Woori Financial Group Inc. (NYSE:WF) Q4 2022 Earnings Call Transcript

Woori Financial Group Inc. (NYSE:WF) Q4 2022 Earnings Call Transcript February 8, 2023

Unidentified Company Representative: Good afternoon. I am , Head of IR at Woori Financial Group and I will be moderating the conference call from this quarter. Let me first begin by thanking everyone for taking time to participate in this earnings call for Woori Financial Group. On today’s call, we have President, Chun Sang-Wook, who also oversees the Group IR function; Group CRO, Jung Seok-Young; Group CFO, Lee Sung-Wook; and Group CDO, Ouk Il-Jin. Today’s call will start with a presentation from President Chun Sang-Wook on the earnings highlights. After which, we will have a presentation on the group’s capital management and shareholder return policies. After that, we will have the Q&A session. Please note that this call is being simultaneously interpreted for overseas investors. With that, let us begin the earnings presentation for Woori Financial Group for 2022.

Sang-Wook Chun: Good afternoon. This is Woori Financial Group President, Chun Sang-Wook. I will now present the fiscal year 2022 performance of the group. Please turn to Page 3 of the material that is available on our website. First, let me discuss the net income. For the full year of 2022, Woori Financial Group’s net income was KRW3,169 billion. This is a 33.7% increase year-over-year. This healthy performance is the result of stronger profit generation capabilities, stable management of our and cost control efforts. For the fourth quarter of 2022 alone, our net income was KRW508 billion. Next moving on to net operating revenue. The 2022 group net operating revenue was KRW9,846 billion, an increase of 18% Y-o-Y. Net interest income was KRW8,697 billion, while non-interest income was KRW1,149 billion.

Due to efforts to improve our profit structure and provided by IR benchmark rate, group interest income grew consistently quarter-over-quarter. In addition, despite market uncertainties, non-interest income showed solid performance driven by core fee income as our subsidiaries focused on their core operations. Moving on to expenses like SG&A and credit costs. The Group’s 2022 SG&A was KRW4,535 billion, representing an increase of 9.3% Y-o-Y, but the cost income ratio was 44.4%, which is a 3.1% point decrease versus the previous year. Groupwide efforts to control costs have been leading to the improvement in our cost income ratio. In spite of concerns of an economic recession, we have proven our stable risk management capabilities. The Group’s 2022 credit cost was KRW848 billion and the credit cost ratio was 0.25%.

Next let me discuss our dividends. Today, the BOD of Woori Financial Group in light of wide range of factors, including the 2022 financial performance and the Group’s mid-term plan decided and disclosed a per share dividend of 2022 of KRW1,131 per share, including the already paid interim dividend of KRW151. The Group has been improving a wide range of shareholder return policies in order to strengthen our shareholder value. On the Group capital allocation policy and midterm shareholder return policy, the group CFO, Lee Sung-Wook, will explain the details after I have discussed the earnings performance. Now let me go into more detail about the performance by each of our business lines or areas and please turn to Page 4. First, let me discuss our interest income and net interest margin.

For our 2022 group net interest income, it grew 24.5% year-over-year to come in at KRW8, 697 billion. In addition, the bank’s NIM for the full year was 1.59% showing a 22 basis point increase versus the previous year and the growth in NIM has been maintained in the fourth quarter. In 2023, SBLK is expected to end its rate hikes this year, we are planning to continue efforts to improve our profit structure. Next let me go over our asset growth and our loan portfolio. Woori Bank’s loans as of 2022 totaled KRW296 trillion, which is a 2.6% level higher than last year, due to rising rates and a decline in housing transaction volumes, retail loans posted a 3.6% decrease or KRW134 trillion as of 2022. On the other hand, for corporate loans, it continues to show a strong growth increasing 7.6% Y-o-Y to KRW158 trillion.

As economic uncertainties grow, we believe it is important to focus on profitable performance. Therefore, the group is planning to continue to maintain a prime asset ratio of 85% plus, which is one of the highest in the industry while also faithfully conducting its role in supplying liquidity in line with economic conditions. Next let me move over to the group’s non-interest income. Group non-interest income recorded KRW1,149 billion. One-off factors due to rising interest rates and exchange rate movements occurred, resulting in a decrease in foreign exchange and marketable securities related profits. However, our full synergies generated across the group led by the Asset Trust and Financial Capital business resulted in core fee income growth of 16.2% Y-o-Y.

In 2023, again, we plan to continue to improve our profit generation capabilities focusing on core fee generation. Next let me talk about expenses and capital adequacy. Please turn to Page 5. Next is on the group’s SG&A expenses. In 2022, the group’s SG&A expenses increased 9.3% year-over-year to KRW4,535 billion, and the cost-to-income ratio stood at 44.4%. Although some one-off factors such as early retirement costs in the fourth quarter was reflected in the figure, considering the group’s annual target limit of 40%, it was managed at a stable level. As inflationary pressure is rising, Woori Financial Group will actively manage SG&A expenses by streamlining sales channels but will continue to make bold investments in future growth resources such as digital domain.

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Moving on to credit costs. In 2022, the group’s credit cost was KRW848 billion and the credit cost ratio was 25 BP. In preparation for a possible economic recession, adjustments were made to the future economic outlook, resulting in additional provisions reflected in the figure. Excluding one-off provisions, the current credit cost ratio stands at 20 BP still managed at a stable level. Due to the recent hikes in interest rates and sluggish real estate markets, concerns over the asset quality of related loans such as real estate PF are increasing. Accordingly, Woori Financial Group is further strengthening monitoring by individual borrower and project. As uncertainty at home and abroad is expected to continue in 2023, the group, based on the risk focused sales culture well established within plans to concentrate its capabilities on asset-quality management.

Let me now elaborate on capital adequacy and dividends. As of the end of 2022, the group’s expected common stock ratio, or CET1 ratio is 11.5%, up 0.1 percentage point from its last year-end. Due to a surge in the exchange rate in the second half of the year, risk weighted assets temporarily increased, but this was a result of solid profit growth and asset risk weighted asset management in consideration of economic conditions. The past 2022 was a year in which we upgraded our ability to generate profits and manage risk despite macroeconomic uncertainties. In 2023, Woori Financial Group will continue its efforts to improve profitability, but also focus on risk management to respond to factors of financial market instability, expanded protection, rights and interest of financial consumers, as well as actually carry out various social contribution activities.

This concludes the presentation on Woori Financial Group’s earnings for the year 2022. Next, Deputy President, Lee Sung-Wook, Group CFO, will give a presentation on group’s capital management policy and direction of our shareholder return policy.

Sung-Wook Lee: Good afternoon. I am the group’s CFO, Deputy President Lee Sung-Wook of Woori Financial Group. Based on the recent favorable performance forecast of major financial holding companies, we are witnessing rising demand and expectations for increased shareholder return in the market. Therefore, I would like to take this opportunity to elaborate in detail the group’s capital management policy and the direction of our shareholder return policy that we have been preparing through continuous engagement and communication with the market. Please refer to Page 19. For your reference, this material was devised based on the discussion at our Board of Director proceedings. As President Chun Sang-Wook also mentioned, the 2022 year-end dividend is KRW981 per share and when including the interim dividend of KRW151, it is KRW1,131 with an annual dividend payout ratio of 26%.

This is a KRW231 or 25.6% increase from last year’s dividend of KRW901 per share and the dividend yield is at 8.8%, which is expected to be the highest amongst our competitors. The group has been continuously communicating with the market about actively promoting various shareholder return policies within the scope of maintaining capital adequacy. And this time around, we would like to definitize our approach to base our policy on CET1 ratio and push ahead with from this year and onwards, a shareholder return policy that takes into account the total shareholder return rate that includes dividends and share buyback and cancellation. The current regulatory requirement for common stock ratio was 8.0%. And when the countercyclical buffer of 0% is imposed at the maximum of 2.5%, it is 10.5%.

Our provisional common stock ratio at the end of last year was 11.5%, which is significantly higher than the regulatory requirement. However, considering the possibility of rapid changes in the financial environment and deploy the role as a stable funding source we set our CET1 target at 12% and plan to meet the target early on. To this end, based on the maximum regulatory requirement of 10.5% and our CET1 target of 12%, the group’s asset growth rate in consideration of the nominal GDP growth rate outlook will be managed at 4.5% levels. And within this range, we will carry out shareholder returns at a total shareholder return rate of 30%, which includes dividends and share buyback and cancellation. Since the dividend payout ratio in 2022 was approximately 26%, this means that a share buyback and cancellation of 4% will take place within 2023.

The share buyback and cancellation of 2023 will be announced upon resolution by the Board of Directors meeting sometime after the second quarter. Even if the total shareholder return rate is maintained at the 30% level, with the future increase in the group’s net income and the effect coming from the share buyback and cancellation kicks in, we expect stock related indicators such as dividend per share and earnings per share to showcase a continuous upward trajectory. In the future, if the common stock ratio as of year-end exceeds 12%, we will review our mid to long-term shareholder return policy to gear towards expanding shareholder returns and share our thoughts with the market. Furthermore, in order to improve the predictability of dividends and to regularize the payout, we will pursue amending the Articles of Incorporation for quarterly dividends at the General Shareholders’ Meeting in March.

This concludes the presentation on the main contents of Woori Financial Group’s capital management and shareholder return policy. In the future, as well, Woori Financial Group will continue to engage and communicate with the market on our key initiatives. Thank you very much.

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Q&A Session

Operator: So now we will start the Q&A session. So the first question will be coming from Daishin Securities. It will be Mr. Park Hye-jin. So please go ahead with your question.

Park Hye-jin: So yes, this is Park Hye-jin from Daishin Securities. There are two questions that I would like to ask you. The first question is with regards — first, I would like to thank you for your explanation about your capital management policy. If you look at the earnings calls of other companies, as you have just mentioned, for the CET1 ratio for the buffer, I think that was 150 basis points to 200 basis points that they are all taking into consideration. So in terms of the CET1 target, if we exceed more than 12% on the CET1 target, when do you think that a natural timing would be? And the second question is that if we look at 2023 in terms of your net interest margin outlook, what would that be?

Unidentified Company Representative: So thank you for your question. And maybe if you could give us a few couple of — a short period of time while we prepare for your questions.

Sung-Wook Lee: Yes. This is the CFO, Lee Sung-Wook. And in the fourth quarter, if you look at our capital adequacy versus the end of September, we actually had an above €“ that was 63 (ph) basis points, and that means that there was an impact of KRW170 from the actual exchange rate difference and also the increase of risk weighted assets as the changes in the interest rate and we took active risk management capabilities. So as a result of that, for the capital adequacy ratio in itself, there was a significant improvement versus September. So going forward, when will we be able to reach 12% in the CET1 ratio? As we have mentioned during our dividend policy, we do think that on asset growth, that would be around 4% to 5%. So that means that there will be around 20 basis points to 30 basis points improvements taking place next year.

So as a result of that, we do expect that, of course, there can be some volatility within the market environment and we don’t know what will happen going forward. But we do think that as of the end of 2024, that is the timing at which we will be able to achieve our target level. In terms of our NIM outlook and maybe if I could talk to that question also. So if you look at 2022, there was a continuous increase in the interest rate. And so as a result of that, there was an increase of around 1.59% in the NIM, which is around 20 basis points higher than that. And if we look at the situation during the fourth quarter, it was at 1.68%, which was a 6 basis point increase Q-o-Q. So we do think that going forward, if you look at our expectations in terms of the monetary policy trend, it is slowing down and the long-term market rate has also started to fall on.

In addition to that, if we look at the — there is a lot of core deposits that have been moving over to other products. So as a result of that, we do think that there are — the one question (ph) in our margins. So if you look at October during the conference call at that time, we did said that the 1.7% target or above would be what we would be able to achieve for this year. But if we look at the full year, we do think that if, as mentioned before, the slowdown in monetary policy, also the core deposits slowing down and all things taken into consideration, we think that we will be at the upper range of the 1.6% level in terms of our year-end performance. Thank you very much.

Operator: Yes. Thank you very much. So the next question will be coming from NH Securities, it will be Jung Jun-Sup. So please go ahead with your question.