Korean banks to dodge woes of earnings impact from Pantech's court filing

They had already provisioned against exposure.

Pantech, a Korea-based smart phone manufacturer, filed for court receivership on 12 August 2014, five months after entering its second corporate workout process in March 2014.

According to a research note from Nomura, however, it believes the impact on overall banks’ earnings should be limited as banks had already provisioned against exposure to Pantech between 4Q13 and 2Q14.

In line with this, though, Nomura believes Hana Financial Group is likely to incur additional provisioning in 3Q14F as it had only provisioned for 37.5% of the total exposure (KRW4.5bn of KRW12bn), and the remaining exposure of KRW7.5bn, as of 2Q14, against Pantech is not covered by mortgaged assets.

Woori Financial Holdings and DGB Financial Group also have remaining exposure to Pantech, at KRW12.4bn and KRW1.3bn, respectively.

Here’s more from Nomura:

However, we think the earnings impact for WFH and DGB will be limited as their remaining exposure to Pantech can be fully covered, with the mortgaged assets.

We are optimistic that Korean banks’ valuations will re-rate on increased dividend payout. We think the new pro-growth government is likely to use Korean banks to set an example for increasing dividend payout ratios.

If we assume that the mid-cycle ROA of Korean banks will be at 70bps, and leverage to rise back to 15x (after depleting excess capital), ROE of Korean banks should rise to 10.5%.

This means that Korean banks can trade up to 1x P/BV (assuming COE of 10.5%), which we have not seen in years.

We reiterate KB Financial (105560 KS, Buy) as our sector top pick.

We expect the company’s earnings to pick up as:

1) credit card operations to normalize after a temporary suspension,

2) company should be the major beneficiary of the structural migration from credit cards to debit cards, and we are positive on the LIG acquisition.