Woori Financial Group Inc.

Good afternoon. I am Lee Jeong-Soo, head of the IR department at Woori Financial Group. Let me extend my deepest gratitude to everyone who is participating in this earnings call today. On today's conference call, we have the CFO, Mr. Lee Seong-Wook, and also the CRO, Mr. Jeong Seok-Yeon, and CDO, Mr. Hwang Won-Chul. Because of COVID-19, Please understand, we have tried to keep the attendees to a minimum. Today, we will start with a presentation on our performance, after which we will have a Q&A session. In addition, we have simultaneous interpretation for our overseas investors ongoing. Let us start the first half 2021 presentation on URI Financial Group. Good afternoon. I am Lee Seong-Wook, CFO and Head of the Financial Division at Uri Financial Group. First, let me thank everyone who is participating on this call for the first half of 2021 for Uri Financial Group. In addition, I would like to take this opportunity to express my gratitude for our shareholders and other market participants for your trust and support in our company. We, Financial Group, in order to strengthen communication with our shareholders and investors in Korea and abroad, will be conducting earnings conference calls from this quarter going forward. With that, let me walk you through the first half 2021 financial performance for the group. Please refer to page three of the presentation materials, which are available on our website. First, Let me go over the net income. The first half 2021 net income for the group was 1 trillion 420 billion KRW. Amid local and global uncertainties due to a prolonged COVID-19 situation, the group was able to exceed last year's full year performance in only six months. The first half performance was up by 114.9% year over year, to choose stronger profit generation capabilities after the holding company transition and stable asset soundness and active cost-saving efforts for the group. For the second quarter 2021, the net income was $753.1 billion. On a per-quarter basis, the first quarter represented the highest performance to date. However, this quarter was a 12.9% QOQ increase, once again setting a new quarterly high. Next is net operating revenue. The group's first half net operating revenue was $4,044,001, up 18.6% year-over-year. Net interest income was $3,323,001, and non-interest income was $721,001. For interest income, the main subsidiary of the group, Uri Bank's solid loan and core deposit growth, continues to drive momentum and improvements in the profit structure. In addition, on the non-interest income side, increasing synergy between subsidiaries after the holding company transition has taken profit generation capabilities to the next level. In terms of quarterly net operating profit, for the first time since establishing the holding company, it has exceeded $2.1 trillion to post $2.57 trillion, which is 3.5% higher QOQ than and 26% higher YOY. Next, let me walk you through the cost side, such as SG&A and credit cost. For the first half group SG&A, it totaled $1,856,001,000,000, an increase of 3.7% YOY. The main drivers are the newly included capital company and savings bank. When excluding these companies, the increase YOY was only around 0.9%. As a result of group-wide cost-saving efforts, the group's cost-income ratio for the first half was 45.9%, an improvement of 6.6% points YOY. The first half group credit cost was $205.1 billion, and the credit cost ratio was 0.13%, lower 0.2% points YOY. A recovery in the shipbuilding and shipping industries led to some reversals in provisions, but even... If this one-off event is excluded, the normal credit cost ratio was 0.17%, showing that the group's key asset soundness indicators are also at the best level in our history. Next, let me go over the group's business in detail by area. Please turn to page four of the presentation. First, I will walk you through the interest income and the NIM. The first half group net interest income totaled 3,323,001,000,000 up by 382,001,000,000 or 13% YOY. The second quarter bank-only NIM was 1.37%, an increase of 0.02% points QOQ, and the group NIM, including the credit card business, was 1.61%, an improvement of 0.01% points QOQ. Even though the market rate, which rose quickly in the second quarter, has somewhat slowed, core deposits increased 10.6% versus the end of 2020, and loan repricing has enhanced lending rates, which led to an improvement in NIM of 0.02% points QOQ. So NIM continues to improve. In addition, next let me touch upon asset growth and our loan portfolio. Bank assets as of June totaled $276.1 trillion, Up by approximately 11 trillion won, or 4.4% versus the end of last year. Household loans stood at 133 trillion won, an increase of 2.1% versus the end of last year, and corporate loans grew 6.9% to reach 141 trillion won, mainly driven by SME loans during the same period. In the second half, to concentrate on capital adequacy and asset soundness, the bank is planning to control its asset growth. In the first half, even though loans grew more than 4% and COVID-19 financial support was extended, We Bank's percentage of prime assets was 88.5% as of June end. Since the end of March 2019, the bank has been able to consistently maintain a level above our target of 85%, showing that our soundness is being maintained at a very stable level.

Next is on the group's non-interest income. In the first half, the group's non-interest income stood at $721.1 billion, which significantly grew by 54.1% year-on-year. Particularly, fee income, which is the core of non-interest income, posted a quarterly record high at Q1 ever since the establishment of the holding company, and this was followed by a performance of a mid-to-upper $300.1 billion range in the second quarter amid improving sales performance of the banking card business, The newly acquired capital business and the subsidiary synergy started to kick in in earnest. Meanwhile, the group's second quarter non-interest income stands at $354.1 billion, which is a 3.5% decrease, QOQ. However, when we exclude the one-off factors of Q1 amounting to $50.1 billion, including profits from the sale of foreign currency bonds, the upward trend for non-interest income continues. Next is on expenses and capital adequacy. Please refer to page 5. As aforementioned, the group's SG&A expense stood at $1,856,001, which is a $66,001,000,000 increase year-on-year. However, when excluding the impact coming from new acquisitions including the capital and savings bank business, the increase was limited to approximately 0.9% YOY. Currently, Woody Financial Group, in order to stably manage the cost-to-income ratio, executing intensive efforts across all subsidiaries to cut SG&A While we will be engaging in bold investments in digital and IT for sustainable growth, the group's target for this year is bringing the CI ratio down by 5% compared to last year to approximately 50% levels. Moving on to credit cost. Group credit cost in the first half was $205 billion. Compared to the same period of the previous year when large-scale preemptive provisioning was executed reflecting future economic outlook, credit cost decreased 54.1% YOY. Credit cost ratio decreased 0.20 percentage point year-on-year, improving significantly to 0.13%. As mentioned earlier, due to earnings improvement in certain sectors in the second quarter, there was a reversal factor. However, even if we exclude this one-off reversal factor, credit cost ratio stands at 0.17% and is being managed at very stable levels. As of the end of June, our NPL ratio and delinquency ratio were 0.37% and 0.26% respectively, and the NPL coverage ratio was 163.0%, which is continuously improving compared to the end of the previous year. Recently, Global Credit Rating Agency on June 16th upgraded Udi Bank's long-term credit rating from A to A+. This is considered as an external recognition of the fact that the group's asset quality is being managed in a stable fashion despite the prolonged impact of COVID-19. Next, let me elaborate on capital adequacy and dividend policy. As of the end of June, the group's expected CT1 ratio posted 10.2%. Currently, the company is implementing the internal ratings-based approach only in certain areas such as individual and retail, and once the internal ratings method receives its final approval, the group's capital ratio is expected to further improve by more than 1%. Considering the financial authority's announcement of the lifting of the dividend restriction in June, Business Performance Exceeding Market Expectations and Past Dividend Payout Ratio, the company confirmed and disclosed the dividend record date for the interim dividend on July 2nd. As the Board of Directors meeting that decides on the dividends is yet to be held, we cannot disclose the exact dividend amount at this time, but we will disclose the information as soon as it is decided. As mentioned in the General Shareholders Meeting and the Disclosures of Business Reports, the company is reviewing various shareholder return policies within the scope of maintaining capital adequacy and plans to raise the dividend payout ratio to 30% in the mid to long term. Furthermore, the Bank of Korea recently mentioned the possibility of raising the base rate within the year. Let me elaborate on the impact of the base rate hike on our profitability and soundness. Please refer to page 6. As of the end of June, Woody Bank's loan assets within the group accounts for approximately 79.7%, of which the variable interest rate proportion is 72.4%. Among the floating rate of loans, the COFIX-linked loans, which are the standard for mortgage loans accounted for 25%, and the proportion of loans linked to three-month CD and Coribor rates, which are highly correlated with the base rate, is approximately 34%. Taking into account that Woody Bank's portfolio has a high correlation with the direction of the base rate, we expect our interest income to increase rapidly when the base rate is raised in the future. Interest income is expected to increase, and if the base rate is raised by 25 BP, we expect interest income to increase Approximately $175 billion won for one year after the raise. On the other hand, at this point in time with the rapid rise of market interest rates and as we see a possible base rate hike, there are concerns about a possibility of insolvency of some marginal companies. The company has continuously rebalanced its asset portfolio that has been concentrated in a specific industry and companies in the past and thus minimized the concentration risk. The proportion of loans to large corporations has been reduced from 20.8% at the end of 2015 to 13.3% as of the end of June 2021. In addition, the proportion of loans to cyclical sectors was reduced from 22.3% at the end of 2015 to 10.3% as of the end of June 2021. These achievements have led to the above-mentioned upgrade in S&P's credit rating and Any asset deterioration due to interest rate hikes is expected to be very limited. This concludes the presentation of Woody Financial Group's earnings for the first half of the year. We will now begin the Q&A session. If you have any questions, please press the star and number one on your phone. To cancel your question, please press star and number two. For proceedings of the session, we will receive only one question per person.

So the first question will be from Hyundai Motor Securities, Mr. Kim Jin-Sang. So please go ahead with your question. Good afternoon. Thank you for your very good performance. In terms of your capital policy, I would like to ask a few questions. So I do believe that the CFO has touched upon the basic direction. However, in terms of the IRB and the impact of that, you did say that there would be an uplift of around 1% points. However, in terms of introduction, when do you think this could actually be introduced? It might not be introduced, but meaning 100% application, when do you think that will actually take place? And in addition to that, in terms of your capital policy, that will give you more room to maneuver, So this time around, you did say that you would be paying out interim dividends. Is this something that will be regular? And would it be possible to you actually expand that to provide quarterly dividends? Is there a possibility of that taking place? In addition, in terms of for your shareholder return policy, for your growth and also shareholder return aspects, could you maybe divide about what your policy would be going forward in each area and what your stance would be in those areas? Yes, this is the CFO, and maybe I can answer your questions. I do believe that you have asked a long range of questions about our capital policy. In terms of IRB application, right now we are looking for the authority's approval. Realistically, we are currently looking at a September-ish timeline, and that is the expectation. So as of the end of September, we do believe that at that time, our overall capital will be able to increase by around 1% points. In terms of the interim dividends, this is something that we did have a limit for dividends around 20%, and that is why this year around we are able to pay out interim dividends. Whether this will be something that we will do on a regular basis is something that we will have to review at the end of the year. So as of now, we will not have anything definitive that we will be able to share with you. In addition, For the end of the year dividend payout ratio and also what we will be doing going forward, as we have mentioned before, the dividend payout ratio that we're looking to achieve over the longer term would be at around 30%. So this time around, we will be doing an interim dividend. However, one thing that the authorities have proposed is that it would be that a 30% cap should be taken into consideration for the full year. So as a result of that, that will be something that we will take into consideration, and at the end of the year, We will look at a level that is higher than our previous years and within the range that the government has recommended. In terms of our M&A opportunities, even if our capital ratio has improved, we believe it will be in the lower 11% range. So versus our peers, we do believe it will be slightly lower. So in the current time, for the capital ratio, any M&A opportunities that we would look at would be within the scope that it would not have a hit on our capital ratio. So I do believe that going forward, if there's more tangible opportunities, we would be able to discuss. But right now, our interest would be in the securities area because we do believe securities brokerage is an area that we would like to beef up. And then in other areas, we would look at opportunities that would not impact our overall capital ratio. So for the capital policy that we have right now, 10.5%, which we do believe is a market minimum, is something that we want to maintain at a minimum. And over the longer term, we want to be above 11%.