apr, Basel
III will lower the Core Tier 1 ratio by 3%p for major banks and by 2%p for small and
midsize banks in Europe (as of end-Jun 2011). The reason is Basel III’s capital
definition excludes goodwill, intangible assets and deferred tax assets. But Korean
banks already exclude the items from the capital category. Korean banks have
followed more conservative capital guidelines than global peers, suggesting their
capital ratios will be less susceptible than European banks to Basel III
3
Banks
implementation. Earlier in Dec 2010, the Basel Committee on Banking Supervision
(BCBS) conducted a comprehensive quantitative impact study (QIS) to determine
the impact of Basel III rules on the banks’ capital adequacy, leverage and liquidity
ratios. A total of 263 banks from 23 of the 27 committee member jurisdictions
participated in the study. According to the study, the Basel III rules would lower the
major banks’ Core Tier 1 ratio by 5.4%p and Tier 1 ratio by 4.2%p on average,
while the Korean banks’ decline would be limited to 1%p each. As such, Korean
banks’ capital ratios will be virtually unaffected after Basel III is implemented and
this fact is widely acknowledged by the market.
European bank capital declines in Basel III (as of Jun
2011)
Group 1
Goup 2
European bank RWA increases in Basel III (as of Jun
2011)
Total
Trading book
Other
Securitisation
banking book
Excess
above 15%
DTAs above
threshold
Group 1
Group 2
CCR
MSRs
Threshold
Financials
50/50
Classified by capital definition
DTAs
Others
Intangibles
(%)
Total
Goodwill
-35
-30
-25
-20
-15
-10
-5
0
-5
(%)
0
5
10
15
20
25
Note: 1) “Others” refer to assets currently in the RWA category but classified as low-risk
Note: “Excess above 15%” pertains to significant investments in the common shares of
assets and deducted from RWA in Basel III; The negative sign in “other” indicates
unconsolidated financial institutions, mortgage servicing rights and DTAs that do not
this effect reduces the RWA
separately exceed the 10% category thresholds due to timing differences, but in the
2) “50/50” measures the increase in RAW applied to securitization exposures
aggregate exceed the 15% basket threshold
Source: EBA, Korea Investment & Securities
currently deducted in the Basel II framework that are risk-weighted at 1250% in
Basel III
3) “Threshold” measures the increase in RWA for exposures that fall below the 10%
and 15% limits for CET1 deduction
Source: EBA, Korea Investment & Securities
QIS in 2010: Impact on Core Tier 1 ratio
(%)
QIS in 2010: Impact on Tier 1 ratio
Pre-Basel III
12
(%)
12
10
10
8
8
6
6
4
4
2
2
0
Post-Basel III
0
Major banks (23
countries avg.)
Major banks (Korean Others (23 countries Others (Korean QIS
QIS banks)
avg.)
banks)
Note: QIS banks refer those subject to the BCBS’ comprehensive quantitative impact
study (QIS)
Source: FSS, Korea Investment & Securities
Basel III unlikely to
result in lower dividend
payout ratio
4
Pre-Basel III
Post-Basel III
Major banks (23
countries avg.)
Major banks (Korean Others (23 countries Others (Korean QIS
QIS banks)
avg.)
banks)
Note: QIS banks refer those subject to the BCBS’ comprehensive quantitative impact
study (QIS)
Source: FSS, Korea Investment & Securities
In this report, we draw special attention to the impact of the stricter capital
requirements on the dividend payout of Korean banks. The dividend payout ratio
on Korean bank stocks was the second-lowest in the world after US banks in 2009
and 2010 and after the European counterparts in 2011. That is, except for the two
epicenters of the global financial crisis, Korean banks had the lowest divided
payout ratio. We believe this is because Korean banks have followed stricter
Banks
guidelines than global peers due to the dependence of the country’s economy on
external markets. In 2011, the KIS Universe banks’ dividend payout ratio averaged
17%, which would fall to 11% if excluding Korea Exchange Bank with an
excessively large dividend payout. As such, stricter capital requirements are
unlikely to pull down the Korean banks’ dividend payout ratio.
Global bank dividend payout ratios
(%)
250
Asian bank dividend payout ratios
Korea
US
France
Germany
UK
(%)
140
120
Japan
China
Hong Kong
Indonesia
Malaysia
Singapore
Australia
Korea
200
100
150
80
60
100
40
20
50
0
0
-20
-40
-50
02
03
04
05
06
07
08
Source: Bloomberg, Korea Investment & Securities
09
10
11
02
Source:
03
04
05
06
07
08
09
10
11
Bloomberg, Korea Investment & Securities
One of the capital requirements in Basel III is the introduction of capital buffers to
mitigate the pro-cyclicality of banks. There are two types of capital buffers – a
capital conservation buffer that requires banks to maintain capital at a certain
portion of risk-weighted assets to absorb losses at all times, and a counter-cyclical
capital buffer that allows the capital weighting to change according to economic
conditions.
Economic fluctuations and capital conservation buffer
Financial cy cle
Capital
conserv ation buf f er
7.0%
2.5%
4.5%
Time
Minimum Core Tier 1 (common equity ) capital requirement
-
Source: Basel III and Risk Management, Korea Investment & Securities
Minimum capital conservation standards based on capital buffer requirement
Capital buffer requirement
Minimum capital conservation ratio
(provisioned capital buffer % of required capital buffer)
(% of earnings)
<25%
100%
25-52%
80%
50-75%
60%
75-100%
40%
>100%
0%
Source: Basel III and Risk Management, Korea Investment & Securities
5
Banks
After meeting capital
requirements, banks
can pay out excess
capital through
dividends; After Basel
III guideline was
announced for Israeli
banks in Mar, the
shares soared 7% in a
single trading day
The purpose of a capital buffer is to prevent banks from making dividend payments
if they cannot meet the capital requirements. As of end-2011, the average Tier 1
core capital of domestic banks stood at ~9.7%, which is ~2.5%p higher than the
minimum Core Tier 1 of 7% (minimum common equity of 4.5% + capital
conservation buffer of 2.5%). Even assuming an additional 2.5% counter-cyclical
capital buffer, the banks are still averaging more than the minimum standard.
Moreover, as the banks’ capital buffer requirement exceeds 100%, their minimum
capital conservation ratio stands at 0%. That is, domestic banks have no obligation
to set aside earnings. Does this mean that once capital requirements are fulfilled,
banks can pay out excess capital through dividends? In principle, the answer is
“yes.” According to the Basel Committee on Banking Supervision (BCBS), after
banks meet their minimum capital requirements, they are free to use excess capital
for dividend payments and other purposes. In Mar, the Basel III guideline was
released for banks in Israel. The Bank of Israel was quoted as saying, “According
to the draft guideline banks can distribute dividends if doing so does not negatively
impact their ability to meet the new requirements.” After the announcement, Israeli
banks averaged a 7% gain in a single trading day.
As for Korea, the Basel III guideline is scheduled to be released in 1H12. Given the
current circumstances in Korea, an excess capital dividend distribution is unlikely
but we believe regulations on dividend policies will not become stricter than they
are at present.
Israeli bank shares
(2011.05.01=100)
Basel lll rules announced
110
100
90
80
70
60
Bank Leumi Le
50
Israel Discount Bank
Mizrahi Tef ahot Bank
40
May -11
Bank Hapoalim
Aug-11
Nov -11
Feb-12
Source: Bloomberg, Korea Investment & Securities
Basel II standards for
group-led banks on a
consolidated basis
would drive up their
capital ratios positive
effect on dividend
payouts
6
Although the full scope of Basel III will become clear after the guideline is released
by the Financial Supervisory Service (FSS), we believe individual banks will be
subject to Basel III, while the standards for group-led banks using consolidated
accounting should be upgraded from Basel I to Basel II. In this case, the
consolidated capital ratio of group-led holding companies is very likely to improve.
Of note, using the internal ratings-based (IRB) approach after Basel II
implementation showed a tendency of risk-weighted assets being reduced.
Moreover, the increase in BIS ratio at Kookmin Bank, Hana Bank and Woori Bank
during 1Q08-2Q08 was due largely to the IRB approach adopted at the time. Thus,
individual banks should see a limited drop in their BIS ratios attributed to Basel III
adoption, while the ratios for group-led banks on a consolidated basis should rise
and have no negative effect on their dividend payout ratio.
Banks
BIS ratio improved on Basel II adoption
(%)
Basel ll implemented
18
16
14
12
KB
Woori
IBK
Daegu
10
8
Shinhan
Hana
KEB
Busan
6
3Q06
2Q07
1Q08
4Q08
3Q09
2Q10
1Q11
4Q11
Source: FISIS, Korea Investment & Securities
7
Banks
II. Basel III: Introduction of liquidity ratio
1. Liquidity requirements to change asset/funding
composition
Domestic banks’ capital
ratios already above
Basel III standards but
liquidity ratios fall short
of requirements
Liquidity and leverage ratios are the new set of requirements for banks in Basel III.
The 2010 QIS results indicate Korean banks will not find it hard to meet the capital
and leverage ratio requirements. In contrast, both short-term and mid to long-term
liquidity indicators fell short of the 100% standard (liquidity coverage ratio: LCR
and net stable funding ratio: NSFR). For NSFR, there is no significant gap between
domestic and overseas banks. However, the LCR of domestic banks is much less
than the overseas counterparts (75-76% vs. 83-98%).
Liquidity ratios
(%)
23 countries av g.
120
Domestic QIS banks
93
100
93
103
98
99
83
80
76
75
60
40
20
0
Major banks' LCR
Major banks' NSFR
Other banks' LCR
Other banks' NSFR
Source: FSS, Korea Investment & Securities
The LCR, a short-term liquidity indicator, is aimed at ensuring banks maintain
adequate levels of high-quality liquid assets (numerator) against net cash outflows
(denominator) over a 30-day significant stress period.
LCR = high-quality liquid assets / total net cash outflow over a 30-day stress
period ≥ 100%
To improve the net stable funding ratio (NSFR), a mid to long-term liquidity
The NSFR, a longer-term liquidity indicator, is designed to give incentives for more
stable asset management and funding to encourage banks to provide reliable
sources of funds over a one-year time horizon in conditions of extended stress.
NSFR = available amount of stable funding / required amount of stable
funding ≥ 100%
The new sets of liquidity ratio requirements should have a significant effect on the
banks’ asset/funding composition. In the past, the critical factors for net interest
income (NII) growth were asset growth and spread effect (difference between
yields on earning assets and funding costs). With the introduction of Basel III, the
changes in asset/funding composition should also become a key factor.
8
Banks
Contributors to NII growth (KIS Universe banks, from 2007 to 2011)
30%
35.6%
28.1%
Asset/f unding amount
Total
25%
20%
15%
10%
5%
0%
-5%
-10%
0.1%
-7.6%
Spread ef f ect
Asset/f unding
composition
Source: Company data, Korea Investment & Securities
2. Earning asset management: Attempt to lift high-quality
liquid asset weighting
Potential changes to
earning assets
breakdown: Bigger
weighting of highquality liquid assets
Regulations in Basel III imply banks will attempt to increase the weighting of highquality liquid assets. Korean banks’ LCR remained at 75-76% in 2010 and should
march toward 100% by 2015. High-quality liquid assets mean assets that can be
easily converted into cash with little loss in value during periods of severe market
stress. A good example is cash and government bonds. Bonds issued by central
governments or central banks are 100% liquid assets, while highly rated corporate
bonds are considered 75% liquid assets. As such, banks are likely to gradually lift
the weighting of government bonds going forward. Currently, government bonds
account for 3-4% of interest-earning assets at Korean banks. It is interesting that
provincial banks in Korea have 11-13% of interest-earning assets in
provincial/municipal bonds, which could be a better bet as they are classified as
high-quality liquid assets and typically yield ~40bps greater return than government
bonds.
Classification of high-quality liquid assets
Qualifying assets
Note
Cash, central bank reserves
Level 1 assets
Level 2 assets
- 100% to be multiplied
Marketable securities from sovereigns and central banks
Marketable securities issued/guaranteed by international against total amount
institutions
- 85% to be multiplied against
total amount (subject to a
Qualified corporate bonds or covered bonds
15% haircut)
- Can only comprise up to
40% of liquid asset pool
Source: FSS, Korea Investment & Securities
9
Banks
Net cash outflow: Inflow and run-off rates
Assets
Cash and cash equivalents
Inflow rates
100%
Liabilities
Retail and SME deposits
- Stable deposits (deposit protection +
operational relationship)
Marketable securities
- Marketable government
100%
bonds
- Qualifying corporate bonds
85%
or covered bonds
- Stocks and other securities
0%
Loans with residual maturities
of less than 30 days
- Retail loans and lending to
75% (under review)
institutions
- Other loans and assets
100% (under review)
Loans with residual maturities
of more than 30 days
0%
Run-off rates
5%
- Less-stable deposits
10%
Deposits from or loans to large
companies
- Operational relationship
25%
- Others
75%
Deposits at or debt from financial
institutions
Collateral loans including repos
Collateral loans including repos
(Individual and corporate credit
commitments)
100%
100%
100%
(5%)
Source: FSS, Korea Investment & Securities
3. Funding: Banks with early lead in retail and SME
deposit markets to be winners
Retail and SME deposits
with fewer run-off rates
to gain importance
With the implementation of Basel III, it would be natural to think that retail and SME
deposits with fewer run-off rates will become more important in the funding
composition. Currently, 67% of Korean bank funding is comprised of KRWdenominated deposits received. The run-off rates designated for retail and SME
deposits are low at 5-10%, whereas those for deposits from large companies are
much higher at 25-75%. It shows large companies are expected to run off their
deposits more easily than retail customers or SMEs in a crisis. As such, banks are
likely to put more emphasis on attracting retail and SME deposits and those with a
large exposure to the funding should gain the upper hand.
Banks’ funding costs could jump in tough competition to attract more deposits. But
its effects on overall profitability should be minimal for banks with larger exposure
to retail and SME customers as it means less exposure to large company assets
with narrower NIS. Banks can take the time to prepare before implementation of
the liquidity ratio rule in 2015.
2%p rise in the portion
of gov’t bonds and 2%p
fall in household loans
would trim the sector’s
average ROE 0.18%p
To assess the effect of asset/funding composition changes on Korean banks’
margins, we assume a 2%p rise in the portion of government bonds (among high
quality liquid assets) and a 2%p fall in the household loan weighting. Barring any
difference in yields on earnings assets, the erosion of the bank sector’s average
ROE would be a mere 0.18%p.
2011 KIS Universe banks’ asset/funding status
Interest bearing assets
KRW-denominated securities
Corporate loans
Household loans
Credit card receivables/loans
FX-denominated interest-earning
assets
Others
Funding
KRW-denominated deposits received
KRW-denominated CD
KRW-denominated debt
KRW-denominated bank debentures
Foreign currency funding
Others
Balance
1,046,028
141,169
404,237
327,229
24,623
Gain/cost
57,865
6,169
23,103
18,282
5,365
Yield/cost rate
5.53
4.37
5.72
5.59
21.79
Weighting
100%
13%
39%
31%
2%
104,067
2,315
2.22
10%
45
3
5.89
4%
997,752
665,348
20,257
54,289
136,579
109,269
12
30,515
19,823
802
1,593
6,245
1,579
0
3.06
2.98
3.96
2.93
4.57
1.44
3.94
100%
67%
2%
5%
14%
11%
1%
Source: Company data, Korea Investment & Securities
10
(W bn, %)
Banks
Government bonds and securities weighting at end-2011 by bank
Equity
Bonds
(%)
KB
Shinhan
Hana
Woori
IBK
KEB
DGB
Busan
Avg
6.9
12.1
9.7
10.5
11.8
13.2
5.0
5.0
10.0
85.8
83.6
74.6
82.4
79.8
85.9
87.6
89.8
82.2
Government bonds
30.7
20.0
23.3
32.7
23.3
6.4
23.1
13.1
23.6
Bank debentures
21.7
32.4
31.8
19.1
24.0
62.7
11.9
13.0
28.1
0.3
1.3
-
-
0.3
-
13.0
11.2
1.2
30.4
26.7
19.2
24.2
28.5
15.7
39.4
51.7
26.6
2.6
3.3
0.3
6.5
3.7
1.1
0.2
0.8
2.7
7.3
4.3
15.7
7.1
8.5
0.9
7.3
5.2
7.9
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
13.1
16.3
12.4
13.3
12.9
13.0
20.0
18.8
13.9
3.9
3.2
2.7
4.3
2.8
0.8
4.3
2.6
3.2
4.0
3.4
2.7
4.3
2.9
0.8
6.7
4.9
3.4
Provincial and municipal bonds
Corporate bonds
Other bonds
Others
Securities
Securities/interest bearing-assets
Government bonds/interestearning assets
Government, provincial and
municipal bonds/interest-earning
assets
Source: Company data, Korea Investment & Securities
Government, provincial, and municipal bond weightings
in interest- earning assets
Investment securities composition by bank
(%)
(%)
8
100
90
7
80
70
6
60
5
50
40
4
30
3
20
10
2
0
Financial debentures
Corporate bonds
Other bonds
Source: Company data, Korea Investment & Securities
0
KEB
Government bonds
1
Hana
Avg.
IBK
Busan
Avg.
Daegu
Shinhan
KEB
KB
IBK
Woori
Stocks
Provincial/munipicial bonds
Others
Woori
Busan
Shinhan Hana
Daegu
KB
Source: Company data, Korea Investment & Securities
11
Banks
III. Waiting for FSS’ Basel III guidelines
Following the suit of major Asian countries such as Hong Kong, Singapore and
India, Korea is expected to release guidelines for Basel III implementation within
1H12. Key issues in the announcement are summarized below.
1. Subject to Basel III: Consolidated vs. stand-alone bank
basis
At present, holding companies follow Basel I requirements for consolidated
accounting and banks follow Basel II. It is unclear if Basel III will be applied for
stand-alone banks or consolidated basis for their holding companies as well. In
principle, minimum regulatory capital and capital buffers are handled on a
consolidated basis; In most overseas cases, Basel III is known to be applied as
consolidated. However, each country’s supervisory authority can determine if the
Basel III standards should be applied to banks only depending on the nation’s
situation. Thus, we expect banks will introduce Basel III and standards for
consolidated holding companies will be upgraded to Basel II. Basel II could
improve the holding companies’ consolidated shareholders’ equity ratio as the
internal rating-based approach of Basel II reduces the size of risk-weighted assets.
2. Adoption of SIFI requirements
The bankruptcy of systemically important financial institutions (SIFI) would
significantly affect the economy. Thus, they are subject to more strict capital quality
supervision. SIFIs that are important at the global economy level are called global
SIFI (G-SIFI) and those with national importance are domestic SIFI (D-SIFI).
Regardless of whether Korean banks are designated as SIFI, the FSS could apply
SIFI-level regulations for banks in general.
3. Adoption of contingent capital system
Contingent capital is a bond that is converted to capital if a bank is deemed nonperforming. While contingent capital is debt in ordinary times, it is converted to
common shares by force when the conditions (e.g., the financial authority’s
judgment) are met. Since creditors must take the compulsory conversion risk, the
cost for financial institutions to issue the securities should be high. Conversion of
the bonds could also cause stock overhang, which in turn could dilute the existing
shareholder value. For capital securities that will be issued on Jan 1, 2013 and
onward, contingency capital requirements will be applied. However, it seems
unrealistic to apply the system beginning in 2013 as no contingency capital has
been issued in Korea. If implementation begins in 2013, banks may issue capital
securities in 2012. That in turn could have a negative effect on the banks’ 2012
NIM as the funding rate for capital securities is high.
12
Banks
IV. Stock strategy
Top picks: BS and DGB Financial Groups
Based on Basel III requirements, we came to the following conclusions regarding
stock selection.
1. Institutions with a high Core Tier 1 ratio will likely at least maintain or raise their
dividend payout.
2. Institutions with a high ratio of high-quality liquid assets (government and
provincial/municipal bonds) will less likely see changes in the earning asset and
funding composition.
3. Since retail and SME deposits are becoming increasingly important, banks with
heavy related weightings are more advantageous.
BS and DGB Financial Groups have high ratios of Core Tier 1 and Tier 1 capital.
Their dividend payout ratios have been higher than nationwide banks. Since their
weightings for government and provincial/municipal bonds are the largest among
banks, they will have the fewest changes to the mix of assets under management.
We also believe they are better than nationwide banks as they have more
provincial/municipal bonds than government bonds. This is an advantage because
yields on provincial/municipal bonds are 40-50bp more than government bonds but
are equally recognized. The two groups already have suitable customer bases for
the introduction of Basel III as they mainly serve SMEs and retail customers rather
than large corporations. Such characteristics should be highlighted once the new
requirements are implemented.
Korean banks’ dividend payout
(%)
Nationwide banks
40
Prov incial banks
35
30
25
20
15
10
Nationwide banks
ex-Korea Exchange Bank
5
0
02
03
04
05
06
07
08
09
10
11
12F
Note: Korea Exchange Bank (KEB)’s dividend payout ratio was much higher than others with Lone Star as its controlling
shareholder; As it has been acquired by Hana Financial Group, KEB’s dividend payout ratio should fall to a level similar to
other nationwide banks
Source: DART, Korea Investment & Securities
13
This page is left blank intentionally
Company
BS Financial Group (138930) .......................................................................................................................................... 16
DGB Financial Group (139130) ..................................................................................................................................... 18
Banks
BS Financial Group (138930)
BUY (Maintain) / TP: W19,000 (Maintain)
Yr to
• Stock price (3 May, KRW)
11,900
• Market cap (USD mn)
2,009
• P-I capital (USD mn)
825
• 52W High/Low (KRW)
16,800/10,300
• 6M avg. daily turnover (USD mn)
• Foreign ownership (%)
8.4
58.9
Total rev.
PPOP
(W bn)
(W bn)
2010A
994
588
476
366
2011A
1,181
692
533
2012F
1,216
704
530
2013F
1,316
778
2014F
1,401
845
Dec
EBT
NP
BPS
PER
PBR
ROA
(won)
(x)
(x)
(%)
(%)
1,960
35.7 13,167
6.1
0.9
1.1
16.0
400
2,144
9.4 15,829
5.5
0.8
1.1
14.8
413
2,215
3.3 17,968
5.4
0.7
1.0
13.1
591
461
2,471
11.6 20,363
4.8
0.6
1.1
12.9
646
504
2,697
9.1 22,885
4.4
0.5
1.1
12.5
(W bn) (W bn)
EPS % chg.
(won)
(YoY)
ROE
BSFG’s key strategies
Performance
1M
Absolute (%)
Rel. to Kospi (%p)
6M
12M
(10.9)
1.7 (24.0)
(8.2)
(5.0) (14.6)
12MF PBR trend
1.2
(X)
1.0
(Won) 18,000
12MF PBR (LHS)
16,000
BS Financial Group (RHS)
14,000
12,000
0.8
10,000
0.6
8,000
6,000
0.4
4,000
0.2
0.0
Jun-07
2,000
0
Jun-08
Jun-09
Jun-10
Jun-11
Maintain BUY with TP W19,000: We maintain BUY on BS Financial Group
(BSFG) and TP of W19,000 at 12MF BP 1.1x (sustainable ROE 13.0%, perpetual
growth 1% and CoE 11.5%). The sustainable ROE is the 2012-2013F average.
Strategies for NII growth – Focus on growth first and then corporate loans
rather than household: Among the KIS Universe banks, Industrial Bank of Korea
(IBK) and Busan Bank posted the biggest net interest income (NII) growth from
2007 to 2011. Although the banks saw the spread narrow, their strong asset
growth drove up income. This shows that beefing up assets was more effective in
lifting NII than adjusting the spread via higher yields on earning assets and lower
funding costs. BSFG has more room to grow assets backed by the regional
economy, which we believe justifies its valuation premium over peers. Another
positive is the bank positioning itself toward corporate loans rather than household,
which will come under tighter regulations going forward.
Strategies for subsidiaries – Synergy with savings banks: BSFG aims to
expand its subsidiaries that can tap Busan Bank’s biggest forté – regional-oriented
operations – rather than acquire non-life insurers that have a different risk/return
profile. Since the suspension of several troubled savings banks in Jan 2011,
business at domestic savings banks has dampened significantly. Moreover, the
savings banks’ net interest spread (NIS) has reached 11%p recently compared to
the commercial banks’ 2%p. This provides a good opportunity for BSFG to expand
its deposits base as the deposit rate between commercial banks and savings
banks is near its narrowest. We believe this strategy will prove profitable as long
as asset quality is tightly controlled.
High dividend payout ratio is another strong point: BSFG’s dividend payout
ratio stood at 16.3% in 2011, the second-most after Korea Exchange Bank (KEB).
Even with the implementation of Basel III, BSFG should have no trouble
maintaining a high dividend payout ratio thanks to a strong capital adequacy ratio.
Joanne Lee
822-3276-5956
[email protected]
16
Banks
Balance sheet
FY-ending Dec.
(W bn)
2010A 2011A 2012F 2013F 2014F
Cash & equivalents
2,005
2,596
2,493
2,395
2,301
Investment securities
6,231
7,340
7,638
7,948
8,270
Loans
Tangible assets
Intangible assets
Other assets
22,079 26,071 28,164 30,247 32,485
Income statement
FY-ending Dec.
Total revenue
Net interest income
(W bn)
2010A 2011A 2012F 2013F 2014F
994
1,181
1,216
1,316
1,401
905
1,025
1,095
1,189
1,268
82
97
100
106
111
7
60
20
22
23
Net commission income
390
413
413
413
413
20
24
24
24
24
Loan loss provisioning
154
145
160
171
184
4,001
2,916
2,688
2,477
2,283
Other non-interest income
Net operating revenue
840
1,036
1,057
1,145
1,217
Total assets
34,726 39,359 41,420 43,504 45,776
SG&A
406
489
512
539
557
Deposits
21,490 24,991 27,371 30,036 32,961
PPOP
588
692
704
778
845
Operating profit
434
547
545
606
660
42
(28)
(15)
(15)
(15)
EBT
476
533
530
591
646
Tax
110
132
117
130
142
Net profit (Consolidated)
366
400
413
461
504
366
400
413
461
504
Other comprehensive profit
0
(22)
80
80
80
Total comprehensive profit
0
57
493
541
584
Comprehen. profit
of controlling interest
0
87
493
541
584
One-off items
(43)
(48)
0
0
0
354
430
413
461
504
Borrowings
3,743
4,638
4,455
4,280
4,111
Debentures
2,636
3,618
3,475
3,339
3,207
Other liabilities
4,400
3,156
2,764
2,048
1,225
Total liabilities
Controlling interests
32,268 36,404 38,066 39,703 41,503
Non-operating profit
2,458
2,955
3,354
3,801
4,272
Paid-in-capital
933
967
967
967
967
Capital surplus
0
46
46
46
46
Capital adjustments
0
(2)
(2)
(2)
(2)
65
36
115
194
2,987
1,460
1,907
2,227
2,595
274
0
0
0
0
0
2,458
2,955
3,354
3,801
4,272
Adj. consolidated net profit
(W bn)
Valuation
2010A 2011A
2012F
2013F
2014F
FY-ending Dec.
Retained earnings
OCI
Minority interests
Total shareholders’ equity
Key financial data
FY-ending Dec.
Profitability (%)
Net profit of controlling interest
2010A 2011A
2012F
2013F
2014F
2,215
2,471
2,697
Per-share (KRW)
NIM
3.1
3.0
2.9
2.9
2.9
EPS
ROE
16.0
14.8
13.1
12.9
12.5
BPS
Adj. ROE
15.5
15.9
13.1
12.9
12.5
DPS
140
350
500
500
600
1.1
1.1
1.0
1.1
1.1
EPS growth (%)
35.7
9.4
3.3
11.6
9.1
BPS growth (%)
16.0
20.2
13.5
13.3
12.4
ROA
Adj. ROA
1,960
2,144
13,167 15,829 17,968 20,363 22,885
1.1
1.2
1.0
1.1
1.1
Cost-to-income ratio
40.8
41.4
42.1
40.9
46.3
Valuation
Loan-to-deposit ratio
99.0
97.3
96.0
94.0
92.0
PER (x)
6.1
5.5
5.4
4.8
4.4
PBR (x)
0.9
0.8
0.7
0.6
0.5
1.1
1.0
1.6
2.2
0.6
Dividend yield (%)
1.2
2.9
4.2
4.2
4.6
NPL coverage ratio
143.7
160.6
164.7
162.2
159.5
Dividend payout ratio (%)
7.1
16.3
22.0
22.0
22.0
New NPL formation
1.8
1.2
1.4
1.4
1.4
DuPont analysis (%)
Credit cost ratio
0.7
0.6
0.6
0.6
0.6
Net interest income
2.8
2.8
2.7
2.8
2.8
Non interest income
0.3
0.4
0.3
0.3
0.3
Asset quality (%)
NPL ratio
Growth (%)
Net interest income
3.1
13.2
6.9
8.6
6.6
SG&A
1.2
1.3
1.3
1.3
1.2
PPOP
23.0
17.6
1.8
10.4
8.6
Credit cost ratio
0.5
0.4
0.4
0.4
0.4
Net profit
35.7
9.4
3.3
11.6
9.1
ROAA
1.1
1.1
1.0
1.1
1.1
Deposit growth
16.1
16.3
9.5
9.7
9.7
Leverage
14.2
13.7
12.8
11.9
11.1
KRW-denominated loan growth
12.2
16.1
8.0
7.4
7.4
ROAE
16.0
14.8
13.1
12.9
12.5
Note: K-IFRS (consolidated)
17
Banks
DGB Financial Group (139130)
BUY (Maintain) / TP: 21,000 (Maintain)
Yr to
• Stock price (Apr 5, KRW)
14,000
• Market cap (USD mn)
639
• P-I capital (USD mn)
584
• 52W High/Low (KRW)
17,250/11,500
• 6M avg. daily turnover (USD mn)
• Foreign ownership (%)
3.5
73.4
Dec
Total rev.
PPOP
EBT
NP
(W bn) (W bn) (W bn) (W bn)
BPS
PER
PBR
ROA
(won)
EPS % chg.
(YoY)
(won)
(x)
(x)
(%)
ROE
(%)
2010A
962
564
300
227
1,721
33.4
15,234
8.1
0.9
0.9
12.0
2011A
1,013
546
415
306
2,314
34.5
17,343
6.0
0.8
1.0
14.2
2012F
1,068
649
440
343
2,595
12.1
19,528
5.4
0.7
1.1
14.1
2013F
1,153
726
443
346
2,616
0.8
21,633
5.4
0.6
1.1
12.7
2014F
1,226
777
480
374
2,833
8.3
23,956
4.9
0.6
1.1
12.4
Ready for Basel III implementation
Performance
1M
6M
12M
Absolute (%)
(7.3)
3.7 (19.7)
Rel. to Kospi (%p)
(4.6)
(3.0) (12.7)
12MF PBR trend
1.0
(x)
(Won) 18,000
0.9
0.8
0.7
0.6
16,000
14,000
12MF PBR (LHS)
12,000
DGB Financial Group(RHS)
10,000
0.5
8,000
0.4
6,000
0.3
4,000
0.2
2,000
0.1
0.0
Jun-07
0
Jun-08
Jun-09
Jun-10
Jun-11
Maintain BUY and TP W21,000: We maintain BUY on DGB Financial Group
(DGBFG) and TP of W21,000 at 12MF BP 1.1x (sustainable ROE 13.5%,
perpetual growth 1% and CoE 11.5%). The sustainable ROE is the 2012-2013F
average.
Sustainable growth model: DGBFG’s 12MF PB valuation is the sector’s highest.
We believe the premium is justified and sustainable. In 1Q12, DGBFG’s KRWdenominated loans grew 1.8% QoQ, led by large corporate (+12.2% QoQ) and
SME (+3.1% QoQ), while household loans shrank 2.6% QoQ. Overall, all the
banks that have released 1Q12 results have reported poor household loan trends.
We forecast household loans growth will be limited as banks must increase the
weighting of fixed-rate loans to 30% or more (currently less than 10%) by 2016.
We believe DGBFG is favorably positioned for loan growth as SME loans account
for 70% of total lending.
Unfazed by Basel III: Government and provincial/municipal bonds account for
~6.7% of DGBFG’s interest-earning assets, which is double the sector average of
3.4%. This clearly shows DGBFG is maintaining a conservative asset
management portfolio. As such, we believe the bank should be in the most
favorable position to deal with the changes in asset/funding compositions
attributed to the implementation of a liquidity coverage ratio (LCR). Moreover,
given that about 70% of DGBFG’s lending assets are in the form of SME loans, the
bank is well prepared for the LCR standard should the weighting of retail and SME
deposits climb to high levels. Also, management disclosed that Daegu Bank’s LCR
as of end-2011 was ~125%, above the minimum requirement equal to or greater
than 100% based on Basel III. As DGBFG has kept its operations conservative
and stable, it should be able to deliver sustainable growth even after Basel III is
implemented.
Joanne Lee
822-3276-5956
[email protected]
18
Banks
Balance sheet
FY-ending Dec.
(W bn)
2010A 2011A 2012F 2013F 2014F
Cash & equivalents
1,801
1,428
1,371
1,317
1,265
Investment securities
5,725
6,214
6,467
6,729
7,002
Loans
Tangible assets
Intangible assets
Other assets
19,480 21,898 23,472 25,158 26,966
Income statement
FY-ending Dec.
Total revenue
Net interest income
(W bn)
2010A 2011A 2012F 2013F 2014F
962
1,013
1,068
1,153
1,226
867
949
994
1,078
1,148
Net commission income
62
69
66
67
69
Other non-interest income
34
(5)
8
8
8
400
299
299
299
299
48
80
80
80
80
Loan loss provisioning
264
135
209
283
298
2,630
(70)
(71)
(72)
(73)
Net operating revenue
698
878
859
870
928
Total assets
30,084 33,535 31,618 33,513 35,541
SG&A
398
467
419
427
448
Deposits
19,095 21,943 23,566 25,310 27,182
PPOP
564
546
649
726
777
Operating profit
300
411
440
443
480
(0)
(4)
0
0
0
EBT
300
415
440
443
480
Tax
72
109
97
97
106
227
306
343
346
374
227
306
343
346
374
Borrowings
3,676
3,329
3,198
3,072
2,951
Debentures
2,535
2,207
2,120
2,036
1,956
Other liabilities
2,766
1,524
154
237
287
Total liabilities
Controlling interests
28,071 29,003 29,038 30,654 32,376
2,013
2,291
2,580
2,858
3,165
Paid-in-capital
661
670
670
670
670
Capital surplus
12
1,424
1,424
1,424
1,424
0
(0)
(0)
(0)
(0)
Capital adjustments
Retained earnings
OCI
Minority interests
Total shareholders’ equity
Net profit (Consolidated)
Net profit of controlling interest
Other comprehensive profit
0
2
12
12
12
Total comprehensive profit
0
(46)
355
358
386
Comprehen. profit
of controlling interest
0
(46)
355
358
386
One-off items
(63)
(41)
0
0
0
273
342
343
346
374
41
23
35
47
1,013
1,299
175
451
718
59
0
0
0
0
0
2,013
2,291
2,580
2,858
3,165
Adj. consolidated net profit
(W bn)
Valuation
2010A 2011A
2012F
2013F
2014F
FY-ending Dec.
Key financial data
FY-ending Dec.
Non-operating profit
Profitability (%)
2010A 2011A
2012F
2013F
2014F
2,595
2,616
2,833
Per-share (KRW)
NIM
3.2
3.1
3.1
3.1
3.1
EPS
ROE
12.0
14.2
14.1
12.7
12.4
BPS
Adj. ROE
14.4
15.9
14.1
12.7
12.4
DPS
140
350
500
600
600
0.9
1.0
1.1
1.1
1.1
EPS growth (%)
33.4
34.5
12.1
0.8
8.3
BPS growth (%)
13.5
13.8
12.6
10.8
10.7
ROA
Adj. ROA
1,721
2,314
15,234 17,343 19,528 21,633 23,956
0.9
1.1
1.1
1.1
1.1
Cost-to-income ratio
41.4
46.1
39.3
37.0
37.5
Valuation
Loan-to-deposit ratio
103.6
96.8
96.6
96.4
96.2
PER (x)
8.1
6.0
5.4
5.4
4.9
PBR (x)
0.9
0.8
0.7
0.6
0.6
1.4
1.1
1.0
1.3
0.7
Dividend yield (%)
1.0
2.5
3.6
4.3
4.6
NPL coverage ratio
115.6
154.7
154.6
160.6
147.1
Dividend payout ratio (%)
8.1
15.1
20.0
22.0
22.0
New NPL formation
2.2
0.8
1.3
1.3
1.1
DuPont analysis (%)
Credit cost ratio
1.3
0.8
0.8
0.7
0.5
Net interest income
3.0
3.0
3.1
3.3
3.3
Non interest income
0.3
0.2
0.2
0.2
0.2
Asset quality (%)
NPL ratio
Growth (%)
Net interest income
9.6
9.5
4.7
8.5
6.5
SG&A
1.4
1.5
1.3
1.3
1.3
PPOP
41.9
(3.3)
18.8
12.0
7.0
Credit cost ratio
0.9
0.4
0.6
0.9
0.9
Net profit
0.8
1.0
1.1
1.1
1.1
33.4
34.4
12.2
0.8
8.3
ROAA
Deposit growth
8.2
14.9
7.4
7.4
7.4
Leverage
15.3
14.8
13.4
12.0
11.5
KRW-denominated loan growth
5.3
11.0
7.2
7.2
7.2
ROAE
12.0
14.2
14.1
12.7
12.4
Note: K-IFRS (consolidated)
19
Banks
Changes to recommendation and price target
Company (Code)
BS Financial Group
Inc. (138930)
Date
Recommendation
Price target
03-29-11
NM
W0
03-30-11
BUY
W20,000
08-24-11
NM
W0
BS Financial Group Inc.(138930)
Company (Code)
DGB Financial Group
(139130)
Date
Recommendation
Price target
10-19-11
BUY
W19,000
10-19-11
BUY
W21,000
DGB Financial Group(139130)
25,000
25,000
20,000
20,000
15,000
15,000
10,000
10,000
5,000
5,000
0
0
May-10
20
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
■
Guide to Korea Investment & Securities Co., Ltd. stock ratings based on absolute 12-month forward share price performance
BUY: Expected to give a return of +15% or more
Hold: Expected to give a return between -15% and +15%
Underweight: Expected to give a return of -15% or less
■
Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months
Overweight: Recommend increasing the sector’s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market
capitalization.
Neutral: Recommend maintaining the sector’s weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization.
Underweight: Recommend reducing the sector’s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market
capitalization.
■
Analyst Certification
I/We, as the research analyst/analysts who prepared this report, do hereby certify that the views expressed in this research report accurately reflect my/our personal
views about the subject securities and issuers discussed in this report. I/We do hereby also certify that no part of my/our compensation was, is, or will be directly or
indirectly related to the specific recommendations or views contained in this research report.
■ Important Disclosures
As of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent
month if the publication date is less than 10 calendar days after the end of the most recent month), Korea Investment & Securities Co., Ltd., or its affiliates does
not own 1% or more of any class of common equity securities of the companies mentioned in this report.
There is no actual, material conflict of interest of the research analyst or Korea Investment & Securities Co., Ltd., or its affiliates known at the time of publication of
the research report or at the time of the public appearance.
Korea Investment & Securities Co., Ltd., or its affiliates has not managed or co-managed a public offering of securities for the companies mentioned in this report
in the past 12 months;
Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from the companies mentioned in this
report in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intends to seek compensation for investment
banking services from the companies mentioned in this report in the next 3 months.
Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in securities of the companies mentioned in this report at the time that the research
report was published.
Korea Investment & Securities Co., Ltd. does not own over 1% of BS Financial Group Inc.,DGB Financial Group shares as of May 4, 2012.
Korea Investment & Securities Co., Ltd. has not provided this report to various third parties.
Neither the analysts covering these companies nor their associates own any shares of as of May 4, 2012.
Prepared by: Joanne Lee
This report was written by Korea Investment & Securities Co., Ltd. to help its clients invest in securities. This material is copyrighted and may not be copied, redistributed,
forwarded or altered in any way without the consent of Korea Investment & Securities Co., Ltd. This report has been prepared by Korea Investment & Securities Co., Ltd.
and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. We make no
representation as to its accuracy or completeness and it should not be relied upon as such. The company accepts no liability whatsoever for any direct or consequential
loss arising from any use of this report or its contents. The final investment decision is based on the client’s judgment, and this report cannot be used as evidence in any
legal dispute related to investment decisions.
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CHUN SOO LIM, Executive Vice President, Head of Global Institutional Group ([email protected] +822 3276 5800)
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JJ MOON, Managing Director ([email protected] +44 207 065 2765)
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Korea Investment & Securities Europe, Ltd.
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London EC2R 6AR
Fax: 44-207-236-4811
Telex: 8812237
This report has been prepared by Korea Investment & Securities Co., Ltd. and is provided for information purposes only. Under no circumstances is it to be used or
considered as an offer to sell, or a solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained herein is not untrue
or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. This report is provided
solely for the information of professional investors who are expected to make their own investment decisions without undue reliance on this report and the company
accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is not intended for the use of private
investors.
2012. All rights reserved. No part of this report may be reproduced or distributed in any manner without permission of Korea Investment & Securities Co.,Ltd.