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

Good afternoon. Thank you for joining the earnings conference call of Hana Financial Group. I am Guenhoon Park, Head of IR at Hana Financial Group. I thank everyone, including shareholders, analysts and other market participants for joining us via the call line or Internet, and now we will start the 2023 first half earnings call. Today, CFO, Jongmoo Park of Hana Financial Group is present together with other key executives of the Hana Financial Group and subsidiaries. We will start with a presentation on business results followed by a Q&A session conducted over the call line. Now CFO, Jongmoo Park, will take you through the first half business results of Hana Financial Group.

Good afternoon. This is Jongmoo Park, CFO of Hana Financial Group. Once again, I would like to thank all the analysts, shareholders and investors for joining us for today's earnings call. Now before going into our earnings, I have some comments on the accounting standards. As you all know, Hana Financial Group has adopted the IFRS 17 accounting standard starting from the 2023 first quarter business results. And for the materials being shared today, the 2022 business results of the group and the insurance affiliate have been re-prepared retrospectively based on IFRS 17. With that, let's look at the group's first half business results. First, the group highlights, which starts from Page 3. Hana Financial Group's second quarter net income was KRW 918.7 billion, which is 11.9% increase year-over-year. Now for the entire first half net income was KRW 2.0209 trillion, which is a 16.6% Y-o-Y increase. While Hana Bank's performance improved significantly versus the first half of last year, the nonbank affiliates, including Hana Securities, fell short of our business plan, resulting in an overall performance coming in below market consensus. In terms of key metrics at the group level, core earnings, including both interest and fee income increased Y-o-Y. In particular, the disposition and valuation gain increased significantly, supported by securities and FX derivative related earnings, benefiting from market volatility, and this was a major driver of our top line improvement. Also, the group's cost-income ratio was 37.1%, which is the lowest since the launch of HFG, thanks to decrease in one-off early retirement expenses combined with Hana Financial Group's strong cost efficiency. Accordingly, Hana Financial Group's first half pre-provision operating profit increased by 37% Y-o-Y, demonstrating a significant improvement in the group's overall income generating power. The group's provisioning expense in first half was KRW 777.4 billion, which is a significant increase versus first half of last year. This is mainly attributed to the preemptive provisioning of KRW 310 billion in total by applying some more conservative probability of default to prepare against domestic and international uncertainties such as inflation, higher interest rates, credit tightening and geopolitical tension. Also today, the Hana Financial Group Board of Directors approved KRW 600 per share quarterly cash dividend. This was a decision taken to provide regular cash flow to the shareholders and to secure full year dividend visibility by institutionalizing a quarterly payout program. Even though the group's CET1 remains under 13% due to various factors, including the final adoption of Basel III in Q1, we plan to stably manage the CET1 ratio in the second half of this year based on the group's current loss absorbing capacity. Also, we will remain focused on faithfully implementing the capital management and shareholder return policy announced at the start of the year and also on delivering above-industry average shareholder return. Please turn to Page 4. In Q2, group NIM was 1.84%, which is a 4 bp decrease from Q1. While Hana Card NIM somewhat improved, thanks to profitability improvement activity, including pullback on interest rate installment offers. Hana Bank's NIM fell by 7 bp Q-o-Q. The bank's NIM drop is mainly attributed to the bank's asset structure, which has a high share of floating rate assets. Market rates, including financial bonds fell significantly compared to 3 or 6 months ago, which resulted in a relatively large asset repricing effect. On top of this, funding cost increased due to the policy rate increase that happened earlier this year, resulting in a drop of NIM quarter-over-quarter. That said, market rates have remained stable since the increase in May and Hana Bank is focusing on portfolio optimization, including increasing the share of fixed rate loans and improving its funding efficiency. We expect bank NIM to bottom out during Q3 and show gradual improvement from Q4. Meanwhile, despite the drop in bank NIM, the group's first half interest income increased by around 2% Y-o-Y and second quarter interest income increased by 2.6% Q-on-Q, thanks to healthy asset growth around high-quality corporate loans and improved interest income from nonbank subsidiaries. On the right-hand panel, you will see that while bank household loan continues to decrease, corporate loans have increased 7.4% year-to-date, resulting in a total Korean won loan growth of 2.6% year-to-date. Household loans have been on a declining trend since last year, owing to higher interest rates and weak real estate markets because household loans were expected to contract again this year, we have been focusing on high-quality corporate loans to make up for this. In the second half, corporate demand for liquidity is expected to continue, and we will pursue loan work selectively around high-quality assets backed by strict risk management. And now let me go over the noninterest income. The group's noninterest income in the first half grew significantly Y-o-Y to KRW 1.371 trillion. The group's disposition and valuation gain increased Y-o-Y to KRW 750.8 billion. Strategic maneuver around financial market indicators such as interest rates, allowed marketable securities-related gain and also efforts to discover new sources of profit, such as introducing for the first time, 24-hour FX transaction greatly improved the trading performance. In addition, on the back of increased overseas travel and newly found demand for forward exchange, Hana Bank branches gain on FX sales showed sound growth. On a quarterly basis as the financial market volatility gradually subdued the group's disposition and valuation gains shrank Q-o-Q, but on a Y-o-Y basis, it is still quite sound, leading the group's noninterest income growth. The fee income maintained the previous year's level for the first half. Some of the market-sensitive items such as brokerage and M&A advisory fees were sluggish, but accumulated tight fees, including trust, retirement pension, operating lease showed decent improvement. The quarterly fee income, which had bottomed out in Q4 last year has steadily recovered and this quarter recorded KRW 471.7 billion, up 6% Q-o-Q. Business conditions improvement along with the increasing Korean stock trading volume uplifted the stock brokerage fee. Also, efforts to grow assets paid off and improvements in fees related to loans and FX. And as such, there is sound growth in the overall fee income items. Moving on to Page 5. The group's NPL ratio in the first half of 2023 has increased 5 bps Q-o-Q to 0.45% due to domestic real estate PF asset deterioration. There is heightened vigilance felt throughout the nonbank subsidiaries as there is an upward trend in NPL. There will be group-wide efforts for asset quality management to curb related risks by actively utilizing the PF Lender Council, which had been active since the second quarter and through prompt resolution of delinquent corporate loans and tight management on household loans. The delinquency ratio went up 3 bps Q-o-Q as there was a slight increase in delinquent assets, including the banks of SOHO loans and mortgage loans. However, most of the bank's delinquent assets are covered by collateral and the group's delinquency ratio growth was greatly reduced, thanks to the group's diligent management efforts. Provision and credit cost ratio will be explained in detail on the next page, let me first address the group's capital adequacy. As of the first half of 2023, the group CET1 ratio is 12.80%. It is slightly down from 2022 year-end due to Basel III, increased credit RWA related to corporate loans and FX appreciation. As was mentioned before, in the second half, we will do our best to manage the capital ratio more stably so that we can enhance shareholder value through diverse shareholder return measures. Page 6 is an additional explanation about the group's preemptive provisioning. Since COVID, Hana Financial Group has steadily set aside for several years preemptive provision to secure sufficient loss absorbing capacity against NPL risk. The effort continued into the first half of this year and in Q1, a total of KRW 40.1 billion of preemptive provision against the bank's PF assets was recognized. In the second quarter, a total of KRW 270.3 billion was additionally provisioned by adjusting the PD by conservatively applying the future-oriented multiplier in order to preemptively be ready for any uncertainties and to build enough loss-absorbing capacity come what severe recession may. As a result, although the group accumulated credit cost ratio in the first half is 42 bps up Q-o-Q, considering the one-offs, the normalized credit cost ratio is being maintained stably within 30 bps. And with the preemptive provisioning, we expect the group's credit cost ratio to not exceed the current level by that much. Page 9 deals with the subsidiaries business results. Hana Bank's net income in the first half recorded KRW 1.839 trillion, 33.9% increase Y-o-Y, thanks to sound core earnings growth and improved disposition and valuation gain. Hana Securities net income for the first half was a disappointing KRW 34.6 billion. Although the investor sentiment arose with the domestic and overseas stock market rallies and an increase in fee income due to increased customer base and IB sales restructuring, due to CST-related provisioning and recognition of impairment loss on the IB investment assets, there was a deficit reported in the second quarter. Lastly, Hana Capital's net income in the first half was KRW 121.1 billion and Hana Card, KRW 72.6 billion. Both subsidiaries experienced a growth in their top line Y-o-Y, thanks to their main businesses' sound growth. However, due to provisioning burden caused by the rising delinquency ratios, the net income decreased. Please refer to the remaining slides for further information. This concludes Hana Financial Group's 2023 first half earnings presentation. Thank you very much.

Thank you very much. And now we will proceed with the Q&A. Let me briefly explain how this will work. [Operator Instructions] The first question will be by NH Investment Securities, Jun-Sup Jung.

Yes. Good afternoon. This is Jun-Sup Jung from NH Securities. I have 2 questions. The first question is about the KDB Life acquisition deal. You have been selected as a preferred bidder and direction-wise, that seems to be the right direction for you to pursue, but KDB Life here are a bit concerned about that business itself. Not only KDB Life, but do you have also other plans on nonbank M&A in a broader context, your overall M&A strategy? That's my first question. Second question is related with the first question. Your CET1 in Q1 is below 13%. You mentioned that in the second half, you will come above that 13%, but you are considering some M&A deals which may actually be a downward pressure additionally on your capital ratio. If you go through with the M&A, how much of an additional downside would that have on your capital ratio? And if your capital ratio still remains below 13% on a CET1 basis at the end of this year, what would be the fair level of shareholder return we should expect?

Yes. Thank you very much for those questions. Please give us a moment to prepare our answers.

Yes, this is CFO, Park. Now you've asked about the KDB Life acquisition as well as our overall group M&A strategy. Mr. Yang, Jae-hyeok, Mr. Yang, who is in charge of our M&A, we'll take the question first, and I will follow up on the second question.

Yes. This is Jae-hyeok Yang, the Group CSO. Thank you very much for your question. Now we have been always looking into an M&A opportunity to make up for some of our weaknesses to emphasize our strengths. So we've always been interested in various investment opportunities in the nonbank sector. To comment about the KDB Life, we have signed an NDA and because of the NDA, we're not able to share any details. We do know that there is some concerns by analysts and investors that the KDB Life deal may require additional capitalization. This deal is in very early stages and we have submitted a nonbinding letter of intent. That is the current status. And the group's M&A strategy has not changed. We have no plans of pursuing M&A just for the sake of increasing size. We have always evaluated potential M&A deals in terms of ROE and shareholder value enhancement. Also, the deal has to present synergy opportunities for us to go ahead with the M&A. Thank you.

And if I may add a few comments. As the CSO, Yang, just mentioned, nothing been decided regarding that deal. And so regarding the impact that deal may have on our CET1, we have not gone through any detailed simulation. But since you've asked about the possibility of shareholder return versus the year-end CET1. Well, in the first half, we adopted Basel III in Q1 that has had an impact. Also FX rate increasing has had around about 33 bp downward pressure on our CET1 in the first half. In the second half, growth issues would have been already resolved. And so automatically, there is a bit of an automatic bounce back in the CET1 in the second half. And so we think that at least in the second half, we are targeting a 13%, at least 13% CET1. You've asked about what shareholder return to expect if we fall below 13% at the end of the year. I think even if we are below 13% at the end of the year, we would look into last year's payout ratio and try to maintain last year's share payout ratio or cash dividend so that we at least deliver on an industry average level of shareholder return.

We'll take the next question. It's from Hanwha Securities, Kim, Do Ha.

I have 2 questions. I did not look at the numbers line by line. And I think you skim through it, but I do have some questions about the deficit recorded by Hana Securities. Were there any one-offs? Could you elaborate? I think that would help greatly. And as for NIM and credit cost, it says on the slide to maintain the guidance, but do you see any other outlook for the NIM and credit cost in the second half?

Yes. Please give us a moment as we get ready.

Yes, I am Jongmoo Park, the CFO. As for Hana Securities and the one-off behind the deficit, I'd like to answer that. And as for the NIM outlook, [indiscernible] from the bank and credit cost, CRO, Kim Ju-Seong, will address your question. As the group CFO for Hana Securities' sluggish performance is something that we regret. We regret to inform you of Hana Securities had received a lot of capital. And it was transforming to an IB entity and it was on a growth track. And since the second half of last year, there was a lot of uncertainty and volatility in the financial market and the valuation of the asset sales had changed. And the gist of your question about the one-off factors behind the losses, those aforementioned and the one-off factors compounded the situation in the second half, and that's why we made losses. And there was the, CSD related provision, it was KRW 61.8 billion. And as for the IB asset valuation loss, it was in the range of KRW 42 billion. And as for the compensation of the funds, we provisioned KRW 53 billion. And underneath all this, the losses were recognized and that's because we were very conservative in recognizing the losses, and that's what I want to say. And now the NIM outlook from the bank.

Hello, I am the bank's CFO, [indiscernible]. I'd like to talk about the NIM outlook. And as for the year-end, in Q2, the NIM had fell Q-o-Q and as for the main factors compared to the other banks, the CD floating rate affected a lot. And the core -- the time deposit in -- they will -- the duration will be -- they will be due in Q2 and Q3. And so with the NIM down in Q2, that had an effect. So in Q3, I think the NIM will be in a similar range, but it will rebound back in Q4. So by the year-end, I think we'll reach a similar level to last year or even higher.

Yes, I am the Group CRO, and I'd like to talk about the credit cost outlook. And as was mentioned in the presentation, the credit cost was 0.42%. And we had provisioned about KRW 310 billion. And if we consider that, it's around 26 bps. And in the second half, there will be some uncertainties in the market, so there could be some additional provisioning in the second half. And as to the size, we cannot say at the moment. So we are just thinking of normal level credit cost and as was -- it was 26 bps in the first half, we believe it will be in a similar range in the second half.

Next question is by Korea Investment Securities, Doosan Baek.

This is Doosan Baek. I have additional follow-up question about your asset quality. The NPL ratio at the bank level did increase Q-o-Q. There has been a 5 bp increase also at the group. But -- so can you give us a bit more detail about the nonbank asset quality? Also tied to that, can you give us a bit more detail about your overseas real estate exposure that has been an issue since March this year? How much exposure do you have in overseas real estate and how much of that is on notebooks versus also how are you managing the exposure that you've sold to your customer? So can you also give us some details about the risk management related with overseas real estate exposure?

Just give us a moment to prepare the answers.

Yes. This is the Group CRO. About the NPL ratio, the Hana Financial Group, but also other financial groups have been seeing an upward trend in their delinquency ratios and NPL ratio. The Hana Bank's NPL ratio was flat Q-o-Q because it focuses more on secured loans and therefore, has been either writing off its NPL and so the nonbanks, they're seeing an increase in delinquencies and NPL ratio. And so they, I think, had more challenges in terms of writing off or selling of the NPLs versus Hana Bank. Regarding overseas real estate, at the group level, we have around KRW 4.6 trillion of overseas real estate. There is mainly exposure in Europe and U.S., that accounts for 90%. Office buildings accounts for about half of our exposure, and there's also industrial logistics centers and other assets. As you know, since end of last year, we are going through a very thorough check of our overseas real estate risk. For those that have some concerns of becoming distressed, we are working, for example, with the asset managers to find a way of turning that into a performing asset. And it's difficult to describe this as how -- what the percentage of substandard and below. But we do not think that there is any issues, especially at the bank, we have no substandard and below exposure on overseas real estate.

We'll take the next question. It's from HSBC Securities, Jaewoong Won.

Thank you for the good results despite the challenging conditions. I have 3 questions. First, maybe this is because I did not understand. On Page 26, the credit cost will be maintained within 30 bps. That is what is written. So as of now -- is this the overall target for the credit cost? In Q2, the accumulated credit cost is much higher. And so I just wanted to check. And the second question is, any plans for treasury buyback and cancellation? Could you give us a heads up on that? And my third question is, I've seen a recent article in [ Daejeon ], new Internet banking could be formed and Hana Financial Group could play a leading role. And so have you heard anything? Or have you had any updates to share with us?

Thank you for your questions. Please give us a moment as we get ready to answer your questions.

Yes. This is the group CRO back again. On Page 6, there is the loss absorbing capacity through preemptive provisioning. And additionally, we do provision from KRW 100 billion to KRW 500 billion, and we did KRW 310 billion provision in the first half. When we set the target, we do include -- if we do include the provision, then it's going to be volatile. And so within the 30 bps means the recurring credit cost without the provisioning, and so it was 42 bps in the first half. But if it is normalized, it is 26 bps. So that's what -- why we mentioned 30 bps as our overall target.

Yes, this is the group CFO. As for treasury buyback and cancellation plans, KB and Shinhan did announce their plans for Q3 for buyback and cancellation. The bank shares in Korea suffer from very low valuation. So under the circumstances, buyback and cancellation of the treasury do have some significance in enhancing the shareholder value. So the top management and the BOD are well aware of this -- but in the first half, the CET1 ratio is 12.8%, and it is a bit less than what we are targeting. But as was mentioned before, by the year-end, we are targeting a CET1 ratio of 13%. I'd like to reiterate that. So as of now, treasury buyback or cancellation plan is not in our visibility, but we will find measures to enhance the shareholder value and increase shareholder return. And as for an article about the [ Daejeon ] Internet bank. Well, we are not ready. So we'll look into it and then talk to you separately. Thank you.

Next question will be by JPMorgan, Jihyun Cho.

I have 1 question. You've mentioned that the group level PF assets quality has deteriorated, and that is required to take additional provisioning. So recently, have you seen any particular issue in your PF exposure? And can you give us some update on your [ PF ] exposure at the group level?

Yes. Thank you very much for that question. Just give us a moment to prepare the answer.

This is the Group CRO. To answer your question, during the first half, we provisioned KRW 300 billion and KRW 40 billion of that was taken in first quarter regarding PF exposure. They were performing loans but they were having, for example, delays in construction. And then the KRW 200 billion that we provisioned in second quarter was not because of deterioration. But actually, we just upward adjusted our probability of default across the board, and so we had no additional provisioning taken specific to PF exposure. But since you've asked, we have around at the group level, KRW 7.7 trillion of PF exposure, about half of that is at the bank. And then there were also some bridge loans, which has been at the nonbank subsidiaries, which has been the major source of delinquencies, but they have no major impact. I hope that answers your question.

We currently do not have any questions on queue. We will wait for the next question. I think that was sufficient for our Q&A. If you have additional questions, please contact the IR team, and we will answer your questions to the best of our ability. We will now conclude the Hana Financial Group earnings presentation for first half 2023. You can listen to the webcast again on our website. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]