Korea Banks Sector
SECTOR REVIEW
Korea banks unlikely to revert to Asian
financial crisis valuations, but ...
Historical P/B and credit cost/assets (sector)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
(x)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5 (%)
Sector aggregate forward P/B (LHS) LLP as a % of average assets (RHS)
0.8x
0.7x
0.4x
Source: Company data, Credit Suisse estimates
■ We believe it is too early to accumulate Korean banks. They may offer
more downside risk over the next one to two quarters as asset quality
is deteriorating drastically, a negative earnings surprise from 4Q08
may materialise, consensus earnings estimates are declining decline,
banks may be embroiled in various contingent liabilities and all macro
indicators are sliding. If our revised 2009E ROE of 7.7% happens, the
sector’s forward P/B may temporarily fall from 0.7x to 0.4x. But,
Korean banks are unlikely to revert to historical lows seen in the Asian
financial crisis. We retain our MARKET WEIGHT on the sector given
short-term downside risk and mid-term upside risk.
■ We cut our 2009E earnings 38.3% to W5.319 bn and 2010E by 21.8% to
W7,142 bn. The sector’s 2009 aggregate net profit is expected to drop
33.5% YoY and our 2009 earnings forecast falls short of consensus
forecasts by 41.2%.
■ We upgrade KBFG to OUTPERFORM, due to its relatively inexpensive
valuations, healthy capital position and low earnings downside risk; it
is our new top pick. We downgrade SFG to NEUTRAL, due to its lack of
differentiation from its competitors, and remove it from our top pick list.
We downgrade IBK to UNDERPERFORM.

Korean banks unlikely to revert to
Asian financial crisis valuations, but …
We recommend that investors stay on the sidelines for Korean banks over the next one to
two quarters as asset quality has started deteriorating, negative earnings surprises in the
coming quarters should be followed by cuts in consensus earnings forecasts, unexpected
contingent liabilities are surfacing and all macro data is sliding deeply and broadly.
However, we believe Korean banks are unlikely to revert to the historical troughs seen in
the Asian financial crisis given the degree of credit and earnings downside risks. On top of
that, investors should look for Korean banks to sharply rebound from a trough sometime in
2Q09. We retain our MARKET WEIGHT stance on the sector.
Revising down our earnings forecasts
We have downgraded our 2009 and 2010 earnings forecasts for the Korean banks sector
by 38.3% and 21.8% to W5,319 bn and W7,412 bn, respectively. This translates into a
33.5% YoY drop in our revised 2009 earnings forecast, which is also 41.2% lower than
consensus. We have downgraded our earnings estimates substantially, as we expect
banks to raise their loan-loss provisions and cut non-interest income.
What if new NPL formation doubled our assumption?
Even if we adopt a worst-case scenario namely that new NPL formation will be two times
our revised assumption, the sector’s aggregate earnings may drop to a mild loss, which is
an apparent contrast to its massive loss in the Asian Financial Crisis. This implies that
most banks do not need fresh capital to run their risk-weighted assets even in a worstcase
scenario.
Peaking out of asset quality erosion needs a few
quarters or more
Korean banks’ latest results show that their asset quality deterioration started in 3Q08. We
continue to believe that asset quality erosion is likely to persist over the next few quarters
given intensifying macro headwinds, surging precautionary loans in 3Q08, the aftermath of
fast-growing loans since 2006 and Korea’s high debt-to-GDP ratio.
Downward NIM outlook
We expect the sector’s net interest margin to relapse from 3Q08, owing to the ongoing
capital market fallout (despite the government’s easing measures), more rapidly falling CD
rates linked to lending rates than debenture rates associated with the funding cost, and
growing delinquent loans under the cash accrual accounting standard.
Growing contingent liabilities
We may hear more negative news on contingent liabilities, including the loss from Kick-In
Kick-Outs (KIKOs), the trading loss from securities investment and possible lawsuit claims
related to undue sales of asset-management products. Dilution risk from re-capitalisation
may also be lurking in the deep discount to Korean banks.
Retain MARKET WEIGHT but more downside risk in
the short term
We upgrade KBFG to OUTPERFORM due to its relatively inexpensive valuations, healthy
capital base and lower earnings downside risk than its peers. The company is our new top
pick in the sector. SFG is downgraded to NEUTRAL and comes off our top pick list. IBK is
also downgraded to UNDERPERFORM. We have lowered our target prices for the banks.