BNK Financial Group, the holding company of South Korea’s regional lenders Busan Bank and Kyongnam Bank, is gaining traction in the market for its undervalued shares compared to its peers in the financial and banking sectors despite its solid results.

In the July-September period, BNK Financial Group posted a net profit of 145.6 billion won ($126.7 million) and an operating profit of 202.4 billion won on sales of 1.28 trillion won - solid earnings meeting expectations by local brokerage firms. For the full year in 2016, BNK Financial Group is projected to raise 550.6 billion won in net income and 725.6 billion won in operating income.

Shares, however strangely underperformed. According to Mirae Asset Securities Co., BNK Financial Group’s price to earnings ratio (PER) that measures the current share price to its per-share earnings is 5.4 based on its estimated 2016 earnings, which is relatively lower than that of its bigger peers Shinhan Financial Group and KB Financial Group with 8 each, Industrial Bank of Korea with 7, and Hana Bank and Woori Bank with 6.5.

Han Jung-tae, an analyst at Hana Financial Investment, said that BNK Financial Group’s PER is about 29.1 percent below the average of other banks, which means the shares have that much potential to go up if conditions in the broader market improve.

The shares are also cheaper in terms of price-to-book ratio (PBR) that compares market value to book value. The group’s PBR is 0.45 based on its estimated year-end earnings, which is lower than Shinhan Financial Group’s 0.66 and KB Financial Group’s 0.55. Analysts claim there is no justice to such poor market evaluation except upon naïve thinking that the group is smaller because it does business beyond the capital. BNK Financial Group is based in Busan, Ulsan, and other Gyeongsang Province regions with its top Busan Bank and Kyongnam Bank.

Analysts also point to BNK Financial Group’s high level of return on equity (ROE), which is a measure of a company’s profitability in relation to its net assets. The higher the figure, the more profit a company reaps by utilizing its capital.

BNK Financial Group’s ROE is 8.4 percent, which is the highest in the industry, followed by Shinhan Financial Group with 8.3 percent. BNK Financial Group has been delivering the highest ROE in the industry for the past several years.

Market analysts, however, raise concerns over its rising nonperforming loan (NPL) ratio and default rate. As of the third quarter ended September, Kyongnam Bank’s NPL ratio was 1.24 percent, up 0.05 percentage point from the previous quarter ended June while its default rate reached 1.04 percent, up 0.44 percentage point over the cited period. The company said that the figures were up due to an expected one-off factor involving STX Offshore & Shipbuilding Co. and that the temporary rise should cause no concern.

By Hong Jang-won

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