Korea Banks:Negatives appear priced in

We expect additional provisioning for troubled corporates, butthis will likely be better than what the market anticipates

    Solid earnings stream should continue, with stabilizing marginand improving recurring credit cost level

    Our preferred plays are Hana FG and Woori Bank (both Buy)

    Concerns on corporate restructuring appear excessive, in our view

    Despite investors’ concerns about corporate restructuring, we believe the actualimpact on Korean banks will be far less significant than the market anticipates.We estimate an additional KRW315bn will be set aside for exposures related toHanjin Shipping and DSME for 2Q16, c17% of 2Q16e sector earnings. However, ashighlighted in our 6May 2016report, ‘Switching gears, turning positive on banks’, webelieve recurring credit cost improvement will help offset the negative impact.

    Stabilizing margin and recurring credit cost improvement to support earningsWe expect bank margins to stabilize as liability re-pricing impact kicks in; 2-3bpstechnical rebound likely in 2Q16and flatten in 2H16once liabilities are fully re-priced.We highlight that discount on lending rates is dissipating, as mortgage reform isnearing completion and tighter credit standards and banks begin to raise commissionrates. As for recurring credit cost, we believe improving new NPL formation trendsignals potential for improvement. This is backed by multi-year asset clean-up effortssince 2009where pre-emptive provisions were made on problematic corporates andactively reduced exposures to risky sectors. Also, banks focused on reshuffling loanbook towards SME/SOHO/mortgages that are backed with collateral instead of credit.

    Our preferred plays are Hana FG and Woori Bank

    We believe investors should increase exposure to those large banks that could beatearnings expectations, namely Hana FG and Woori Bank (both Buy). For Hana, weexpect to see a clean set of results this year with cost stabilization and efficiencyimprovement. For Woori Bank, significant improvement in new NPL formation trends willpush down the level of recurring credit cost, in our view. Valuation and risks on pg 3.