Liability management takes centre stage
in 2008
􀀗 Rising funding costs (deposits+bonds)
put interest income growth at risk
􀀗 Preferred picks: IBK, Daegu Bank and
Pusan Bank
Bets on potential new government regulations
should not pre-empt fundamental valuations
We see potential economic stimuli with the new government,
but believe we will see deteriorating earnings before the
realisation of positive sentiment. We suggest a return to
fundamentals instead of riding on sentiment.
2008: the year of funding cost pressure
Funding costs to continue to threaten margins in 2008 on
scheduled debt refinancing as well as deposit re-pricing.
Kookmin , Woori, and Hana to be most affected. On the
asset side, re-priced SME loans significantly benefited
margins of banks with larger SME exposures, IBK, Daegu
and Pusan, as competition eased from late November 2007.
Beware of the ‘value trap’
Recent underperformance of bank shares offers attractive
valuation multiples but beware of the value trap. We prefer
IBK, Daegu and Pusan. IBK should be less negatively
impacted by rising spreads and benefit from easing
competition and sustainable loan growth. Daegu and Pusan
have more advantageous funding structures and longer-term
bond assets. Due to recent share price performance, we
upgrade Woori to Neutral and maintain Neutral on Kookmin
and Hana and Overweight on Shinhan.