BNK Financial Group, the holding company of South Korea’s regional lenders Busan Bank and Kyongnam Bank, is projected to deliver the highest return on equity (ROE) among local financial institutions this year, allowing its undervalued shares to recover to normal range. The high profitability comes despite concerns over lenders following intensive restructuring in the shipbuilding and shipping industries.

According to multiple sources from the financial industry, BNK Financial Group’s price-to-book value ratio (PBR) currently hovers at 0.41, meaning that if the financial group liquidates, its shareholders would receive about 2.5 times higher return than the current stock price.

Although overall valuation of local lenders has gone down significantly amid the overall low interest rate trend, the PBR of BNK Financial Group is relatively lower than its rivaling lenders. A lower PBR would mean that the stock is undervalued. The PBR of other financial institutions hovers above 0.5 - Shinhan Financial Group at 0.65, Jeju Bank 0.55, and KB Financial Group 0.51. BNK Financial Group’s price-earnings ratio (PER) that measures the current share price to its per-share earnings is 4.78 - the lowest among 10 listed financial institutions.

Industry observers note that the stock price of BNK Financial Group is relatively undervalued in the market due to rising concerns over lenders amid intensive restructuring in the shipbuilding and shipping industries. Some investors believe that BNK Financial Group would be providing large amount of loans to struggling shipbuilders and shippers as the regional bank in South Gyeongsang Province. They worry that profitability of BNK Financial Group would deteriorate if it is required to pile up more reserves for future losses.

However, according to BNK Financial Group, only 4 percent of its total loans are lent out to shipbuilders and shippers. The group has provided 2.6 trillion won ($2.4 billion) worth of loans to shipbuilding and shipping companies, of which 60 percent of the total can be covered by security and loan reserves.

An unnamed official from BNK Financial Group said that the group has only provided 300 million won worth of loans to the financially-troubled Daewoo Shipbuilding & Marine Engineering Co. (DSME) Also, loans were mainly provided to DSME suppliers, allowing BNK Financial Group to be less affected by the shipbuilder’s current restructuring. The official added that the group’s various financial soundness indices such as default rate and non-performing loan (NPL) ratio are rather improving.

On July 28, BNK Financial Group announced favorable second quarter earnings, brushing off overall market concerns. The net interest margin (NIM) of Busan Bank was 2.3 percent in the April-June period, up 1 basis point from three months earlier. The NIM of Kyongnam Bank also went up 4 basis points to 2.17 percent during the same period. NIM is an index that shows earning power of a lender by dividing total investment returns minus interest expenses by average earning assets. In general, if the key interest rate falls, NIM also drops. In case of BNK Financial Group, however, NIM rather went up.

Industry observers note that BNK Financial Group, which has been posting the highest ROE and return on assets (ROA) among lenders every year since 2012, should be reevaluated to above industry average based on its profitability.

By Yong Hwan-jin

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