Collaborations With Kakao And OpenAI And Expanded Loan Offerings Will Enhance Future Earnings

Key Takeaways

• Expansion in AI-related investments and collaborations could enhance services, drive customer engagement, and boost revenue growth.
  
• Focus on growing low-cost deposits and launching new loan products could improve margins and drive interest income growth.
  
• KakaoBank's projected decline in NIM and potential asset quality risks, alongside reliance on platform revenue, could pressure earnings amidst regulatory and competitive challenges.

Catalysts

An Internet bank, provides banking services through electronic financial transaction method in South Korea.

• KakaoBank is expanding its AI-related investments, leveraging its collaboration with Kakao and OpenAI to enhance its service offerings, which could lead to improved customer engagement and, consequently, higher revenue growth.
  
• The company is focusing on significant growth in its loan comparison and advertisement businesses, with expectations of over 40% growth in these areas, indicating potential substantial increases in noninterest income, which would support overall revenue growth.
  
• An expected continued focus on increasing the share of low-cost deposits helps manage the funding costs efficiently, positively impacting net margins and allowing for competitive loan offerings that could increase earnings.
  
• KakaoBank is planning to launch higher-value unsecured and secured SOHO loans, which could drive loan growth and increase interest income, ultimately impacting the top line favorably.
  
• The company aims to gradually increase its dividend payout ratio to 50% by 2026, enhancing shareholder returns and possibly driving investor interest, which could support share price appreciation, thereby positively impacting overall market valuation and earnings per share.

KakaoBank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming KakaoBank's revenue will grow by 8.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 28.5% today to 34.5% in 3 years time.
• Analysts expect earnings to reach ₩672.0 billion (and earnings per share of ₩1418.58) by about March 2028, up from ₩431.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.7x on those 2028 earnings, down from 26.2x today. This future PE is greater than the current PE for the KR Banks industry at 5.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.15%, as per the Simply Wall St company report.

KakaoBank Future Earnings Per Share Growth

Risks

• KakaoBank's projected decline in the net interest margin (NIM) due to anticipated lower lending rates and economic sluggishness could affect its interest-based revenue stream, potentially decreasing overall earnings.
  
• The increased fourth-quarter credit costs, due to additional provisioning, indicate potential risk in asset quality, which could impact future net margins if defaults increase, especially with plans to launch higher-value unsecured loans.
  
• The reliance on growing platform revenue, particularly through loan comparison and advertisement business, posits risk if these areas do not achieve expected growth or face increased competition, potentially impacting projected revenue growth.
  
• The strategy to significantly increase low-cost deposits, while beneficial for stable funding, could put pressure on the loan deposit spread and affect net margins if interest earnings from loans do not sufficiently offset the reduced spread.
  
• A slowdown in mortgage loan growth, coupled with regulatory limitations on loan growth, could constrain revenue from interest-generating activities, as these loans make up a significant portion of total loans.

Valuation

• The analysts have a consensus price target of ₩26388.889 for KakaoBank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩34000.0, and the most bearish reporting a price target of just ₩20000.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₩1949.1 billion, earnings will come to ₩672.0 billion, and it would be trading on a PE ratio of 23.7x, assuming you use a discount rate of 8.1%.
• Given the current share price of ₩23650.0, the analyst price target of ₩26388.89 is 10.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.