Half-year Dividend Expected at End-July
The author is an analyst of Shinhan Investment Corp. He can be reached at sh.kim@shinhan.com. -- Ed.
2Q21 NP at all-time high of KRW752.6bn (+429% YoY, +12.8% QoQ)
Woori Financial Group reported net profit of controlling interests of KRW752.6bn for 2Q21, exceeding the consensus estimate by nearly 20% and outstripping the previous record set in 1Q21. Improvement in fundamentals was seen across the board. KRW-denominated loans grew 4.2% so far this year, already achieving the annual target. The bank’s net interest margin (NIM) rose 2bp QoQ thanks to the increase in low-cost deposits and low funding rates as expected. The decline in lending rates slowed down to 3bp QoQ, raising expectations for higher return on loans in 2H21. Non-interest income stayed solid.
The SG&A ratio stood at 45.9% to date, coming in lower than the average 50%. The group’s digital drive is making good progress. A reversal of about KRW60bn in provisions was reported due to improvement in shipbuilding and ocean shipping market conditions (Daewoo Shipbuilding & Marine Engineering, HMM, etc.). Even without the reversal, ordinary loan loss provisions stabilized downward in the KRW120bn range, lower than the previous KRW150bn levels.
Provision reversal and equity method gains from K Bank in 2H21
NIM is forecast to rise 2bp QoQ in 3Q, continuing on an uptrend. Among top-tier banks, the group has the highest portion of loans (33.5%) linked to CD rates and KORIBOR (Korea Interbank Offered Rates) and thus stands to enjoy strong NIM growth upon a benchmark interest rate hike.
We expect a reversal of roughly KRW100bn in provisions in the second half given earnings improvement at Kumho Tire, whose loans are currently classified as ‘precautionary.’ Equity method gains from K Bank (12.5% stake) are estimated to be around KRW70bn in 3Q, owing to an increase in net asset value. As a result, the group’s net profit of controlling interests is projected to exceed KRW700bn once again in 3Q.
Half-year dividend expected at end-July; target price raised by 11%
Woori Financial Group is likely to pay its first interim dividend since converting to a financial holding company structure. We expect full-fledged adoption of the internal ratings-based (IRB) approach before the end of September. The group’s equity tier-1 (CET1) ratio should reach 11.5%, surpassing the minimum10.5% requirement upon the adoption. Meanwhile, the possibility of Korea Depository Insurance Corporation selling its remaining stake in the group (15.3%) is near zero at current share price levels (vs. break-even price of KRW12,200) given the government’s goal of maximizing public fund retrieval. We raise our target price for Woori Financial Group by 11% based on the upward revision of our annual earnings forecasts.