KB Financial Group:Normalized earnings power to improve further

WHAT’S THE STORY?

    1Q results surprise on stronger earnings power, one-off gains: KB FinancialGroup today reported that its net profit rose 91.7% q-q and 59.6% y-y to a far-better-thanforecastKRW870.1b in 1Q—this, despite KRW64.5b in additional provisioning againstloans to Daewoo Shipbuilding & Marine Engineering (DSME). We attribute the surpriseto: 1) recurring provisioning and G&A costs declining for another quarter; 2) pronouncedimprovement in earnings at KB Securities, which reported a 1Q net profit of KRW108.8b;and 3) one-off gains of KRW158.3b from the sale of a stake in Kazakh bank BCC. Weexpect further improvement in earning power as consolidating KB Insurance and KBCapital and increase in valuation merit.

    Still our top pick: KBFG remains our top pick for three main reasons. First, its boastssector-high capital adequacy, which bestows it with enormous flexibility to grow its assets. Second, its banking operation has enjoyed NIM- and G&A cost-led profitabilityimprovements. Third, it plans to fully acquire KB Insurance and KB Capital, moves thatwould: 1) allow it to recognize negative goodwill in 2Q; 2) boost consolidated net profitfrom 3Q; and 3) generate more synergies, leading to stronger earnings power.