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

[Interpreted] For today's earnings release, we have with us, the group CFO, Hoo-seung Lee; and the senior management members of key subsidiaries. Today, we will first walk you through the business results of the group and then proceed to a Q&A session via phone. Now we will invite our CFO, Hoo-seung Lee, for the 2021 Q3 business results presentation.

[Interpreted] Good afternoon, investors, research analysts, finance journalists and capital market participants. We thank you for your interest in Hana Financial Group. I am Hoo-seung Lee, the CFO of the Hana Financial Group. With the advent of the chili fall weather, we find ourselves in the last quarter of this year. I'm pleased to be able to greet you with healthy business results that are in keeping with the market expectations in this season of bounty and harvest. It is already Friday. I hope all of you will be able to enjoy the beautiful autumn colors over the weekend. I will now walk you through the Q3 2021 Hana Financial Group's business results. First is the group's financial highlights. Please refer to Page 3. The cumulative net income in Q3 of 2021 for Hana Financial Group is up 27.4% over the previous year to post KRW 2,137.2 billion. The net income in Q3 stands at KRW 928.7 billion, up 1.3% Q-o-Q and is up 22.5% Y-o-Y. Following last quarter, the net income has exceeded the KRW 900 billion mark, once again, demonstrating our ability to generate strong profit. Against the backdrop of improved core earnings, stable cost management at the bottom line, including declining loan loss provisions, were the key driver. However, amidst rising oil and commodity prices and the supply chain disruptions that's threatening the global economy, we are seeing in some parts and signs of a [ location ], both at home and abroad. Also, like the policy rate hike undertaken by the BOK in August. Discussions on normalizing the monetary policies of major countries are gaining traction to ease the growing financial imbalance across the world that has emerged after the outbreak of the pandemic, thus leading to greater uncertainties in the global economic environment. As such, Hana Financial Group will stay committed to further strengthening our fundamentals by conservatively managing our risk and employment our strategy focusing on high-quality assets to respond to changes in the domestic and external business environment. Based on a strong capital position, we will explore various means of improving shareholder value, and we'll will proactively take in the government's policy to provide COVID-19-related assistance to realize our commitment of making financial means of growing together and sharing happiness while also paying heat to issues of inequity as well as injustice. Now let me give you some more details on the business results. First, the group's key fundamental core earnings have continued its growth trend Y-o-Y. The NIM declined over the previous quarter, but due to the effect of the increase in the loan asset average balance, interest income was up 3.6% Q-o-Q. And on a cumulative basis, it is up 15.3% as well. In the case of the fee income, despite the fall in the merchant fee income on a Q-on-Q basis, IB and asset management fee was up Q-on-Q, constraining the decline. Thus, on a cumulative basis, it is up 11.3% Y-o-Y to close KRW 1,879.8 billion. Next, in Q3, the group's cumulative SG&A posted KRW 3,003.5 billion due to one-off factors, such as the labor cost of the bank that was occurred in the first half. On a Y-o-Y basis, it is up 9.5%. But against the annual business target, it is being maintained at an appropriate level. In particular, the SG&A in Q3 was down 0.6% Q-o-Q due to the absence of the one off factors such as the bank's labor cost and was stabilized at below KRW 1 trillion for the quarter. Going forward, we will continue to improve cost and efficiency through group line cost savings and digital innovation. Finally, the group's Q3 cumulative credit cost ratio is 11 bps. So following up from the first half, a stable credit cost ratio is being maintained and against the annual target. We are maintaining a sufficient level of buffer. As well as managing the delinquency rate and other asset quality measures at a healthy level, we have extended the deadline for the COVID-19 loan assistance program until next year of March, and maintaining such policy support has been a positive factor. However, the increasing uncertainties surrounding the economy, both domestically and globally, dictate that we continue to maintain robust asset quality by strengthening preemptive management such as risk management and selection of watch list to respond against fluctuations in key macro indicators, such as the commodity price and the foreign exchange rates. With regards to profitability measures, if you look at the bottom left of the page, on a cumulative basis for Q3, the group's ROE and ROE stands at 11.23% and 0.76%, showing a significant improvement Y-o-Y. Next, on Page 4. The group's Q3 NIM, including Hana Bank and Hana Card is down 3 bps Q-o-Q to post 1.64%. The bank NIM, which takes up a predominant share in the interest-bearing assets of the group and affects the interest income, is down 1 bps Q-o-Q to stand at 1.4%. And the main reason for this is that the share of the assets in foreign currency, whose interest rates are relatively lower, increase somewhat in the interest-bearing asset segment. And for the purpose of managing liquidity ratios such as the LCR, the funding side has grown temporarily, which led to a lower LDR. And so the main causes are related to factors concerning portfolio changes. Such factors are deemed to be temporary in nature. And in August, after the BOK rate hike in Q4 as well, the market expectations of another hike in interest rate is positively reflected in the market rate. And thus, this is leading us to expect positive improvement in the NIM going forward. However, due to the drop in card NIM, this led to additional decline in group's NIM. And the main cause for this was the fall in the card business earnings, and this was because of the reduction in the average balance of card loans undertaken for preemptive risk management. Due to the COVID-19 pandemic, the risk faced by the self-employed has grown, and there are concerns of the default risk stemming from the increasing household debt. Thus, we have preemptively strengthened management of high-risk multiple debtors as well as managing the card's own limits. Such a strategy of risk management will be maintained in Q4 as well. And to ensure stable asset growth in return for reducing the lines on high-risk loan assets, we will expand the customer base of customers with sound asset quality and we will also respond preemptively towards normalizing the overseas segment, which has experienced reverse growth, thus diversifying our income base. Next, if you look at the right-hand side of the screen, the Korean won loans of the bank has grown 2.2% QTD to post KRW 254 trillion. Based on such healthy loan growth, the group's interest income in Q3 was up 3.6% Q-o-Q. And on a cumulative basis, it has grown 15.3% over the last year. In the case of the Q3, group fee income, as I have already noted, the card fee income has declined also due to other one-off special factors. So it has come down from Q2. However, the IB fee income has increased even further, and the asset management fee also has improved Q-o-Q to partially offset the decline in the group fee income. Starting Q3 on a cumulative basis, the group fee income has grown 11.3% Y-o-Y, maintaining a solid trend against the business targets. Next is Page 5. As of the end of Q3 2021, the NPL ratio of the group is 0.33%, down 3 bps QTD. And the delinquency ratio is the same as last quarter to post 0.28%, maintaining a stable trend. The group's Q3 cumulative credit cost ratio is down 1 bps over the first half and as close to 0.11%. The group-wide effort to manage risk has led to the downward stabilization of the key asset quality-related indicators. However, due to the protracted global pandemic, we are seeing fatigue, building up in the real economy, and thus, we will do our best to continue supporting a sound asset quality by being prepared preemptively. Finally, as of the end of Q3, the group's CET1 ratio is expected to be down for this Q-o-Q to reach 14.06%. Despite the increase in the retained earnings due to improved earnings and performance due to the impact of the rise in ForEx rate, RWA increased, resulting in a slight decline of the CET1 ratio. But following on from Q2, the CET1 ratio is above 14%, and thus the CET1 ratio underpins the highest capital adequacy level among our peers. Now I'd like to go over the group's business results by item. Please refer to Page 7 for the group's consolidated income statement. Of the general operating income in Q3 2021, Hana Financial Group's interest income grew 3.6% Q-o-Q to KRW 1,740.2 billion. And on a cumulative basis, it grew 15.3% Y-o-Y. The fee income stood at KRW 618.5 billion, down 3.9% Q-o-Q, but on an accumulative basis, grew 11.3% Y-o-Y. The group's valuation gain on sales decreased 86.6% Q-o-Q to KRW 31 billion. This was due to a significantly weak Korean won leading to a nonmonetary translation loss of KRW 81.9 billion and also due to other factors such as slow performance on bond trading due to a market rate hike. Let me say a few more words on the nonmonetary translation loss. The FX rate changes affect the translation gain or loss in accounting numbers. And to minimize its impact on the bank's net income, we reduced the foreign currency-denominated open position related to overseas network this quarter, and we are considering further reduction. Lastly, the Q3 SG&A decreased 6.6% Q-o-Q to KRW 988.5 billion and loan loss provisioning also decreased 21.5% Q-o-Q to KRW 83.8 billion, proving the group's excellent cost control capabilities. And now moving on to Page 8, net income of subsidiaries. The group's major subsidiary, Hana Bank, recorded a net income of KRW 1.947 billion in Q3, up 17.7% Y-o-Y and maintaining a high growth rate. Despite the weak valuation gain that I mentioned earlier, thanks to the growth in interest income and the bottom line cost reduction in both SG&A and provisioning, the Q3 net income dropped only slightly Q-o-Q and was able to defend itself. Hana Financial Investments net income for Q3 increased by 43% Y-o-Y to KRW 409.5 billion. Overall, profit fundamentals improved. For example, core earnings increased on the back of favorable results in asset management fees. Hana Card net income in Q3 increased 73.9% Y-o-Y to reach KRW 199 billion. And lastly, Hana Capital also saw an increase in its net income by 51.9% Y-o-Y to KRW 193.1 billion, thanks to an overall increase in general operating income. And please refer to the slide for the other subsidiaries' results. Pages 9 through 11 discuss the NIM, noninterest income and SG&A details that I mentioned earlier. And please look on Page 13 for group's total assets liabilities and equity. And now I'd like to direct your attention to Page 14, Hana Bank's loans and deposits in won. As of Q3 2021, Hana Bank's loan in won is KRW 254 trillion, up 2.2% Q-o-Q. Breaking down the loan growth by each item, corporate loans increased to KRW 122 trillion, up 2.8% Q-o-Q. As funding support continued for SME and SOHO borrowers, SME loans posted a sound growth of 2.7% Q-o-Q. And with the fund demand growing for some corporations, large corp loans increased yearly, making up for last quarter's decrease. In the household loans, Jeonse loan and prime credit loan drove the growth, recording KRW 132 trillion, up 1.7% Q-o-Q. Deposits in won in Q3 rose 1.6% Q-o-Q to KRW 263 trillion. Low-cost core deposits increased 2.4% Q-o-Q, reconfirming the abundant liquidity in the market. Line deposits also increased 2.3% Q-o-Q, continuing with a stable funding structure. However, the MMDA balance decreased slightly Q-o-Q due to fund withdraws by households and some large corporations. Due to the FX rate increase at the end of the quarter, there was a temporary increase in demand for foreign currency deposits, and the share of low-cost deposits was lowered slightly from the previous quarter. As can be seen from the graph on the bottom right, the LDR in Q3 is 98.7 -- 98.6% Please refer to Page 15 for Hana Bank's loan breakdown. And now moving on to Page 17, group's asset quality. The group's total credit grew 2.5% Q-o-Q to KRW 342 trillion, and the amount of NPL fell 4.9% Q-o-Q to KRW 1,142.6 billion. This brought down the group's NPL ratio to 0.33%, down by 3 bps Q-o-Q. On the top right, you will see the group's new NPL formation in Q3 was KRW 141.2 billion, although there was a slight increase in some NPL in household and some corporations overseas operations. A similar level to the previous quarter's NPL was maintained, thanks to an overall decrease in corporate NPL with reduction in new defaults. Bank's asset quality on the following page, Page 18. The bank's total credit rose 2.6% Q-o-Q to KRW 290 trillion, and NPL was KRW 781.1 billion. As was the case with the group, this lowered the bank's NPL ratio to 0.27%, a 3 bps decrease Q-o-Q. And the NPL coverage ratio at the end of Q3 is 142.5%. The bank's delinquency ratio as of quarter end was 0.19%, down 1 basis point Q-o-Q. Despite the increase in the corporate loans, the delinquent amount decreased bringing down the total delinquency ratio slightly. Pages 19 and 20 talk about the group's and the bank's provisions. Please refer to them later. And lastly, moving on to Page 21 about capital adequacy. The group's BIS ratio and Tier 1 ratio are estimated at 16.58% and 15.37% respectively. As for CET1 ratio, we expect it to be around 14.06%. With robust earnings continuing from the previous quarter, we're able to maintain a high level of CET1 ratio, once again, boasting of the industry's highest level of capital adequacy. This brings me to the end of Hana Financial Group's earnings presentation for Q3 2021. Thank you.

[Interpreted] Thank you very much. Now we will take questions. [Operator Instructions] We will take the first question.

[Interpreted] The first question comes from Mr. Byung Gun Lee from DB Financial Investment.

[Interpreted] I'm Byung Gun Lee from DB Financial Investment. And so I have 2 questions. The first is with regard to the dividend. So that's my first question. Although you have talked about this quite often in the past, but we have to ask this again. So overall, you did undertake interim dividend. So at the year-end, what can we expect in terms of the dividend payout ratio? And the other question is, if you look at the peers, they have followed you, and they have started interim dividend payment. And although the amount is quite minimal, there are other companies that have undertaken even quarterly dividends. But in the case of Hana, there's a slight difference. So we cannot exclude the possibility of the financial regulatories, taking a different turn in terms of their policy. So is there any possibility of you undertaking this quarterly dividend? And my second question is, you talked about the card loans. Well, this was not a company that had a large amount of card loans. The balance of card loan has been reduced. And in Q1, Q2 and Q3, the card loan execution amount has been reduced, although you said you consider the risk. But to what extent are you going to further decrease the card loads? And another follow-up question would be the DSR regulation is in effect. Well, in the case of the bank, you are well prepared, I believe. And so I don't think there will be any significant impact. But in the case of other companies, in the case of the card business, so there's some, I think -- some are concerned that there might be an impact of the DSR in the card business. So how further can the card loan can be reduced in terms of risk management. And also if the DSR regulation is taking into effect, what kind of impact would it have on the credit card business?

[Interpreted] Thank you very much. Please wait a few seconds while we prepare the answer.

[Interpreted] Mr. Lee, I'm Hoo-seung Lee, the CFO. With regards to dividend payout ratio, I'll take that question. With regards to the credit card loans, Mr. Kim Jung-Tai from Hana Card will be answering that question. With regards to dividend payout ratio, the year before last, we intend at least to match that level. That's about 26%. And other financial groups dividend payout ratio, we believe it will be about the same level. So that is a cautious prediction. And as we have said before, share buyback is something that we are preparing for as well. And so gradually, the shareholder return policy will continue. That is something that I can say for sure. And with regards to quarterly dividends, the Shinhan Financial Group in Q3 as well, they have undertaken the quarterly dividend. So at a time when the quarterly dividend is becoming stabilized, we are making preparations for that and we are also reviewing, revising the corporate policy. With regards to the reduced balance of the credit card loans, that will be taken up by Mr. Kim from Hana Card.

[Interpreted] So I'm Tai Kim from Hana Card. So with regards to your question, there's the pandemic and other risks. And so to preemptively respond to these roles, so we have managed our risk focusing on the risk borrowers. And so we have reduced from KRW 2.7 trillion to KRW 2.5 trillion. In the case of other peers, we have moved a bit faster and taking these preemptive measures. And we are going to continue the level of card loans for high credit borrowers. And the second question, the impact of DSR, the credit card business. Well, the DSR guidelines. We have been divided by at income level. And the amount itself is not that large, and we don't believe the impact will be large either. With regards to dividend, I'm going to add on to those answers that have been already provided. When we engage in IR activities, what we communicate always is that Hana Financial Group's shareholder return policy is something that is very steady that it's consistent. And after the founding of our company, we have not skipped the interim dividend payment. And so although our peers are starting to pay out the quarterly dividend, I think the greatest differentiating point is that we have continued to do this in the past. And we are going to continue to gradually increase dividends going forward. However, the market competition and also consultations with the regulators, and on the basis of that, we are considering the dividend policy. And so for this year, we're going to take into consideration the level of the year before last, and we will not be paying dividends that is far behind that of our peers. And it's going to increase over the years going forward. So I think that is the basic direction that we're going to take.

[Interpreted] We will take the next question from Mr. Jin-Sang Kim from Hyundai Motor Securities.

[Interpreted] Congratulations on a good quarter. I have 2 questions. One is for SG&A. On Q-on-Q, it decreased slightly. But on a cumulative basis, it seems like there was an increase. As for Hana Financial Group, last year, there wasn't a huge M&A deal. And compared to the other banks, the cost has been controlled better while we still have Q1 remaining. The CIR is very good because of the good top line. But on a growth rate basis, Q4 and next year, what do you expect is the growth rate of your SG&A of your CIR? And as for the credit cost, it is the industry's lowest, and I guess it has to do with the COVID-19. If it is normalized, how much do you expect your credit cost ratio to be?

[Interpreted] Thank you very much for the questions. Please wait.

[Interpreted] Nice to see you again. Thank you, Mr. Jin-Sang Kim for your wonderful questions. Let me talk about the SG&A. We had one-off this year. In Q1, KRW 90 billion was spent, and that affected our net income. And last year, it was exceptional and that the bank's net income target did not reach the PS ratio. And this year, we had to have reserves of another KRW 90 billion. So that is why we had an increase in the SG&A this year. And as for the CIR target, we are always targeting the mid-40%. That is our goal. And this year and going into next year, we believe that the SG&A will be managed lower than this year. And as for the normalized credit cost ratio, Mr. Hwang Hyo-Sang, the CRO, will respond.

[Interpreted] Hello, I'm Hwang Hyo-Sang. Delinquencies or asset soundness wise, there are areas that we can reduce the cost and we have that asset structure. And last year, continuing on, the credit cost is going down. Even though the loan portfolio is growing, whether it'd be the household or the corporates, we are reducing the exposure of high risk. And that is why we have minimum impact on credit cost, even though the loans have grown. But in the second half or going into next year, we will not have that much of a lower impact on the credit cost. Maybe next year, it will not be so low. But compared to last year, we'll be able to manage the credit cost at a relatively low level.

[Interpreted] Yes, going back to your earlier question about CIR, I have something to add. As was mentioned by the CFO, we had the target of CIR in the mid-40%. But in the initial period in the beginning of the year, it was low and then it grew slightly. And we believe we'll end the year with 40-something percent. It's too early to tell about next year, but we have a credit -- we have a cost control plan group-wide, and the subsidiaries are following it. And for the last 5 years, KRW 4 trillion of SG&A cost was maintained for about 5 years. So if everything goes as planned, we believe that we will stay close to KRW 4 trillion in terms of SG&A. And if that happens, then the CIR could be lower than the current mid-40%.

[Interpreted] We will invite the next question. It's Yafei Tian from Citi Securities.

I have a couple of quick ones. The first one is I noticed there is nonoperating gain in the P&L. Can you let us know what is that related to for this quarter? And then the second question is on loan growth. Year-to-date, you already reported over 6% of loan growth. So does that mean that going into fourth quarter this year, there will be much loan growth? And then finally, any net interest margin outlook for fourth quarter and next year would be appreciated.

[Interpreted] So with regards to the outlook for the loan growth, in Q3, overall in the case of Korean won loans, there was an increase of KRW 5.6 trillion, but there was KRW 4.3 trillion in corporate and KRW 2.2 trillion in the household loan. But in Q4, there's a clear limit that is imposed by the regulators. So in the case of the household debt, there isn't much room for further growth, but we do expect KRW 2 trillion growth in the corporate sector. So in Q4, we do believe that for the Korean won loan, there's -- we expect about KRW 2 trillion growth. In the case of the NIM outlook, in Q3, 1.40 was posted. As has been previously noted, LCR funding has been one of the factors. But in Q4, the effect of the BOK rate hike will be reflected, and there are some other one-off factors compared to Q3. We do believe that the NIM will go up. And just yesterday, with regards to the nonoperating income, the BIDV equity method took place in this quarter that was a one-off factor for this quarter, and also the write-back of provisions for the preparation of the private fund. And also, again, from the proposal of investment equity has occurred, and this led to an increase in nonoperating income. And also, as has been noted by other members of the senior management, the positive effect from the BOK rate hike will be positively reflective for the group for the NIM. And so compared to Q3 and Q4, we think the NIM will go up.

[Interpreted] I hope that answers your question. And the next question is from Cho Jihyun, JPMorgan.

[Interpreted] Thank you for giving me the opportunity. Internet bank starting next year will be coming up with mortgage products. So that's what I would like to ask you. You will be competing with the Internet banks, and the products will overlap. And your products will have to be launched online. Realistically, is it possible? That's my first question. If it is difficult, what technical difficulties prevent you? Or is there going to be some collision with the existing channels that you have? And in relation to this and connected to digital conversion, I think many banks are trying their best, IT investment or acquiring stakes from fintechs. What kind of investment are you thinking? And do you have a mid- to long-term strategy in the digital.

[Interpreted] Thank you very much for your questions. I am from the bank. As for the Internet banks of mortgage products online, we have already released them. And up until Q3, we have KRW 100 billion of sales. But other than apartments, multi-tenant houses or other products, we will be covering them by Q1 so that we will be providing these products non-face-to-face. So we are even one step ahead of the Internet banks. Thank you.

[Interpreted] Yes, I'd like to talk about digital conversion. I am Yang [indiscernible]. Thank you for asking the question on digital. Fintech companies are now entering the financial industry. And as for the nonfinancial players and the platform companies are entering the competition, and we have a need for 3 strategies. One is we need to have an ecosystem for payment and settlement, and we need to innovate the user experience, and we need a new growth engine. And these 3-pronged approaches will be needed to implement a successful digital conversion. As we're securing a financial ecosystem, we need to invest in and form alliances for mobile financial platform and so that we can establish the ecosystem and gain leadership in the changing ecosystem. We need to have services that are close to the users' everyday lives, and we need to make the right investment. And second, innovating the user experience on -- in digital. We need personalized marketing, and also we need to go by the big data. And we also need digital marketing so that we can have closer interaction with the users. And so that's what we are working on to increase our digital sales capabilities. And for gaining a new growth engine, we're going to internalize the AI chatbot so that we can provide personalized services and we can provide automated routines for the employees so that they can concentrate on core jobs. And we are going to invest more in the digital R&D working with POSTECH and [ Crist ].

[Interpreted] So we don't have any more questions coming in. We will wait for a while for more questions. Yes, we will invite the next question. It's Ms. Yafei Tian from Citi Securities.

Just to follow up with the net interest margin guidance you kindly provided earlier. You mentioned there's some one-off potentially in the fourth quarter. I didn't catch that quite clearly. So what is that exactly related to? And how is that going to impact net interest margin? And also, based on the percentage of floating loans, Hana seems to be higher than peers. Does that imply that Hana would benefit more than peers from a higher interest rate?

[Interpreted] My name is Kim Byoung-ho. With regards to the outlook for the NIM as well. As we have said before, in Q3, there was a 1 bp drop compared to Q2, and the LCR in Q3 was addressed preemptively. And so there was increased funding. And so that was one of the drivers for lowered NIM. And also the BOK rate hike effect was not fully reflected in Q3, but that will be fully reflected in Q4. And also, we do have a higher ratio of floating rate loans, and we do think that this will be a positive factor for the NIM. So for Q4, I'll look for Q4 for NIM, it's about 1.42. And the floating rate loan, it's higher than peers. And what is the impact of that? It's about 77% of the total loans. And if we divide that into corporate household debt, our corporate is 84%. And for the personal household loan is about 70%. In the case of the corporate sector, the CD base interest rate would be widely used interest rate and the 3 months floating rate is higher than the 6 months floating rate. And it's about KRW 65 trillion for the 3 months floating rate. And because of this concentration of the corporate loans in the 3 months. And yes, so our share of the floating rate is higher than other peers. Let me add on to that. In the case of the floating rate, yes, it is substantially higher than peers. So historically, if you look at our past track record, when there's a BOK rate hike, the higher NIM can be enjoyed by our company compared to our peers because of this higher rate of floating rate loans.

[Interpreted] Let me also add to that. In loans, we're speaking -- and because of the higher percentage of floating rate loans. And the asset repricing is concentrated in the 3 months loading rate loans. And so as the CFO noted, initially, in Q1 and in Q2, it goes up higher and then -- and when there's a rising of liabilities, then gradually, based on the sensitivity-led fall, the margins will go on. So because of our higher percentage of floating rate loans, in the phase when the interest rate hikes are done, then yes, there is asset repricing done.

So we don't have any further questions coming in, so we will wait for a while.

It seems there are no further questions. We would like to conclude the IR presentation of Hana Financial Group for Q3 2021. We will upload the IR material on our website and alongside of the IR data book. If you have remaining questions, please contact the IR team, and we will do our best to provide you with the answers. Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]