On Monday, DGB Financial Group (139130:KS) experienced a downgrade in its stock rating by JPMorgan from Neutral to Underweight, accompanied by a reduction in the price target to KRW8,000 from the previous KRW9,000. This adjustment comes as the firm anticipates the upcoming second-quarter earnings season.
The revision in the financial outlook for DGB Financial Group is driven by several factors. JPMorgan highlighted the company's scaled-back, yet robust, loan growth objectives as it transitions to a national banking model.
Additionally, the expected increase in margin pressure due to expansion activities and a higher credit cost associated with a relatively large project financing (PF) exposure were noted. These factors are in line with regulatory guidelines that call for conservative provisioning.
The analysis by JPMorgan also pointed out that while the bank's expansion into new regions is a positive move for risk management, market penetration is expected to be a slow process that will contribute to an increase in risk-weighted assets (RWA).
The bank might adjust the pace of its lending expansion to manage RWA, but the growing burden of provisioning is likely to continue exerting downward pressure on earnings and the Common Equity Tier 1 (CET1) ratio.
DGB Financial Group's current CET1 ratio stands at 11.1% as of the first quarter of 2024, which JPMorgan indicates is lower than its peers. The firm suggests that this weaker position may limit the potential for increasing shareholder returns. The detailed commentary from JPMorgan provides insight into the rationale behind the downgrade and revised price target for DGB Financial Group.
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