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

Good afternoon, everyone. Thank you for participating in Hana Financial Group's earnings presentation. I am Junghoon Lee, Head of IR. I'd like to thank the shareholders, analysts and other market participants for taking time out of their busy schedule to participate in today's earnings release via phone or the Internet. We now begin the 2021 first half earnings presentation. We have with us today the Group CFO, Hoo-seung Lee; and senior management members responsible for finance, risk and strategy from the group and the major subsidiaries. Today, we will first give a presentation on the group's business results and then hold a Q&A session via phone. We will now invite our CFO, Hoo-seung Lee, for a presentation on the 2021 first half business results of Hana Financial Group.

Good afternoon, investors, capital market participants, research analysts and financial news journalists. Good afternoon. I am Hoo-seung Lee, CFO of Hana Financial Group. Thank you very much for your interest in our company. The year is already half over, and we meet again in July, which is the start of the second half. Although we are warned of record breaking heatwaves following the end of the monsoon season, we hope that at least in our hearts we will be able to enjoy a cool and refreshing summer. We also wish you the best of luck in all your endeavors in the second half as well. I'll now walk you through the 2021 first half Hana Financial Group's business results. First, the group's financial highlights. Please refer to Page 3. The net income of Hana Financial Group in Q2 of 2021 posted KRW 917.5 billion, up 33.2% Y-o-Y and 9.8% Q-o-Q. As such, the first half net income grew 30.2% Y-o-Y to post KRW 1,753.2 billion. What is noteworthy is the increase in core earnings driven by the simultaneous growth of both interest income and fee income. Credit cost was also managed at a stable level. Against such a backdrop, the group posted record high results for the first half, once again demonstrating the solid capability of the group to generate profit. As the vaccination rate in Korea grows, herd immunity is expected to be achieved in the second half and the BOK's forecast for economic growth has been adjusted upward, which is reflecting optimistic expectations. However, the Delta variant of COVID-19 is spreading across the world, with Korea imposing Level 4 social distancing measures to stem the surge in new cases. And thus, uncertainly still remains. To respond to such factors that may have an adverse impact on the business environment, Hana Financial Group has already set aside a large scale loan loss provisioning preemptively to prepare for various risk scenarios. Going forward, we will maintain a conservative provisioning policy to counter any potential COVID-19 related defaults and will strengthen, monitoring a relatively high risk exposures to maintain stable risk management. In addition, we will be enhancing the profitability of the group and expand the shareholder return policy through diversifying the group's business portfolio, stable cost management and strengthened synergy between the global and digital businesses. Let me explain in more detail the gross business results. In the first half of 2021, the group's core earning grew 14.5% Y-o-Y to post a KRW 4,515.3 billion. Improving imbalanced growth of Hana Bank and major nonbank subsidiaries' performance led to a significant increase in interest income and fee income, resulting in the largest quarterly and first half core earnings ever. If we delve into greater detail on the back of the rise in NIM and the solid growth in loan assets in the second quarter, the group's interest income is up 13.7% Y-o-Y for the first half. Fee income for the first half also showed a solid growth trend led by brokerage fee, IB-related M&A advisory and Hana credit card fee and is up 16.7% Y-o-Y. Next, the group's first half cumulative credit cost ratio is 0.12%, a slight increase over the previous quarter but kept well within the annual target level. The impact of preemptive COVID-19 provisioning on a large scale last year still continues until this quarter. And due to the approval by the financial authorities of the modifying credit rating model, the corporate PD has undergone changes leading to a one-off write-back of KRW 41.2 billion in the bank. So the group's credit cost ratio is maintained at a very low level. Also, based on the strategy of asset growth focusing on quality and efforts to manage risk at the group level, the delinquency rate and other such key asset quality indicators are being managed at a healthy level. However, given the possibility of the growing volatility in the financial market due to the spread of the Delta variant and inflation concerns, we will continue to closely monitor the relevant trends. In particular, because of the so-called COVID 3 highs, namely inflation, interest rate hikes and the rise of the exchange rate, we are keeping a close eye on the possibility of rising interest expense for both households and corporate sector and also the corporate burden exacerbating owing to the rise in the commodities price. At the same time, we intend to implement the necessary measures at the right time by preemptively studying the impact of growing risks in emerging economies as well as the potential pressure for capital outflow. Finally, the SG&A of the group in the first half of 2021 is KRW 2,015 billion, up 13.4% Y-o-Y. The key contributors were mostly special one-off factors, including the paying out of bonuses in Q1; the setting aside of the reserves, which was resumed from Q2 for the performance pay; write-back of reserves related to Hana Bank performance pay and the base sector from incorporating Hana Insurance as the group subsidiary last June. With regards to the bank's resumption of provisioning for performance pay reserves, we will provide more details on Page 7. Despite such special one-off factors, the size of the SG&A has been again stabilized to below KRW 1 trillion level. And as of the first half, this SG&A and C/I ratio also are being managed within the targeted range established earlier in the year. Going forward to achieve stable business results against the business environment rife with uncertainties and to secure the financial capabilities necessary to respond to the trend of digital transformation of the financial industry, we will continue our group-wide cost-saving efforts. In relation to the profitability indicators, if you look at the bottom left-hand side, the group's ROE and ROA for the first half of 2021 is 11.25% and 0.76%, respectively, significant improvement Y-o-Y. Next, please refer to Page 4. Including Hana Bank and Hana Card, the group's 2021 Q2 NIM rose 6 bps Q-o-Q to post 1.67%. Hana Card contributed to enhanced group NIM through the average balances set and Hana Bank's NIM grew 5 bps Q-o-Q to post 1.41%, continuing a solid growth trend. So the trend is due largely to the additional drop in funding costs for the time deposits and cumulative deposits that strengthen the loan to deposit pricing on the back of rebounding loan asset yield and efforts to increase low-cost deposits leading to improved portfolio mix. Next, if you look at the right-hand side, the bank's loan in Korean won is up 1.9% QTD posting KRW 249 trillion. As such, driven by both improved profitability and sound loan growth, the group's interest income in Q2 grew 6.7% Q-o-Q and as of the first half grew 13.7% Y-o-Y. Also, the group's Q2 fee income increased 4.3% Q-o-Q led by IB and card fees, continuing the trend of healthy improvement of the group's core earnings. Next is Page 5. As of the end of Q2 of 2021, the group's NPL ratio stood at 0.36%, down 4 bps QTD, and the delinquency ratio is down 2 bps Q-o-Q, posting 0.28% and maintained at a stable level overall. Next, the group's cumulative credit cost ratio in the first half is down 15 bps Y-o-Y to post 0.12%. As I have explained previously, preemptive efforts at risk management and approval of the modified corporate loan model has led to a temporary download adjustment to Hana Bank's provisioning cost. And we expect the credit cost ratio to recover gradually back to ordinary levels. Unlike our initial expectations early in the year, the Delta variant of COVID-19 is spreading globally, causing concerns of deteriorating macro environment. Thus in the second half as well, we will take all necessary measures to ensure that sound asset quality is maintained. Finally, the group CET1 ratio grew 12 bps QTD approximately and is expected to post 14.16%. Despite the growth in RWA, due to the interim dividend payout and the increase in loan assets, due to growing retained earnings on the back of enhanced business results, capital adequacy is being maintained at a solid level. The following are the group's business results by item. Please refer to the group's consolidated earnings on Page 7. Out of the group's Q2 general operating income, the interest income grew 6.7% Q-on-Q to KRW 1,679.7 billion. And on a half year basis, it has risen 13.7% Y-o-Y. The fee income in Q2 rose 4.3% Q-o-Q to KRW 643.9 billion, and the first half year fee income went up 16.7% Y-o-Y. The group's Q2 disposition/valuation gain increased 121% Q-o-Q to KRW 232.1 billion. This is due to the disappearance of Q1's large-scale nonmonetary translation loss. The group's disposition/valuation gain in the first half decreased by 20.2% Y-o-Y to KRW 337.1 billion because of different market interest rate environment from last year due to higher inflation pressures and thus produced the base effect of lower returns from securities under management. The group's SG&A decreased 2.5% Q-o-Q to KRW 994.6 billion. I'd like to elaborate on how Hana Bank restarted putting aside reserves for performance paid that I had mentioned earlier. As you are well aware, the system was introduced in Q3 2017 to minimize SG&A volatility due to the payment of performance incentives. However, in response to the uncertainties in the financial market and the macroeconomic environment created by the pandemic, the system was put on hold temporarily from Q2 last year to secure a financial buffer through proactive cost control. Luckily, contrary to market concerns, we posted a sound growth in the first half of 2021, continuing from last year, allowing us to restart the provisioning of reserves for performance payment. A total of KRW 55.3 billion, including that of Q1, was recognized in Q2 as reserve money for performance pay. Along with the other one-offs I mentioned earlier, the SG&A in the first half increased by 13.4% Y-o-Y, but the recurring SG&A is maintained at a stable level. Moving on to Page 8, business results for the subsidiaries. Hana Bank's net income for first half of 2021 went up 17.9% Y-o-Y to KRW 1,253 billion. Despite the one-offs and base effect in SG&A and disposition/valuation gain that I had mentioned earlier, the bank achieved a high growth rate, thanks to sound growth in core earnings and lower loan loss provisioning. Hana Financial Investment's net income for the first half stood at KRW 276 billion, up 60% Y-o-Y. This was thanks to a significantly higher earning power with higher fee income in S&T and IB as well as higher interest income. As for Hana Card, it has improved earnings fundamentals through digital innovation and credit card sales volume recovered. Its net income for the first half was KRW 142.2 billion, 117.8% higher Y-o-Y. Hana Capital's net income for the first half reached KRW 125.5 billion, up 49.3% Y-o-Y on the back of higher general operating income, including interest income and disposition/valuation gain. Please refer to the table for the other subsidiaries' results. And also please refer to Pages 9 through 11 for details about NIM, noninterest income and SG&A explained earlier. And also, please flip to Page 13 for the group's total assets, liabilities and equity. And now moving on to Page 14, Hana Bank's loan and deposit in Korean won. As of Q2 end 2021, the bank's loans in won stood at KRW 249 trillion, up 1.9% Q-o-Q. The asset growth is broken down as follows. Corporate loan grew 2.2% Q-o-Q to KRW 119 trillion as funding support continued. For nonexternally audited SMEs and SOHO borrowers, SME loan increased 3.3% Q-o-Q, driving the overall loan growth. Large corp loans decreased 4.9% Q-o-Q as some of the companies paid back sizable loans. Household loans increased 1.6% Q-o-Q to KRW 130 trillion on the back of [ Trans-A ] loans and credit loans to prime borrowers. As of quarter end, the deposit in won stood at KRW 258 trillion, up 0.8% Q-o-Q. Low-cost deposit increased 3.9% Q-o-Q, reflecting the abundant market liquidity. It's just that the LCF weight dropped slightly Q-o-Q because of lower MMDA balance due to large scale withdraw by some of the companies and financial institutions. For your reference, the graph on the bottom right shows the LDR in the first half to be 99.4%. Please refer to Page 15 for Hana Bank's loan composition. And now moving on to group's asset quality on Page 17. As of quarter end, the group's total credit grew 3.5% Q-o-Q to KRW 333 trillion, and NPL decreased 6.4% Q-o-Q to KRW 1,201.4 billion, bringing down the group's NPL ratio to 0.36%, a 4 bps drop from the previous quarter. The top right shows the group's new NPL formation in Q2 was KRW 139.5 billion, significantly down from the previous quarter as some of the overseas delinquencies in Q1 have been normalized. Let me elaborate on the bank's asset quality on Page 18. Please look to Page 18. Hana Bank's total credit in Q2 has grown 2.0% Q-o-Q to KRW 282 trillion, and NPL amounted to KRW 849.8 billion. Accordingly, the bank's NPL ratio fell by 4 bps, the same as the group Q-o-Q to 0.30% and the NPL coverage ratio is 136.9%. Hana Bank's delinquency ratio at the end of Q2 was 0.20%, down 4 bps Q-o-Q. With the household loan delinquency remaining at previous quarter level and lower delinquency ratios in both large corp and SMEs, the overall delinquency for the bank decreased. Please refer to the group's and bank's provision on Pages 19 and 20. Lastly, capital adequacy on Page 21. We expect the group's BIS ratio and Tier 1 ratio to be 16.6% and 15.33%, respectively. At the end of Q2, CET1 ratio is expected to be 14.16%. With solid earnings growth, the group was able to maintain a high CET1 ratio, over 14%, posting the highest level of capital adequacy in the industry. At today's BOD meeting, it was resolved that interim dividend of KRW 700 per share, up KRW 200 Y-o-Y, will be paid out. Considering the worsened conditions such as emergence of virus variant, dampening the economic recovery mood in and out of the country despite the global vaccine supply, we were able to normalize shareholder return policy, considering the shareholders' concerns as well as the regulation of the financial authorities. And we will deal with this in an orderly, phased manner. Despite the uncertainties, Hana Financial Group achieved higher-than-expected net income proving its stability and is maintaining one of the industry's highest levels of capital buffer. And so based on this, we will do our best to implement shareholder-friendly policies such as increased year-end dividend and share buyback to continue to enhance shareholder value. This concludes the earnings presentation for Hana Financial Group for first half 2021. Thank you very much.

Thank you, Mr. CFO. And now we will take questions.

I'd like to explain to you how this works. [Operator Instructions] We have received the first question from [ Degroof ] Investment Securities, Mr. [ Victor Sani ].

My name is [ Victor Sani ]. I have a question about the digital strategy. If you look at the IR PT material, it's on the last page. Recently, Internet, banks, research companies have emerged in the market. And so we are expecting intensified competition in the field. And also, a lot of preparations have been made, I understand, by your group. So group-wide strategy for the digital arena. I would like to ask my question on this area.

Thank you very much for your question. Please wait a second while we prepare the answers. Mr. [ Victor, ] sir, you're doing well I hope. The digital strategy, I think that was your question. So let me talk on this topic. Recently, because of the rights offering of KakaoBank, the digital strategy, especially the commercial banks digital strategies, all picked up much curiosity. In the case of the IPO of KakaoBank, through that IPO as we understand it, they are focusing mostly on the mid-interest level. And through this area, they're expecting to expand their customer base. So the mid-interest level loans. Well, this is not an area that we are in direct competition with KakaoBank. So it won't have much of an impact on us. [ Trans-A ] loan, in the case of Hana Bank, we are pursuing the mobilization of retail products. And through various partnerships with mobility, real estate, this every day finance platform is the vision that we have. We are implementing this vision. And as you are well aware, Toss Bank, last year, they have established an entity, and we haven't made investments. And so in conjunction with Toss Bank, we are going to create synergies in the digital arena. For more details, please contact our IR team, and we will provide a more full detailed answer.

We have no more questions coming in, so we will wait for a few minutes. The next question is from HSBC Securities, Mr. Won Jaewoong.

Congratulations on a good quarter and first half. I have 2 questions. One is NIM has grown significantly. In the second half, what is your outlook for NIM? I'd like to hear your opinion. And the second question is, the interim dividend was explained in the presentation. If -- so compared to 2019, if you have such a good business result, can you show a better, stronger dividend payout? Or because of the Delta variant, will you be conservative on your dividend policies going forward?

Thank you very much for the questions, and I hope you're doing well despite the pandemic. Please stay healthy and safe. In Q2, Hana Bank's NIM grew significantly, and that is due to the repricing of loan deposit and because of higher low-cost deposits and the portfolio was improved and the NIM went up by 5 bps Q-o-Q. And as for the second half outlook, with the rate hike, we believe that impact will end. In first half, LCR and LDR rules will be tightened again. And so the bank NIM may not have a good outlook going forward. But we are going to concentrate on prime assets and LCS is increasing. So with improved portfolio in Q3 and Q4, the group's NIM 1.67% and bank NIM 1.41%. That is our target. And as for the second question about the dividend policies, I know this is a quite sensitive question. As you're expecting, because of the Delta variant, we have been conservative on our interim dividend. And we're sorry that we could not pay out higher dividend. In the morning, we had the BOD meeting. And so the interim dividend was decided at KRW 700 per share, and the payout ratio is 11%. Hana Financial Group for 15 years now has been paying out interim dividend for over 15 years, and that is the long-held tradition. Since 2017, every year, we had increased the dividend amount by KRW 100 per share based on capital adequacy and good earnings. And so we were committed to interim dividend. But last year's interim dividend was only KRW 500 per share, the same as the year before. Despite the crisis, we wanted to commit to our promise of continuing with the interim dividend. But at the same time, we are apologetic to the shareholders that we could not consistently increase the interim dividend. But we will not be increasing the dividend payout excessively, but we will be consistent, and we would like to remind you that we have decided on KRW 700 per share because the normal dividend interim last year would have been KRW 600. I'm sure -- we are sorry that we could not be more aggressive. We will do our best to be more proactive in our dividend policies. KakaoBank is going to go public soon, and the market cap is very high. And the stock price is reflective of future growth potentials, but the bank shares are undervalued. As for Hana Financial Group, we have the financial profitability and the earnings power, and we want to show the shareholders about the value of our shares. Everyone can invest in shares and they can enjoy the dividend shares, the profit from the dividend, and we want to live up to your expectations and we have listened to the concerned voices of financial authorities. The banks in the U.S. have increased their dividend payout. And in June, the recommendations and guidelines for capital has been expired. And I'm sure the shareholders have higher expectations for higher dividends. But because of many risks, including the vaccine supply and the virus variants, et cetera, we cannot be too relaxed. And so we have to monitor the current situation and the financial authorities concern is very valid at this point. For a long time, many small merchants have been suffering due to the pandemic. And Hana Financial Group has played the role of injecting capital into the market. And we are mindful of the existing risks and we will absorb losses. And we will continue to maintain sound asset quality and capital adequacy. President of JPMorgan said that this crisis is just a drop in the bucket and 1 year has passed, and JPMorgan has risen with sound results and is very prominent in shareholder policy. Hana's interim dividend is 0.6% of the capital, but interim dividend level is the highest in the financial industry. And we are in line with JPMorgan's policies going forward. In the Q1 earnings call, I talked about how financial company of Hana always speaks and acts louder than words. I'd like to thank the shareholders for your faith. In the second half, we will do our best and put special care to year-end dividend.

Thank you very much for that answer. There is no further questions coming in, so we will hold. We have no questions coming in, so we will hold for another few minutes. I don't think we have any further questions. So with this, we would like to conclude the earnings presentation for the first half of 2021 of Hana Financial Group. Today's earnings presentation can be listened to again in our website. We will also upload our presentation materials. And if you have not been able to ask your questions during the presentation, please contact our IR team. Thank you very much for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]