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| A smartphone user views Kakao Bank's mobile banking app. Korea Times file |
By Kim Yoo-chul, Anna J. Park
Kakao Bank, one among a small number of digital banks in Korea, became a profitable enterprise in 2019 after just 18 months of operation. The bank plans to launch an initial public offering (IPO) in 2021. The process of selecting underwriters is underway.
The key questions for investors and market watchers now are whether or not Kakao Bank's business model is sustainable and where else similar success stories in Asia can be found.
When considering the following five key requirements ― distinctiveness in lending and deposit franchises, large unserved customer pools, unprepared competitors, large synergistic backers and regulatory support ― Kakao Bank is ideally positioned to pursue its IPO as planned and scheduled, senior fund managers and investment banks said, Sunday.
The single requirement of building of a large customer base is often difficult for digital banks as many players in the payment services sector are able to demonstrate such ability. However, not many have been able to maintain that position while proving monetization ability.
What Kakao did "right" though was to quickly leverage the large Kakao Talk base to ramp up both lendings and deposits, and doing so within regulatory auspices, while others did comparatively little.
Kakao Bank managed to crack the profitability code in just 18 months by leveraging the network of its parent company ― Kakao Talk ― to gain an edge over its competitors. Kakao Talk is the leading mobile messaging app in Korea.
"The market penetration of Kakao is in fact small ― 1 percent of system lendings and deposits ― and this can be a good thing reflecting market share gain potential," Kevin Kwek and Pranav Gundlapalle at Bernstein Research said via email.
According to the senior analysts at the top-tier investment bank, its view of Kakao Bank is positive.
"The bank certainly has done impressively well to turn a profit so quickly. Sustainable? Yes, in at least three factors. Conduciveness of regulations, we are not as sure about, given what we just saw in China and regulatory trends that may over time aim for a more level playing field. Looking at Tencent in China, Kakao is already profitable," the two analysts said.
Regarding any investment view for bank investors, they said there is no need to be too alarmed by the digital bank threat.
"Kakao certainly looks promising with checks on four of the five stated factors. Having a large backer with synergies in terms of risk management or customer reach is a big boost too. Even so, the most successful digital banks remain a small part of the entire banking system. The so-called fintech threat seems overblown despite impressive growth," according to them, adding Kakao Bank's value is estimated be around 10 trillion won for a pre-IPO round.
Another rationale for Kakao Bank's success is the integration of smart services via the Kakao Talk platform, features which have helped differentiate the service. Furthermore, featuring "Kakao Friends" characters on Kakao Bank's smartphone application and debit cards helped immensely in attracting customers in the bank's early stages.
The two analysts said in terms of leveraging its parent's expertise in building a digital platform, Kakao Bank's application has a higher rating than most existing banking apps with Bernstein's rating on Kakao reaching over 4 points, followed by Shinhan and KB Financial with 4, Woori, NongHyup and KEB Hana with below 4.
"The lower fees on a variety of transactions continue to be a differentiator. For example, Kakao, unlike competitors, charges low fees on international remittances and no fees for debit cards and ATM transactions. The question is the impact on profitability," they said, adding the net interest margin (NIM) of Kakao remains below its peers such as K bank.
To prevent it from further margin falls, Kakao partnered with Shinhan Card and Samsung Card to ramp up its non-interest income. This kind of combination of manufacturing and distribution would further help Kakao achieve profitability.
Additionally, having clear ownership will help Kakao's planned IPO succeed. Both K bank and Kakao faced initial scrutiny from regulators around the increase in ownership by its parent entities. Unlike Kakao, K bank faced a long period of uncertainty due to an antitrust probe of its parent KT.
"This halted K bank's loan business for a while leading to uncertainties that have since been resolved. While Kakao Bank too faced some initial regulatory hurdles, Kakao is now a clear majority shareholder which helped in better integration and capital infusion," the two analysts said
At present, Kakao Group's market capitalization is about 33 trillion won, followed by KB with 20 trillion won, Shinhan with 18 trillion won, Hana with 10 trillion won and Woori with 8 trillion won, according to data compiled by Bloomberg and Bernstein analysis.
