Unattractive market keeping investors away
By Park Hyong-ki
Foreign investors in local financial groups and banks will be in for a treat as those companies are about post strong annual profits for fiscal 2018.
But will they?
Analysts and industry sources say they should not get their hopes up.
KB Financial, Shinhan Financial, Hana Financial and Woori Financial may show their best numbers in years thanks to brisk bank earnings.
But their stocks are not expected to perform in 2019 as well as their 2018 results.
There are several macroeconomic factors leading to such a grim outlook such as slower growth both at home and abroad.
Also, a downcycle for semiconductors, which had helped sustained the economy, will weaken the sentiment in the broader market, analysts say.
There seems to be a "paradox" in the way financial holding and bank shares are moving and losing luster when examining two of the industry's key metrics.
Their profitability measured by return on equity (ROE) had been increasing on the back of strong earnings led by their flagship banks.
The sector ROE reached over 8 percent as of the third quarter of 2018, up from 1.3 percent in 2016 and 6 percent in 2017. It is likely to stand at 9 percent in 2019, according to IBK Securities and the Korea Institute of Finance (KIF).
If the ROE increases, it is natural to see their price to book ratio (PBR) follow the upward pattern, reflecting their fundamentals. PBR is used to measure the comparison between companies' book value and market value.
But the industry PBR stands at multiple of 0.47, below 0.53 in 2008 when the global financial crisis erupted.
Those local bank shares can be technically seen as undervalued.
But in reality, investors don't see them as worthy investment stocks that could get them good returns in the long run.
"It is depressing to see those two metrics moving oppositely," said Kim Eun-gab, an analyst at IBK Securities.
"Their stocks have long been driven by the weak sentiment that has been developing on a dim outlook since 2018, despite positive earnings."
The four major groups are expected to post a combined net profit of 11.2 trillion won ($10 billion) in 2018, up 13 percent from 2017, according to FnGuide, a financial information service provider.
But an index measuring financial holding firm and bank stocks fell 19 percent in 2018, which was worse than KOSPI's 17 percent decline, according to the Korea Exchange (KRX).
What's more worrisome is that there won't be a lot of "events" in 2019 that can help turn the tide. Tougher regulations on household lending and the Federal Reserve's interest rate hikes are going to slow local companies down.
Industry sources say besides regulations, local banks have moved relatively slower than their global peers in developing new growth, making their stocks unattractive.
"They stayed in their comfort zone too long. This made them laid-back, becoming latecomers in digital," said a bank industry source.
To this end, analysts say financial companies have to be more aggressive than ever to find a breakthrough.
"They need to speed up in their digital transformation and finding growth outside the country," said Lee Tai-ki, a senior researcher at the KIF.