KB Financial Group has solidified its position as South Korea‘s top banking group in terms of earnings and market cap, on the back of higher-than-expected earnings in the fourth quarter of 2017 that led to a record-high yearly net income last year.

Stock analysts have said the financial giant’s capability to carry out shareholder-friendly actions driven by its increase in capital, will stretch its lead in the domestic banking industry, ahead of Shinhan Financial Group that topped in 2016.

The banking group‘s annual net income in 2017 came to 3.3 trillion won ($3.1 billion), up 52.7 percent compared to the previous year, according to the bank’s preliminary data in February. The net profit on the fourth quarter last year came to 554.2 billion won, up 22.1 percent on-year.

The earnings surprise originates from subsidiaries‘ decent performance. Its signature KB Kookmin Bank’s net profit more than doubled last year, while KB Securities came to the black. In contrast, Shinhan Financial Group‘s signature Shinhan Bank saw its 2017 net revenue, taking up more than half of the group, shed 11.9 percent on-year.

After the announcement, KB Financial Group said it would offer 1,920 won of dividend per share, up 53.6 percent from that of 2016 at 1,250 won. The group‘s stellar performance allowed the group to maintain its dividend payout ratio at 23.2 percent in 2017, the same as the previous year, analysts agreed.

Such shareholder-friendly approach to keep the ratio steady appears to impact little on the banking giant’s busienss, when “considering its capital adequacy,” despite tightening regulation on banks, Kim Do-ha, an analyst at SK Securities, wrote in a note.

The banking group said it aims to “ultimately” increase the ratio to 30 percent.

The move, along with a 1,000 share buy-back of in November 2017 should be seen as a “decision to put shareholder value to the priority,” according to Choi Chung-uk, an analyst at Daishin Securities.

The fourth quarter earnings came as a surprise to stock market watchers, as most stemmed from 60 billion won collected from its debenture to finance infrastructure projects, significantly decreasing allowance for bad debts that resulted in its improvement in financial soundness.

“There has been a clear improvement in KB Financial Group‘s financial soundness,” wrote Han Jung-tae, an analyst at Hana Financial Investment. “The allowance for bad debts have remained at a very low level ... and the figure will rise by a small margin in 2018, but is not expected to undermine earnings this year.”

Also, in the fourth quarter, the volume of loans by the group‘s signature KB Kookmin Bank rose 1.8 percent on-quarter, contributing to the improvement in its balance sheet.

These indicators far outweighed a slip in net interest margin of KB Financial Group by 4 basis points, which analysts, including Kim Soo-hyun of Shinhan Financial Investment, said was transitory, considering a key rate hike momentum by the central bank. If net interest margins drops, the interest expense of a banking firm was larger than interest income.

KB Financial Group became Korea’s first banking group to top 10 percent mark in return on equity in 2017. The group‘s ROE stood at 10.2 percent.

KB Financial Group‘s market cap at 26 trillion won on Thursday was also higher than that of its contender Shinhan Financial Group at 21 trillion won, as of Friday.

Aside from such investor-friendly policies, KB Financial Group Chairman Yoon Jong-kyoo’s push for business expansion is expected to continue. Yoon, serving his second three-year term since November, has sought to take over a life insurance company.

Some analysts said the banking group‘s risk factor lingers, including an ongoing clash between the labor union and the bank, surrounding the nomination of an outside director of the board, according to Choi of Daishin Securities. The in-house labor union’s recommendation of an outside director has faced an opposition of the board of directors.

“Any cases that would dent a shareholder-friendly decision-making structure will draw concerns of shareholders,” Choi wrote.

Analysts were mixed on the earnings forecast in 2018, but forecast any explosive growth in net income to be unlikely. Han of Hana Financial Investment and Choi of Daishin Securities forecast the 2018 net income to fall by 2.5 percent and 3.3 percent on-year, respectively, while Kim of SK Securities estimated it to increase by 4.5 percent.

By Son Ji-hyoung 
(consnow@heraldcorp.com)