Woori Financial Group Inc (WF) 2022 Q3 法說會逐字稿

Good afternoon. I am Lee Jung-Soo, Head of IR at Woori Financial Group. Let me begin by first thanking everyone for taking time to participate in this earnings conference call for the Woori Financial Group.

On today's call, we have the Woori Financial Group Chairman, Sohn Tae-Seung; President, Chun Sang-Wook, responsible for the Group IR; Group CRO, Jung Seok-Young; Group CSO and ESG Officer, Park Jong-Il; and Group CFO, Lee Sung-Wook on the call today.

For today's call, Group Chairman, Sohn Tae-Seung will deliver his remarks, after which we will go into the presentation and then open the Q&A session. In addition, please note that for our overseas investors, we have simultaneous interpretation that is being provided.

Now let me hand it over to the Group Chairman, Sohn Tae-Seung for his remarks.

Good afternoon. This is Woori Financial Group Chairman, Sohn Tae-Seung. Let me first begin by extending my sincere gratitude to everyone who is on this call for the 2022 Q3 earnings conference call. Before going into the presentation and the Q&A, I would like to take this opportunity to briefly go over the third quarter highlights and also future business direction.

The group's 2022 Q3 year-to-date net profit totaled KRW2,661.7 billion, which includes the third-quarter net profit of KRW899.8 billion. This is a year-over-year increase of 21.1%. Moreover, we have already exceeded last year's full-year performance in only three quarters and the third-quarter YTD performance is the strongest level in our history.

This performance was driven by an increase in our non-bank revenue as our portfolio expanded and by stronger profit generation capabilities. In addition, in terms of third quarter asset quality, credit cost was 0.24% and the delinquency rate 0.22%, representing the strongest asset quality levels within the industry.

As inflation in Korea and abroad leads to deeper concerns about consumer price increases, pre-emptive efforts to improve business efficiency at the group has enabled the group in the third quarter to post the cost income ratio of 40.5%, an improvement of 4.7% year over year. We only have around two months left in 2022. We will continue our efforts to the end of this year to end our business successfully and prepare for 2023.

In 2023, we expect uncertain economic conditions to continue globally by strengthening our attention to the bottom line, the Woori Financial Group wants to be in a position to take a big leap forward when economic conditions subside. Thus, it is building its 2023 business plan with a focus on further strengthening our fundamental competencies.

Once the business plan is finalized and after discussion at the BOD, we will make sure to share our plans in more detail. The Woori Financial Group will continue efforts to broaden its portfolio and improve profitability through better efficiency. Moreover, we are also planning to highlight the social role of finance by engaging in ESG management and social contribution activities. Digital initiatives will also continue to enhance competitiveness.

Through these efforts and based on the strong YTD performance, we will continue efforts to enhance our corporate value. I recently have had many opportunities to meet with investors in Korea and abroad. Amid an uncertain macro environment, I was able to confirm investor expectations about the performance and future of the group. I plan to more actively engage with our investors and will try to reflect the market's diverse views in our operations as much as possible.

So let me wrap up here and next for the details of our financial performance, President, Chun Sang-Wook will now go through the presentation. Thank you.

Good afternoon. This is President Chun Sang-Wook, and I am also responsible for the group's IR activities. Let me go over the third-quarter 2022 business performance of the group, and please refer to page 3 of the presentation available on our website.

First, let me discuss the group's net income. On a 2022 third-quarter year-to-date basis, the group's accumulative net income was up 21.1% year over year at KRW2,661.7 billion. This is due to our stronger profit generation capabilities, stable asset soundness management, and cost efficiency efforts. In addition, our third quarter only net income was KRW899.8 billion.

Next, let me move on to our net operating revenue. The third quarter YTD accumulative net operating revenue was KRW7,263 billion, an increase of 17.5% year over year. Net interest income was KRW6,348 billion, while non-interest income was KRW915 billion. Though funding costs has increased, the group's interest income has continued to grow due to our solid asset growth by core subsidiaries.

On the non-interest income side, even though there were some non-cash valuation losses due to the movement in our FX rate, stronger synergies were created across affiliates resulting in core fees driving solid performance. For the third quarter only net operating revenue, it was KRW2,377 billion, up by 11.3% year over year.

Next is on costs, including group SG&A expenses and credit cost. YTD group SG&A edged up 5.2% year on year to KRW2.938 trillion [sic - slide 5, "KRW2,938 billion"]. But the C/I ratio decreased 4.7% year on year to record 40.5%. This is ascribable to Woori Financial Group's group-wide pre-emptive cost optimization efforts. Meanwhile, YTD group credit cost recorded KRW622 billion, and credit cost ratio posted 0.24%, demonstrating the group's stable risk management capabilities.

Next, I will elaborate on group business results in more detail. Please refer to page 4 of the materials. First is our group interest income and NIM or NIM. YTD group net interest income jumped 24.7% year on year to KRW6.348 trillion (sic - slide 7, "KRW6,348 billion"). Q3 bank NIM climbed 4 basis points quarter on quarter to record 1.62%, while group NIM including Woori Card increased 3 basis points quarter on quarter to post 1.86%. This is thanks to a sustained growth in corporate lending and loan repricing effect despite policy rate hikes and subsequent increase in funding costs.

Next is asset growth and lending. As of end of September 2022, bank lending stood at KRW301 trillion, up 4.5% compared to end of 2021. Household loans dropped 3% compared to the end of last year and recorded KRW135 trillion due to rising interest rates, including housing market among other factors.

Corporate loans, on the other hand, rose 11% compared to the end of the previous year to record KRW163 trillion, back by 8.9% increase in Korean won denominated loans, coupled with a rise in FX rates. With looming macroeconomic uncertainties, we believe it is important to ensure quality management. In this slide, Woori Financial Group will focus on maintaining the current prime asset ratio of 89.3% as of September 2022 going forward.

Next is group non-interest income. YTD group non-interest income recorded KRW915 billion, one-off factors including soaring FX rates and interest rates are depressed Q3 non-interest income compared to the previous quarter. Even so, fees and commissions and other income sources still remain robust. Woori Financial Group will leverage inter-affiliate synergies and generate greater core fee income to respond to macroeconomic volatilities.

Next, I will walk you through costs and capital adequacy. Please turn to page 5 of your material. Group SG&A is under stable management of within the yearly group C/I ratio target of 50%. Cost management is high on our agenda due to unrelenting global inflation. In the face of rising inflation pressures and increasing concerns over cost management, Woori Financial Group will beef up its ongoing pre-emptive cost optimization efforts while making sustained investments in digital and IT segments to fuel future growth.

Next is credit cost. YTD credit -- group credit cost recorded KRW622 billion. The figure includes an additional provision of around KRW130 billion booked in accordance with the updated future economic outlook from Q2. Meanwhile, Q3 group credit cost stood at KRW125 billion, kept at a stable level with a normalized credit cost ratio of 11 basis points. There is a growing interest in asset quality management in light of recent macroeconomic changes.

Woori Financial Group has settled risk-centered business practices and also improved its asset portfolio to substantially lower. the risk of having disproportionate exposure to certain industries or borrowers. We'll continue to focus on asset quality management as there are lingering uncertainties both at home and abroad.

Finally, I will brief you on capital adequacy. As of September -- late September, group CET1 ratio stood at 10.9%. This is primarily due to an increase in the RWAs among foreign currency assets following FX rate hike despite strong retained earnings, but by modest net income. But this is only temporary and Woori Financial Group will stay committed to expand income to raise capital ratio. We'll also proactively manage risk-weighted assets, so as to keep them within a stable level.

With that, I would like to conclude Woori Financial Group's business report for Q3. Thank you for your attention.

(Operator Instructions) Jeong Tae-Joon, Yuanta Securities.

Yes, good afternoon. I am Jeong Tae-Joon. So thank you for your very strong performance.

There are two questions that I would like to ask you. The first question is that in terms of the margins that you see there continues to be an improvement. But in terms of the level, it seems to be slowing down. So what is your outlook on that area? And the second is that if there are any one-off events that took place in the third quarter, please elaborate what they were.

So Mr. Jeong, could you again verify or recap what the second question was? We weren't able to hear.

So the question is that during the quarter, if you had any one-off events or one-off elements, could you please elaborate what they were?

Yes, Mr. Jeong. So you first asked the question about the overall margin outlook that we have going forward. And the second question would be in terms of the one-off elements or one-off factors that we had had. So if you could just wait while we are preparing the answers.

Yes, I am the CFO, Lee Sung-Wook and maybe I can address the questions one by one. So first to talk about the NIM outlook that we have to take your questions in order. So if you look at the third quarter NIM levels, it would be 1.62%. So on a YoY -- QoQ basis, it was a 0.04% improvement. And if you look at it in September, September was the highest level because it was around the mid-1.6% level. So if we go into the year end, in terms of expectations, we do think that it will be at the upper level of 1.6%.

So as a result of that, we do think that there -- we would hope that NIM would expand more rapidly. But because there is an economic slowdown, and also we do think that in the core areas there may be a slowdown there. And also as the loan deposit spread continues to be disclosed, we do think that there will be some issues related to that.

So we do think that the overall growth going forward will be too moderate. So at the end of the year, we think that we will be at the upper band of the 1.6% and then going into next year that it will be at around 1.7%. So we do think that there will be a 1 point -- 0.1% point uplift from what we see this year.

To talk about third quarter, about one-off factors. The first is that in terms of the FX rate changes that we have seen, we did have a non-cash valuation loss of around 900 -- KRW92 billion. And if we take that into consideration, there was around about KRW70 billion in terms. So if we take that out of the overall equation, that the overall net income level would be around KRW970 billion. So that would be the overall impact that we had from the one-off FX rate.

[Jeong Joon-Seok], NH Securities.

Hello, I am from NH. My name is Jeong. Thank you very much for the opportunity to ask a question. I have a question about CET1 ratio. So Q3 you recorded 10.9%, so it's not that high. And of course, you talked about the fixed rates, and we understand the level, but I believe that there isn't a sufficient buffer to sufficiently high level. So if FX rates don't go as we wish, how do you plan to further manage the capital ratio? And also with regard to capital ratio, I understand that it's going to be difficult to have M&A. So is there any M&A strategy changes going forward? Thank you. --

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the company sponsoring this event.