Hana Financial Group Inc. (A086790) Earnings Call Transcript & Summary

Good afternoon, everyone. I am Lee Junghoon, Head of IR from Hana Financial Group. I'd like to thank shareholders, analysts and other market participants for taking part via phone or Internet in today's event despite your busy schedules. We'll now begin the 2020 first half Hana Financial Group's earnings presentation. First, let me introduce the members of our senior management joining us today. From Hana Financial Group, the new CFO, Lee Hoo-Seung, is with us; our CRO, Hwang Hyo-Sang; and our CSO, Ahn Seun-Jong, are here with us. Next from Hana Bank, the Vice President Lee Seung-Yeol from the Business Strategy Group is here. From Hana Financial Investment, Vice President Lee Sang-hoon is with us. Finally, from Hana Card, Managing Director Kim Tae-Young from Business Planning Division is with us. First, we will invite CFO, Lee Hoo-Seung, for a presentation of the business results. And afterwards, we will hold a Q&A session via phone. We will now commence the 2020 first half earnings presentation of Hana Financial Group by CFO, Lee Hoo-Seung.

Good afternoon. I'm glad to have everyone with us. I'm honored to have this chance to introduce myself to investors and market participants who continue to show their support and interest towards Hana Financial Group. I am Lee Hoo-Seung, the newly appointed CFO of the group. I have come to assume this position at a time when uncertainties are running high in financial markets, both home and abroad due to COVID-19. Going forward, I will do my best to sustain the proactive and market-friendly IR activities of Hana Financial Group. From now on, let me speak on the subject of Hana Financial Group business results for the first half of 2020. First, the group's financial highlights. Please refer to Page 3 of the presentation deck. The net income of Hana Financial Group in 2020 Q2 posted KRW 687.6 billion, up 4.4% Y-o-Y and up 4.7% Q-o-Q. As such, the net income for the first half of 2020 posted KRW 1,344.6 billion, up 11.6% Y-o-Y. Despite setting aside a large loan loss provisioning in response to the protection of COVID-19 and reserves related to private equity funds, sound core earnings growth in the nonbank and global segments and also one-off gains such as nonmonetary FX gains, drove the performances higher than market expectations. With the recent increase in the number of confirmed COVID-19 cases in Korea, we are projecting a difficult business environment ahead in the second half as well. As such, Hana Financial Group, based on healthy and stable business results, will continue with its efforts to secure sufficient capability to absorb losses and strengthen our ability to reliably supply funds into the real economy. And now let me go into business highlights of the first half of 2020. First of all, core earnings were maintained at a fair level, while nonbanking and global segment's business results improved, enhancing the overall income earning capabilities of the group. And following the bank's interest income -- following the drop in the NIM was offset by the growth in the interest income of overseas units and growth in the domestic loan asset. As such, the group's interest income was maintained at the same level Y-o-Y. Fee income as well, despite the impact from COVID-19, was able to defend the previous year's level, owing to the solid growth in the card fees and brokerage fees. In addition, expansion of the securities income from the bank and securities subsidiary led to a substantial increase of the gains in valuation and disposal Y-o-Y for the group in the first half of the year. What's more, because of the structural reforms undertaken by the Chinese economy last year, gains from equity investment into China recovered and BIDV gains from equity method valuation was added, thus diversifying the sources of income for the group. Next, efficient control of the group's SG&A continued. Group-wide cost-cutting efforts, along with the impact from last year-end's preemptive ERP, led to stable management of the group's recurring SG&A. Not only that, a partial write-back of the reserve set aside last year for the bank's performance-linked bonus took place in Q2 so that the group's SG&A fell 9.7% Y-o-Y. The group's cost efficiency was improved and served as a basis for stronger income stability, despite the worsening external environment due to the COVID-19. Finally, as uncertainties continue both at home and abroad, various preemptive provisionings were set aside. With COVID-19 cases on the rise again, to respond to a possible recession, approximately KRW 165.5 billion of provisioning was additionally recognized, leading to a considerable increase in the cumulative credit cost ratio of the group in the first half. However, recurring credit cost ratio is maintained at a stable level. And approximately KRW 118.5 billion in reserves related to private equity funds were set aside to secure the funds that may be needed to respond to possible indemnity. Such measures have cleared much of the uncertainties related to future performance and at the same time, secure the ability to meet potential external shocks. If you look at the lower left-hand corner of the page, the group's ROE at end of the first half of 2020 is 9.44%, up from the end of the previous quarter, and ROA posted 0.63%, similar to the end of the previous quarter. The group's cumulative C/I ratio posted 43.1%, falling significantly over Q1 due to the impact from one-off factors such as labor cost savings. Next, moving on to Page 4. The group's 2020 Q2 NIM, including Hana Bank and Hana Card, posted 1.62%, same as Q1. Hana Bank's NIM came to 1.37%, falling 2 bps Q-o-Q. During the quarter, additional cut in the BOK rate weakened the NIS. But with funding portfolio improving owing to increase in low-cost deposits and with the bank maintaining a profit-centered asset growth strategy, the fall in the bank's NIM was minimized. Meanwhile, card NIM improved significantly Q-o-Q on the back of increase in payment-related fee income, thus offsetting the drop in the bank's NIM. The group's second quarter interest income maintained the previous quarter's level despite the fall in the NIM due to the fair growth in the loan assets. The fee income increased 5.3% Q-o-Q as well, driven by card and brokerage fees. As such, the group's Q2 core earnings is up 1.7% Q-o-Q to post KRW 1,987.8 billion. Referring to the right-hand side of the page, the bank's Korean won loans expanded mostly -- extended to SMEs posting KRW 226.8 trillion, up 1.8% QTD and up 3.8% YTD. Next, on Page 5. As of the end of Q2 2020, the group's NPL ratio stood at 0.45%, down 2 bps QTD. And the delinquency rate posted 0.31%, same as the end of Q1. The bank's delinquency rate was the same as the QTD level, and the group's delinquency rate increased with the recent inclusion of the delinquent assets of Hana Insurance. However, on the back of the government's financial assistance and internal risk management effort, the overall nonbanking subsidiary delinquency rate declined, sustaining the stable trend of the group's asset quality indicators. Meanwhile, the group's first half cumulative credit cost ratio posted 0.27%, up 14 bps QTD due to the large preemptive provisioning, reflecting fluctuations in the economic situation. But when excluding the provisions related to COVID-19, the figure comes to -- when excluding KRW 165 billion related to COVID-19, it comes to 0.16% being managed within our annual target level. With the additional recognition of loan loss provisioning to counter a possible recession, the group's ability to absorb losses has expanded. And going into the second half, we will strengthen our asset quality management through continued risk factor monitoring. The group's 2020 end of Q2 CET1 ratio is up 14 bps QTD, expecting to post 12.04%. Despite the higher RWA due to the growth in loan assets, healthy income levels were realized, and the overall capital adequacy was improved. Now let me walk you through the group's business results by item. Please refer to the group's consolidated earnings on Page 7. The group's quarterly interest income grew slightly Q-o-Q to KRW 1,433.3 billion, and its half year interest income fell 0.9% Y-o-Y to KRW 2,861.3 billion. Q2 fee income recorded KRW 554.5 billion, showing a decline in asset management and IB-related fees due to COVID-19. However, this was offset by the growth in credit card and brokerage fees, driving a 5.3% growth Q-o-Q. In the first half, the fee income was KRW 1,080.9 billion, maintaining a similar level Y-o-Y. The group's Q2 disposition/valuation gain increased significantly Q-o-Q to KRW 348 billion. This is due to the base effect of Q1's large-scale nonmonetary FX loss, KRW 40.8 billion worth of nonmonetary FX gain in Q2 and improved returns from major subsidiary securities. As a result, the group's disposition/valuation gain in the earlier half of the year recorded KRW 422.1 billion, up 64.7% Y-o-Y. SG&A in Q2 stood at KRW 848.4 billion, lower by 8.6% Q-o-Q, resulting from the performance salary write-back. SG&A also decreased on a half year basis, thanks to the preemptive execution of the large-scale ERP at the end of the last year, recording a 9.7% decrease Y-o-Y. Moving on to Page 8, business results for the subsidiaries. Hana Bank's net income for first half 2020 went up 2.7% Y-o-Y, recording KRW 1,062 billion. Despite the reduced core earnings due to worsened business environment and a considerable increase in COVID-19-related provisions, the bank posted a robust performance, thanks to improved returns of securities and SG&A savings. And Hana Financial Investment's net income in the first half was up 12.9% Y-o-Y to KRW 172.5 billion. Despite the pandemic, the stock markets in and out of Korea rallied in the second quarter. Stock subscription amount increased, leading to higher brokerage fees, and also disposition/valuation gain increased. Hana Capital's net income for the first half increased 78.7% Y-o-Y to KRW 84.1 billion, thanks to overall performance improvement, including interest income. Lastly, Hana Card showed signs of recovery from the first half 2019 hit by the lowering of merchant fees, recording a net income of KRW 65.3 billion, up 93.9% Y-o-Y. As can be seen from the left-hand side, with the swift improvement in the nonbank subsidiaries performance, they are now contributing 30% to the group's net income. We will take a phased approach to strengthen the group's nonbank subsidiaries in order to diversify profit base with a balanced business portfolio and to secure a sustainable growth engine amidst the low interest rate trend. Please refer to the table for other subsidiaries' performance. Please refer to Pages 9 through 11 for the details about NIM, noninterest income and SG&A explained earlier. And also, please refer to Page 13 for the group's total assets, liabilities and equity. Now on Page 14, Hana Bank's loan and deposit in Korean won. As of Q2 end 2020, the bank's loans in won stood at KRW 226.8 trillion, up 1.8% QTD. The asset growth is broken down as follows: corporate loans stood at KRW 109.7 trillion, growing 2.6% QTD. Large corp loan decreased 1% QTD to KRW 15.4 trillion as liquidity crunch was eased in the financial market. SME loans grew 3.1% QTD driven by the demand from the externally audited companies and SOHO loans for funding support related to COVID-19. And as for household loans, it grew 1.1% QTD to KRW 117.1 trillion as Tranche A loans increased. As of quarter end, the deposit in won stood at KRW 242 trillion, up 2.1% QTD. As was the case in Q1, abundant liquidity in the market flowed into low-cost deposit and MMDA, each growing 10.4% and 4.1%, respectively. As a result, the LCF weight in Q2 increased to 37.3%, up from the previous quarter. For your reference, the graph on the bottom right shows the LDR as of Q2 end to be 97.5%. Please refer to Page 15 for Hana Bank's loan composition. And now let's move to Page 17, the group's asset quality. As of quarter end, the group's total credit grew 2.1% QTD to KRW 301.4 trillion, and NPL decreased 3.2% QTD to KRW 1.4 trillion, bringing down the group's NPL ratio to 0.45%. This is a 2 bps drop from the previous quarter end. The top right shows the group's new NPL formation in Q2 was KRW 196.9 billion KRW, down from the previous quarter. This is because the NPL decreased in the bank's corporate segment and in some of the nonbank subsidiaries. There was also the base effect of Q1 when NPL had increased due to a revision in supervision regulations, making the loan classification criteria more stringent in certain subsidiaries. Let me elaborate on the bank's asset quality on Page 18. Please return to Page 18. Hana Bank's total credit in Q2 end has grown 1.6% QTD to KRW 260.7 trillion, and NPL decreased by 4.6% to KRW 0.9 trillion. NPL ratio fell by 2 bps QTD to 0.35%, and the NPL coverage ratio has significantly increased to 120.9%. Hana Bank's delinquency ratio at the end of Q2 was 0.21%, same as the previous quarter end. Corporate loan delinquency increased, but was offset by lower household loan delinquency, enabling stable management of the bank's overall delinquency ratio. Please refer to the group's and bank's provisions on Pages 19 and 20. Lastly, capital adequacy on Page 21. We expect the group's BIS ratio and Tier 1 ratio to be 14.08% and 12.89%, respectively, at the end of the quarter. CET1 ratio is expected to be 12.04%. The group's capital ratio and ability to absorb losses increased over the quarter, thanks to stable management of risk-weighted assets and robust quarterly net income. We'd also like to inform you that in line with our active shareholder return policy, it was resolved today that interim dividend of KRW 500 per share will be paid out. Based on improved performance from nonbank and global as well as on better business results possible through cost management, we're able to maintain last year's interim dividend level. Going forward, we will work hard to maintain sound recurring profit and capital adequacy for the group, and continue to enhance shareholder value by strengthening our shareholder return policy. This concludes the earnings presentation for Hana Financial Group for first half 2020. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]