South Korea's regional financial holding companies remain mired in undervaluation despite posting solid earnings and pursuing aggressive shareholder return policies.
According to financial industry sources Thursday, BNK Financial Group, JB Financial Group, and iM Financial Group are trading at price-to-book ratios (PBR) of 0.5x, 0.8x, and 0.4x, respectively. A PBR below 1x typically indicates that a company's market value is being assessed at less than its book value.
Regional financial groups remain relatively undervalued compared to their nationwide counterparts. Over the same period, KB Financial trades at 0.92x, while Shinhan Financial Group and Hana Financial Group stand at 0.75x and 0.68x, respectively, and Woori Financial at 0.57x. Excluding JB Financial Group at 0.8x, regional financial groups are being valued at a discount relative to nationwide financial holding companies.
Share price performance has also been weak. Based on closing prices on the 1st, shares of BNK, JB, and iM Financial have fallen 28.5%, 37.7%, and 25.7%, respectively, from their highs recorded in the first quarter of this year. This stands in contrast to the KOSPI, which has continued its rally and seen improved investor sentiment over the same period. While nationwide financial holding companies have also experienced declines, their drops have been limited to the mid-10% range, making the relative underperformance of regional financial groups more pronounced.
Earnings, however, paint a different picture. Regional financial holding companies posted combined net profit of 532 billion won in the first quarter, up 10.0% from 483.7 billion won a year earlier. Backed by solid earnings, they are also accelerating shareholder return programs. BNK Financial set its quarterly dividend at 150 won per share, up 25% year-on-year, and plans to repurchase and cancel 60 billion won worth of treasury shares in the first half. JB Financial and iM Financial are similarly strengthening shareholder return policies through expanded dividends and treasury share cancellations.
Still, the market remains unmoved. Industry observers point to limited growth potential in the banking segment—the core revenue source—as one reason for the undervaluation, despite improving earnings. Sluggish regional economies are also amplifying uncertainty over loan growth and asset quality.
Regional banks' asset quality indicators are indeed weaker than those of nationwide banks. Their average delinquency rate in the first quarter stood at 1.19%, roughly three times the 0.40% average of the five major nationwide banks. Non-performing loan (NPL) ratios have also risen year-on-year at most banks, increasing the burden of soundness management.
Potential changes in the interest rate environment in the second half are seen as another variable. The market already views an additional benchmark rate hike as a foregone conclusion. While higher rates can support net interest margins (NIM), they may also raise borrowers' repayment burdens, leading to higher delinquency rates and increased loan-loss provisions.
The government's tighter stance on household debt management and growing demands for greater public roles from financial institutions are also weighing on the valuation of regional financial groups. Some argue that these factors are structurally entrenching the undervaluation of regional financial firms.
"Financial holding companies posted solid first-quarter earnings and pursued aggressive shareholder return policies, but the market is paying more attention to growth and sustainability," a financial industry official said. "Financial holding companies are also taking on greater public roles, which structurally limits their ability to demonstrate growth potential in terms of scalability."
