(Bloomberg) -- From London to New York, investors are wagering that South Korean banks will remain star performers thanks to the government’s corporate-reform push.

Their cheap valuations, and signs that the banks are responding to the Corporate Value-up initiative, have driven their stock up by as much as 47% this year. KB Financial Group Inc. and Shinhan Financial Group Co. told investors recently they’re targeting a 10% return on equity, breaking with norms to avoid setting benchmarks.

“We think the upside remains even with the recent run-ups that those banks have seen,” said Christine Phillpotts, a New York-based portfolio manager at Ariel Investments LLC, “We’re starting to see that inflection point. The Value-up program helps further encourage that behavior.”

The reform push lifted much of the stock market earlier this year, before most of those broad early gains were reversed. Many investors are coming to the view that the Value-up program will benefit companies like banks rather than firms like the chaebols — big businesses controlled by founding families.

It’s “much easier to change professionally managed businesses once you put little incentives in place,” said Graeme Forster, a director at Orbis Investment Advisory Ltd. who manages a $3.8 billion fund. “But I don’t think that’ll be enough on the conglomerate side.”

After South Korea finalized the Value-up guidelines, KB Financial Group was among the first to address shareholder-value enhancements. Speaking in New York in May, KB CEO Yang Jong Hee reiterated a commitment to quarterly dividends, while CEO Jin Okdong of Shinhan Financial Group said the firm will reduce the number of outstanding shares. They both said their return on equity target was 10%. 

KB rose 47% year-to-date and Hana Financial Group Inc. advanced 42%. Fellow banking giant Shinhan Financial Group Co. gained 17%. Still, their price-to-book ratios ranged from 0.44 to 0.53, versus the MSCI Asia Financials Index’s 1.07.

“There is a large margin of safety in terms of valuations here,” said Dan Kelly, a senior portfolio manager at Mondrian Investment Partners in London. 

Contrast that with the chaebols. E-Mart Inc. fell 20% so far in 2024, while Samsung C&T Corp. is up just 4.3%. Shareholders of Samsung C&T, including National Pension Service, rejected the activists’ proposal for higher dividends and buyback in March. 

The large financial firms will still need to deliver. 

“There is ample potential for them to trade above net asset value,” Orbis’s Forster said of the banks. The companies should use their capital better, for example by buying back their stock, he said.

But the combination of Value-up anticipation and cheap share prices, for now, is drawing in bullish predictions.

Arjun Jayaraman at Causeway Capital, whose $1.8 billion fund beat 98% of its peers so far this year, likes Korean bank stocks. With Hana and Shinhan trading at less than half of their book value even after the advances this year, “you can still see maybe another 10% to 20% gain and they still won’t look overvalued,” said Jayaraman. “We think the rally can go further.” 

©2024 Bloomberg L.P.