[Press9] KB Financial Chairman Yang Jong-hee promised at the IR event in New York recently that he will achieve 10% ROE for the group. The consensus estimate for the group's ROE in 2024 is currently 8.27%. 

In order to achieve the 10% ROE goal, the numerator, net profit, must be increased or the denominator, capital, must be reduced. To achieve ROE of 10% by increasing net profit without changing capital, profits must increase by 21%. 

However, it seems almost impossible to increase its net profit by 21% given the rate environment. Of KB Financial Group's first quarter operating revenue of KRW 4.412 trillion, net interest income was KRW 3.1515 trillion, accounting for 71%. The interest income, which accounts for most of operating revenue, is expected to grow modestly or stop growing going forward with the market rates falling.  

Thanks to the real estate boom, the banks' loan assets have increased at a very rapid pace until 2022 and continued to grow at a modest pace until 1QFY24. Meanwhile from the second half of 2021, interest rates rose sharply. As a result the group’s interest income increased by 92% from 2021 to 2023. 

However, now that the real estate market has entered a downturn, the demand for loans has decreased. In addition, the rates are falling steadily. With inflation coming down recently, the market expectation for the interest rate seems to be a downwards trend.  

Meanwhile, its fee income has not seen much growth for quite some time. Net fee income in 2023 was KRW 3.6735 trillion, a 1.3% increase compared to KRW 3.6255 trillion in 2021. Its fee income has not been able to keep up with the inflation for two years. 

There could be some room for improvement on the credit cost given that the 2023 credit cost seems a bit elevated. However, it may be enough to boost the market consensus meaningfully. In addition, if the real estate project financing loan restructuring plan by the government is initiated, then there could be downside risk to the consensus, in our view.   

The market consensus estimates that KB Financial Group's net profit will grow by about 11% y-y in 2025. Although 11% net profit growth seems a difficult target to achieve in this current macroeconomic environment, even if it is achieved, the ROE will only be 8.76%. 

10% ROE cannot be achieved unless capital is drastically reduced. However, as long as the financial regulator insists on keeping the common equity tier 1 ratio (CET1) requirement at 13%, the bank cannot reduce its capital drastically.

KB Financial’s CET1 ratio in the first quarter was 13.4%. In order for ROE to reach 10%, approximately 10 trillion won of capital must be reduced. In this case, the CET1 rate would drop to 10.4%. ROE of 10% cannot be achieved while maintaining the CET1 ratio above 13%. 

Chairman Yang Jong-hee's pledge to achieve 10% ROE is a promise that he cannot deliver, in our view.