Woori Financial Group Inc. (A316140) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. I'm Han Hong Sung, Head of IR, here at Woori Financial Group. I would like to sincerely thank all of you for taking the time to participate in Woori Financial Group's Earnings Conference Call despite your busy schedules. On today's call, we have Group CFO, Lee Sung-Wook; Group CEO, [ Yim Jong-Yong]; and Group CRO, Park Jang-Geun. Today's earnings announcement will be conducted in the following sequence. First, a presentation of the group's financial performance by Mr. Lee Sung-Wook, our group CFO, followed by a presentation on key measures to enhance corporate value announced today. And lastly, we will proceed with the Q&A session. We would also like to inform our international investors that simultaneous interpretation service will be available for your convenience. Let's now start with Woori Financial Group's business results for the first half of 2024.

Good afternoon. I'm Lee Sung-Wook, CFO of Woori Financial Group. I would like to highlight that today is very important. We will be sharing with you the first half performance, and we have also announced our value-up plans of our group. I would like to make sure that I share with you as transparent as possible all the information we have available for you. Now without further ado, I would like to present the financial performance for the first half of 2023. Please refer to Page 3 of the financial performance materials available on our website. Let me start with Woori Financial Group's net income. In the first half of 2024, the group recorded a net income of KRW 1.755 trillion, up 14.1% compared to the same period last year. Despite additional credit cost provisions for real estate PF, net income for Q2 was KRW 931.4 billion, significantly surpassing market consensus and achieving the highest quarterly performance ever. With improved profit generation and stable cost management, the group's ROE rose to 10.8%. Notably, as a result of ongoing efforts in cost optimization, the C/I ratio recorded 39.9%, falling below 40% for the first time since the establishment of the holding company. Additionally, today, Woori Financial Group's Board of Directors confirmed and announced a quarterly dividend of KRW 180 per share as in the previous quarter. Next is the group's net operating revenue. Net operating revenue in the first half of 2024 recorded KRW 5.28 trillion, up 5.1% year-on-year and net operating revenue in Q2 recorded [ KRW 2.73 trillion ] up 7.2% Q-o-Q, This top line growth is attributed to strong interest income driven by asset growth centered on prime corporate loans and margin improvement as well as significant increase in noninterest income, primarily from core fees across both banking and nonbanking subsidiaries. Next is on credit cost. For the first half of 2024, the group's credit cost was KRW 775.7 billion (sic) [ KRW 776 billion ], down 5. 2% Y-o-Y. On a quarterly basis, it increased by 11.6% from the previous quarter, reaching KRW 409.1 billion. The credit cost ratio stood at 0.42%. This quarter saw one-off factors such as additional provisioning due to the revaluation of real estate PF, nevertheless with these -- even with these considerations our credit cost remains stable and well managed within our financial plan. In addition, the provisions are accumulated consecutively over the past 2 or 3 years have ensured that our loss absorption capacity remains robust. Next, let me address capital adequacy, including the capital ratio. As of the end of June 2024, the group's CET1 ratio is expected to be 12.04%. Despite KRW 42 increase in the won-dollar exchange rate last quarter, our CET1 ratio improved by 9 basis points from the previous quarter, driven by solid profit generation, prudent asset growth and proactive risk-weighted asset management. We remain committed to further enhancing our capital ratio to support growth and shareholder returns. Next, I will elaborate on group's business results in more detail. Please refer to Page 4 of your materials. First, let me explain the net operating revenue and NIM or NIM. For the first half of 2024, the group's net operating revenue increased 5.1% year-on-year, reaching KRW 5.28 trillion while interest income remained stable at KRW 4.395 trillion compared to the same period last year. Meanwhile, the bank's NIM for Q2 was 1.47%, down 3 basis points from the previous quarter. The group NIM, including Woori Card remained unchanged at 1.74%. For Woori Bank [indiscernible] while the decline in market interest rates and intensified competition in corporate loans have squeezed the lending margins, proactive management and time deposit maturities and funding costs helped limit the [ decrease ]. With the Bank of Korea likely to cut rates in the second half, we will actively counter margin declines by achieving appropriate growth in line with our initial targets and through group-wide efforts to increase core deposits and strengthen ALM. Next, I will discuss asset growth and loan status. As of the end of June 2024, total bank loans amounted to KRW 324 trillion, marking a 2.5% increase from March. Corporate loans grew by 4.3% to KRW 183 trillion compared to March driven by strong demand from large corporations and steady growth from SMEs. Meanwhile, the decline in credit loans continued, retail loans grew by 0.6% to KRW 137 trillion compared to March driven by increased demand for housing-related bonds and policy mortgages. In the second half of the year, we will maintain the growth focused on corporate finance, while considering capital ratios, aiming for solid growth aligned with our annual plan and considering RORWA. Next is an update on deposits. As of the end of June 2024, the total Korean won deposits at Woori Bank were KRW 310 trillion, which represents a 1.6% increase from the end of March. In the second half of the year, ahead of the anticipated interest rate cuts, we plan to build core deposits through proactive collaboration across the group to defend margins and also ensure stable funding sources. The bank will focus on sales and marketing targets targeting customers with high core deposit contributions, while nonbank subsidiaries will work to increase the use of Woori Bank for customer payment account, escrow accounts and other services. The group as a whole is committed to maximizing core deposit growth. As of June 30, 2024, the bank's loan-to-deposit ratio is 97.8%, reflecting a comfortably sufficient level. Next, I will move on to noninterest income and costs. Please refer to Page 5. First is the group's noninterest income. For the first half of the year, the group's noninterest income amounted to KRW 885.4 billion, marking a significant increase of 45.1% compared to the same period last year. In particular, thanks to the expansion of Corporate Finance and Global [ IB ] activities by the bank and proactive sales by subsidiaries like Woori Card and Woori Financial Capital. Fee income increased by 25.6% Y-o-Y and 10.4% Q-o-Q driving the rise in noninterest income. Excluding market volatility impact, Woori Financial group's core fee income stands at approximately KRW 500 billion per quarter significantly contributing to stable revenue generation. With the launch of reinvestment and securities in early August, synergies among the affiliates are expected to intensify, leading to further growth in the group's noninterest income. Moving on to the group's SG&A expense. For the first half of 2024, the group's SG&A expense amounted to KRW 2.1 trillion, inching up slightly by 2.1% from the previous year and remaining well managed. The C/I ratio came in at 39.9%, falling below 40% for the first time since the group's inception. Despite continued cost pressures from higher FX rates and oil prices, our group-wide cost optimization initiatives seemed to have paid off. We will continue to enhance group-wide cost management efforts through channel optimization, like advanced IT operations and a reduction of unnecessary operating expenses. Next is credit cost. Credit cost for the first half of 2024 was KRW 775.7 billion (sic) [ KRW 776 billion ] and the credit cost ratio was 0.42%. The group's credit cost in Q2 stood at KRW 409.1 billion, which is 11.6% Q-o-Q increase. However, this figure reflects a provision of approximately KRW 80 billion in relation to the revaluation of real estate PF. Ordinary credit cost ratio considering additional provisions against PF was 0.40%, and is being stably managed at 40 basis points level. The group and the bank's NPL ratio slightly increased to 0.56% and 0.23%, respectively, as the delinquency of nonbank subsidiaries rose, but still is the lowest in the industry. In the second half, refinancial group will work to soft land high-risk assets, such as real estate PF and overseas CRE and strengthen risk management of vulnerable areas to increase the loss absorption capacity of the group. We will now move on to capital adequacy and shareholder return policy. Please refer to Page 6. As of June 2024, the group's CET1 ratio was 12.04%, which is a 9 basis points increase from the previous quarter. The rise was mainly driven by efforts to boost capital adequacy such as achieving an appropriate level of growth considering RORWA despite the continued rapid depreciation of the Korean won and the robust growth of noninterest income, which does not contribute to RWA as interest rates and [ FX ] rates are protected to continue to show high volatility and the financial authorities are expected to introduce stronger capital regulations in the second half, refinancial group will manage growth in a flexible manner to enhance capital ratios. We also make utmost effort to manage RWA by improving the RWA calculation process and diligently managing high-risk assets such as PI and equity investments. Meanwhile, today the Board of Woori Financial Group declared quarterly dividends of KRW 180 per share, considering the company's quarterly dividend policy and market expectations. I'll go into more detail on shareholder return a little bit later. Thank you.

This concludes the presentation on the earnings of the first half of 2024. We will move on to the next section. Today, Woori Financial Group announced a Corporate Value-Up Plan and made disclosure on KRX as disclosed in prior notification of disclosure in June. Lee Sung-Wook, CFO and Vice President of the group will go over the highlights of the group's Corporate Value-Up Plan.

Today, Woori Financial Group announced its Corporate Value-Up Plan. The first among bank financial groups in Korea, as noted in the disclosure last month. The value-up program has been developed based on various discussions within the group and is being communicated to the market today after reporting the plan to the Board in June and receiving and reflecting feedback. The areas that required consideration were increasing shareholder return and establishing a portfolio strategy to secure new growth opportunities. I will now go over the highlights of Woori Financial Group's Value-Up Plan with the material that has been disclosed and circulated today. Please refer to Page 7 of the value-up slides. ROE is a key indicator of corporate value. It is a criteria for corporate decision-making and the basis for enhancing shareholder return. The group aims to achieve 9% ROE in 2024 and reached a sustainable and stable double-digit ROE in the mid, long term. This year, to generate stable ROE growth, the group will work to outperform market expectations in terms of financial performance by strengthening core competency and generating group synergy. In the mid-long term, we plan to maintain ROE at 10% or above by delivering RORWA-based growth, achieving group-wide cost optimization and implementing preemptive risk management. Next, I will go over the capital ratios and our shareholder return policy. Please refer to Page 8. The target for CET1 ratio is to achieve 12.5% early by 2025 and 12.2% by the end of this year. The target considers FX rate and M&A. We will be seeking diverse options to achieve the target, including realizing appropriate level of asset growth and strict RWA management. Also, if the recent strong dollar and weak Korean won stabilizes in the future at more balanced levels, additional CET1 ratio improvement may be possible. Regarding shareholder return expansion, the mid long-term TSR target has been set at 50%. The shareholder return policy based on CET1 ratio has been refined and elaborated. Compared to the previous policy, the CET1 ratio segmentation has become more detailed and an intermediate target of 12.5% has been set while securing visibility, it has become possible to deliver a shareholder return of 40% if the CET1 ratio exceeds 12.5%. Up to TSR of 40%, cash dividend will be 30%, and the remaining full amount will be used to buyback and cancel stock. If TSR exceeds 40%, both cash dividend and share buyback policy will be increased in a balanced manner. If we progressively increase the TSR on top of the current industry top-level dividend yield of our group, the shareholder value of the group will be enhanced to levels above peers. Next, I will go over the group's business portfolio strategy. Please refer to Page 9. Expanding the nonbank portfolio via M&A is essential to strengthen the group's operational capacity and improve income stability. Since inception in 2019, Woori Financial Group has consistently expanded the business portfolio by adding Woori Financial Capital, Asset Trust and F&I. Woori Investment Securities is set to launch in August this year. We will be reentering the securities market in 10 years. And while not finalized yet, we are working to add an insurance arm under our umbrella. I'd like to clearly state that we will not be overpaying for acquisitions. Also, regarding investor concerns on our current interest in insurance, we are not considering a paid-in capital increase at all. The imminent launch of the merged securities company does not have a sizable asset base, therefore, will not have a material impact to the capital ratio. The new company will focus on organic growth as a securities firm anchored in digital and [ IV ]. In insurance, as mentioned last time, according to the BIS calculation method, within CET1 ratio, 10% of the group, 250% of the investment amount is categorized as RWA, which means that even if there is an acquisition, the impact of the capital ratios will be limited. We are aware that it is not easy to pursue inorganic growth and shareholder return expansion at the same time with limited capital. The group will pursue M&A opportunities that can boost ROE by generating group synergy. Also, we will faithfully implement the Value-Up Plan announced today to enhance shareholder return. In line with the Value-Up Plan, we will be working to strengthen communication with investors. As the ownership of foreign and retail investors is on the rise, we will be diversifying IR channels to cater to various investors. We will also be interactively communicating with the market with a variety of IR content, including ESG and governance on top of financial performance. While the market may view today's announcement as somewhat insufficient, the group will assess the progress every year and continue to make value-up disclosures with improved strategies and measures as part of our efforts to strengthen communication with investors. The Korean government has launched the Value-up Index and announced tax benefits in relation to the Value-Up program, evidencing commitment to invigorate the Korean capital market. In line with such government policy, Woori Financial Group has developed the Corporate Value-Up Plan with the mindset to contribute to the fundamental improvement of Korea's capital markets. The group will make utmost effort to ensure that this Value-Up Plan contributes to enhancing corporate value grounded in respect for shareholder value over mid-long term rather than a mere short-term stock price boosting measure. Thank you.

Thank you very much. And as was explained in the beginning, we will now open the floor for Q&A. [Operator Instructions] We will now give you time as you prepare your questions.

We have the first question. So the first question is from Mr. Jung from NH Investment & Securities. You have the floor.

I'm from NH Investment and Securities Thank you very much for the performance. I do have 2 questions. First of all, I understand that you're trying to acquire an insurance company. So once that acquisition is made and if there is a bargain purchase gain, would that be reflected? Would that be used for the group? So how will the benefit be actually realized as it going to be reflected as a treasury stock? And second point, you talked about your mid- to long-term ROE of 10%. So you have different industries, for example, bank, nonbank and insurance. Can you share with us the individual industry ROE target?

Yes, I would like to take your question. As you have mentioned with regard to insurance acquisition, we believe that there will be some bargain purchase gain that we can enjoy. However, that gain could contribute to CET1 ratio or capital ratio and we have about KRW 1.9 trillion as our investment limit, and that will be deducted from the capital. So I think that we have to make a clear distinction, and this is not yet decided. But towards the end of the year, I think that we will be able to see some clear understanding. So we will take into consideration many different factors. For example, dividend payout ratios and also shareholder return, before we decide. As to your second question, which was related to ROE, banking ROE is over 10%. But we originally mentioned 9% because I believe the [ bonus ] ratio for nonbanking is quite significant, and there are some losses in that area. So towards the end of last year, we had about KRW 200 billion as loans provision. And in the first half of this year, we had KRW 80 billion for PF. So for nonbanking, we believe that we were able to clean up in the demand banking sector. If that is the case, then overall, I think that for both banking and nonbanking, we will have an ROE of about 10%. For a securities company, I think that we are just beginning, just launching, so the initial ROE of 10% is going to be quite challenging because there was a paid-in capital increase of about KRW 500 billion. So I think that for a securities company that ROE of 10% is going to be difficult for some time. For insurance, I did mention earlier in my presentation that we are trying to acquire this insurance company without paying capital increase. And I think that, that will contribute significantly to group's ROE. The capital is going to stay the same and the numerator will increase. And therefore, I think that ROE 10% or more is going to be easily attained. So overall, for banking and insurance, 10% is quite achievable. For a securities company is going to be quite challenging. But overall, I think that if you take into consideration the offset between the two, by the end of this year, we will have overall ROE of about 10%.

We will move on to the next question. Next question is from Mr. Seol from SK Securities.

I have 2 questions. So first is about Page 8 in the Value-up program we have the CET1 ratio and you have stress buffer max 2.5% bottom left of the chart. Has this been confirmed? And if this is 2.5% or below 2.5%, what would be the CET1 ratio considering the stress buffer? And the second question. So by 2025, you have a target of 12.5% CET1 ratio. So I'd like to know in a little bit more detail, what are the strategies and plans you have to achieve this target? So you are considering M&A and other activities? And it cannot have -- you said that it will not have a huge impact on the capital ratios, but I would like to know a little bit more on this topic.

Yes, thank you for the question. Your first question was about stress buffer, and it's maximum 2.5%. Currently, the financial authorities are conducting simulations and I think it will be much lower than 2.5%. So the maximum can go up to 2.5%. The number hasn't been finalized yet, but we believe it will be much lower. Second question was 12.1% (sic) [ 12.5% ] CET1 ratio, how we can achieve this. So before -- so 12.04% was as of June this year. And we included in the Value-Up Plan that by 2024 year-end, it will be above 12.2%. So we need to get to 12.2% first and we are making multifaceted efforts. First, we are improving the RWA computation process, and we are managing PI and equity investments and other high-risk assets. And then we have the business plan, and we are overachieving the business plan. We are also in the process of developing other options. As you all know, if we acquire insurance company, so this is still based on assumptions because it has not been finalized yet. But if we acquire insurance company, there can be other options that we can take as well. And if the exchange rate stabilizes, there can be additional improvements to the capital ratios. In particular, in Q3 and year-end performance, I think we will be able to share more visible improvements in the capital ratios later half of this year. And RORWA improvement asset growth, we are looking into mostly faceted ways to get to 12.5% before the year-end of 2025. So like I mentioned earlier, if the exchange rates go down, we will be able to achieve this target earlier than scheduled. So [ KRW 10 ] is around 3 bps. If you look at the exchange rate, sensitivity of the capital ratios and so depending on the movement of the exchange rate, we can maybe even achieve close to 13% CET1 ratio.

Moving on to the next question. This question is going to be asked by Mr. Kim from Kyobo Securities.

I'm Kim Ji-Young from Kyobo Securities. And also, I'd like to appreciate your detailed explanation on the Value-Up Program. I have a question about your nonbanking subsidiaries. As it was [indiscernible] explained, the Woori Investment and Securities will be launched coming August. And if you think about it, I think that you will be honoring your commitments in a way throughout this year. You have capital and assets. And if you take those into consideration with regard to securities and investment company, do you plan to do additional M&As? And my second question has to do with the comment you made during your presentation, you did mention, however, you are working to acquire an insurance company. And you mentioned how a paid-in capital increase is not going to be considered. If that is the case, how do you plan to procure funds?

Yes. Thank you very much for the question. Give us time so that we can prepare answers.

First of all, I would like to take your question on the securities company. So Korea POS Securities and Woori Investment Company merging is our primary focus and additional M&A specialty securities company is not something that we're considering at the moment. We do see that [indiscernible] securities is out in the market. However, that is not something that we are considering at the moment as our acquisition target. Securities and also license are both held by this securities company. And we believe that it has a full competency. So we will primarily focus on providing all the support necessary so that Woori Investment Securities can have competitiveness. Yesterday, we got the final regulators' approval. So we are planning to launch the securities company coming August, also [ MGS ] the corporate culture. We are currently working on the organizational culture. And in order to create synergies amongst the subsidiaries mid to long term, yes, we can consider additional M&A but again, I would like to mention that our primary focus at this point in time is growing the competitiveness of this Woori Investment Securities company. With regard to insurance companies, I think that you will remember, but we did consider acquiring a life insurance company, but as was disclosed, we decided not to acquire. And of course, depending on how the deal goes on, it could differ. We are currently reviewing our -- having due diligence on a target. And depending on the results, I believe that we will have to wait and see, but we don't plan to do any life insurance acquisition for the time being. And we believe that group ROE can be improved and also shareholder return can intense with the M&As that we have ongoing at the moment. As for your second question regarding trading capital increase. Woori Financial Group's stock price is significantly undervalued compared to our peers. And we believe that the reasons are as follows: there are uncertainties related to M&A and also capital ratio decline concerns and also paid-in capital increase possibility. For these reasons, we believe that we are undervalued. We are fully cognizant of these concerns. We -- if you think about the securities company that we are currently considering, the asset base is quite small and so it has fairly any impact on our capital ratio. And the insurance company, the material investment, it is based on the BIS considered as a material investment. So within 10% of the total capital, the 20% -- 50% of the amount of the investment is considered to be RWA. We believe that the bargain purchase gain can be achieved and if that is the case, the impact on our capital ratio will be minimal, and we can do the M&A with our capital paid-in capital increase. Again, after the due diligence, the purchasing price will be decided. But again, we will not be overpaying that could burden our capital ratio.