WFG
The author is an analyst of NH Investment & Securities. He can be reached at junsup@nhqv.com -- Ed.
While internal and external environments may be unfavorable, WFG shares are trading at a historic low. We note that: 1) the firm’s DY is above 10%; and 2) share buyback is expected.
Conditions may be difficult, but shares at historic low
We cut our TP on WFG from W18,000 to W16,000, in line with: 1) adjustment of our discount rate (60% → 65%) to reflect rising uncertainty in the banking industry (including macro indicators and regulations); and 2) a reduction in earnings estimates, considering falling market rates and higher delinquency rates. Our TP assumes a target P/B of 0.39x and 2023E BPS of W39,981.
We reiterate a Buy rating, noting that the shares are trading at a rock-bottom level (2023E P/B of 0.28x). Assuming 2023E DPS of W1,150 (DPR of 25.4%), DY reaches 10.2%. When considering that share buyback and cancellation is expected this year, the target shareholder return rate of 30% is achievable.
Stagnant interest income is inevitable; securing non-interest income to be engine for additional growth
Affected by slowing loan growth, falling market interest rates, and tighter regulations, financial holding companies are likely to see a decline in both net interest margin (NIM) and interest income this year. At WFG, NIM is likely to decline q-q throughout 2023, with annual NIM (group basis) forecast to arrive at 1.85%, showing improvement of only 1bp y-y.
As WFG has a weaker non-banking portfolio than peers, acquiring non-interest income has become increasingly important. In other words, this year, WFG will likely need a significant non-bank M&A to secure non-interest income while maintaining a CET1 ratio of over 10.5%. Although challenging, if WFG succeeds in this mission, it would not only acquire a strong growth engine but also warrant share price re-rating.
1Q23E NP of W864bn, +3% y-y
We expect WFG to report 1Q23 NP (excluding minority interest) of W864bn, matching consensus. NIM likely declined by 3~4bp q-q, and loan growth likely proved stagnant amid sluggish household and corporate borrowing. We estimate moderate levels of non-interest income and deposits, assuming a rise in delinquencies at the credit card and capital domains.