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IPOs

Is the KakaoBank IPO too expensive?

Despite strong growth potential, profit structure seen similar to existing banks'

By Jul 20, 2021 (Gmt+09:00)

KakaoBank mobile application
KakaoBank mobile application

Debate is heating up over KakaoBank Corp.’s new share value ahead of an initial public offering of the mobile banking unit of South Korea’s online messaging app giant Kakao Corp. on Aug. 5.

Some say KakaoBank is overvalued compared to existing banks although there is not much difference between them, while others say the market should consider its high growth potential and listing effects.

TOO EXPENSIVE

Meritz Securities Co., on July 19 estimated KakaoBank's valuation at 15.5 trillion won ($13.5 billion), below 15.68 trillion won, the lower end of the lender’s guidance.

KakaoBank, the country’s largest Internet-only lender, has strong growth potential based on its platforms. But analysts pointed out that its profit structure is similar to existing banks. Bank shares often move in line with return on equity (ROE) since the industry manages funds to increase profit.

“The IPO price is excessive compared to the ROE since banks’ ROE will not be able to rise above 10%,” said Yuanta Securities Korea.

There is no convincing reason to apply at least a 7 or 12 times higher price-book ratio (PBR) than major local banks given a similar ROE, analysts said.

“The IPO prices reflect a 30% growth in net profit a year on average by 2030. To do so, loans should increase 20% per year on average,” said DB Financial Investment Co.’s analyst Lee Byung-gun.

KakaoBank’s household loan growth, its key growth engine, is slowing down. Its household loan balance edged up 0.1% in the first quarter from a year earlier.

“That shows its platform competitiveness alone has further growth limits,” said Meritz Securities’ analyst Eun Kyung-wan. “It also suggests it's tough to differentiate products in loan markets without interest rates and credit lines.”

On the other hand, SK Securities valued KakaoBank's market capitalization at 31 trillion won after listing as its contactless financial models are attractive in terms of cost efficiency. The lender’s sales and administrative expenses were 52.2% of operating profit last year, lower than existing banks'.

KakaoBank, however, needs to prove its ability to evaluate credit risk using customer data and artificial intelligence to justify a higher PBR than other lenders, said SK Securities analyst Koo Kyung-hoe.
A KakaoBank user compares other banks' interest rates and credit lines for a loan.
A KakaoBank user compares other banks' interest rates and credit lines for a loan.

POST-IPO VOLATILITY EXPECTED

Stock prices are often volatile after an IPO on supply and demand and KakaoBank’s shares will follow the trend. The market force usually affects listed stocks for three to six months and reflects corporate values in the mid- to long-term.

The number of shares ready to trade after its IPO is relatively low. The shares that are not locked up account for about 27% of total listed shares.

KakaoBank is likely to be included in the MSCI Emerging Market Index and the Kospi 200 Index soon after the listing. That is expected to attract about 380 billion won, according to the brokerage industry.

In recent IPOs, individual investors rushed to buy shares, ramping up their prices, while existing shareholders and foreign investors did not sell immediately after listing. Foreigners may not dump KakaoBank’s shares after the IPO since they see high growth potential as it is the de facto largest internet-only lender in the world, analysts said.

“Foreigners may refrain from profit-taking in anticipation of events such as inclusions in major indices, ignoring corporate valuations,” said DB Financial Investment’s Lee. “Share prices will be very volatile for three to six months given a small number of shares ready to trade.”

Write to Yun-Sang Ko at kys@hankyung.com

Jongwoo Cheon edited this article.

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