The author is an analyst of KB Securities. He can be reached at cygun101@kbfg.com. — Ed.
Mid-/long-term shareholder return policy proportionate to CET1 ratio level
— HFG posted 2022 consolidated NP (attributable to controlling interests) of KRW3.6tn (+2.8% YoY).
— NII rose 20.0% YoY with growth in both KRW-based loans (+6.7% YoY) and NIM (+21bps). However, non-interest income fell 20.6% on a drop in fee income (real estate project financing) and reflection of both non-monetary FX losses (unfavorable FX rates) and losses on valuation of marketable securities. Loan loss provisions rose 109.1% YoY (+KRW580.9bn).
— HFG announced its mid-term capital policy at its earnings conference call:
(1) At a CET1 ratio ranging from 13.0% to 13.5%, half of capital responsible for a YoY increase in the ratio will go to shareholder return. If the CET1 ratio exceeds 13.5%, all excess capital will go to shareholder return.
(2) The mid-/long-term target for shareholder return ratio is set at 50%; HFG plans to gradually increase DPS and engage in share buybacks/retirements to compensate for earnings fluctuations.
(3) Quarterly dividends will be introduced.
— A capital ratio increase will be driven by current year profits and RWA growth. For example, 10% ROE and 4% RWA growth would result in +0.7pp in CET1 ratio; in such a case, capital accounting for 50% of a CET1 increase (or +0.35pp in CET1 ratio) will raise shareholder return to 30%.
— The 4Q22 CET1 ratio was 13.15% and 2022 dividend payout ratio was 27% (KRW800 interim DPS; KRW2,550 year-end DPS).
Conservative provisioning policy, relatively decent performance
— HFG posted 4Q22 consolidated NP (attributable to controlling interests) of KRW776.3bn (-8.1% YoY), falling 11.5% below the market consensus. The shortcoming was attributable to:
(1) additional provisioning of KRW247.2bn based on HFG’s economic outlook and
(2) KRW64.3bn in valuation losses for securities subsidiaries’ overseas alternative investment-related assets.
— We view the performance as relatively decent given that HFG’s banking subsidiaries saw:
(1) loan growth of 2.1% (corporate +4.6%; household -0.6%), higher than that of peers;
(2) NIM advance 12bps (7bps from early withdrawal of deposits), also higher than that of peers;
(3) KRW161.4bn in non-monetary FX gains amid favorable FX rates; and
(4) negative one-offs (e.g., conservative loss provisioning; valuation loss for marketable securities) that were not as significant as they were at other commercial banks.
— Group NII income rose 6.0% QoQ, while non-interest income increased 4.6% QoQ), with FX gains offsetting a decline in real estate PF-related commissions.
— 4Q22 CCR came in at 52bps, increasing the burden of loss provisioning by 33bp QoQ.
— NP by subsidiary, Banking posted KRW925.4bn (+48.4% YoY), Card KRW26.4bn (-48.7% YoY), Capital KRW45.3bn (-42.5% YoY) and Securities -KRW159.5bn (turn to red YoY).
