Expanding Loan Services And Global Ventures Will Strengthen Future Prospects

Key Takeaways

• KakaoBank's expanded partnerships and diversified loan services are expected to boost revenue and positively impact operating earnings.
  
• Strategic international expansion and technological investments could enhance operational efficiency and long-term profitability.
  
• Increased competition, regulatory constraints, and high exposure to mid-credit loans could hinder revenue growth and elevate credit costs for KakaoBank.

Catalysts

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

• KakaoBank is planning to expand its loan platform by increasing the number of financial institutions it partners with and adding services like home mortgage loans and joint loan services. This is expected to significantly boost platform revenue.
  
• The expansion of lending services into more diversified categories, such as SOHO (small office/home office) loans and guaranteed loans, will help KakaoBank to drive continued growth in its loan balance, impacting operating revenue and earnings positively.
  
• By leveraging its low-cost funding advantage, KakaoBank can offer competitive lending rates, which should help increase its market share and potentially improve its net interest margins and overall profitability.
  
• Strategic investments and market expansion into countries like Indonesia and Thailand position KakaoBank for international growth, which could result in increased revenue and earnings potential from these markets over the long term.
  
• Continued improvement in CIR (cost-to-income ratio) and investment in new technology and AI is expected to enhance operational efficiency, contributing to better net margins and increased profitability in the future.

KakaoBank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming KakaoBank's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 28.5% today to 37.5% in 3 years time.
• Analysts expect earnings to reach ₩664.8 billion (and earnings per share of ₩1425.42) by about December 2027, up from ₩431.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₩747.8 billion in earnings, and the most bearish expecting ₩514.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.2x on those 2027 earnings, down from 26.7x today. This future PE is greater than the current PE for the KR Banks industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 0.75% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.82%, as per the Simply Wall St company report.

KakaoBank Future Earnings Per Share Growth

Risks

• Increased competition in the loan comparison service sector may lead to downward pressure on fee income, impacting overall platform revenue growth.
  
• Regulatory constraints on household loans could limit loan growth potential, negatively affecting revenue and earnings growth prospects.
  
• High exposure to mid-credit and SOHO credit loans may result in increased credit costs if delinquency rates rise, potentially impacting net margins.
  
• Intense competition within the Indonesian banking market could delay the delivery of meaningful results from international investments, affecting overall revenue growth.
  
• Potential reductions in government regulation of household loans could limit KakaoBank's ability to capitalize on growth opportunities within these segments, affecting future revenue streams.

Valuation

• The analysts have a consensus price target of ₩27552.63 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 ₩37000.0, and the most bearish reporting a price target of just ₩18000.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₩1772.2 billion, earnings will come to ₩664.8 billion, and it would be trading on a PE ratio of 24.2x, assuming you use a discount rate of 7.8%.
• Given the current share price of ₩24150.0, the analyst's price target of ₩27552.63 is 12.3% 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.