South Korean mobile-only bank KakaoBank has defended its valuation ahead of a planned initial public offering (IPO) after financial regulators in South Korea demanded that the digital lender adjust its prospectus, arguing that it was “highly overvalued”.

In a rebuttal, company CEO Yun Ho-young said on Tuesday that KakaoBank’s valuation was calculated in comparison with global peers rather than local lenders. He argued that digital banks differ from traditional lenders as their businesses are based on mobile devices and do not require physical branches.

“As an internet bank, we have a different starting point. We are unique, as we do our business based on mobiles, with no physical contact,” said Yun in an online news conference.

His comments come after Korea’s Financial Supervisory Service (FSS) demanded that Kakao Bank’s sister company, Kakao Pay, correct its IPO prospectus, saying it could mislead investors’ “reasonable judgment.”

The company recently increased its price-to-book ratio to up to 7.3, up significantly from 4.3 last year. The ratio measures the market’s valuation of a company relative to its book value.

For traditional banks in South Korea, the ratio remains well below 1. The figure is 0.52 for KB Financial Group and 0.5 for Shinhan Financial Group, according to the Korea Times.

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But the internet-only bank used a ratio drawn from figures of between 4.6 and 8.8, based on figures from leading innovative platform businesses including US mortgage lending platform Rocket Companies, Brazilian digital payment service provider Pagseguro Digital, Swedish digital finance platform Nordnet and Russian bank TCS.

But analysts doubted that this stance was justifiable.

“[Kakao] is currently into retail banking only. It doesn’t have corporate business yet, and it is mainly into lending credit to top-tier customers only and therefore, the valuation is definitely not justified. The bank is using a valuation multiple which is global as they have noted, which isn’t reflective of the local market, making it a quite a controversial valuation with justified backlash,” senior GlobalData analyst Jaimini Pattani tells Verdict.

According to KakaoBank’s IPO prospectus filed with the Financial Services Commission, the company set its IPO price range between 33,000 won to 39,000 won for the issue of 65.45 million new shares. If the price is set at the top end, its IPO is expected to raise up to 2.55tn won ($2.3bn).

With the new shares floated, the number of Kakao Bank’s total outstanding shares will be 475.1 million, putting the immediate market cap between 15.7tn won ($13.6bn) and 18.5tn won.

KakaoBank and KakaoPay are both affiliates of South Korean internet company Kakao, which operates South Korea’s dominant messaging app KakaoTalk.

CEO Yun said on Tuesday that the company has already made plans to expand in overseas markets, notably in Asia.

“We will consider actively going to overseas markets after expanding our capital with the IPO,” he said. “It could be capital investments or joint ventures with fintech partners.”

Yun also added that KakaoBank would launch its all-mobile mortgage loan service in South Korea sometime this year, which he believes would expand its customer base. He said the lender would use advanced technology to provide mortgage loans without the need to meet borrowers in person.

Pattani acknowledged that KakaoBank has good prospects:

“On the other hand, growth perspectives are promising for the bank. As explored in our digital challengers report, KakaoBank has made a profit from its lending in its first year – something that rarely happens for challenger banks. The bank has shown to be very innovative and successful in it’s earlier days, and therefore it’s likely the bank will show further growth through rapid expansion.”

So far, Kakao Bank has focused on offering credit to top-tier customers, but it aims to widen its services to homebuyers, small business owners and non-Korean residents of the country, as well as those unable to borrow money from traditional banks.

Interestingly, South Korea’s biggest payment app is backed by Jack Ma’s Ant Group, which was forced to halt its dual listing in Shanghai and Hong Kong last year, as the company’s (and its CEO’s) relationship with Chinese regulators turned sour.

Ant Group, which operates the digital payment behemoth Alipay, had been due to complete a record $37bn IPO. However, regulators blocked the move citing “changes to the financial technology regulatory environment and other major issues.”

KakaoPay said Monday that its IPO might be delayed due to the FSS action.

KakaoBank won the neobank IPO race

If finalised, KakaoBank’s IPO would mark a significant milestone on the global fintech stage and set the benchmark for international competitors, many of which have also suggest that they might go public.

UK-based challenger bank Monzo has been dropping hints recently that it has plans. “I think I’ll see [an IPO]”, Monzo’s COO Sujata Bhatia told Sifted in a joint interview. Her colleague, general counsel Stephanie Pagni, agrees that taking the company public during her tenure would “make sense”.

Another British neobank, Revolut, recently joined the tridecacorn club, following an $800m funding round which pushed its valuation past $33bn. Rumours of the company going public have been circulating. However, the London-based company has not confirmed anything yet.

Australian challenger bank Volt came close to an IPO. However, its plans were thwarted due to Covid. Last year, the company was determined to raise $50m in its IPO. However, when the pandemic hit, CEO Steve Weston decided to put his plans on ice.

Next-gen neobank Douugh, also from down under, debuted on the Australian Stock Exchange last year. However, with a market cap of $33m, it is not playing in the same league as KakaoPay, Alipay, Revolut, etc.

Across the Atlantic, Brazilian fintech Nubank has also spoken of a possible Nasdaq listing. The company is arguably the world’s biggest challenger bank, boasting 35 million clients. The flotation rumours made headlines in April after the company raised $400m in a Series G round, which pushed its valuation past $25bn.