U.S. Markets closed

Edited Transcript of 086790.KS earnings conference call or presentation 21-Apr-17 7:00am GMT

Thomson Reuters StreetEvents

Q1 2017 Hana Financial Group Inc Earnings Call

Seoul Apr 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Hana Financial Group Inc earnings conference call or presentation Friday, April 21, 2017 at 7:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Byoung-ho Kim

Hana Financial Group Inc. - Vice Chairman, CEO of Hana Bank and President of Hana Bank

* Hyo Sang Hwang

Hana Financial Group Inc. - Chief Risk Officer and EVP

* Junghoon Lee

* Kwark Cheol-seung

================================================================================

Conference Call Participants

================================================================================

* Byung Gun Lee

Dongbu Securities Co., Ltd., Research Division - Team Leader

* Chan Young Hwang

Macquarie Research - Head of Korea Research

* Jae Woo Kim

Samsung Securities Co. Ltd., Research Division - Analyst

* Jinsang Kim

HMC Investment Securities Co., Ltd., Research Division - Analyst

* Michael Na

Nomura Securities Co. Ltd., Research Division - Analyst

* Munyoung Cha

BNP Paribas, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Junghoon Lee, [1]

--------------------------------------------------------------------------------

Greetings to all joining in on Hana Financial Group 2017 Q1 business presentation. I am Hana Financial Group IR team leader, Lee Junghoon. I express sincere appreciation to shareholders, analysts and other market participants joining via phone or Internet despite their busy schedules. We will now begin the 2017 Q1 business presentation.

First, I would like to introduce our executives here for today's earnings release. From Hana Financial Group, Vice Chairman, Kim Byoung-ho; Executive Vice President and CFO, Kwark Cheol-seung; Senior Executive Vice President and CRO, Hwang Hyo Sang are here with us.

From KEB Hana Bank, Executive VP of Planning and Management Group, [ Lee Seung-Yeol ]. From Hana Financial Investment, Executive VP, [ Lee Seung-Hoo ] from management strategy division is here with us. Last but not least, Hana Card EVP and [ CSO ], Song Jong-Gun of Management Strategy Division is here with us.

First, we will hear Vice Chairman's introductory remarks and then CFO and EVP, Kwark Cheol-seung will deliver a business results presentation. And then, we will engage in a phone Q&A session.

Now I would like to invite our Vice Chairman, Kim Byoung-ho, for introductory remarks.

--------------------------------------------------------------------------------

Byoung-ho Kim, Hana Financial Group Inc. - Vice Chairman, CEO of Hana Bank and President of Hana Bank [2]

--------------------------------------------------------------------------------

I express my deepest gratitude to all the participants for your interest in Hana Financial Group and for joining in. In Q1, after the Trump administration took office, there was rapid interest rate and FX rate fluctuations and expansion of UN Asian countries' capital market volatility. The domestic market also from last year was affected by the continued political issues and shipbuilding industry restructuring, and the domestic financial industry was amidst ample uncertainty.

In the market, I know there are concerns that our DSME exposure is relatively large among commercial banks and the uncertainty is high regarding our quarterly results. Our CFO will elaborate soon, but with the recent DSME voluntary agreement decision, we believe that we can dissipate the concerns from the market and, going forward, completely regain our investors' trust by provisioning in Q1, which can remove the uncertainty as much as possible that can impact our company. With this impact, there was a temporary rise in provisioning in Q1, but we were able to continue strong top line growth by maintaining an appropriate level of loan growth, making aggressive NIM improvement efforts and with the favorable growth trend of overall fee income.

In addition, with the realization of synergy creation in earnest, the SG&A improvement effect is continuing. And with the bottom line improvement through aggressive asset quality management, our net income exceeded the market expectations.

I believe through our preemptive measures, most of our overhang issues related to DSME have been resolved. And the normalized credit cost ratio, excluding DSME, posted 16 bp and is continuing to go down following last year and is being stabilized. The overall asset quality and normalized provisioning is being improved at a fast pace.

We believe the main driver behind this quarter's net income exceeding the market expectation was because of the synergy creation in earnest following last year's bank IT integration, leading to efficient HR and resource allocation. This is a testimony to more strengthened fundamentals of Hana Financial Group.

This year also holds uncertainty in and out of Korea with the strengthened protectionist trade policies of the Trump government, interest rate hike expectations as well as political volatility expansion following the early presidential elections in Korea. Hana Financial Group will preemptively respond to these uncertainties and prepare beforehand and maintain a stable financial structure. And at the same time, based on the growth strategy considering efficiency and profitability at the same time, focus on getting a mid to long-term future growth engine for the future. All the employees at Hana Financial Group will strive to realize stable business results and respond positively to your continued support and interest. Our CFO will now elaborate on the detailed business results.

--------------------------------------------------------------------------------

Junghoon Lee, [3]

--------------------------------------------------------------------------------

Thank you very much. I would like to invite our CFO, and EVP, Kwark Cheol-seung for 2017 Q1 Hana Financial Group earnings release.

--------------------------------------------------------------------------------

Kwark Cheol-seung, [4]

--------------------------------------------------------------------------------

Greetings, I am CFO Kwark Cheol-seung, EVP at Hana Financial group in charge of finance and strategy. Let me now cover the 2017 Q1 group business results.

First, group's 2017 Q1 major highlights. Please refer to Page 3. Hana Financial group's 2017 Q1 net income posted KRW 492.1 billion, a 12.4% Y-o-Y and 444.5% Q-o-Q increase, respectively, and recorded the highest quarterly result once again following the previous year. In particular, despite the DSME-related one-off provisioning effect, strong top line growth and bottom line stabilization continued markedly and improved considerably Y-o-Y.

To elaborate on the breakdown of the financial highlights in Q1. First, a favorable NIM environment was formed through stable loan growth and the effects from the market interest rate hike. The highest level of interest income since 2013 Q1 was recorded. Overall fee income also grew favorably, leading to considerable improvement in core earnings Y-o-Y comprised of interest income and fee income. Secondly, after the 2016 June bank IT integration, efficiency improved in HR placement and resource management, leading to the continued drop of SG&A following the previous quarter, creating integration synergy in earnest. On the bottom right of the page, Q1 and group ROE and ROA each recorded 8.85% and 0.60%, respectively, and the group's cost-to-income ratio posted 45.7%. Group's major financial indices are improving quickly.

Please refer to Page 4. First, the NIM. The group's 2017 Q1 NIM comprised of KEB Hana Bank and Hana Card posted 1.86%, a 6 bp rise Q-o-Q. With the recent U.S. interest rate hike leading to favorable domestic interest environment, increasing core deposits and adjustment of time deposit funding cost, overall loan/deposit pricing improved, posting KRW 1,191.9 billion of interest income, a Y-o-Y 2.1% increase and Q-o-Q 0.7% increase, respectively. Fee income showed healthy improvement overall including loan-related fee income and asset management fee income and posted KRW 489.2 billion, a 11.1% Y-o-Y increase and 7.1% Q-o-Q increase.

On the bottom right side of the slide, you can see that the bank's loans in won grew 0.7%, centering on corporate loans for high creditworthy borrowers. But excluding KRW 2.8 trillion of mortgage loan transferred to KHFC, loans in won grew 2.4% compared to last year end, showing sound growth.

Please go to Page 5. Let me first elaborate on the group's provisioning. With the additional KRW 350.2 billion of provisioning following the recent DSME creditors' voluntary agreement decision, group's credit cost ratio posted 0.72%. But excluding this effect, credit cost ratio posted 0.16%, a significant drop Q-o-Q, which is the lowest rate since the acquisition of KEB Bank.

Our uncertainty over the shipbuilding industry restructuring seems to have been removed to a great degree with the provisioning for DSME, and we expect the normalized provisioning to quickly stabilize.

Next, 2017 Q1 group's NPL ratio posted 0.89%, a 3 bp drop Q-o-Q. Delinquency rates posted 0.53% and is being stably managed at an appropriate level. Q1 CET1 ratio is expected to report 12.42%, a 65 bp increase Q-o-Q and is expected to improve by a great degree Q-o-Q. This is attributable to profitability-based growth policy and aggressive RWA management. We will strive forward that the CET ratio can continuously improve again this year.

Now I will cover the group's profitability in more detail. Please refer to the group's consolidated earnings on Page 7. Let me cover the group's general operating income. Of the general operating income, 2017 Q1 interest income posted KRW 1,191.9 billion. Through stable loan growth, favorable interest environment and aggressive deposit loan pricing improvement efforts, NIM rose and improved 2.1% Y-o-Y and 0.7% Q-o-Q, respectively. 2017 Q1 fee income posted KRW 489.2 billion, a significant growth in credit card fee income Y-o-Y. Overall fee income, including loan-related income and asset management-related income, including trust income and beneficiary certificate income, grew in a balanced manner leading to 18.1% Y-o-Y and 7.1% Q-o-Q growth.

Q1 disposition/valuation gains recorded KRW 348.3 billion, a 38.5% increase Y-o-Y. The considerable improvement Q-o-Q was attributable to the base effect following the nonmonetary foreign currency translation losses occurring in the previous quarter. And the KRW 166.7 billion of nonmonetary translation gains in this quarter with a strong won compared to end last year. A significant improvement took place with sound flow of disposition gains from AFS and foreign exchange derivatives.

Regarding SG&A, following the bank IT system integration in June of 2016, synergy is now being created in earnest with effective HR management and resource allocation with preemptive HR restructuring. SG&A posted KRW 878.7 billion, a 5.6% Y-o-Y and 27.8% Q-o-Q decline.

Cost-income ratio posted 45.7% and is rapidly going down and is being stabilized. Credit loss provision has gone up considerably Q-o-Q with the one-off DSME provisioning effect. But normalized provisioning at KRW 93 billion level and is rapidly being improved following the previous quarter.

Next, on Page 8, business results of subsidiaries. KEB Hana Bank, a major subsidiary of the group realized a net income of KRW 478 billion in Q1 of 2017, down 2.9% Y-o-Y. However, if we exclude impact of provisioning for DSME, we have posted our strongest performance since -- post integration.

In the case of KEB Hana Card, net income for Q1 comes to KRW 50 billion, a record high performance since its creation. Even if you consider the temporary marketing cost with the increase in new cardholders and the one-off gains from disposal of loan debt, the card business is showing steady growth.

In the case of Hana Financial Investment, the consolidated net income is down Q-o-Q, but this is due to the consolidated tax payment effect. And the pretax net income has gone up KRW 23 billion Q-o-Q, continuing a stable growth trend.

For your information, such consolidated tax payment effect occurs in the financial accounting context and is merely an item to be adjusted among the subsidiaries with no impact on the group's consolidated net income. For more details on other subsidiaries, please refer to the presentation materials.

Page 9 to Page 11 deals with NIM, noninterest income, and SG&A previously touched upon, so please refer to the material for more information.

Next, on Page 13, the group's total assets and liabilities. As of the end of Q1 2017, the group's total assets stood at KRW 343 trillion. And if the group's trust assets of KRW 92.1 trillion is included, then the total assets comes to KRW 352.6 trillion. The group's total liability and among the total asset and if the trust asset of KEB Hana Bank is included, total asset comes to KRW 352.6 trillion.

The group's total liability is KRW 319.5 trillion, the shareholder equity KRW 23.5 trillion.

Next, on Page 14, the loans and deposits in Korean won of KEB Hana Bank. In Q1 of 2017, the existing Korean won loans of KEB Hana Bank grew 6.3% Y-o-Y and 0.7% Q-o-Q to reach KRW 179.9 trillion.

If we break down the loan growth by segment, in Q1, loans to large conglomerate posted KRW 15.7 trillion, up 3.2% Q-o-Q. And this is due to the seasonal factor of total loans contracting temporarily at the year-end and then increasing again afterwards as well as the new loans to high-credit large companies. In addition, SME loans grew 3.1% Q-o-Q, posting KRW 68.5 trillion, showing continuing growth led by SOHO loans.

Household retail loans in Q1 posted KRW 93.8 trillion. They're down 1.3% Q-o-Q after transferring the KRW 2.8 trillion of mortgage loans through KHFC. If the above transfer is excluded, then the growth rate of retail loans in Q1 is 1.9%.

And going forward, our profitability and asset quality will be at the center of our loan growth policy.

Next page. Deposits posted KRW 204.9 trillion, up 4.3% Y-o-Y. In particular, among the Korean won deposits, the low-cost loans grew 12.5% Y-o-Y. But the more costly time deposits grew only by 3.7% Y-o-Y, exhibiting a robust improvement in the funding structure.

For your information, as can be seen by the graphic at the lower right hand, LDR of Q1 is 98.4%.

Next, Page 16, Group Asset Quality. At the end of Q1 of 2017, the total loans are up 3.5% Y-o-Y, standing at KRW 235.5 trillion. And the NPL amount is down 4.0% YTD, demonstrating a clear and stable downward trend. As such, the group's NPL ratio as at the end of Q1 is 0.89%, down 3 bp YTD.

If you look at the upper right-hand corner of the page, during Q1, the growth of new NPLs before write-off -- I'm sorry, debt-to-equity swap is KRW 112.9 billion, largely similar to the previous quarter. And efforts toward risk management and improving the quality of the loan portfolio focusing on cyclical sectors led to an overall decline in new defaults. And as a result, the new NPL amount is maintained at a stable level.

Asset quality of the bank will be explained in more detail on the next page.

Page 17, asset quality of KEB Hana Bank. Total loans of KEB Hana Bank as of the end of Q1 2017 is up 2.9% Y-o-Y, posting KRW 209.2 trillion. And the NPL ratio is down 3 bp Q-o-Q, coming to 0.81%.

The NPL coverage ratio, which excludes the loan-loss reserves in accordance with regulatory changes of last year December is 91.5%, up 18.7%.

The delinquency ratio as of end of Q1 2017 of KEB Hana Bank is 0.41%, up 2 bp. This slight increase is due to a temporary increase of SME delinquency rate and the decline in sales and write-offs YTD. And during Q1, the actual delinquencies that occurred were smaller amounts Y-o-Y and Q-o-Q. And during the month of March, the delinquency ratio of SMEs is on a downward trend and is being stably maintained.

Next, Page 18, provisions. The cumulative credit cost ratio of Q1 of the group is up 38 bp, posting 0.72% Q-o-Q, owing to the additional provisioning related to DSME voluntary restructuring workout agreement. However, if DSME impact is excluded, then the group's credit cost ratio is down 18 bp YTD to reach 0.16%, demonstrating significant improvement in the recurring credit cost ratio.

In the case of credit cost ratio of KEB Hana Bank, it is up 46 bp YTD, posting 0.71%. But if the DSME effect is removed, then it is down sharply Q-o-Q to reach 0.05%.

As can be seen from the bottom of the page, the provisions for credit loss increased temporarily due to the impact of additional provisioning for DSME, as mentioned previously. But if this effect is removed, Q1's recurring credit loss provision has fallen substantially.

Finally, Page 19, Capital Adequacy. The group's BIS ratio, Tier 1 ratio, CET1 ratio for Q1 of 2017 are expected to reach 14.69%, 12.98%, 12.42%, respectively. And the substantial improvement over the previous quarter can be expected. This is largely driven by: first, a growth policy geared towards profitability; increasing retrieved earnings from improving performance in Q1; and sustain the risk-weighted asset management at the group level. Going forward, we will continue to work toward enhancing portfolio efficiency as well as capital adequacy.

For more information on business results and subsidiaries and major financial highlights, please refer to the attachments.

With this, let me conclude the earnings release presentation of Hana Financial Group Q1 2017. Thank you very much for your attention.

--------------------------------------------------------------------------------

Junghoon Lee, [5]

--------------------------------------------------------------------------------

Thank you. Next, we will move on to the Q&A. First, some housekeeping rules. (Operator Instructions)

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Junghoon Lee, [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question is Kim Jinsang from HMC Investment Securities.

--------------------------------------------------------------------------------

Jinsang Kim, HMC Investment Securities Co., Ltd., Research Division - Analyst [2]

--------------------------------------------------------------------------------

I have 3 short questions. First is SG&A, it has gone down. And on an annualized basis, can you tell us about this year's and next year's SG&A and how much of a decrease will occur? Second is about the CET1 ratio and capital adequacy. And I know that it has gone up rapidly and I also know that it has contributed to more earnings. But with RWA, I know you have made a lot of improvements. Do you have any plans to increase your capital adequacy? And if you do, can you give us the RWA capital ratio improvement that will take place on an annual basis and a quarterly basis? Last question is about your loan growth, it was quite substantial and I see more SOHO growth. And the economy doesn't seem to be faring very well now, so I think some are concerned about the SOHO loans. So can you give us your intake on the risk management of these types of loans?

--------------------------------------------------------------------------------

Junghoon Lee, [3]

--------------------------------------------------------------------------------

Thank you very much for your questions. Please hold until we prepare the answers.

--------------------------------------------------------------------------------

Kwark Cheol-seung, [4]

--------------------------------------------------------------------------------

So let me answer the first and second question first, and then our CRO will answer the third question. Regarding SG&A, as you mentioned, it is going down as we had expected. In particular, the year before last year, there was the ERP. And then last year, we also had a retirement system based on our basic system. And those are some basic factors. And as mentioned before, it was because of the IT integration leading to HR, the placement changes. And I think that is leading to these market changes. And regarding our C/I ratio, we are thinking of 50% for the year and mid-50% or even lower than 50%. If we can, we plan to be very aggressive. But maybe in the mid-50% range, we want to maintain our C/I ratio or cost-income ratio. And regarding our CET1 ratio, with the RWA adjustments, it is true that we had been managing our capital and we had portfolio adjustment as well. And as you can know, it was very effective. Our goal for this year as well, compared to other groups, we might be a little bit different because from the beginning, we said that we will have adequate loan growth that will be managed. So this year, CET1 ratio, we have the goal of 12.5%, so that is why we had plans to manage the RWA from early on. And that goal is being maintained. And in Q1, our RWA really went down and CET1 went up sharply, in part, because of the foreign exchange rate drop. As you know, in late December, there was the $1 exchange rate about 90 to 100 won per $1. So that is why it also impacted the RWA. So there was a big increase as well. It seems that we still need some more time for us to reach our target, but we believe that adequate level of growth and appropriate level of RWA management will be important. And regarding the third question, let me give the floor to our CRO.

--------------------------------------------------------------------------------

Hyo Sang Hwang, Hana Financial Group Inc. - Chief Risk Officer and EVP [5]

--------------------------------------------------------------------------------

Yes. I'm the CRO, Hwang Hyo Sang. Regarding the third question, let me answer. Regarding SOHO loans, last year KRW 5 trillion, went up; and this year, about KRW 2.5 trillion. So it seems that in the market, it is quite concerned about SOHO growth. However, last year and this year as well, we are continuously adjusting our portfolio. Another point is that for SOHO loans, we have focused monitoring for delinquencies. Last year, fortunately, for the delinquent SOHO loans, the amount was not considerable. And this year, it is not big as well. Secondly, most of the SOHO loans that we have, have collateral and they're securitized. That is why our collateral or securitization level is more than, nowadays, 85%. So it's mostly over 80%. So even if there is a shock, we believe that risk management will be fine based on this securitization. And the SOHO delinquency rate is being managed within 0.38% to the 0.39%, so we believe that it is very good compared to other categories.

--------------------------------------------------------------------------------

Junghoon Lee, [6]

--------------------------------------------------------------------------------

We will receive the next question, Mr. Lee Byung Gun from Dongbu Securities.

--------------------------------------------------------------------------------

Byung Gun Lee, Dongbu Securities Co., Ltd., Research Division - Team Leader [7]

--------------------------------------------------------------------------------

I am Lee Byung Gun from Dongbu Securities. I have one simple question. With regards to fee income, you have a very good result. But as you have said, your credit card business has done really well. But as has been seen in other banks, trust and other financial products, fee income was also very strong; fund product management have done well. So what is the share of fund product performance? And also, (inaudible) sales last year was quite slow. This year -- or has the performance improved this year?

--------------------------------------------------------------------------------

Junghoon Lee, [8]

--------------------------------------------------------------------------------

Thank you very much for your questions, please hold for a second.

--------------------------------------------------------------------------------

Kwark Cheol-seung, [9]

--------------------------------------------------------------------------------

Let me get that question. As you have said, the credit card business fee income, KRW 74 billion improvement has been made in fee income. Last year, though, we had been very concerned about the fee income decline as the core income has dropped significantly, over KRW 100 billion. So this year's business plan, we have been very ambitious. And we have worked really hard to improve the performance. And actually, the results were above our expectations, that is true. And also the KRW 23.6 billion of improvement has been made Y-o-Y. And yes, also trust and other financial products have done well, as you have said. Over KRW 20 billion increase has been posted. So 1/3 is from credit card business and 1/3 is from asset management and the rest is investment banking and others. In the second quarter or third quarter, we do expect the same performance continuing. But in April, the stock market is changing somewhat compared to the first quarter. But anyways, we will continue to make efforts to achieve the same performance.

--------------------------------------------------------------------------------

Junghoon Lee, [10]

--------------------------------------------------------------------------------

Thank you very much for your answer. It seems that there are no other queued. So we will be holding until further questions come in.

Next question from Nomura Securities, we have Mr. Na (inaudible).

--------------------------------------------------------------------------------

Michael Na, Nomura Securities Co. Ltd., Research Division - Analyst [11]

--------------------------------------------------------------------------------

I'm Na (inaudible) of Nomura Securities. I saw a lot of trading gains, so is it from FX? Or is it from other income? And second is about your capital ratio improvement. And I am curious about your dividend plan going forward. Well, I think that it should be normalized. So looking at this year's earnings and for next year, can you give us your take on the PI ratio going forward?

--------------------------------------------------------------------------------

Junghoon Lee, [12]

--------------------------------------------------------------------------------

Thank you very much for your question. Let me answer.

Let me answer the question. So regarding the disposition and valuation gains, there was a great contribution by the foreign exchange, and it was about KRW 170 billion. And for trading, it is true that in FX or in other derivatives, we had many gains. I think you're quite interested in this. And we have fixed income disposal gains last year. But as you know, the interest rate environment were Y-o-Y -- in fixed income, the trading gains really shrunk to a great extent. So looking in the details, because we had a lot of fixed income gains last year from -- it seems that there was just ordinary trading gains and the disposition gains from our branches. So that is why we had more income in those areas and that is why we were able to pursue a more balanced growth. Regarding the improvement of capital adequacy and the dividend payout ratio, well, we always say that for dividend plans going forward, we will try to increase this going forward. And because this is only the business results for Q1, we cannot give you a detailed answer about the dividend payout ratio going forward. But I just want to tell you that our direction in increasing dividend payout ratio in the mid- to long-term still remains unchanged.

Next question, Mr. Hwang from Macquarie Securities.

--------------------------------------------------------------------------------

Chan Young Hwang, Macquarie Research - Head of Korea Research [13]

--------------------------------------------------------------------------------

I'm Hwang Chan Young from Macquarie Securities. Actually, I wanted to ask the very same question as the previous question. The [ CFR ] have emphasized starting from early last year the KPI, or the business objective, has been that you're focusing on RORWA, that you're going to impose strict management (inaudible). RORWA management targets, of course, I believe negative goodwill is included. And if negative goodwill is reduced going forward, then the fundamentals of Hana Financial Group would seem better, appear better. So RORWA, what kind of target have you set internally for this within the group? And so -- and I am -- and commissions -- related to this, how are you going to manage it in the mid to long term? So -- and if you showed such intention of will, I think this will be well received by analysts and investors.

--------------------------------------------------------------------------------

Junghoon Lee, [14]

--------------------------------------------------------------------------------

Thank you very much for your question. We will prepare an answer for this.

--------------------------------------------------------------------------------

Kwark Cheol-seung, [15]

--------------------------------------------------------------------------------

Yes, let me take your question. RORWA, actually and the business trends -- our CRO, actually, is in charge of this. So let me give you the general take and then pass the floor to our CRO. We have continuously emphasized through RORWA management, that we are continuing to balance our risk and profits so by product, by customer base. So we're engaged in this, and the details will be provided to you by our CRO. In 2019, starting from 2019, in the case of negative goodwill, as you have said, on an annualized basis, the KRW 120 billion is written off. But after 2018, KRW 100 billion will be reduced. So after tax, about KRW 100 billion will occur, so -- from 2019. And more details will be provided by our CRO.

--------------------------------------------------------------------------------

Hyo Sang Hwang, Hana Financial Group Inc. - Chief Risk Officer and EVP [16]

--------------------------------------------------------------------------------

I'm the CRO. So let me provide you with some supplemental explanation. In the case of RORWA, we had exerted efforts from last year. And last year, there were no specific targets. But starting this year, for each subsidiary and within each subsidiary, the department and business lines and the sales lines are also managed. And with regards to RWA, the limits each subsidiary and each business lines are managing it on their own. When we assign these ceilings, in order to maintain our capital adequacy, in order to maintain this target, we are engaged in this effort. So in order to improve RORWA, last year realized figure 10% improvement on last year's figure is our target. And in the process, by product for each business segment, if there is problematic portfolios, those will be adjusted. That is the process that we undergo. Actually, in the business front, profitability-focused mindset is being implemented.

--------------------------------------------------------------------------------

Junghoon Lee, [17]

--------------------------------------------------------------------------------

We don't have any other questions coming in, but we will hold for a moment.

Next question is coming in from BNP Paribas Securities, we have Director Cha Munyoung.

--------------------------------------------------------------------------------

Munyoung Cha, BNP Paribas, Research Division - Analyst [18]

--------------------------------------------------------------------------------

Yes, I am from BNP Paribas Securities, my name is Cha Munyoung. And I have 2 questions. First question is about your NIM, net interest margin. And in Q1, it grew significantly. But in the mid to long term, what is the NIM recovery rate that you expect if there is no changes in the short-term interest rate? And when you consider, for example, core deposits compared to 2013 and 2014, it has grown substantially. I think you can also explain about that. So can you tell us about the NIM recovery that you expect in the mid to long term? Second is about credit cost. In the mid to long term, I'm curious about your view. It's because there has been DSME -- well, you didn't elaborate on the exact amount. But when you see corporate, household, well, you haven't seen provisioning. And for SOHOs or other loans, it seems that in the mid to long term, you probably have a forecast. So can you share with us your thoughts on this for credit costs going forward?

--------------------------------------------------------------------------------

Junghoon Lee, [19]

--------------------------------------------------------------------------------

Thank you very much. Please wait until we prepare answers.

--------------------------------------------------------------------------------

Kwark Cheol-seung, [20]

--------------------------------------------------------------------------------

Let me answer the question. First, regarding the NIM rise in Q1, the mid- to long-term NIM outlook. Well, regarding question 2 and question 1, I think they are not easy questions for us to answer. So let me try to come up with the best answer. Well, when we have this year's business plan going forward, Bank of Korea's stance has changed somewhat recently, but if there is no BOK rate change, well with portfolio readjustment and other measures, we have plans to improve the NIM. I believe that both efforts are leading to good results. The quarterly NIM of 1.44% well, on an annualized basis, that is almost identical level of our annual NIM plan. So I believe that we can have an improvement, depending on the market conditions. So it's very difficult for us to give you concrete number regarding the NIM forecast. But I think there is low possibility of interest rate going down. So if -- and the market believes the interest rate probably will go in one direction, but we can't be sure of it. But if this trend, current trend continues, then I believe that for liquidity, if we believe that it is ample going forward, then there are our pricing efforts. And with more liquidity, there are low-cost funds that can also go up. And it will depend on our efforts, but it will also depend on other factors as well. If there are no rate changes and if we are asked to give you an outlook on our NIM, it's very difficult for us to answer. It's because if there's a 25 bp rate change then, in our portfolio, about 2 or 3 bps can change, so there is that difficulty. So I cannot mention specific numbers at this time. So our current situation, the economic situation and our efforts, I think, will lead to the results. And regarding the credit costs, regarding DSME, I mentioned that KRW 350.2 billion of additional provisioning was made in this quarter. So it was also mentioned by our Vice Chairman as well. And regarding the credit cost issues related to DSME, we believe that most of them have been removed from our company, from Hana Financial Group, and we are quite confident of this. However, excluding this DSME effect, in looking at our credit cost, it was very low and even lower than a normalized level. And it's not just for us. I think it also applies to a lot of our competitors as well. So we are also curious about what cycle this is derived from. And externally, the economy seems to be doing quite badly. And it seems that for the low-income SOHOs, there might be a crisis. But it seems that the impact has not reached us yet. So our preemptive efforts, the economic cycle, well, I believe many different factors worked comprehensively leading to this result. I cannot be very confident at this time, but I think for a short while, maybe a few months, maybe until the end of this year, but I think this trend at least for the commercial banks will continue. And then going beyond that, I don't think I can make any predictions. Thank you.

--------------------------------------------------------------------------------

Hyo Sang Hwang, Hana Financial Group Inc. - Chief Risk Officer and EVP [21]

--------------------------------------------------------------------------------

And I am the CRO, Hwang Hyo Sang, let me add some comments. Our group itself had provisioned KRW 790 billion. And this year, if we exclude DSME, then we would have had more than KRW 100 billion of less provisioning this year. And when we think about next year, for next year, in household, we believe that most of the loans are securitized, so we do not have a provisioning burden. And for large corporates and SOHOs and SMEs, well, for SOHOs I mentioned that more than 80% of the loans are securitized, so we do not have a provisioning burden for the SOHOs. However, for large corporates and SMEs, for large corporates, from 2 to 3 years ago, we have been portfolio adjusting, so we believe that there will not be a lot of provisioning that is needed for large corporate loans. For SME loans, it is true that they carry some risk. So we are trying to maintain our portfolio more stably. For next year, we believe that the provisioning burden will not go up substantially. Thank you.

--------------------------------------------------------------------------------

Junghoon Lee, [22]

--------------------------------------------------------------------------------

As of yet we have no further questions coming in, so we will wait for a while. Yes, next question from Samsung Securities, Mr. Kim Jae Woo.

--------------------------------------------------------------------------------

Jae Woo Kim, Samsung Securities Co. Ltd., Research Division - Analyst [23]

--------------------------------------------------------------------------------

I have 2 questions. First of all, even if you consider the one-off factors of additional provisioning, we think it's at a normalized level. But the actual number is greater than I initially expected. So do you think this is a normalized level? And if you look at the ROA, it's about 6.0% (sic) [ 0.6% ] to 1%, well, for the past 3 to 4 years, it has never been that high. If we believe that NIM will go up, how much improvement do you think you can make in the ROA front? And the KEB Hana Financial Group, they are strengthening their loan banking sector through M&A? In the case of Hana, I think you have all the platform established but some nonbanking subsidiaries do not have economies of scale. Because the capital ratio has gone up, I think you have more room for maneuvering. So what kind of strategies do you have to strengthen your nonbanking subsidiaries going forward?

--------------------------------------------------------------------------------

Junghoon Lee, [24]

--------------------------------------------------------------------------------

Thank you very much for your question. Please wait for a second.

--------------------------------------------------------------------------------

Kwark Cheol-seung, [25]

--------------------------------------------------------------------------------

So let me provide you with an answer. So many difficult questions are being posed to us, so it's very difficult for us to answer properly. But let me do my best in the case of recurring profit level, as Mr. Kim has asked. So we have calculated this internally, and because of the synergistic effect, how much it has increased is something that we are calculating. Let me just point out one thing. In the first quarter, our competitors have all released their earnings for this quarter. But internally, in this quarter, our recurring income level for our group is as follows: according to our calculations, if we remove the DSME provisioning, then for the first quarter of 2017, it's about KRW 600 billion. However, as we have mentioned during the presentation, the fee income and the core income increase, especially fee income increase has been exceptionally strong. And above anything else, the credit cost has been exceptionally -- with the exception of DSME, is quite low. And these factors had an impact. And so the KRW 600 billion of recurring profit for Q1, I don't think this is something that can be sustained. I think the recurring -- normalized recurring level would be more lower than that. But our recurring profit level is at an improved level. But compared to 2 to 3 years ago, yes, our capital capability has gone up significantly. And considering that, I think we will be able to achieve our targets for this year. Secondly, the ROA level, this is also true. It's also linked to the first question. As I said previously, in the core income segment, how long it can be sustained. And the SG&A, whether there's any likelihood of exceptional factors appearing, contingent factors appearing despite our hard work and effort and also the provisioning, can it be maintained as was the case in the first quarter. So depending on all of those, we -- this will determine the ROA. In the first quarter, some of the core income has been higher than expected. So given that, we believe that the ROA might come lower than the current level. But our fundamentals, compared to 2 to 3 years ago, has been strengthened substantially, that is very, very clear. And thirdly, with regards to the nonbanking subsidiaries, the fact that they lack economies of scale, well, this is something that we are giving a lot of thought to. And this is something that we are questioned frequently by analysts and investors. As we have continuously emphasized during the past 2 to 3 years, because of the capital ratio issue for the overall group, well, we have invested a lot of work and effort. And so we are now, rather relatively speaking, free from the burden of capital adequacy issues. But the CET1 ratio, to reach our target, I think we do need to accumulate some more capital. However, in the course of that, in the midst of all that, how we can expand and strengthen our nonbanking subsidiaries is something that we are thinking about. First, how can we expand the nonbanking subsidiaries so that the overall group portfolio can move away from its bias to the banking segment and reduce its dependence? And secondly, how can we enhance the efficiency of the nonbanking subsidiaries? I cannot disclose any details about our plans or strategies, but after clear decisions have been made, we will be able to reveal further details.

--------------------------------------------------------------------------------

Byoung-ho Kim, Hana Financial Group Inc. - Vice Chairman, CEO of Hana Bank and President of Hana Bank [26]

--------------------------------------------------------------------------------

So let me add one thing more to that -- the third question that has been answered by our CFO. Yes, this is something that we are frequently asked. If you look at Hana Financial Group, I'm going to ask this of you, whether it's the banking segment or the nonbanking segment, that is one dimension and then there's also the dimension of whether its overseas or domestic portfolio. Our overseas portfolio has been conducted mostly through the investments by the banking segments, so it's all included in the banking subsidiary. So the portfolio makeup, whether it's composed of banking segments or nonbanking segment, that's important. But what's also important is to have the mix between overseas and domestic businesses. And we are making efforts to strengthen our overseas business. And although the figures may vary, depending on the definition, but at present, at the global level, the contribution is as high as 25% at the present moment. And so I would like to ask you to please look at both dimensions to understand the diversity of the overall portfolio of the group.

--------------------------------------------------------------------------------

Junghoon Lee, [27]

--------------------------------------------------------------------------------

Well, because now some time has passed, we will conclude the 2017 Q1 Hana Financial Group business presentation. Regarding our earnings release, please visit www.hanafn.com for today's earnings release, and we will also have our IR Databook online as well. If you contact our IR team for further questions, we would be more than happy to answer them. Thank you for listening.