Source: Bloomberg

Renewed global GDP growth and a new cycle of technology investments are bound to boost South Korea’s expert-oriented economy, with a growth rate of at least 3 percent in the cards for 2012.

The country’s banks have been busily repairing their balance sheets, positioning them to be beneficiaries of an improving economy. Until recently, many investors were reluctant to embrace this positive assessment and adopted a cautious, but not pessimistic, wait-and-see attitude. Therefore, even though bank stocks have risen this year, they still offer good value and are poised to surprise on the upside as soon as this year’s earnings reports start coming in.

As noted in this issue’s main feature article, a relatively solid economy and a stabilizing real estate market should be enough to boost bank stocks higher. When investing in South Korean banks, keep in mind that the property market traditionally has formed an important part of the credit cycle of South Korean banks.

Home equity loans account for 67 percent of total retail loans and construction/real estate corporate loans account for 37 percent of total corporate loans. About 50 percent of all loans are collateralized by real estate.

Our bank stock pick KB has been improving its operations on every level. Its net interest margin (NIM) has surpassed 3 percent, a big positive given that South Korean banks generate about 80 percent of their operating earnings from interest income. Stronger NIM should lead to faster earnings growth.

South Korea’s government now strictly regulates the pace of loan growth and lending rates, to control the level of household debt. This is yet another reason why an improving NIM is critical to the health of South Korea’s banks. Regardless, KB’s management expects loans to grow by around 5 percent this year.

KB’s strategy has been to increase the fee-based income part of its business, a big positive for the bank because it doesn’t incur credit costs nor consume capital.

KB’s shares trade at 0.7 times book value and seven times earnings. In 2008, the stock traded at 0.44 times book value; the lender’s shares traded at 1.2 times book value at its 2009 high. The bank’s Tier 1 ratio stands at 11 percent, among the highest of its peer group. KB Financial Group is a buy up to USD45.