Korean banks' earnings to fall short of consensus estimate

Blame it on additional provisioning to meet tighter FSS guidelines.

Nomura expects Korea banks to post a net profit of KRW1.2tr or 38% below the consensus estimate of KRW1.9tr, mainly due to additional provisioning to meet tighter FSS guidelines. However, Nomura thinks it is well known in the market and therefore unlikely to derail the current rally.

Here's more from Nomura:

Our economic team believes that the BoK will likely hold its key policy rate at 2.75% through 2013, given that the team expects GDP growth and CPI inflation to continue rising on a q-q sequential basis through 2013, supported by inventory restocking, fiscal stimulus and a modest recovery of overseas demand. 

Given that it usually takes two quarters to reflect the policy rate cut, we think that Korea bank NIM will likely bottom out in 1Q13 and start to recovery starting in 2Q13.

Modest loan growth in 2013
Although we expect macro economic recovery in 2013, Korea banks seem to have a more conservative outlook on Korea’s economy. That said, we think that banks will likely focus more on asset quality than asset growth. We estimate 2-3% loan growth in 2013F, with the exception of Hana Financial Group (HFG). It seems that HFG has a more aggressive stance on asset growth in 2013. We forecast 6% loan growth for Hana Bank and 8% growth for KEB in 2013F.

Credit cost to improve in 2013
Given our positive macroeconomic view we expect credit cost to improve in 2013F. Although we expect modest loan growth and NIM expansion, y-y interest income growth should remain largely flat.

However, we believe credit cost still remains at an elevated level and should contribute the most to earnings growth if macro recovery unfolds in 2013. That said, we think Woori Financial Holding is the most leveraged of companies under our coverage to improvement in credit cost.

Hana and Woori are our top picks in the sector
Korea banks have outperformed the KOSPI by 8% since the current rally started in early November 2012. We think the outperformance was driven mostly by easing of global macro issues (Euro break-up and US Fiscal Cliff).

Going forward, fundamental improvement should be the key share price driver. That said, we like Hana and Woori the most in our sector, both of which suffered the most among Korea banks during the recent downturn.