M&As to Drive Further Top-line Growth Going Forward
The author is an analyst of Shinhan Investment Corp. He can be reached at sh.kim@shinhan.com. -- Ed.
1Q21 preview: NP to beat consensus at KRW603.3bn (+16% YoY)
Woori Financial Group’s net profit of controlling interest is expected to have climbed 16% YoY to KRW603.3bn in 1Q21, exceeding the current consensus estimate of KRW488.4bn by over 20%. Net interest margin (NIM) likely improved by more than 5bp QoQ to 1.34% on the decline in funding rates. Total loans should have increased 2.3% QoQ, with strong growth driven by corporate loans to SMEs and small office home office (SOHO) businesses.
Earnings power on the non-interest side, seen as a major weak point of Woori Financial Group in the past, is set to visibly improve going forward. Notable improvement in 1Q21 was likely driven by: 1) higher earnings contribution from commission income following the inclusion of Woori Financial Capital (formerly Aju Capital) as a consolidated subsidiary (74% stake) in 4Q20; and 2) increase in securities-related revenue at the bank. We believe loan soundness was solid in 1Q21, and expect additional costs booked for the mismanagement of private equity funds to remain at KRW20bn-30bn levels.
IRB adoption and M&A to open up opportunities for further growth
Within 2021, Woori Financial Group is set to receive additional approval on the adoption of the internal ratings-based (IRB) approach at subsidiaries subject to external audits. The group’s common equity tier-1 (CET1) ratio should rise by as much as 140bp to 11.4% upon full-fledged IRB adoption in 2H21, and will likely continue to improve going forward. The increased buffer in capital ratio will allow the group to pursue top-line growth opportunities and normalize shareholder return. We see ample upside potential for non-banking profits, with possible acquisition of a brokerage firm to lead to growth in commission income and operational synergy with the existing investment banking business going forward.
Excessive share price gap with major peers to narrow
Woori Financial Group shares have gained just 9% since the start of the year, excessively underperforming the over-20% rally seen for KB Financial Group and Hana Financial Group. We expect the share price gap with major financial holding group peers to narrow, with: 1) 1Q21 results expected to show stronger improvement in earnings than peers; 2) projections for full-year profit growth at the highest level in the sector; 3) capital adequacy and shareholder return set to improve upon full IRB approval in 3Q21; and 4) M&As to drive further top-line growth going forward. Our target price for Woori Financial Group is raised by 12.5% to KRW13,500 from KRW12,000 in reflection of upward revised earnings forecasts.