Korean banks must increase total shareholder returns: Align Partners

South Korean private equity firm Align Partners Capital Management Inc. is set to lead shareholder activism against the country’s top financial holding companies from the beginning of the new year.

On Jan. 2, the PE firm sent an activist shareholder letter to each board of directors at seven financial holding firms – KB Financial Group Inc., Shinhan Financial Group Co., Hana Financial Group Inc., Woori Financial Holdings Co., JB Financial Group Co., BNK Financial Group Inc. and DGB Financial Group Co.

In the letter, Align requested each company to set up and disclose its shareholder return policy, including target return rate, by Feb. 9. The PE firm also said it will file activist shareholder proposals at the general meetings of shareholders in March, if the financial holding firms refuse the request or their return to stakeholders, via dividends or stock buybacks, is regarded insufficient.

Align owns 14% and 1% stakes in JB and Woori, respectively, and has been delegated voting rights for a 1% stake in DGB from other stakeholders. The PE firm also holds less than a 0.5% stake in each of the other five financial holding firms.

It means that the investment firm is allowed to submit activist shareholder proposals to the former three companies and may do the same thing to the other five firms, with a delegation of proxy voting rights, Align founder and CEO Lee Chang-hwan said to The Korea Economic Daily on Tuesday.

"Korean banks' stocks are significantly undervalued compared with their overseas peers, despite high capital adequacy ratios, financial soundness and earnings," he said.

"The stock prices can be more than doubled if the banks reduce the annual growth rate of risk-weighted assets, such as loans, from the current 10% to 2-5% and increase the total shareholder return ratio from the current 25% to more than 50%," the CEO added.

Lee said Korean bank stocks' average price-to-book (P/B) ratio is 0.31 as of the closing on Dec. 29, 2022, less than one-fourth of the overseas peers' 1.28. The domestic banks' average price-to-earnings (P/E) ratio is 3.05, compared with foreign major banks' 9.5. 

On the other hand, Korean banks' average return on equity (ROE) for the past four quarters was 9.9%, similar to overseas major banks' 10.5%.

The domestic bank stocks have been undervalued as they have had too low total shareholder returns since the 1997 Asian Financial Crisis, the CEO said. Last year, Korean banks returned about 24% of their net profits to shareholders through dividends and share buybacks, while overseas banks returned 64%. 

"The local banks have aggressively increased loans to boost ROE. As a result, Korea's debt to gross domestic product (GDP) reached 220% as of end-2021," Lee said.

The Korean banks should return more portion of their net profits to stakeholders, rather than ramping up their loans. That will boost their stocks, accelerate rights offerings when needed, enhance efficiency in M&As as well as increase non-interest income via such deals, he added.

Founded in 2021, Align is managing 270 billion won ($211.9 million) in assets. The activist investor is creating a 500 billion won blind pool fund with some overseas institutional investors’ participation.

The activist investment firm owns a 1.1% stake in K-pop label giant SM Entertainment Co. as of October 2022.

Through a letter to SM last year, the investor requested that the entertainment agency terminate its production business contracts with Like, a boutique firm wholly owned by SM founder and Chief Producer Lee Soo-man. After a board meeting in October, SM ended the contract with Like as of Dec. 31, 2022.

Write to Chang-Jae Yoo at yoocool@hankyung.com
Jihyun Kim edited this article.