Kakaobank: foreigners rush in where locals fear to tread

South Korean business & finance updates

South Korean digital lender Kakaobank is the latest business to illustrate the doctrinal split between tech fans and investors focused on fundamentals. The enthusiasts believe high prices not only reflect disruptive potential but may also increase it, in a variation of the motto “fake it ’til you make it”. The sceptics avoid stocks whose valuations defy conventional metrics.

By market value, Kakaobank has already made it. Its shares have almost doubled compared with the price set for its initial public offering last Friday. That makes it South Korea’s biggest local lender by market capitalisation at $32bn.

There are reasons to be bullish. Unlike most fintechs, Kakaobank is profitable and has been so for two years. It has more than 16m customers and about $25bn in assets. It sells itself as a platform — not just a bank.

There is also cause to be very wary. South Korean investors, eager buyers of other new listings, have shown little interest. Foreigners have bought four times as many shares as local institutions.

They are less likely to have registered a recent tightening of local banking rules. Regulators have started to see Kakaobank as a bank. They are requiring it to increase the proportion of loans made to customers with low-to-mid-credit scores to 30 per cent of its total, from 12 per cent at present. That should mean lower margins and more bad debt.

Shares in Kakaobank trade at 11.3 times price to book, compared with KB Financial, South Korea’s biggest traditional financial group, at 0.47 times. KakaoBank’s assets of $25bn are a long way from KB’s $565bn. Even at a current 23 per cent annual rate of growth, it would take more than a decade to catch up.

Three-quarters of operating profits last year came from interest income. The glamorous platform-related businesses, mostly consisting of credit card and stock account partnerships, is just 8 per cent of the business. The group runs negative margins on its non-interest income. The balance of advantage lies with sceptical fundamentalists rather than tech evangelists in the case of Kakaobank.

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