Banking:Disparate asset growth at internet-primary banks

3Q results of Kakao Bank and K-Bank reveal…: Kakao Bank and K-Bank postedrespective net losses KRW48.1b and KRW 19.6b for 3Q, but the former’s positivesindicate it should reach BEP faster than most forecasts, backed by sharp asset growth.

    …the former’s outperformance: Kakao Bank’s total loans hit KRW3.3t in 3Q, or 4.3xK-Bank’s KRW768.9b, and given the former’s loftier capital, we would expect it tomaintain an aggressive asset growth strategy.

    Portfolio rebalancing to enhance NIM: K-Bank’s NIM improved for the quarter asthe portion of mid-rate loans in its portfolio increased, and while the figure at Kakao Bankremains quite low—as it has offered loans mainly to clients with high credit ratings—weforesee it jumping as a rising portion of mid-rate loans spurs loan growth.

    Fee losses inevitable while seeking economies of scale: Net fee losses seemunavoidable as banks seek to increase their customer base, but once it reaches a certainthreshold and the portion of internal transfers increases, commission fees from externaltransactions should gradually decline.

    Limited G&A cost hikes: Kakao Bank and K-Bank reported respective G&A costs ofKRW25.5b and KRW20.5b for 3Q, implying approximate annual figures of KRW100b,even though the former’s total assets of KRW4.1t dwarf the latter’s KRW1.1t, with furtherasset growth therefore not expected to bring additional G&A cost hikes.

    BEP prerequisite: Kakao Bank’s 3Q results suggest it needs total assets of KRW10t toreach BEP, with the current pace of growth having us believe it will reach that pointsooner than most expect.

    Investment points: Investors should focus on interest-rate hike led earningsimprovements by traditional players more than threats from the internet primary banks,with the 58% stake held by Korea Investment Holdings in Kakao Bank likely to bestow itwith a valuation premium as the latter approaches BEP.