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Presentation

Woori Financial Group Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Han Hong Sung: Good afternoon. I am Han Hong Sung, Head of IR at Woori Financial Group. Let me first begin by thanking everyone for taking time to participate on this Earnings Call for Woori Financial Group. On today’s call, we have Group’s CFO, Lee Sung-Wook; Group CRO, Park Jang-Geun; and Group CDO, Ouk Il-Jin, participating. For today’s call, the CFO, Lee Sung-Wook, will present the earnings performance and Woori Financial Group’s capital management plan, after which the CRO, Park Jang-Geun, will walk you through an overview of the Group’s risk management efforts; and at the end, we will have a Q&A session. In addition, please note that today’s call is being interpreted simultaneously for our overseas investors. Now, let us start the presentation of Woori Financial Group 2023 business performance.

Lee Sung-Wook: Good afternoon. I am Lee Sung-Wook, CFO of Woori Financial Group. Let me dive into the 2023 performance of our group. Based on the presentation, which is available on our website, please turn to Page 3. First, let me discuss the Group’s 2023 profit and losses. In 2023, Woori Financial Group’s net income was KRW2,516.7 billion, representing a 19.9% decrease year-over-year. The decline in net income was due to mainly one-off factors such as preemptive provisions by changing the credit cost calculation components, strengthening the loss absorption capabilities of vulnerable areas within the non-bank subsidiaries, and expenses related to corporate and finance programs. Following the steep rise in interest rates, the higher for longer environment has led to increasing concerns by the market on the quality of high risk assets such as real estate project finance and loans to vulnerable borrowers.

We have been focusing on our efforts in the fourth quarter to ensure we preemptively address these market concerns. On the bank side, we adjusted the assumptions that go into our credit cost, such as the LGD and PD values to reflect the future economic outlook. In addition, in the non-bank side, we conducted a comprehensive examination on vulnerable areas to actively set aside provisions, and during the fourth quarter, these activities led to approximately KRW525 billion in additional one-off credit. In addition to actively participate in extending cooperative finance, we approximately KRW170 billion in other operating expenses were recognized in the fourth quarter. When excluding these one-off factors, the Group continues to maintain solid profit generating capabilities.

Based on our enhanced loss absorption capabilities in 2024, we will strengthen our fundamental competitiveness and intergroup synergies to further solidify our performance improvements. Next, let me move on to the expenses including our SG&A and credit cost. The Group’s 2023 Group SG&A was KRW4,443.9 billion. Though inflationary pressure continued, it decreased 1.9% year-over-year. The cost income ratio was 43.5%, which is a 0.9% point decrease versus the previous year, and it has been being maintained at a stable level. On the Group credit cost, including, for the fourth quarter, KRW802.2 billion, for the full year of 2023, the Group provisioned KRW1,880.7 billion, which is around two times higher year-over-year, which we believe represents sufficient loss absorption capabilities.

When excluding the one off factors that we mentioned before related to preemptive risk management, the normalized credit cost ratio is 0.32%. As a result of actively dealing with future uncertainties, the Group MPL ratio is 0.35%, and the MPL coverage ratio, which is an indicator of loss absorption capabilities, is 229%, the highest level to date. Next, let me move on to discuss our capital ratios and dividends. As of the end of 2023, the Group’s CET1 ratio is expected to be 11.9%. This is a result of prudent management on risk weighted assets and is a 0.3% increase versus the end of the previous year. In addition, during the Group BoD meeting today, in consideration of the financial performance and the Group’s mid- to long-term plans, the Board decided on a year-end dividend of KRW641 per share for 2023.

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When including quarterly dividends of KRW361, it becomes KRW1,001 per share. In addition to modernize the dividend policy, the reference date for the 2023 year dividends has been determined to be February 29. When excluding the 100 billion share buyback and cancellation conducted during the year, Woori Financial Group total shareholder return rate is 33.7%, which is a significant increase versus the previous year. After the earnings presentation, I will provide you with additional information on our new capital management policy and mid- to long-term shareholder return policy. Next, let me delve into the performance of each area in more detail. Please refer to Page 4 of the presentation. First is interest income and net interest margin, or NIM.

The Group’s 2023 net interest income totaled KRW8,742.5 billion, similar to the prior year. And in the fourth quarter, the net interest income was KRW2,142.6 billion, a 2% decrease Q-o-Q. Woori Bank’s 2023 NIM was 1.56%, and the group NIM, including the credit card business was 1.82%. The NIM of the bank and the group fell three basis points and two basis points, respectively, versus 2022. Amid a high interest rate environment, the portion of low-cost core deposits increased significantly – decreased significantly, resulting in a continued increase in funding cost, which was one of the main drivers behind the weaker margins. This year, we will be entering a rate-cutting cycle. And thus, we expect the backdrop will be challenging from a profitability perspective.

However, low-cost core deposits have recently recovered and the interest on time deposits is declining. We will continue to focus our efforts on improving our funding cost and defend our margins. Next, let me talk about asset growth and the loan book. The total loans of the bank as of the end of 2023 totaled KRW311 trillion, which is a 5.1% increase year-over-year. On the corporate loan side, the large corporate loan demand was very strong, with high quality SME loan growth, also very solid, leading to corporate loans posting KRW170 trillion, up by 8% Y-o-Y. On the other hand, retail loans was KRW136 trillion, an increase of 1.9% Y-o-Y as growth was driven by real demand mortgage loans due to the effects of the government’s household debt management policy.

This year, the group will diligently execute its role as a liquidity supplier in light of the economic situation. But as uncertainties at home and abroad are still looming large, we are planning to focus our portfolio growth on high quality assets with a consideration of our risk weights to achieve profitable growth. Next, let me talk about the group noninterest income. The group’s 2023 noninterest income was KRW1,094.8 billion, a decrease of 4.7% Y-o-Y. This includes the support we will extend to cooperative finance, and when excluding this amount, non-interest income grew 10% YoY. In addition, core fee income each quarter is recording a mid KRW400 billion level, representing a solid growth trend. As intergroup synergies are realized in full, the fee income contribution of non-bank subsidiaries such as credit card trust and capital business has grown a lot versus the early days of the holding companies.

In 2024, the group is planning to actively pursue HQ sales in the areas of FX and derivatives, and marketable securities and asset management will be focusing on wealth management. The bank will become a leader in the asset management market by creating an upgraded product lineup and portfolio enhancing sales capabilities by increasing the channel specialized in asset management and utilizing its existing robust product risk management system. Next, let me move on to expenses and capital adequacy, please look at Page 5. This is the SG&A. The group’s SG&A in 2023 was KRW4,443.9 billion, and although inflationary pressure continued, the SG&A was down by 1.9% year-over-year. In addition, the cost income ratio recorded 43.5%, a decrease of 0.9 percent point year-over-year, maintaining a three-year continuous and consecutive decline.

Due to consistent efforts to rationalize personnel, labor costs decreased 6.3% YoY, and in addition, even though new subsidiaries like Woori Venture Partners was added, general and administrative cost only grew slightly versus the previous year. As the top line growth will be challenging, we believe it is important to focus on cost management in the current conditions. The group has kept recurring expenses outside of future core businesses flat and while also continuing to rationalize channels and personnel such company-wide cost saving efforts will be strengthened further going forward. Next is credit cost. In 2023, the group’s credit cost was KRW1,880.7 billion for the full year and KRW802.2 billion for the fourth quarter. In the first half of the year, Woori Financial Group executed preemptive provisioning of KRW263 billion, reflecting adjustments to the future economic outlook, and in the fourth quarter, the banking business in consideration of changes in credit cost calculation components such as real estate LGD values, set aside KRW229 billion in preemptive provisions and to enhance loss absorption capacity in vulnerable sectors, the non-banking side added provisions of approximately KRW200 billion.

And when adding the provisioning of KRW96 billion related to Taeyoung E&C, which recently filed for a debt workout, the total of additional credit costs recognized stands at approximately KRW525 billion, putting the group at a stronger position to respond to future economic conditions. As a result, the groups and the bank’s NPL coverage ratios are at record high levels of 229% and 318%, respectively, and the NPL ratio is stably managed at 0.35% and 0.18%. Meanwhile, the group’s credit cost ratio is 0.53%, but excluding the one off factors mentioned – aforementioned, the current credit cost ratio is at 0.32% level. Considering the risk of default in real estate PF loans and the rising delinquency rate in the non-banking side, concerns about the soundness of the market are likely to persist for some time.

However, Woori Financial Group has proactively reexamine the group’s risk factors and strengthened its loss absorbing capacity at an early stage, thereby securing sufficient capacity for future risk management. Going forward, the group based on such risk management capabilities will continue to focus on managing high risk assets such as real estate PF and vulnerable borrower loans. Let me now elaborate on capital adequacy indicators. As of the end of 2023, the group’s common stock ratio is expected to be 11.9%, an increase of 0.3 percentage points from the previous year end. While additional provisions to expand loss absorption capacity and cooperative finance programs resulted in decline in profitability, the aforementioned result was possible due to our strengthened efforts to enhance capital adequacy, including active risk weighted asset management.

As the supervisory authorities measures to strengthen capital regulations such as the imposition of stress buffer capital are scheduled to be implemented in the future, the Group plans to manage its capital ratio at a level above the CET1 ratio of 12%, and we will further strive to improve our capital adequacy through solid financial performance and thorough risk management. Following the update on the financial performance, I would like to take this opportunity to present the Group’s new capital management policy and shareholder return policy. Please refer to Page 6. For your reference, this material was prepared based on what was discussed at the Board of Directors meeting. At last year’s earning call, the Group announced that based on a CET1 ratio of 12%, the total return to shareholders, including dividends and share buyback would be implemented within 30%.

In addition, the Group noted that when the common stock ratio reaches 12%, it will review its mid to long-term shareholder return policy with a view to expanding shareholder return. Last year, Woori Financial Group for the first time since its establishment as a holding company, paid quarterly dividends of KRW181 per share in the second and third quarters and also engaged in the buyback and cancellation of treasury shares worth KRW100 billion. The Group also signed a stock transfer framework agreement with KDIC and resolved related overhang risks. Considering the closing dividend of KRW641 per share announced today, the Group’s dividend payout ratio for 2023 is 29.7% and the total shareholder return is 33.7%. Furthermore, in order to improve the dividend process, the group for its 2023 year-end dividend has set the dividend reference date to February 29 after the dividend amount has been determined, thereby enhancing the predictability of dividends.

This year, in light of strengthened capital regulations and expanded loss absorption capacity, we reset the common stock ratio target to 13%. We will maintain the shareholder return method of combining dividends and treasury stock buyback and cancellation, but will implement more active shareholder return for each common stock ratio tier, and such approach feeds into our reestablished shareholder return policy that focuses on gradually increasing dividend per share and total shareholder return. Considering our current capital ratio, when the group’s CET1 ratio is within 13%, we will gradually increase the TSR or total shareholder return to 35%, and when the CET1 is above 13%, we will pursue a total shareholder return of 35% or more. However, the mid-to-long term TSR target is set at 50%.

In particular for the group’s capital management, we plan to actively manage risk weighted assets by enhancing our portfolio with a focus on low risk, high return quality prime assets and selective asset growth. Based on RoRWA. The recently discussed corporate value program aimed at resolving the undervaluation of the stock market is also expected to greatly contribute to this trend of expanding shareholder return and provide momentum for valuation recovery of value stocks that are undervalued in the market. This year, Woori Financial Group, based on its upgraded profit generating capability and stabilized asset soundness, plans to initiate a full scale earnings turnaround also, so that the profits generated in this way can be more faithfully returned to shareholders.

We will endeavor to implement various shareholder value enhancement measures. By achieving our management plan targets, we will restore our 2024 dividend per share to the level at or above 2022 [ph] levels and continue to further increase in the future. The plan to purchase the 1.2% stake in the company held by KDIC is also currently under discussion to be implemented as soon as possible. And given the current stock price level, this is KRW130 billion, an increase of more than 30% year-on-year in share buyback, and the total amount is to be canceled after the purchase. We will announce the decision as soon as it is finalized. In 2023, the group reviewed its vulnerabilities and focused its efforts to proactively secure the ability to respond to future economic conditions.

These proactive measures resulted in a decline in net income, but this is only temporary. This year, based on our recovered performance, we will continue to improve shareholder value as described earlier and fulfill our social responsibility as a financial institution. Thank you. Next, the group’s CRO, Mr. Park Jang-Geun, will elaborate on the status of the group’s risk management.

Park Jang-Geun: Good afternoon. I am the CRO of Woori Financial Group. I am Park Jang-Geun. Let me present the risk management section in Woori Financial Group’s 2023 annual business performance, please refer to Page 7. First is delinquency rate trend. In the case of Woori Bank, it was 0.26% which was an increase of 0.05 percentage point year-on-year and Woori Card was 1.22% which was up 0.02 percentage point year-on-year. And we’re seeing high interest rates and market instability is continuing on and therefore delinquency rate did increase slightly. However, if you refer to the increase, it is at the lowest level in each relative industry. And let me now move on to the proactive risk management. As you can see here in this graph, in 2023, the annual credit cost was KRW1,881 billion.

Of this amount KRW1,009 billion was of ordinary accruals and KRW872 billion was for preemptive provisioning. And this preemptive credit cost amounts to KRW525 billion in the fourth quarter. In the case of the KRW525 billion it is in response to regular estimates reflecting future economic outlook and adjustments to the loan loss factors including risk management components of LGD. And therefore this is KRW229 billion that was set aside for reserves, and in addition to that KRW96 billion related to the debt workout company and KRW200 billion to strengthen loss absorption capacity in vulnerable sectors such as real estate PF. Next is on NPL coverage ratio and the loan loss provision ratio to total loans. Now, Woori Financial Group as was mentioned has been very much focused on preemptive provisioning and we have been strengthening our loss absorption capacity and the NPL coverage ratio as of the end of fourth quarter 2023 is 229.2%.

And not only in terms of the provisioning but if you refer to the provisioning ratio to total loans, it has been continuously increasing indicating that the other group has been very much proactive in preparing for any insolvency across all loans. On the right, you can refer to the status of the real estate PF loans. The total amount of the group’s real estate PF loans and the PF bridge loans a total of KRW3.4 trillion. Of this we have agency guaranteed loans which is KRW1.3 trillion including the HUG or HUG guarantee. And you can see that it’s – excluding that it’s KRW2 trillion in terms of the outstanding balance. Including the bridge loans and the overall real estate PF we have a total of 200 sites and what we have been doing was in a comprehensive site evaluation to understand the risk as well as any cases of insolvency and we’ve been reviewing the vitality of the sites.

And we have developed and managed the response plans such as adding additional reserves in case of losses. Next, moving on to the CRE in the U.S. With regard to CRE in the U.S., it’s KRW2.9 trillion and syndicate is KRW1.1 trillion loan and the general loans is KRW1.8 trillion. In the case of the general loans, unlike the syndicated loans, it’s true that it consists of small amount loans and the risk is of course diverse. And in the case of the CRE loans, you can see that mostly are senior loans. So the LTV ratio is average 40% and in terms of loan preservation or recovering credit, it’s quite satisfactory. And last but not least, in 2024, I would like to mention our direction in 2024, the unstable financial market and the high risk interest rate situation is to persist.

And in response, we’ve been very much focused on asset soundness as well as capital adequacy when it comes to our risk management. Through growth center on new quality growth companies and prime companies, we will improve our quality of the portfolio and also with regard to high risk assets, including CRE assets. And also in terms of vulnerabilities and some of these subsidiaries portfolio, we will be focusing on inducing a soft landing and by establishing a regular response system for each risk factor such as interest rates and exchange rates; we’ll strengthen the group’s crisis response capabilities and also including ICT risk and digital risk and other operational risk. And also understanding the country specific risks. We want to put in place a differentiated global risk management system.

Thank you very much.

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