Thank you for taking part in the 2014 first half Hana Financial Group Business Results Presentation. I am Lee Jung-hoon from Hana Financial Group IR Team. Thank you, our shareholders, analysts and other market participants who are joining in today’s earnings release via phone or the internet and let us now begin the 2014 first half Hana Financial Group business results presentation.
Let me first introduce the Group management who are here with us.
From Hana Financial Group, we haveGroupChief Finance & Strategy Officer, CFO& CSO, Lee Woo-kong; Group Chief Risk Management Officer, CRO, Hwang Hyo-sang.From Hana Bank, Risk Management Group Head, Lee Young-jun; Business Management Group Head, Park Hyung-joon.From KEB, Planning & Management Group Head, Joo Jae-jung; Risk Management GroupHead, Ann Byung-hyun. From Hana Daetoo Securities,Business Administration Group Head, KangSeung-won; and from Hana SK card, Management Support Division Head, KoHyung-seok are here with us.
We will first hear the 2014 first half business results presentation then have a Q&A session via phone connection.
Now I would like to invite our CFO, Lee Woo-kong to deliver the 2014 first half Hana Financial Group earnings presentation.
Greetings, I am Lee Woo-kong, CFO of Hana Financial Group. I’d like to walk you through the business results of Hana Financial Group for the first half of 2014. 2014 first half financial highlights consists of four parts profitability, total lending and funding, asset quality and capital adequacy.
First profitability. Please look at page four.
Please refer to page 4.
Hana Financial Group during the first half of 2014 realized KRW610.1billion of net income, a 17.6% increase Y-o-Y. Q2 net income recorded KRW417.4 billion a 116.6% growth Q-o-Q. Major highlight of Q2 was the even growth of overall core profit including growth of down-interest income and fee income with an appropriate level of SG&A management thanks to cost efficiency as well as provisioning stabilization, there was notable ordinary income improvement.
On the other hand, there were one off gains with a non-monetary income gains following the SK Hynix securities disposition gains and the strong won resulting in net income making up for last quarter’s weak performance.
Major Group subsidiary, Hana Bank and KEB’s consolidated net income in the first half of 2014 recorded KRW556.2 billion, and KRW319.5 billion respectively, a 61.5% and 63.4% growth Y-o-Y respectively.
Hana Bank KEB and Hana SK Card total Group 2014 Q2 NIM recorded 1.93%, a 2bp increase Q-o-Q. Hana Bank 2014 Q2 NIM excluding card posted 1.50%, a 3bp increase Q-o-Q.
KEB’s NIM including KEB Card recorded 2.04%, a 3bp drop Q-o-Q. Through sound loangrowth leading to interest bearing asset growth and through funding cost management, both banks were able to have a rise in interest income Q-o-Q.
2014 first half major business indicators of ROE and ROA posted 6.06% and 0.42% in a cumulative basis respectively. Cost income ratio recorded 58.7%.
For your reference, excluding the KRW55.3 billion of first half negative goodwill write-off occurring from the KEB acquisition in 2012, the Group’s cost income ratio recorded 56.1%.
So consolidated asset as of 2014 Q2-end including Group’s trust assets, posted KRW393.6 trillion, a 6.8% growth Y-o-Y and 2.7% increase Q-o-Q, showing a continuous asset growth trend. Hana Bank consolidated assets as of end-second quarter posted KRW194.2 trillion, a 6.8% growth compared to last year-end. In the case of KEB, recorded KRW147 trillion, a 8.3% increase compared to end-last year.
The total loans in won balance as of end second quarter for 2014 or sum of Hana Bank and KEB’s loans in won posted KRW163.2 trillion, a 3.4% and 1.2% increase compared to last year-end and Q-o-Q respectively.
In the case of Hana bank in the first half, through even growth of householdloans and corporate loans, KRW110 trillion of loans and won balance a 2.4% increase compared to last year-end was posted. KEB’s corporate loans went up 12.8% compared to last year-end and 10.9% increase for SME loans in the same period. However household loans went down 3.7% compared to end of last year, KEB recording KRW53.2 trillion of loans in won balance, a 5.5% increase compared to end of last year.
Next page, Hana Bank and KEB’s 2014 second quarter total deposit average balance recorded KRW184.3 trillion, a 2.7% and 1.7% increase compared to last year-end and Q-o-Q respectively. Hana Bank second quarter average deposit balance recorded KRW115.3 trillion, a 2.4% increase compared to end last year. KEB’s deposit, average deposit balance recorded KRW69 trillion, a 3.3% increase compared to last year-end.
10Next, asset quality, NPL loans.
The Group NPL ratio as of 2014 second quarter-end recorded 1.42%, a 0.02% increase Q-o-Q. As you can see on the bottom right side of the chart, the Group’s NPL ratio rise was caused mainly by the 0.15% increase in KEB’s NPL ratio Q-o-Q. This was partly because of the real estate rental business and PF loan downward classification, leading to new NPL going up approximately more than KRW100 billion. However, the size of the KEB write-off and sell-off was smaller than the previous quarter and the provisioning effect caused by the loan downward classification was relatively limited because there was more than 20% of collateral and pre-provisioning.
With the slight increase in new NPL assets Q-o-Q and with the approximate KRW 110 billion growth of write-off, sell-off and debt equity swap Q-o-Q. Hana Bank second quarter and NPL ratio recorded 1.33%, a 0.09% drop Q-o-Q.
Next page, delinquency. The Group delinquency ratio as of 2014 end second quarter posted 0.68%, the same as the previous quarter. Hana Bank’s delinquency ratio recorded 0.51%, a 0.07% drop Q-o-Q and KEB’s delinquency ratio posted 0.56% a 0.06% rise Q-o-Q. Delinquency of approximately KRW30 billion of KTENS factor receivable was the main cause of KEB delinquency rise but full provisioning was made for the loan in the previous quarter when it filed for bankruptcy.
Next page, second quarter cumulative credit cost posted 0.48%, a 0.03% drop Q-o-Q. As you can see on the right graph, Hana Bank’s credit cost posted 0.31%, a 0.03% drop Q-o-Q. KEB’s credit cost posted 0.59%, a 0.06% drop Q-o-Q.
Next, capital adequacy. Group’s expected BIS ratio and Tier 1 ratio as of 2014 second quarter end posted 12.23% and 9.56% respectively, 0.22% and 0.23% rise. We expect to see the BI ratio going up because although the risk weighted asset growth was limited due to the Q2 profitability based asset growth trend, the retained earnings went up relatively largely compared to the previous quarter thanks to performance improvement.
Hana Bank’s expected BIS ratio and Tier1 ratio stand at 13.74% and 10.78%, a 0.22% and 0.23% increase Q-o-Q.
15In the case of KEB, the expected BIS ratio and Tier 1 ratio posted 13.46% and 11.45% respectively, a 0.09% and 0.12% increase.
I would now like to cover the Group’s first half business performance in detail. Please refer to the Group’s consolidated statements on page 17. First, the Group’s general operating income. Among the Group’s general ordinaryincome, interest income with astrong loan growth trend and second quarter NIM growth posting 4.3% and 3.6% rise Y-o-Y and Q-o-Q respectively.
Fee income rose 1.1% Y-o-Y. In particular, the Q2 fee income went up 9.6% Q-o-Q with the overall even growth including credit card fee, asset management and loan FX fee income. With one-off gains including the non-monetary KRW106.1billion following the strong won and KRW45.6 billion of SK Hynix disposition gains as well as the much smaller National Happiness Fund impairment losses compared to the previous quarter, disposition valuation gains went up 224.9% and 565.8% Y-o-Y and Q-o-Q respectively.
Accordingly, the general operating income of the Group posted 7.8% and 19.6% increase Y-o-Y and Q-o-Q respectively and recorded KRW3,189 billion. First Half SG&A is being managed at an appropriate level at KRW 1,870.5 billion a 1.1% increase Q-o-Q taking into account the KRW16.6 billion ERP costs of Hana Daetoo Securities, the level of SG&A being maintained at a similar level to the same period in the previous year.
With no major credit event and with a stable flow Q2 loan loss reserves has gone down KRW31 billion Q-o-Q posting KRW261.7 billion, and is being maintained within the yearly guideline.
Next, page 18, subsidiary business results, Hana Bank consolidated 2014 first half net income as aforementioned posted KRW556.2 billion and KEB’s consolidated net income recorded KRW319.5 billion. To elaborate on the notable net income influencing events of the subsidiaries in the Hana Bank Q1 consolidated business results KRW97.3 billion of the securities disposition gains as a result of the Hana Bank Indonesia subsidiary integration to KEB Indonesia subsidiary was not included at Group’s consolidated business results.
In the case of KEB Q2 consolidated business results, KRW44.8 billion of SK Hynix security disposition gains were not included in the Group consolidated business results. Please take this into consideration, Hana Daetoo Securities and Hana Capital first have separate net income recorded KRW19.2 billion, and KRW26.1 billion respectively, and please refer to the materials for further information about the other subsidiaries.
Now, page 19 the Group’s NIM, as was mentioned before combined NIM of Hana Bank, Hana SK Card and KEB for Q2 rose 2bp to 1.93 Q-o-Q.
Hana Bank realized NIM of 1.5% of3bp Q-o-Q thanks to portfolio adjustment effect from stable increase in loans and also to reduction of interest expense ratio from redemption of high interest rate subordinate debt. KEB due to reduction of interest spread for corporate loans at Korean won net interest spreads are decreased, so its NIM dropped by 3bp to 2.04%. Despite these NIM or NIM drop KEB still enjoy the steady increase in corporate loans leading to increased interest income Q-o-Q.
There has been continued drop in market rate due to the anticipated rate cut to stimulate domestic demand since June and this will make it difficult to improve interest income for the time being.
However in the second half, we will manage NIM by steadily improving the portfolio through expansion of loans to help the SMEs and through controlling time deposit expense ratio.
Non-interest income and SG&A expenses will be covered on page 20.
In the first half of 2014, the Group’s non-interest income rose 18.6% Y-o-Y KRW868.7 billion. The graph on the right hand side shows that the Group with KRW453 billion has recorded highest level of quarterly fee income since the acquisition of KEB.
Thanks to healthy increase in fees for credit card., loan and foreign exchange and asset management, there was overall improvement in the fees for the Group. Thanks to Group-wide effort to attain cost efficiency in the first half of the year. SG&A expense dropped 1.8% Y-o-Y and non-personnel expenses were kept at the same level as the same period last year. The SG&A expenses were managed within the planned annual budget.
Next on page 22 is the total asset liabilities paid to, off the Group. The Group’s total asset at the end of Q2 stood at KRW314.9 trillion. And with the Trust assets included the number increases to KRW393.6 trillion.
Trust asset inclusive total assets for Hana Bank and KEB were KRW194 trillion and KRW147 trillion respectively. The Group’s total liabilities stood at KRW293.5 trillion and equity reached KRW21.4 trillion.
As of end of Q2 Hana Bank’s Korean won loan balance rose 2.4% from the end of last year and 0.7% Q-o-Q to record KRW110 trillion. Let us now look at details. Loans to large corporates rose 2.9% YTD and 1.3% Q-o-Q to stand at KRW17 trillion. Loans to SMEs grew 2.7% YTD and 0.8% Q-o-Q and reached KRW35.3 trillion. Household loans jumped 2.4% Y-o-Y and 0.3% Q-o-Q to reach KRW56trillion. Average balance of deposit was KRW115.3 trillion up 2.4% from the year-end. In particular core deposits rose to KRW16.7 trillion up 7.1% YTD and 1.7% Q-o-Q demonstrating sound improvement in the funding structure.
KEB’s loans and deposits in Korean won are explained on page 24. At the end of Q2 2014 KEB’s Korean won loan balance increase 5.5% YTD and 2.4% Q-o-Q to stand at KRW53.2 trillion.As for details, KEB realized KRW12 trillion of large corporate loans of 12.8% YTD and 3.2% Q-o-Q. Its loans to SMEs were KRW19.1trillion up 10.9% from the year-end and 4.6% Q-o-Q.
However household loans declined 3.7% Y-o-Y and 0.4% Q-o-Q and recorded KRW21.1 trillion due to drop in mortgage loans. Average balance of deposits rose to KRW69 trillion, growing 3.3% YTD.
The group’s asset quality is covered on page 26. The Group’s total credit at the end of Q2 of 2014 was KRW231.4 trillion, NPL amount was KRW3.3 trillion, total credit rose KRW610 billion Q-o-Q and NPL amount grew by KRW44 billion Q-o-Q.
NPL ratio was 1.42% up 0.02%. NPL coverage ratio was 119.7%. NPL increase before write off, the sell off and debt equity swap in other words, the new NPL increase was KRW482 billion. It is rather a healthy number given seasonal factors such as half-year and periodic review combined new increase in NPL from Hana Bank and KEB was KRW430 billion and new NPL increase from other subsidiary was up around KRW50 billion.
Let me now delve into the Banks’ asset quality on the next pages.
Hana Bank’s asset quality, Hana Bank’s total credit at the end of Q2 was KRW126.7 trillion. During the same period its NPL dropped KRW110 billion to KRW1.68 trillion. NPL ratio at the end of Q2 stood at 1.33% down 9bp Q-o-Q and NPL coverage ratio was similar to the previous quarter at 118.7%.
Delinquency ratio for Hana Bank at the end of Q2 was at a healthy level up 0.51% down 0.07% Q-o-Q.
Page 28 covers KEB’s asset quality. As of end of Q2 KEB’s total credit was KRW85.5trillion. NPL amount was KRW1.08 trillionup KRW130 billion Q-o-Q.NPL ratio rose 0.15% to 1.27% and NPL coverage ratio dropped 13.6% to 124.6%.
The delinquency ratio for KEB at the end of Q2 rose 0.06% to 0.56% showing relative stable level of delinquency ratio.
Provisioning is covered on page 29. The Group’s credit cost at the end of Q2 dropped 0.03% Q-o-Q to 0.48% and credit cost for Hana Bank and KEB were 0.31% and 0.59% respectively.
Page 31 covers the Group’s capital adequacy. Anticipated BIS ratio and Tier 1 ratio for the Group as end of Q2 are 12.23% and 9.56% respectively.
Group’s common equity Tier 1 ratio, common equity Tier 1 ratio that is, is expected to be 9.8% and debt to equity ratio and double leverage ratio are expected to be 28.48% and 126.02% respectively.
Page 32 capital adequacy of Hana Bank and KEB.At the end of Q2 2014 Hana Bank’s BIS and Tier 1 ratio are expected to be 13.74% and 10.78% respectively. For KEB anticipated BIS and Tier 1 ratio are 13.46% and 11.45% respectively. Please refer to the attachment for other major management indicators.
This concludes the earnings report for Hana Financial Group for the first half of 2014. Thank you.