Woori Bank: Interest Income Provides Firm Downside Support

About: Woori Finl Grp Shs Sponsored American Depositary Receipt When Issued Repr 3 Shs (WF.W-OLD)
by: Hyundai Motor Investment & Securities

4Q18 net income of KRW115.8bn, missing consensus of KRW173.7bn.

Core income up 8.4% YoY and 0.5% QoQ.

Maintain BUY and target price of KRW24,000.

Investment highlights

Woori Bank (WF.W-OLD) reported 4Q18 net income of KRW115.8bn, missing the consensus of KRW173.7bn. This was due to a one-off cost of KRW335bn. Core income (interest plus commissions) rose 8.4% YoY and 0.5% QoQ. NIM (net interest margin) slipped by 1bp QoQ, due to a higher funding cost burden caused by an increase in term deposits. Meanwhile, the loan-to-deposit ratio improved by 2.1%p QoQ to 96%. Loans increased 2.1% QoQ, resulting in double-digit growth in net interest income (+10% YoY). Non-interest income slipped 2.4% QoQ thanks to a considerable increase in gains from securities valuation and gains from loans receivable valuation/sales, which helped offset lower commission income (-5.1% QoQ). For the full year, however, commission income rose 4.8% YoY.

The credit cost ratio improved by 4bps YoY to 44bps. A sharp increase on a QoQ basis stems from massive provisioning, for Hanjin Heavy Industries (about KRW100bn) and IFRS9 (International Financial Reporting Standards 9)stage 9 (KRW35bn). Without this, the credit cost ratio would have come to 22bps. Despite an interest rate cut and a decline in none-interest income in the quarter, interest income stood firm. We believe earnings will continue to grow in 2019. We maintain BUY and our target price of KRW24,000.

Major issues and earnings outlook

Even assuming the 2018 dividend propensity stays flat YoY at 26.7%, Woori pays a handsome DPS (dividend per share) of KRW800, which translates to a yield of 5.4%. For 2019, management guides for: 1) a flat or stronger NIM; 2) loan growth of 4-5%; 3) CIR (cost:income ratio) at the lower 50% level; and 4) a credit cost ratio of 25bps. We believe the bank’s plan as it prepares for a holding company structure is to first expand the areas that do not require as much capital as others (e.g., asset management, capital, real estate trust) and then strengthen its non-banking portfolio in the mid to long term including insurance and securities. The CET1 (common equity Tier 1)ratio is expected to fall temporarily due to the introduction of a standardized approach as the company turns into a holding structure. However, we believe an internal ratings based approach (IRB) will be re-introduced in timely manner, and will not hurt the company’s 2019 dividend policy and growth strategies. For our target price, we applied 0.80x target P/B to 2019F BPS (COE 14.1%, ROE 11.3%).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Hyundai Motor Company is a passive shareholder in our bank.