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Edited Transcript of 086790.KS earnings conference call or presentation 25-Oct-19 7:00am GMT

Q3 2019 Hana Financial Group Inc Earnings Call

Seoul Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Hana Financial Group Inc earnings conference call or presentation Friday, October 25, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Junghoon Lee

Hana Financial Group Inc. - Head of IR Team

* Seung-Iyul Lee

Hana Financial Group Inc. - CFO & Deputy President

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Conference Call Participants

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* Byung Gun Lee

DB Financial Investment Co., Ltd., Research Division - Team Leader

* Jihyun Cho

JP Morgan Chase & Co, Research Division - Research Analyst

* Jin-Sang Kim

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

* Joon Seok

Morgan Stanley, Research Division - Executive Director

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Presentation

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Junghoon Lee, Hana Financial Group Inc. - Head of IR Team [1]

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Thank you for taking part in the Hana Financial Group Business Results Presentation. I am Lee Junghoon, the IR team General Manager of Hana Financial Group. I express my appreciation to all those shareholders, analysts and other market participants for joining in via the phone or the Internet despite your busy schedules.

I would like to introduce our executives for the 2019 Q3 Hana Financial Group Earnings Release. We have here with us from Hana Financial Group, our CFO and Deputy President, Lee Seung-Iyul; and our CRO and Deputy President, Hwang Hyo-Sang. Next, from KEB Hana Bank, SEVP Lee Hu-Seung is here with us; and from Hana Financial Investment, Deputy President Lee Sang-Hun is here with us. From Hana Card, Division Head of Management Strategy, Kwon Tae-Gyun is here with us.

I will invite our CFO and Deputy President, Lee Seung-Iyul, to deliver the earnings presentation and then engage in a Q&A session via the phone. From now on, our CFO and Deputy President, Lee Seung-Iyul, will deliver the business results for Q3 of Hana Financial Group.

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Seung-Iyul Lee, Hana Financial Group Inc. - CFO & Deputy President [2]

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Greetings. I am Lee Seung-Iyul, the CFO and Deputy President of Hana Financial Group. I would like to cover the 2019 Q3 Group Business Results Presentation. First, the major business highlights of the group. Please refer to Page 3 of the material.

The cumulative net earnings of Hana Financial Group posted KRW 2.0404 trillion, a 7.8% increase Y-o-Y. On the back of core earnings growth and around KRW 320 billion of after-tax one-off fixed asset disposition gains, Q3 cumulative net income that surpassed last year's performance was achieved for this quarter. Around KRW 84.4 billion of nonmonetary translation losses as well as donations and other costs were recognized in Q3. But as aforementioned, there was a sizable building disposition gain as well as some provisioning write-back. And the KRW 836 billion of quarterly net income, a 27% increase Q-o-Q was realized. The quarterly recurring income, excluding various one-off items, posted around KRW 590 billion, a Q-o-Q drop due to seasonal factors but maintained the Y-o-Y level.

Now let me cover the group's business performance in more detail. First of all, the 2019 Q3 cumulative core earnings continuously maintained a growth trend Y-o-Y. Q3 NIM declined, greatly affected by factors including the BOK rate cut. But on the back of sound loan asset growth, Q3 interest income maintained the previous quarter level. And on a cumulative basis, it grew 4.2% Y-o-Y.

On the other hand, in the case of fee income, the Q3 performance decreased Q-o-Q. And on a cumulative basis, it was slightly lower than Y-o-Y results. However, taking into consideration the base effect caused by the transfer of account of the variable annuity from other operating income to other fees of around KRW 70 billion, the fee income maintained a sound growth trend. Accordingly, the group's Q3 cumulative core earnings posted KRW 6.0153 trillion, a 2.3% increase Y-o-Y and reached the highest level since the financial group was established.

Next, as a result of the group-wide risk management efforts, the asset quality indicators seems to be managed at a very sound level. In particular, in the case of cumulative credit cost at the end of Q3 based on the growth strategy centering on asset quality with the recurring credit cost level being stably maintained and managed, there was the one-off provisioning write-back related to some large corporate loans, and it posted a 7 -- and it posted 70 bp, a 2 bp decline compared to the previous quarter end.

Lastly, Hana Financial Group's 2019 Q3 cumulative SG&A posted KRW 2.9883 trillion and rose 4.9% Y-o-Y. This was caused not by only around KRW 126 billion of Q1 wage peak retirement expenses as well as some labor cost items which have been divided and recognized in different quarters but also by factors including sports marketing expenses as well as other factors leading to seasonal administrative expense increase in Q3. The group's SG&A expenses, even including these one-off costs, is being maintained within KRW 1 trillion per quarter and is showing the appropriate progress rate compared to the early business management goals.

Looking at the bottom right side of the page, the group's 2019 Q3 end ROE and ROA each posted 10.01% and 0.69%, respectively, and improved Q-o-Q. The Q3 cumulative cost-to-income ratio posted 50.8% and is at a 48.7% level, excluding the sizable wage peak retirement expenses.

Let us now go to Page 4. The group's 2019 Q3 NIM, a sum of KEB Hana Bank and Hana Card, posted 1.72%, and KEB Hana Bank's NIM posted 1.47%, each declining by 9 bp and 7 bp Q-o-Q, respectively. The group's recurring level of decline was around 6 bp. Despite the efforts to have a more efficient internal portfolio with the BOK rate cut in Korea and concerns about additional trade conflict between the U.S. and China, the market interest rate in July and August rapidly declined. With the bank margin contracting, Card NIM also declined with the fee refund to new small and medium merchants, which were major reasons behind the drop.

With the disappearance of the nonrecurring items, including the previous quarter sizable delinquent interest recovery, deposit insurance fee exception, an additional downward pressure pulled down 3 bps and the group NIM fell by somewhat a large degree compared to the previous quarter. With last week's additional BOK interest rate cuts, Korean base rate has reached a record low level, and the global Central Bank's monetary easing policy is expected to continue until the first half of next year.

Accordingly, although we expect the NIM downward pressure to continue for Q4 of this year and in 2020, in order to guard the NIM decline as much as possible following the market environment deterioration, we will selectively grow the high-quality assets and manage the proportion of high-cost time deposits to actively improve our portfolio so that it is more focused on profitability.

Looking at the bottom right side of the graph -- the bottom right of the page, you can see the graph and the bank loans in won as of 2019 Q3 end posted a 1.8% Q-o-Q and 5.9% YTD growth, respectively, and posted KRW 214.6 trillion. Accordingly, despite the NIM decline, the group's Q3 interest income maintained the level of the previous quarter on the back of sound loan asset growth and grew 2.2% Y-o-Y.

In the case of Q3 fee income, with the delay of several IB deal closings, some underwriting and advisory fees decreased. And with the decline of asset management-related fees, including trust-related fees, fee income declined around 9.3% Q-o-Q. However, Q3 fee income grew 3.3% Y-o-Y. And accordingly, the group's core earnings also grew 2.5% Y-o-Y in Q3.

Next, let's go to Page 5. The group's Q3 and group's NPL ratio posted 0.48%, a 8 bp drop Q-o-Q end, and delinquency rate posted 0.35%, a 1 bp decline Q-o-Q end and showed downward stability. In addition, in the case of the group's cumulative credit cost ratio, as was aforementioned, it posted 17 bp, a 2 bp decline Q-o-Q end. Accordingly, on the back of the group-wide asset quality improvement and risk management efforts, many asset-quality indicators are continuously being stabilized.

However, taking into account recent rising concerns of economic downturn expansion, we must continuously take interest and strengthen asset quality management. The group's Q3 CET1 ratio is expected to post 12.25%, a 37 bp drop Q-o-Q. With the recognition of the Vietnam equity investment and related credit and market RWA being recognized in this quarter, the CET1 ratio declined around 31 bp.

Other than that, with the share buyback and rapid rise of the won-dollar exchange rate, around 31 -- around 37 bp of CET1 ratio effects took place. And excluding these nonrecurring factors, the Q3 CET1 ratio of the group was around 20 bp Q-o-Q and is being stably managed according to the profitability-focused asset growth strategy.

And now I will walk you through the group's business performance by each item. Please refer to Page 7 for the group's consolidated earnings. Of the group's Q3 general operating income, interest income stood at KRW 1.4588 trillion, maintaining a similar level Q-o-Q. However, if the NIM continues to go down at the current rate, then the interest income in Q4 could be reduced. As was mentioned before, the cumulative interest income is KRW 4.3454 trillion, up 4.2% Y-o-Y.

Fee income in Q3 was down 9.3% Q-o-Q to KRW 535 billion. As there is concern about economic recession in and outside the country, the conditions grow unfavorable vis-à-vis fee income related to asset management, which is sensitive to the market decline -- market climate. If some of the IB deals that have been put off are closed, then we may expect the fee income to recover in Q4. The group's cumulative fee income is KRW 1.6699 trillion, down by 2.3% Y-o-Y. However, this is mainly due to the base effect of last year when there was a variable annuity related transfer of account from other operating income to other fees.

So if we take out this factor, the cumulative normalized fee income grew 1.8% Y-o-Y. With the U.S. dollar continuing to grow stronger against the Korean won, valuation on sales in Q3 suffered a nonmonetary loss on foreign currency translation amounting to KRW 84.4 billion. Thus, there was a 30.4% fall Q-o-Q in valuation gain, recording KRW 61.2 billion. On a cumulative basis, there was a total of KRW 159.2 billion of nonmonetary loss in translation. But there was an increase of 1.5% Y-o-Y in valuation gain, thanks to improved profit from securities management.

Lastly on this page, the cumulative SG&A amounted to KRW 2.9883 trillion, managed within the range of the annual business plan. There were seasonal increases, such as sports marketing expenses, leading to a 6.2% increase Q-o-Q. But on a Y-o-Y basis, it fell by 4.4% with the ERP cost taken out.

And now on Page 8, net income of subsidiaries. The group's major subsidiary, KEB Hana Bank, recorded a cumulative net income of KRW 1.7913 trillion in Q3, up 1.9% Y-o-Y with the disposition gain on sale of the HQ building offsetting huge one-off items, such as wage peak, retirement cost and nonmonetary translation loss. Of this, the net income for Q3 is KRW 757.5 billion, up 36.7% Q-o-Q and up 33.9% Y-o-Y.

Hana Financial Investments' cumulative net income on a consolidated basis increased by 48.9% Y-o-Y to KRW 211.4 billion, although it was slightly sluggish in Q3. The overall performance, except for stock brokerage fees, was similar to that of the previous year. And the net income cumulative is much higher than the net income for the whole year of 2018. The recapitalization last year created an earnings power and improved the ROA.

Due to the lowered merchant fees, Hana Card's cumulative net income up to Q3 decreased 37.8% Y-o-Y to KRW 49.8 billion. And Hana Capital achieved cumulative net income of KRW 77 billion, which is similar to the previous year.

Please refer to the slides for other subsidiaries' business results, and Pages 9 through 11 deal with the NIM, noninterest income and SG&A details that I have mentioned earlier.

Moving on to Page 13, group's total assets, liabilities and equity. As of the quarter end, the group's total assets stand at KRW 420 trillion or KRW 540 trillion if the group's trust asset of KRW 120 trillion is included. KEB Hana Bank's assets, inclusive of trust assets, stand at KRW 437 trillion. The group's total liabilities are KRW 391 trillion, and total equity, KRW 29 trillion. KEB Hana Bank's loans in won and deposits on Page 14. As of Q3 end this year, KEB Hana Bank's loans in won is KRW 214.6 trillion, up 1.8% Q-o-Q and up 5.9% YTD.

Breaking down the loan growth by each item, corporate loans increased to KRW 102.8 trillion, up 6.8% YTD. Corporate bond issuance increased on the back of lowered interest rate and large corp loans decreased 4.1% in Q3 and by 1.2% YTD to KRW 14.4 trillion.

SME loans grew by 8.3% YTD to KRW 86.3 trillion, a robust momentum led by the sound SME loans. With an additional 2.4% growth in Q3, driven by the increase in Tranche A loans and final payment for apartment purchases loans, the household loans increased 5% YTD to KRW 111.8 trillion. Deposits in won as of Q3 rose 5.5% YTD to KRW 223.3 trillion. The low-cost core deposits increased 7.7% YTD, and time deposits increased 8% year-to-date, continuing with a stable funding structure.

In the middle of September, the MMDA balance decreased due to huge amounts of withdrawals by some large corporations and public agencies, driving down the portion of low-cost deposits compared to the previous quarter. As can be seen from the graph on the bottom right, the LDR in Q3 is 97.6%.

And now group's asset quality on Page 16. The group's total credit grew 7.1% YTD to KRW 282.6 trillion. And the amount of NPL fell 12.8% YTD to KRW 1.4 trillion. The group's Q3 NPL ratio is 0.48%, down by 11 bp YTD and down by 8 bp Q-o-Q, continuing with the downward trend from Q2.

On the top right, you see the group's new NPL formation in Q3 was KRW 145.4 billion, a huge decrease over Q2. That is because there was a significantly lower amount of new defaults, and some large corporate exposure was taken out of the NPL because their ratings were adjusted upward.

The bank's asset quality will be explained on the next page, Page 17. The bank's total credit rose 6.3% year-to-date to KRW 246.6 trillion in Q3, and NPL decreased 19.8% to KRW 1 trillion. This brought down the NPL ratio to 0.4%, down by 12 bp YTD and down by 7 bp Q-o-Q. The NPL coverage ratio for Q3 was up by 2.9 percentage points at 94.4%.

The bank's delinquency ratio in Q3 was 0.23%, down 2 bp Q-o-Q, recording the lowest ever in the history of the holding company. Household loan delinquency ratio was at a similar level to Q2, and the corporate loan delinquency was improved by 2 bp, continuing with the downward curve on the overall loan delinquency.

Provision on Page 18. The group's Q3 credit cost ratio was 0.17%, and KEB Hana Bank's credit cost ratio recorded 0.05%.

Lastly, capital adequacy on Page 19. The group's BIS ratio and Tier 1 ratio are estimated at 14.17% and 12.97%, respectively, in Q3. The group's CET1 ratio is expected to record 12.25%. As was mentioned in the beginning, the capital ratio fell Q-o-Q due to some one-offs, such as policies for securing profit base and a shareholder return. However, they are managed at an adequate level on a recurring basis, and we will continue to do our best to enhance capital efficiency and shareholder value based on the improved and stable business results. Please [index] for further details. This brings me to the end of Hana Financial Group's earnings presentation for Q3 2019. Thank you.

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Questions and Answers

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Junghoon Lee, Hana Financial Group Inc. - Head of IR Team [1]

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(Operator Instructions) We will take the first question. It is Mr. Kim Jin-Sang from Hyundai Motor Securities.

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

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Congratulations on your good performance. I would like to ask you 2 questions. First is about the NIM. You had some nonrecurring items. But I think you had a great decline in the NIM. Can you break down the reasons behind the NIM decline? And can you tell us about what caused the NIM to go down in the group and in the other subsidiaries? And can you tell us about the NIM forecast for Q4 and for next year? Please give us the NIM guidance.

And I believe that you had another nonrecurring item, the group's CET1 ratio has been going down for 2 quarters in a row. Can you tell us about your dividend payout ratio and if it has affected this ratio of CET1? And what is the dividend payout ratio that you are forecasting? So if you can give us a few words about capital management, it would be greatly appreciated. Are you also thinking of quarterly dividend payouts?

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Junghoon Lee, Hana Financial Group Inc. - Head of IR Team [3]

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Thank you for your questions. We will soon answer them.

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Seung-Iyul Lee, Hana Financial Group Inc. - CFO & Deputy President [4]

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Thank you very much for your questions, Mr. Kim Jin-Sang. Regarding the factors behind the NIM drop, compared to the previous quarter, in the group, 9 bps went down. And at the bank, 7 bps went down. And for the other bps -- 2 bps, it went from the card -- credit card. So talking about the bank's 7 bp decline, we had 6 bps going down from loan-to-deposit pricing. And for corporate or household loans, the interest rate also dropped. So this was partly due to that. And we also had time deposits. Because for time deposits, when the interest rate goes down, it can cover the NIM but cannot cover the household and other loans or SOHO loans.

So going forward, in Q4, we believe this type of situation can continue, and we believe that, in Q4, our NIM, I cannot give you the accurate numbers now, but I believe that we will have somewhat little decline continuing. And compared to the monthly NIM, it -- the quarterly NIMs are going down. And it will be quite difficult to forecast next year's NIM forecast, but we believe that it will be lower than the Q3 and Q4 NIM of this year.

Regarding the CET1 ratio drop and its relation to dividend payout ratio, in Q3, the BIS ratio went down and with the CET1 ratio going down, as you know, we have the share buyback, and we acquired BIDV in Vietnam. So those were factors that led to the drop. And in Q4, the BIS ratio, we believe, will be quite covered. That is why, in Q4, we believe that the total BIS ratio will push up. And then it will also push up the CET1 ratio and will not impact the dividend payout ratio that much, and we already gave out dividends last year. So please take those factors into consideration.

For the quarterly dividend payout idea, we are not considering that possibility at this time.

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Junghoon Lee, Hana Financial Group Inc. - Head of IR Team [5]

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Thank you for the question. Thank you for the answer. We'll wait for further questions to come on queue. We will take the next question from JPMorgan, Director, Cho Jihyun.

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Jihyun Cho, JP Morgan Chase & Co, Research Division - Research Analyst [6]

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The -- I was wondering about your effort to strengthen fee income and the noninterest income. How do you plan to respond? And I have questions about the DLS and -- DLS, the maturity, and how that will impact your profit? And is your strategy for selling these structured products going to change? And as for acquiring equity in the Vietnam entity, we thought that this would be finished by the year-end. The CET1 ratio is affected. So what is the schedule for that?

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Seung-Iyul Lee, Hana Financial Group Inc. - CFO & Deputy President [7]

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Yes. Let me talk about the schedule for acquisition of BIDV. The Central Bank or the supervisory agency of Vietnam, as soon as there is approval, we will make the payment from our escrow account, and the deal will be closed, and that will be closed by the year-end.

And as for the DLS and the income, well, there has been a social issue. And the fee income coming from selling these products will not be that strong. And to make up for that, we want to strengthen the IB fees and the retirement pension fees, and we want to build a base of products in which we can gain the fee income to make up for this.

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Junghoon Lee, Hana Financial Group Inc. - Head of IR Team [8]

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We'll take the next question from DB Financial Securities, Mr. Lee Byung Gun.

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Byung Gun Lee, DB Financial Investment Co., Ltd., Research Division - Team Leader [9]

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Congratulations on your performance. I would like to ask about your growth strategy. This year, you had grown sizably. And I think that made up maybe for -- somewhat for the NIM decline. And I believe that the high growth could have caused some of the NIM decline. However, entering the latter part of the year, since the loan conversion program has taken part, and although, it hasn't been mentioned, I think there are future plans for growth strategy next year, although the economic situation may not permit this. So I'm curious about your stance. And if you can also give us your forecast on NIM forecast? And do you think the interest income can grow next year? And when you grow, for Tranche A loans and SOHO loans, we will have more heated competition there, so can you give us your thoughts?

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Junghoon Lee, Hana Financial Group Inc. - Head of IR Team [10]

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Thank you very much for your questions. Please hold.

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Seung-Iyul Lee, Hana Financial Group Inc. - CFO & Deputy President [11]

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For next year, regarding our growth strategy, as you are quite aware, I believe, well, we had grown quite sizably, but for next year, we believe that the BIS ratio or other economic downturn factors could exist. So we believe basically that pursuing sound growth is optimal. And for [RRW], it's being looked at for ROE as well. So we believe that it will be quite hard to grow as much as this year. It is quite evident. However, with the NIM decline in Q3, we are starting the Q4. So compared to this year, next year's interest income, I think, will be quite hard to grow compared to this year.

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Junghoon Lee, Hana Financial Group Inc. - Head of IR Team [12]

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We have no other questions on the line. So please hold. I'm still waiting for additional questions to come up, please hold. From Morgan Stanley Securities, Mr. Seok Joon, please.

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Joon Seok, Morgan Stanley, Research Division - Executive Director [13]

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Congratulations. I have 2 questions. One is related to the Card. It seems that the results are a bit sluggish, and what are your strategies for the next year? And how much improvement can you make? And I also have a question about the cost. Any additional measures to be more cost efficient?

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Junghoon Lee, Hana Financial Group Inc. - Head of IR Team [14]

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Thank you for the questions. Please hold.

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Seung-Iyul Lee, Hana Financial Group Inc. - CFO & Deputy President [15]

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Yes, as far as the cost management, next year at a group level, we have now gained KRW 300 billion after tax for the proceeds from the sale of the headquarter building. And we are now thinking of measures to cut costs. Interest income and fee income will be difficult to get next year, so we will continue with the cost-cutting measures. We could digitalize the product sales and make the channels and human resources more efficient, and we'll be able to squeeze or minimize the cost. That was the answer for the cost. And now as to the first question about the Card.

Yes, let me answer the question about the Card. There was the lowering of the merchant fee and that shows in our card performance, but starting in the early part of this year, we are -- we have managed the strategies so that there is organization restructuring and to try to maximize the business efficiency in Card, and we are strengthening the digital value chain, and we're going to diversify the profit sources, and we're going to strengthen our fundamentals.

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Junghoon Lee, Hana Financial Group Inc. - Head of IR Team [16]

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Thank you for your answer. We have no other questions in the queue. So please hold. We have no further questions on the line, and we will conclude the 2019 Q3 Hana Financial Group Earnings Release. Thank you very much for your participation, and you can visit our website for the earnings presentation. We also have our IR book that will be put up on the website. For those who can -- who would like to ask questions, please contact our IR team, and we'll be happy to answer your questions. Thank you very much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]