Elevator Pitch
I still rate KB Financial Group Inc. (NYSE:KB) [105560:KS] stock as a Buy.
My earlier July 27, 2023 write-up for KB was focused on the review of the company’s Q2 2023 financial performance. With the current article, I draw attention to KB Financial’s leadership transition and shareholder capital return.
KB’s current Vice Chairman and the former head of its insurance business arm is expected to be the company’s new CEO and Chairman. On the other hand, KB Financial offers an attractive fiscal 2023 shareholder yield of more than 9%, which is likely to be realized without opposition from the regulators. I have a positive view of recent corporate and industry developments, which leads me to maintain a Buy rating for KB.
Overhang Regarding KB’s Leadership Transition Has Been Removed
Previously, there was no clear answers relating to the question of who will lead KB Financial as the new Chairman and CEO in the future. Local media Korea JoongAng Daily reported in early August this year that “Yoon Jong-kyoo will not seek a fourth term” as CEO and Chairman of KB after “his term is slated to terminate on Nov. 20.”
Initially, Yoon Jong-kyoo’s departure was a concern for investors, considering that he has led KB Financial for a long period of time. Yoon Jong-kyoo has been the Chairman and CEO of the company for almost a decade since 2014; he also served as KB’s CFO between 2010 and 2013. It is reasonable to say that there are few people who are as familiar with KB Financial as Yoon Jong-kyoo.
Earlier, there were also worries that the new CEO and Chairman appointment process will be prolonged due to competition and potential interference from the Korean government in the selection of candidates. Pulse News Korea’s late July commentary piece had alluded to a potential “three-way race”, and also highlighted that “former government officials” might be among those competing for the Chairman and CEO positions.
The overhang associated with KB Financial’s leadership transition was finally removed last month, when Yang Jong-hee was “nominated as KB Financial’s new chief” according to a report published by Yonhap News Agency. This latest development is positive in a number of ways.
Firstly, there won’t be any leadership vacuum at KB Financial for an extended period of time, as Yang Jong-hee is expected to formally take over from Yoon Jong-kyoo as Chairman and CEO next month.
Secondly, KB Financial’s current Vice Chairman, Yang Jong-hee, will become the company’s new CEO, instead of having an external candidate appointed or suggested by the government to lead KB. This means that there is a high probability of KB Financial continuing with the same strategy and business direction when Yoon Jong-kyoo was at the helm.
Thirdly, the selection of Yang Jong-hee as the new CEO and Chairman sends a positive signal regarding KB Financial’s non-banking business diversification plans. A September 10, 2023 news report issued by The Korea Times noted that Yang Jong-hee will be KB’s “first and only chairman who did not serve as the CEO of its flagship affiliate, KB Kookmin Bank.”
Non-banking businesses’ earnings as a proportion of KB’s total profit was 41% for 1H 2023 as disclosed at the company’s Q2 2023 results call. Given that Yang Jong-hee was formerly in charge of one of the KB Financial’s non-banking businesses, he is more likely to continue with KB’s existing plans to diversify beyond its core banking business.
KB Financial’s Capital Return Moves Are Unlikely To Face Resistance From Regulators
When KB released its Q2 2023 financial results in late July this year, the company reiterated its commitment to buying back KRW600 billion worth of its shares for the current year. At its second quarter earnings briefing, KB Financial also stressed that “we are very much committed to a progressive (dividend) payout ratio.”
However, the market was aware of the risk that Korean financial regulators might possibly limit the amount of capital that listed financial services businesses in South Korea can distribute to their shareholders, in view of the challenging economic environment. But these concerns appear to be overdone.
On September 19, 2023, Macquarie Group (OTCPK:MCQEF) (OTCPK:MQBKY) published a research report (not publicly available) titled “Korean Banks – More Than Just A Dividend Play”. In this report, it was noted that “during the Europe IR (Investor Relations) events, the head of (Korea’s) FSS (Financial Supervisory Service) reiterated the commitment on autonomy of banks’ dividend (or shareholder capital return) policy.” This sends a clear message that the regulatory agencies in South Korea won’t put a cap on the dividend payout ratios or share buyback quantum for domestic financial services companies.
In the absence of opposition from regulators, KB Financial is in a good position to execute on its KRW600 billion share repurchase plan and distribute an estimated total dividend per share of KRW3,389 (consensus data taken from S&P Capital IQ) for full-year FY 2023. This suggests that KB Financial’s FY 2023 shareholder yield (sum of buybacks and dividends divided by market capitalization) could be as high as 9.1%.
Concluding Thoughts
I retain my Buy rating for KB Financial. Recent events associated with the company’s leadership change and the Korean banking industry’s regulatory direction have made me more bullish on KB.
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