20080723-Mirae Asset-Daegu Bank (005270.KS)

Lingering Concerns on Margin, Asset Quality
2Q08 earnings in line with market expectations
The company posted 2Q08 NP of W71.2bn (down 18.4% YoY, down 8.0% QoQ),
higher than the QoQ market consensus by 1.4%p and lower than our QoQ
estimates by 2.3%p. Overall, the 2Q08 earnings came in line with market
expectations. The QoQ drop in NP is due to a seasonal increase in SG&A expenses
(up W6.3bn QoQ), while sharp YoY decline is mainly due to one-off of W12.8bn in
2Q07 and increased provisioning caused by asset quality erosion.
Worse-than-expected NIM drops 21bp in 2Q08
Regional banks are suffering from NIM erosion and Daegu Bank is not an exception
to this trend as its NIM plunged 21bp in 2Q08. NIM stabilization in 2H08 should
depend on how much Korean banks will moderate loan growth and reduce
dependency on debentures and CDs for funding. The proportion of debentures in
the company’s total debt is 8.5% (lower than the sector average of 14.2%), but it is
soaring from 1.9% at the end of 2006.
Continuing asset quality erosion of corporate loans not a worry
Unlike household loans and credit cards, the soundness of corporate loans has
been deteriorating. Net growth of NPL has been increasing steadily after hitting
bottom in 4Q07 and the real delinquency rate is also on the rise. However, it is still
early to be concerned about asset quality erosion given the deceleration of
precautionary loan growth and increasing proportion of prime loans out of total
corporate loans.
Maintain our BUY rating and TP of W18,200
We maintain our BUY rating and TP of W18,200 given FY08 P/B of 1.0x and FY08
P/E of 5.5x. Despite a sharp decline in NIM in 1H08, solid NIM protection in 2H08 is
expected due to the restrain on loan growth. Other positives are the consistency of
profit and expected dividend yield of 5.3%.