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KB Financial Group, Inc. (ADR) (KB), Woori Finance Holdings Co., Ltd. (ADR) (WF) & More Korean Banks With ADRs That Deserve Interest

The banks in South Korea did not have the near death experiences during the financial crisis that gripped European and U.S. financial institutions due to their minimal exposure to mortgage backed securities. Following the Asian crisis of 1997, Asian banks became more conservative, which enabled them to withstand the financial crisis of 2008 and 2009 much better than banks in Western economies. Three such Korean banks, whose ADRs (American depository receipts) trade on the NYSE and offer solid investment opportunities based on a number of valuation measures and business prospects, are KB Financial Group, Inc. (ADR) (NYSE:KB)Woori Finance Holdings Co., Ltd. (ADR) (NYSE:WF), and Shinhan Financial Group Co., Ltd. (ADR) (NYSE:SHG). KB Financial Group, Inc. (ADR) (NYSE:KB), Woori Finance Holdings Co., Ltd. (ADR) (NYSE:WF) and Shinhan appear more attractive than their U.S. and European counterparts due to the following characteristics:

Exposure to rapidly growing economies in Korea and Asia that are more reliant on capital intensive industries (auto, heavy machinery, appliances and electronics)

Relatively attractive valuations

Vertically integrated financial service companies with little competition from alternative financing sources (hedge funds and private equity)

Ability to provide additional financial services such as investments and wealth management

Conservatively managed

Fundamentals and valuations

According to the World Economic Outlook published by the IMF in April 2013, Korea’s real GDP is expected to grow by about 2.8% in 2013, compared to 1.6%, 8.0%, -0.3%, and 1.9% for Japan, China, the Euro Area, and the U.S, respectively. While the economic environment in Korea and Asia, in general, seems healthier than in Europe and the U.S., KB, Woori Finance Holdings Co., Ltd. (ADR) (NYSE:WF) and Shinhan Financial Group Co., Ltd. (ADR) (NYSE:SHG) ADRs do not trade at premiums compared to Wells Fargo & Co (NYSE:WFC) and the S&P 500, for example. The table below compares recent fundamentals and valuation measures between the three Korean banking giants to those of Wells Fargo & Co (NYSE:WFC) the S&P 500.

Market capitalization $12.1B $8.3B $15.8B $194B $13,857B
Dividend yield 2.10% 2.20% 1.90% 2.70% 2.20%
Operating margin 30.50% 26.80% 37.60% 34.40% 15.30%
Net interest margin 2.88% 2.38% 3.36% 3.76% n/a
Tier 1 ratio, Basel I 10.64% 9.20% 12.64% 10.12% n/a
Price-to-earnings (2013) 5.8 6.6 3.3 9.8 14.1
Return on equity 11.09% 8.70% 9.60% 12.95% 13.70%
Return on assets 0.90% 0.50% 0.80% 1.41% 1.20%
Nonperforming assets as a % of loans 1.36% 1.77% 1.28% 3.07% n/a
Efficiency ratio 44.5%* 47.6%* 47.28% 58.80% n/a
Price-to-book-value 0.6 0.5 0.7 1.3 6.9
Allowance as a % of total loans 1.51% 1.77% 2.26% 2.19% n/a
Beta 2 2.3 1.8 1.4 1
1-year total return (as of 4.22.13)

Source: Capital IQ, Thomson Reuters, SEC filings, author’s calculations. All data is as of December 31, 2012 or for the year ended on that date unless indicated otherwise.

* 2011

As seen from the above table, KB Financial Group, Inc. (ADR) (NYSE:KB), Woori Finance Holdings Co., Ltd. (ADR) (NYSE:WF) and Shinhan Financial Group Co., Ltd. (ADR) (NYSE:SHG) outperformed Wells Fargo & Co (NYSE:WFC) in terms of efficiency ratios, nonperforming assets as a percentage of loans and allowance as a percentage of total loans. At the same time, their price to earnings and price to book ratios are much smaller than that of Wells Fargo. One of the reasons for this discrepancy of risk and reward between the Korean and U.S. financial institutions is that the interest rate in the U.S. is 0.25%, while the base rate in South Korea is 2.75%, leaving a smaller net interest margin opportunity for Korean banks. Also, most U.S. banks have a dividend yield of nearly 3%, while the dividend yield of their Korean counterparts is closer to 2%. Korean banks have been overly conservative, and the reason for the lower dividend is that they have decided to keep a larger portion of income in their retained earnings. As the global economy stabilizes, the dividend yield for Korean banks should rise.

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