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

Good afternoon, everyone. I am Lee Junghoon, Head of IR at Hana Financial Group. We'd like to thank shareholders, analysts and other market participants for taking part via phone or Internet in today's event despite your busy schedule. We'll now begin 2020 Q3 Hana Financial Group's earnings presentation. First, let me introduce the members of our senior management joining us today. First, from Hana Financial Group, our 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, our 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 our CFO, Lee Hoo-Seung, for our presentation of the business results and afterwards, hold a Q&A session via phone. We'll now commence the 2020 Q3 earnings presentation of Hana Financial Group to be delivered by our CFO, Lee Hoo-Seung.

Good afternoon, everyone. Greetings to all the investors, market participants, research analysts, and thank you all for your deep interest in Hana Financial Group. I am Lee Hoo-Seung, CFO of Hana Financial Group. It's been already 3 months since we had our last earnings presentation. Although the hardships stemming from COVID-19 continue, still, this doesn't take away from the fact that autumn is indeed a beautiful season. I hope you can all make good use of this weekend to really enjoy the beautiful fall colors. Most of all, I must tell you how pleased I am to have been able to meet your expectations with a balanced and healthy business performance. And so without further ado, let me walk you through the business results of 2020, Q3 of the Hana Financial Group. Please refer to Page 3 of your presentation deck. First of all, the group's financial highlights. Net income of Hana Financial Group in Q3 came to KRW 760.1 billion, up 10.3% Q-o-Q. Also on a YTD Q3 basis, net income of KRW 2,106.1 billion was posted, up 3.2% over the same period last year when one-off gains from sale of fixed assets was recognized. As the COVID-19 pandemic continues, uncertainties are found both in home and abroad. For its part, Hana Financial Group focused on shoring up its sales through the expansion of untapped channels and improving each subsidiary's ability to generate profit on the back of enhanced competitiveness. As a result, financial indices across the board have stabilized and healthy results were achieved for the quarter following a solid first half. Recently, we see this phrase with corona often in the news media. This signifies that COVID-19 is no longer a black swan event but has become a constant in the business environment. With the U.S. presidential election coming up, the likelihood of a structural change taking place in the global economy and capital market is also growing. Against this backdrop, the Hana Financial Group will thoroughly examine the potential risk factors. And based on a stable business performance, we'll continue to maintain a sufficient ability to absorb losses, thereby, ensuring that the company fulfills its essential role in the market and enhance shareholder value. Let me explain in more detail about the group's business results. First, the group's fundamentals are strong with its core earnings showing a healthy growth. Despite the low interest rate regime, on the back of increased demand for funds, the bank's interest income is maintained at the same level of last quarter. Growth in the interest income of nonbank and global business segment led to the group's Q3 interest income increasing over the last quarter. Also, the quarterly fee income, including M&A advisory, asset management, brokerage and card fee has grown markedly, owing to the stable performance of nonbank subsidiaries. As such, the core earnings of the group in Q3 is up 4.5% Q-o-Q and 5.6% Y-o-Y to reach KRW 2,077.5 billion. On a YTD Q3 basis, the group posted KRW 6,019.6 billion, up 1.4% Y-o-Y. Efforts such as capital infusion to strengthen the nonbank subsidiaries over the years is now producing visible results. Going forward, we'll continue to focus on diversifying the group's business portfolio and secure key growth engines to drive our core earnings. Next, we have continued to make efforts to shore up the group's ability to buffer external shock by preemptively setting aside loan loss provisions. To counter possible economic downturns, following Q2 in this quarter as well, we have reassessed the future prospect information reflecting the COVID-19 situation. And by conservatively changing the forward-looking multiple of the PD value, we have set aside KRW 58 billion of additional provisioning. And so on a YTD Q3 basis, there is KRW 349.4 billion in recurring loan loss provisions and KRW 221 billion in additional COVID-19 provisioning. And private equity fund related reserves of KRW 118.5 billion provision in Q2 have been set aside to ensure a sufficient loss absorption buffer to counter possible future uncertainties. Thus, the group's cumulative credit cost ratio in Q3 is slightly down Q-o-Q, posting 0.24%. And if the one-off factors in Q2 and Q3 are excluded, the credit cost ratio comes to 0.15%, demonstrating that the recurring loan loss provisions are being managed stably. Although the overall asset quality indicators of major subsidiaries is at a fair level, Hana Financial Group will continue to take necessary preparatory actions to effectively respond to any volatility in the global economic environment by preemptively managing borrowers with the potential to default and maintaining a conservative provisioning policy. Finally, the group's cost efficiency has been markedly improved over the previous year and such trends continue in the third quarter as well. In Q3, cumulative SG&A is KRW 2,742.6 billion, down 6.6% Y-o-Y. And on a cumulative basis, the C/I ratio is in the low 40% range following last quarter. In the case of the SG&A for Q3, although it is up Q-o-Q, this is due to the base effects from the Q2 write-back of the bank's performance linked compensation reserves, and when compared Y-o-Y, is down slightly. Company-wide efforts to save costs and last year's year-end preemptive ERP has led the group's SG&A to be managed at a level much lower than the 4-year target. The financial industry in recent years is witnessing a wide range of changes, including sustained growth in the share of transactions processed through online channels and the dramatic rise of the platform business. Going forward, in accordance with the mid- to long-term priorities that reflects such realities, we'll continue to effectively control our SG&A to ensure sustained achievement of stable profit. If you look at the lower left-hand side of this slide, the group's ROE in Q3 of 2020 posted 9.66%. ROA is 0.66%, slightly up Q-o-Q. Next, on Page 4. Hana Bank and Hana Card included, the group's 2020 Q3 NIM is down 4 bps Q-on-Q to stand at 1.58%. Hana Card's NIM is maintained at the previous quarter's level but Hana Bank's NIM is 1.33%, down 4 bps Q-on-Q. The main reason for this is the downward pressure on the bank as SME loans grow in the midst of asset repricing taking place in the back of ROK (sic) [ BOK ] rate cut in the first half. However, given the global policy rate cut and plunge in the market rate, right -- in the immediate aftermath of COVID-19, on a yearly basis, a fair trend is being maintained. And without any additional BOK rate cut in the fourth quarter, we'll be able to confirm the [ trough ]. As the low interest rate regime is set to continue for the time being to support the economy, the bank's NIM will be proactively managed through a funding portfolio improvement and expansion of digital base, high-quality assets. The group's Q3 interest income is up and 2.6% Q-o-Q with growing contribution from nonbank subsidiaries and the partial offsetting of the fall in NIMs through sound growth in loan assets. In the case of the quarterly fee income, along with the growth of some nonbank segments, some of the bank fee items have seen a recovery leading to an increase of 9.6% Q-o-Q. If you look at the right-hand side of the slide, the bank's loan in Korean won is up 3.4% QTD and up 7.4% YTD. KRW 234 trillion has been posted. Page 5. As of quarter end, the group's NPL ratio was down 4 bps Q-o-Q to 0.41% and the group's delinquency ratio was 0.27%, 4 bps lower compared to Q2. As was the case with the bank's delinquency ratio, the nonbank subsidiaries delinquency ratio fell overall, showing improvement at the group level. Additional preemptive provisioning of KRW 58 billion against COVID-19 in Q3 delivered a credit cost of 0.24% for the group. Normalized credit cost without the extra provisioning is 0.1%, still in line with the group's annual target. The group's CET1 ratio as of quarter end is expected to record 12.07%, up 4 bps Q-o-Q. This is before applying the Basel III credit RWA calculation. Continuing from last quarter, enhanced group earnings and well-managed risk-weighted assets led to strengthened capital ratios. And 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 cumulative interest income in Q3 stood at KRW 4,331.2 billion, maintaining the same level Y-o-Y. The cumulative Q3 fee income recorded KRW 1,688.4 billion, up 6.1% Y-o-Y. Improvement was most noticeable in credit card fee income, which had suffered last year due to merchant fee cuts. The group's cumulative Q3 disposition valuation gain increased 110.2% Y-o-Y to KRW 667.3 billion. Thanks to the strong Korean won, whose trend began from the previous quarter, Q3 saw KRW 40 billion worth of nonmonetary translation gain, on top of which improved returns from securities management resulted in a significant increase in the group's disposition valuation gain Y-o-Y. Moving on to Page 8, business results for the subsidiaries. Hana Bank's net income for Q3 went up 16.3% Q-o-Q, recording KRW 591.4 billion. However, due to the base effect related to the one-off disposition gain of fixed assets in Q3 last year, the bank's cumulative net income decreased 7.6% Y-o-Y to KRW 1,654.4 billion. Hana Financial Investment's cumulative net income in Q3 was up 36.2% Y-o-Y to KRW 288 billion. Amidst the overall business results improvement, security, brokerage fees and IP advisory fees drove up their interest income. Hana Capital's cumulative net income in Q3 increased 65.2% Y-o-Y to KRW 127.1 billion, thanks to interest income growth backed by interest rate bearing assets. Lastly, Hana Card realized cumulative net income of KRW 114.4 billion, a huge improvement Y-o-Y, thanks to the increase in credit card fees. In this quarter, the bank's recurring business results were well maintained and the nonbanks continued to improve their performance. Please refer to the material for other subsidiaries. Pages 9 through 11 outline the details about NIM, noninterest income and SG&A explained earlier. 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 Q3 end 2020, the bank's loans in won stood at KRW 234.5 trillion, up 3.4% Q-o-Q. The asset growth can be broken down as follows: corporate loans grew 3.0% Q-o-Q to KRW 112.9 trillion, out of which large corporate loan decreased slightly Q-o-Q to KRW 15.3 trillion and SME loans grew 3.9% Q-o-Q to KRW 95.8 trillion, driven by expansion and funding support. Household loans grew 3.8% Q-o-Q to KRW 121.6 trillion as Jeonse loans was the main driver. As of quarter end, deposits in won stood at KRW 240.3 trillion, down 0.7% Q-o-Q. Abundant liquidity in the market flowed into low-cost deposit and MMDA, but because of the decrease in time deposits, the balance amount of deposit in won fell slightly Q-o-Q. However, the average balance is at a similar level to the previous quarter. The LCF weight in Q3 increased to 38.7%, up from the previous quarter. For your reference, the graph on the bottom right shows the LDR in Q3 to be 100.5%. Please refer to Page 15 for Hana Bank's loan composition. And now moving on to Page 17, the group's asset quality. As of quarter end, the group's total credit grew 3.2% Q-o-Q to KRW 311 trillion. NPL decreased 4.9% Q-o-Q to KRW 1.3 trillion, bringing down the group's NPL ratio to 0.41%. This was a 4 bps drop from the previous quarter. The top right shows the group's new NPL formation in Q3 was KRW 181.2 billion, down from the previous quarter. This is because the NPL decreased in some of the nonbank subsidiaries. Let me elaborate on the bank's asset quality on Page 18. Hana Bank's total credit in Q3 has grown 2.9% Q-o-Q to KRW 268.2 trillion and NPL is similar to the previous quarter at KRW 0.9 trillion. NPL ratio fell by 1 basis point Q-o-Q to 0.34% and the NPL coverage ratio went up by 3.9 percentage points Q-on-Q to 124.8%. Hana Bank's delinquency ratio at the end of Q3 was 0.20%, down 1 basis point Q-o-Q. Corporate loan and household loan delinquency ratios came down slightly, thanks to asset growth and reduction of delinquent assets. Please refer to the group's and bank's provision on pages 19 and 20. Finally, capital adequacy on Page 21. We expect the group's BIS ratio and Tier 1 ratio to be 14.36% and 13.13%, respectively, and CET1 ratio to be 12.07%, respectively. And this is before applying the Basel III calculation. The group's capital ratio and ability to absorb losses continue to improve, thanks to stable management of RWA and robust quarterly net income. This concludes the earnings presentation for Hana Financial Group Q3 2020. Thank you.