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

Good afternoon. This is G.H. Park, Head of IR at Hana Financial Group. Thank you very much for joining us for our first half earnings call despite your busy schedules. Now we will start the 2026 first half earnings call of Hana Financial Group. For today's earnings call, we have key executives of Hana Financial Group and key subsidiaries. First, we have Group CFO, Jong Moo Park; Group CRO, Jae Shin Kang; Group CSO, Ho Sik Nam. We also have from Hana Bank CFO, Young Seok Jeong; Hana Bank CRO, Chang Wook Pae. And also, we have from Hana Securities, CFO, Dong Sik Kim. Today, we would like to take you through the newly announced 2026 Value Up Plan of Hana Financial Group before we go into our first half results and then take your questions and answers. Please also note that there are some forward-looking statements that are mentioned today that could change depending on macroeconomic and market situations, and there could be material differences from our actual business results. Now our CFO, Jong Moo Park, will take the presentation.

Good afternoon. This is Jong Moo Park, CFO of Hana Financial Group. Thank you, shareholders, investors and analysts for joining today's earnings call despite your busy schedules. We truly appreciate your attention. Before going into our first half results, I would like to highlight the key points of the 2026 Value Up plan that has been approved by our Board of Directors earlier today. Please turn to Page 1. Hana Financial Group first announced its value-up plan back in 2024, setting clear targets for the 3 key metrics of TSR, CET1 and ROE, which we have followed through consistently since. The group's TSR shareholder return ratio increased to 47% in 2025, and we're on track to reaching the 50% target ahead of schedule. Hana Financial Group's PBR, which was only 0.4x at the end of 2024 has increased to around 0.7x as of end of June this year. That said, during the same period, the PBR of major global peers have also increased, placing our valuation still at a relative low. Under the lead of the Board of Directors, we conducted an as is diagnostic and have explored various ways of driving continuous enterprise value enhancement, leading to the new value of plan with new targets for the key metrics, which we have announced today. This page shows you the 3 key points of the new value plan. First, the ROE target has been revised up to 12% from the previous 10% or above. This will be achieved by structurally stepping up the group's ROE by significantly expanding Hana Bank's already healthy core competitive edge and by strengthening the core business competitiveness of our nonbank subsidiaries. Also, the strategic partnership with the multi-digital asset platform, Dunamu, will be leveraged to preempt this evolution to digital asset-based future financial services and to add new growth engines for the group to achieve an ROE of 12%. Next is the shareholder return target, which has been revised to 50% or more based on a framework that links better ROE and lower RWA growth rates to higher shareholder returns. This improves the predictability of shareholder return and at the same time, establishes capital allocation principles that links improved profitability with greater shareholder return. Also, Hana Financial Group aims to become one of the leading dividend shares in Korea by actively increasing dividend going forward. We plan to increase total cash dividend by at least 10% or more each year until reaching a payout ratio of 40%, which is to satisfy the high dividend company requirement under the act on restriction of special cases on taxation. With the share buyback and cancellation running in parallel, we will continue to gradually reduce the number of outstanding shares and dividend per share would increase by more than 10% each year. On top of this, with the separation tax -- separate taxation on dividends effective from this year and tax-free dividend from next year, shareholders are expected to experience an even more elastic improvement in dividend yield. Lastly, CET1 target has been revised to 13% or more. And accordingly, we plan to maintain CET1 sustainably around 13% or above while supporting predictable shareholder return based on the framework. As you will have noticed, the new value of plan is not merely an update of target numbers, but a meaningful new design that formalizes and institutionalizes a virtuous feedback cycle between increased shareholder return and enterprise value enhancement. Hana Financial Group will remain focused on accelerating enterprise value enhancement based on differentiated earning power and predictable shareholder return. Also, we will faithfully execute the value of plan announced today that translates the group's sustainable growth to greater shareholder value and deliver real-term performance in response to the trust and expectations we receive from the market. For the details of the value of plan, please refer to the materials that we have disclosed today. And now I will go into the first half 2026 group business results. First, the key highlights are on Page 4 or 2. Hana Financial Group's 2026 first half net income was KRW 2,402.9 billion, which is a 4.4% increase Y-o-Y and the highest half year net income in group history. Despite the KRW 109.8 billion in FX translation loss in the first half due to higher exchange rates and increased tax-related expenses caused by changes in tax regulations, including corporate income tax, our first half earnings was solid, thanks to solid growth of core earnings, both interest and noninterest income. Hana Bank's healthy NIM improvement and Korean won loan growth drove group's interest income by 7.1% Y-o-Y and the bullish stock market helped asset management-related fee income growth, including brokerage fees, driving group's fee income up by 37.7% Y-o-Y. First half core earnings increased 13% Y-o-Y, driving our net income growth of the group in the first half. Group's Q2 net income was KRW 1,192.8 billion, which is a 1.4% Q-o-Q decrease. Insurance profit decreased temporarily due to the actuarial assumption improvement regulations in effect and provisioning expense was incurred due to a large business group filing for corporate rehabilitation, but general operating profit, including our core income and disposition and valuation gains increased 7.9% Q-o-Q, delivering good quarterly results despite the one-offs. Accordingly, our first half group ROE was 10.62%. Next, we expect first half and group CET1 ratio to post 13.21%, a 2 bp decline Q-o-Q. Despite continued downward pressure on the CET1 ratio from the depreciation of the Korean won on the back of RoRWA-focused asset growth strategy and disciplined RWA management, the group maintained its CET1 ratio at a stable level as of the end of the first half. Next, I will cover shareholder return. At today's BOD meeting, KRW 250 billion of share buyback and cancellation was approved, and we plan to complete the purchase within 3 months. Including the KRW 250 billion approved today, our cumulative share buyback and cancellation for 2026 as of now amounts to a total of KRW 700 billion. Next, Q2 dividend per share posted KRW 1,155, a 26.5% increase Y-o-Y. As a result, we will pay around KRW 600 billion of cash dividends in the first half of the year. And assuming that we pay the same amount in cash dividends in the second half, total cash dividends for 2026 will amount to around KRW 1.2 trillion, an increase of 10% Y-o-Y. As outlined previously in our corporate value of plan, we will continue to enhance shareholder value by actively increasing dividends while concurrently pursuing share buyback and cancellations. Let me now walk you through the details of our group's financial performance. Please refer to Page 5 of the presentation materials. Group's 2026 first half interest income posted KRW 4,808.2 billion, a 7.1% increase Y-o-Y. First, looking at the NIM. Hana Bank's Q2 NIM recorded 1.61%. And on the back of profitability-focused loan asset growth and portfolio optimization efforts, it increased 3 bp Q-o-Q. Group's Q2 NIM posted 1.88%, a 6 bp increase Q-o-Q, and this was on the back of Hana Bank NIM improvement as well as Hana Card NIM growth, thanks to factors, including credit card purchase volume increase. Next, 2026 Q2 bank loans in won grew 2.0% compared to the previous quarter end. Of this, household loans increased as mortgage lending to real end users expanded and with the increase in outstanding balances on unsecured credit lines. As a result, it grew 1.2% compared to previous quarter end. For corporate loans, we provided funding and liquidity support centering on high-quality companies and industries experiencing increasing financing demand such as defense and semiconductors, and it grew 2.6% compared to previous quarter end. Next is the group's noninterest income. Let's go to Page 6. Group's 2026 first half fee income posted KRW 1,487.4 billion and increased 37.7% Y-o-Y. As I aforementioned, asset management related to fees drove the improvement trend of fee income improvement in the first half. First of all, Hana Securities on the back of increase of stock market transaction volume saw a 208.5% increase of brokerage fees Y-o-Y. And as a result of strategically strengthening wrap account products, and wrap and operation fees increased 634.9% Y-o-Y. In addition, there was a great increase of ETF sales at Hana Bank and trust fee income grew 61.4% Y-o-Y. In addition, group's IB-related fees also delivered solid results through enhancing competitiveness through the group's IB platform as a result of strengthening the portfolio centering on high-quality senior assets, first half M&A and advisory fees increased 73.9% Y-o-Y. Next, group's first half disposition and valuation gains posted KRW 660.2 billion, a 20.1% decrease Y-o-Y. This was mostly due to the base effect since KRW 133.9 billion of FX translation gains occurred in the same quarter of the previous year and the recognition of KRW 109.8 billion of FX translation losses with the continued won depreciation trend in the first half of this year. However, since the Korean won began strengthening in July of this year, the exchange rate has declined to the upper KRW 1,400 range. If the exchange rate remains at its current level through the end of September, we expect a substantial portion of the FX translation losses recognized in the first half to be reversed in the third quarter. Next, let's go to the next page, and I will cover group's G&A expenses. 2026 first half group's G&A expenses due to the increase of labor and salary and benefits and taxes and depreciation posted KRW 2,489 billion, a 9.8% increase Y-o-Y and group C/I ratio posted 38.8% and is being managed favorably compared to our business plan. Next, I will cover group's asset quality. Please go to Page 8. Group's first half provisioning posted KRW 663 billion and increased 4.5% Y-o-Y. The main reason was due to KRW 74.9 billion of one-off provisioning costs in Q2 following a large corporate group's filing for corporate rehabilitation proceedings and the first half cumulative credit cost ratio recorded 0.29% and is being managed stably within our business plan target. Now let's go to Page 9. Group's Q2 and NPL ratio posted 0.93%, a 13 bp increase Q-o-Q, and the NPL coverage ratio posted 86.4%, a 9.2 percentage point decrease Q-o-Q. With the aforementioned large core filing for corporate rehabilitation, around KRW 420 billion of newly classified NPL increased at once and NPL-related indicators showed relatively significant changes compared to the previous quarter. If we exclude the effect regarding corporate rehabilitation filing, group's Q2 end NPL ratio posted 0.85%, a 5 bp increase compared to previous quarter end and NPL coverage ratio recorded a 92.6% level, a 3 percentage point decrease compared to previous quarter end. The group's NPL coverage ratio remains below 100% due to the characteristics of its portfolio with secured loans accounting for approximately 90% of Hana Bank's delinquent assets. For secured loans, even when they are classified as nonperforming loans, loan loss provisions are calculated after taking into account the recoverable value of the collateral. And as a result, the NPL coverage ratio is relatively lower than that of unsecured loans. Accordingly, the group's loss absorption capacity is being managed at a solid level considering both the coverage ratio and collateral value. But since high interest rate and high inflation environment is expected to continue until the end of this year, we plan to expand the write-off and sale of nonperforming assets in the second half so that our NPL coverage ratio will be increased to over 100%. On the other hand, group delinquency ratio despite the higher debt servicing burdens from elevated market interest rate maintained a 0.59% level, similar to the previous year on the back of efforts, including aggressive efforts to reduce delinquent assets and improved 2 bp Q-o-Q. Please refer to the posted materials for more information. With this, I will conclude my presentation for Hana Financial Group's 2026 first half business results. Thank you for your attention.

Thank you very much. Next, we will have a Q&A session.

[Operator Instructions] The first question is from Hanwha Investment & Securities, Do Ha Kim.

This is Do Ha Kim of Hanwha Securities. I have a few questions about interest income. Interest income actually decreased, but your interest-bearing assets grew and your NIM is also positive. But versus the spread widening, and so even though your liabilities have increased, I don't think your margins have decreased as much. But your interest expenses increased double digit Q-o-Q, suppressing your interest profit income. Can you explain the technicals behind that? Second question is about your shareholder return formula. When we compare you to that to your peers, their formula has the target ROE in the denominator, but you have put in your actual ROE in the denominator. What if your ROE is lower than expected, your shareholder return will decrease and you would sort of have a reverse effect of reducing your equity to improve your shareholder return. I'm sure you have run that during your considerations. And so what would be your response to that?

Well, thank you very much for those questions. Please give us some time to prepare the answers.

Yes, this is Jong Moo Park. I'm the Group CFO. Thank you very much for those wonderful questions. To answer your first question is about our interest income not increasing as much. There is a bit of a distortion effect. And that is related with the variable insurance. You probably heard that effect from other financial groups, too. There is the interest expense being replaced, and that has the impact of around KRW 290 billion. And then your second question was about the ROE in the formula of shareholder return. If it's actual ROE that's below our expectations, wouldn't that have a negative effect? Well, up till now, our shareholder return has been 47% up until last year, and we have unveiled our new value plan. And today -- and our goal is to hit at least 50% shareholder return during this year, 2026. That is our initial goal. And we weren't able to expressly put this in the table, but we do expect to hit 50% shareholder return this year, which then means we would have to aim for higher than 50%. That is, I think, the assumption that we will continue to exert our efforts to keep our shareholder return above 50% going forward.

We will take the next question. The next question is from NH Securities. We have Jun-Sup Jung on the line.

I also have a question related to the corporate Value Up plan that you announced today. I have 2 questions. The first question is regarding in order to increase TSR, you have ROE target of 12% that's going to be very important for you to meet. And I would like to know your concrete plans to meet that. I know that it's mid- to long-term target, but when do you think you will accomplish the target? And in order to uplift the ROE, I think the bank and also nonbanks profitability will be quite important. So for your core subsidiaries, well, their trajectory for ROE, any targets, if you have them in mind, I would like to hear some explanations. My second question is for increasing the retail investors' contribution. And from next year, there's going to be tax exemption dividend. So I think that there's going to be some room for that. But if you have any more plans to attract more retail investors, it would be greatly appreciated. It's because for tax-exempt dividends, well, that will actually probably be applied to other banks as well. So can you tell us about any differentiated plan to increase your number of retail investors?

Thank you very much for your questions. Please hold and we will soon answer your questions.

I am the CFO of the Group, Jong Moo Park, once again. And thank you very much for your questions, Mr. Jung. I think you actually had some answers in your questions. So it might be easy for me to reply. Regarding the 12% of ROE that we're going to aim for to give you a target time line was your question, and you also asked about ROE targets for our subsidiaries. On our presentation materials, it says mid- to long term. But until last year, we had our ROE target of 10% or higher as our ROE target, and it was near that number, but it wasn't actually achieved. However, we -- when we review our details internally, it seems that our recurring fundamentals actually translate that of not only 10%, but even 12%. So we believe that in order for us to achieve 12%, as you just mentioned in your question, well, we will need to strengthen the bank competitiveness, and we also will need to normalize our nonbanking operations and also through the new businesses that we are pursuing, if we gain new growth drivers, we believe that we will have more opportunities to generate profits. Also for nonbanking, regarding the ROE targets, we basically believe that for the capital costs, at least 10% will be our target. So I hope that answers your question. And regarding your second question, regarding the tax exemption dividends or separate taxation of dividend income, yes, it is similar to other peers. But at Hana Securities, there was Futu Securities that we had an MOU with. So we have been actually making a lot of these relationships, and we have had offline meetings for retail investors as well. So we have been explaining about the tax-related benefits, and we have actually been listening to the market more so that we can have more retail investors.

The next question comes from IM, Yong Jin Seol.

I also have 2 questions. When we look at your margins, the group margin is higher than bank. And was there any one-off explaining that difference? And what's your outlook on your second half, your margins and income? What do you expect in the second half? Credit cost, if we set aside the one-off, there does seem to be higher credit cost than before. Can you also give us your CCR guidance going forward? Second question is about your nonbank businesses. That's a major part of improving your profitability. If you had to compare organic versus inorganic, which will be the stronger priority for you?

Thank you very much for your questions. Please give us a moment to prepare the answers.

Yes. Thank you very much for your questions. During the presentation, looking through our earnings, the group NIM, there was the effect of the credit card NIM in Q2, their volume increase that helped upward. Also in Q2, there was some reversal of some merchant fees that happened. And that's why the group NIM expanded or group NIM became higher than the bank NIM. So that explains that difference. About -- you've also asked about our asset quality guidance, and our CRO will answer that question.

This is Jae Shin Kang, CRO. In Q2 versus Q1, our credit cost did increase a bit. In Q1, I think we had some reversals, one-off reversals. That's why it was unusually low. Q2 actually is the expected normalized level. The increase on Q-o-Q basis can be explained by some large companies filing for rehabilitation. Now towards the second half, assuming that there will not be these unexpected one-offs, we think that we will be able to keep it around the low 30 bp range, which is actually the level that we had assumed when we planned the business plan for this year.

And this is Ho-Sik Nam, the CSO. Your second question was about the nonbank businesses and improving our profitability on nonbank is the top priority. You've asked about organic versus inorganic, if we had to choose one. We really don't have a direction towards one or the other. We're looking at all. At least we are going to focus on enhancing the competitiveness of each subsidiary's core business capabilities and competencies.

And this is Young Seok Jeong of the Hana Bank. You've asked about the second half bank NIM. First half NIM was 1.60%, assuming our neutral outlook in the second half, we expect our NIM to stay flat around 1.60%. There are some upsides and downsides. As you know, market rates are expected to be raised by 2x and the loan cycle is becoming shorter. It's around -- concentrated around 3 months or 6 months. So we actually think that there will be an upside for better interest income because we have shorter duration loans. But then we have also been focusing more on our funding from public sector and SMEs. But then there are some payments from retail individual side increasing. And then there is the new regulation that will prohibit us from adding the insurance, the credit insurance premium on our loan interest rates that could be a negative. But overall, offsetting, we are going to target a neutral NIM in the second half.