Korea Investment Holdings: IB growth, trading earnings deliver earnings surprise

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The author is an analyst at KB Securities. He can be reached at [email protected] — ed.

Strong increase in IB commission income, stronger than expected trading income

– KIH reported 1Q22 NP (attributable controlling interests) of KRW 307.6 billion, which is 21.2% above our estimate and 11.2% above the market consensus.

— Given the lower trading value and deteriorating asset management conditions, we view the results as resilient. We attribute the winning blow to the following:

(1) IB commission income increased 28.8% QoQ due to a sharp increase in project finance advisory fees.

(2) Trading and product revenues were stronger than expected despite higher bond yields and higher HSCEI volatility.

KIH reduced negative valuation and disposal income by increasing the balance of outstanding debt (KRW 1.8 trillion → KRW 10.14 trillion) and increasing interest/dividend income by expanding corporate loans.

— Given concerns about central bank tightening and geopolitical risk triggered by the Russia-Ukraine war, brokerage firms’ decisions on portfolio rebalancing and management strategy are likely to have a significant impact on returns. We are sympathetic to strategies that bolster interest income by greatly increasing the balance of bond issuance amid the uptrend in interest rates and increasing IB’s earnings contribution. We maintain KIH as our best choice in the industry.

1Q22 consolidated NP (attributable to controlling interests) declined 0.3% qoq to KRW 307.6 billion

— For Korea Investment & Securities (KIS), consolidated NP declined 0.3% QoQ to KRW307.6 billion in Q1’22, but standalone NP rose 56.7% QoQ.

— In Q4 21, KIS reported relatively disappointing stand alone NP at conservative asset valuation related to debt issued. However, in 1Q22 it posted solid consolidated NP thanks to the reflection of valuation gains from consolidated funds at KIS and robust earnings at consolidated subsidiaries. Although KIS recorded a steep increase in standalone NP in Q1 22, largely on a favorable comparative basis, we note that consolidated NP has been held at Q4 21 levels.

— KIS brokerage revenues shrank 17.4% sequentially on lower trade value.

— However, IB commission income rose 28.8% QoQ/10.9% YoY to KRW185.4 billion. Notably, M&A and financial advisory fees increased 59.9% q/q/20.2% y/y to KRW123.9 billion, which may reflect KIH’s active response to the booming project finance market.

— Trading and product revenues fell 26.6% year-on-year to KRW175.5 billion but improved sharply quarter-on-quarter compared to a loss of KRW13.9 billion in 4Q21. Despite rising yields, bond valuation gains rose to over KRW 10.0 billion (incl. costs) thanks to active duration management. KIH also reported solid DLS management gains. In addition, the stock of debt securities issued QoQ increased by KRW 1.8 trillion from KRW 8.4 trillion in 4Q21 to KRW 10.1 trillion in 1Q22, reducing management revenue volatility.

— Other subsidiaries (excluding Korea Investment Capital) reported relatively weak results. Korea Investment Capital has steadily expanded its assets since its KRW 50.0 billion increase last December; The company is actively responding to the booming project finance market. In fact, 1Q22 earnings surged 65.2% QoQ/52.3% YoY to KRW 37.0 billion.

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