Thank you for taking part in the Hana Financial Group Business Results Presentation. I am Lee Junghoon, IR Team Leader at Hana Financial Group. Thank you shareholders, analysts and other market participants for joining in today's earnings release via phone or the internet. Let us now begin the 2016 Q1 Hana Financial Group business results presentation.
Let me first introduce the Group management who are here with us to answer your questions.
From Hana Financial Group, we have Vice Chairman, Kim Byoung-ho; and Deputy President of Finance and Stratergy, our CFO Kwark Cheol-seung. We also have Group CRO, Chief Risk Officer and SEVP Hwang Hyo-sang. Next from KEB Hana Bank, Executive Vice President and in charge of Planning and Management Group, Lee Seung-lyul is here with us.
For today, we will first hear remarks from our Vice Chairman, and then CFO Kwark Cheol-seung will deliver a presentation on business performance. Then we will have a Q&A session via phone. First, we will hear introductory remarks from our Vice Chairman, Kim Byoung-ho.
It's great to be here today. I am Vice Chairman, Kim Byoung-ho. I would like to express my gratitude to all the investors, analysts and market participants for joining our earnings release for Hana Financial Group.
With the continued low interest rate regime and difficulties in the local and global environment, we are aware that there are many concerns and worries about the Korean financial industry and about our Group.
Moreover, we regrettably have disappointed many and did not meet the investors' expectations with business results and share prices from our 2012 KEB acquisition to the bank integration in September of last year.
However, in this difficult environment, Hana Financial Group has made continued efforts to stabilize the Group.
First of all, after the successful bank integration, not only profitability but also asset quality and capital stability is being improved at a fast pace. Further, details of the Q1 earnings will be presented to you by our CFO Kwark Cheol-seung later on. But let me mention that in the case of Q1 earnings, despite a difficult economic situation first domestically and globally which puts a burden on improving the top line including the interest income and fees, the preemptive risk management and cost control efforts, we have been enabled to reduce the provision for credit losses and SG&A. Bottom line has also showed a marked improvement.
I am extremely pleased to be able to present such positive results through today's earnings release, especially with regards to capital adequacy issue, which is an object of much concern in the market. We have been able to significantly raise the CET1 ratio to improving our loan portfolio, and by engaging a strengthened management of risk-weighted assets, I'm convinced we have proved the market the level of commitment and our ability to deliver on our promises.
Now such a recovery trend is expected to accelerate after the banks’ IT integration scheduled for this June.
Going forward, we will continue to do our best to further enhance our shareholder value and normalization of group operations. So we ask for your continued support and trust towards Hana Financial Group.
Thank you very much.
Thank you very much. Next I would like to introduce our CFO, Kwark Cheol-seung, who will deliver the 2016 Q1 Hana Financial Group business results.
Greetings. I am Kwark Cheol-seung, the CFO of Hana Financial Group. I'd like to walk you through the 2016 Q1 Hana Financial Group business results.
First, page four.
First, I would like to cover 2016 group financial highlights. Hana Financial Group in 2016 Q1 posted KRW437.9 billion of net income 17.1% growth YoY, and this was the highest net income level on a quarterly basis since Q1, 2012. The following are the reasons why sound performance was possible in this Korean economic environment with continued low growth trend.
First, loan portfolio improved in quality leading to an interest income rebound continued from the previous quarter, gains on disposition and valuation improved following the rise of available for sale securities disposition gains and FX derivatives related gains leading to general operating income improvement.
Second, following the previous year's preemptive risk management, provisioning stabilized greatly.
And third, SG&A also dropped significantly. Thanks to group wide cost cutting measures. Along with Q1 profit improvement efforts and continuous management of risk-weighted assets, group's Q1 CET1 ratio is expected to record 10.35%, a 56 bp rise QoQ. Accordingly, a CET1 ratio in the 10% range is expected to be reached.
On the bottom right side of the page, you can see the groups’ Q1 ROE and ROA posting 7.93% and 0.55% respectively. Group's cost income ratio reached 54%, a 13.7% drop YTD. Overall, the Group's business indicators greatly improved.
Let's now go to page five. First, the NIM.
Group's 2016 Q1 NIM combining KEB Hana Bank and Hana Card dropped 2bp QoQ, posting 1.80%. KEB Hana Banks Q1 NIM went down 1 bp recording 1.40%. Regarding the Q1 NIM flow, household and corporate loan balance interest rate declined slightly, but funding cost on time deposits felt even further continuing a favorable NIM environment. However, with the absence of one-off during the previous quarters bank integration in Q1, Q1 NIM fell slightly QoQ. If the policy rate and market interest rate is maintained at the current level going forward, NIM is expected to gradually improve after Q2 through continuous drop of funding costs and profitability based loan portfolio improvement.
If you see the graph on the bottom right, banks loan denominated loans dropped 1.6% YTD. The main reasons behind this decline were consistent exposure reduction of large corporate and temporary drop in household loans due to mortgage book transferred to Korea Housing Finance Corporation or KHFC. Excluding the mortgage book transfer amount of KRW4.3 trillion through KHFC, bank's total loan denominated loan growth rate posted approximately 1.0%.
Now let's go to page six. 2016 Q1 and Group NPL ratio went up 3 bp, recording 1.30% and delinquency ratio went up 7 bp QoQ posting 0.75%. New NPL was lower than the recurring level, leading to a decrease in NPL loans, but with the reduction in large corporation exposure and mortgage book transfer, other loan reduction was relatively big leading to a slight rise in NPL ratio.
On the other hand, through preemptive rate adjustment of shipbuilding and shipping sector in Q1, around KRW80 billion of provisioning was additionally accumulated, but with the decrease of new bankruptcies recurring provisioning was maintained at a stable level leading to a group credit cost ratio of 0.37% a 10 bp drop QoQ.
On the bottom right of the slide, you can see through profit-oriented improvement and continued risk weighted asset management, the 2016 Q1 group’s CET1 ratio is expected to post 10.35% of 56 bp increase QoQ. In particular, we have strengthen credit risk weighted asset monitoring and through aggressive control including focused effort to manage high risk industries with high RWA as well as Tier II large corporation, we have created a basis so that CET ratio can continuously increase.
Let's now cover the Group's profitability in more detail. Please turn to page eight, Group's consolidated earnings.
Let me cover the group's general operating income. Interest income from the group's general operating income grew 3.3% YoY and 1.6% QoQ respectively with the portfolio adjustment through continuous SOHO loan growth and funding costs drop following the increase in core low interest rates deposit growth. In fee income with the credit card fee income decreasing following the merchant fee cut as well as drop in equity-linked product related trust fees declining overall fee income drop resulting in 11.3% drop YoY and 0.8% drop QoQ.
Disposition and valuation gains went up 8.5% YoY and 6.5% QoQ. One-off factor in Q1 was a slight FX translation loss, but with the available for sale securities disposition gains and FX derivative disposition gains showing a sound flow it improved YoY and QoQ.
In Q1, SG&A went down 5.2% YoY and 35.5% QoQ showing significant improvement. This was caused by the base effect of last year's bank one-off integration cost execution and large scale ERP cost, as well as group wide efforts to cut costs in Q1. Accordingly, group's Q1 cost-income ratio posted 54%, a 13.7% improvement QoQ.
Now page nine, business results of subsidiaries.
Group's major subsidiary KEB Hana Bank 2016 Q1 cumulative net income posted KRW492.2 billion, a 303% increase YoY. For your reference, with the formerly KEB bank, the surviving entity, was being integrated with formally Hana Bank as of September 1, 2015.
It is difficult to compare QoQ, since 2015 Q1 KEB Hana Bank’s cumulative performance only includes the formerly KEB, surviving entity, Q1 2015 performance. Accordingly, our simple sum of net income of the formerly Hana Bank and formerly KEB Bank's performance data before and after the two banks integration has been provided separately in another category. So please refer to it if needed. Even from a simple sum basis, Q1 integrated bank net income grew 46% YoY meaning that Q1 KEB Bank's income improvement effect was more superior among the group's subsidiaries.
Hana Financial Investments in Q1, 2016 posted a decline in operating income before tax, owing to a reduction in trading value on the back of greater market volatility and correction in the KOSDAQ. Due to the impact of the consolidated tax payments, in addition of corporate tax expense of 29.3 billion, was incurred resulting in a loss of KRW 12.7 billion. Hana Financial Investment on a consolidated basis, when the effect of the one-off consolidated tax payment is removed, the net income of Hana Financial Investment in Q1 comes to KRW16.6 billion. The impact on consolidated tax payment has occurred because tax accounting does not recognize unrealized profit. This is an issue that needs to be settled among the subsidiaries and does not have an effect under group's consolidated earnings. The impact will be temporary, and starting from Q2, it will be gradually readjusted. Please take a note of this. For details related to other subsidiaries please refer to the presentation material.
Next on page 10 and 11, NIM, Non-interest income and SG&A details, please refer to the presentation materials.
Next, on page 13, the group's total assets and total liabilities and equity.
As of the end of Q1 of 2016, the group's total assets stand at KRW336.4 trillion, and if the group's trust asset of KRW81.7 trillion is included, the group's total assets come to KRW418.1 trillion. Among the group's assets, other assets have grown 48.1% QoQ, and this is due to the temporary increase in suspense account value related to foreign currency transactions with the customers. Among the group's total assets, the total assets including the trust asset of KEB Hana Bank is KRW348 trillion. The group's total liabilities is KRW313.3 trillion and shareholder equity KRW23.1 trillion.
Next on page 14, KEB Hana Bank's loans and deposits in Korean won. At the end of Q1 of 2016 the KEB Hana Bank's loan in won fell 1.6% QoQ to reach KRW169.3 trillion. If you look at the loan growth by segment, large corporate loans were down 6.2% QoQ to stand at KRW18.8 trillion, and SME loans grew 1.5% Q-o-Q posting KRW63.4 trillion. Starting from 2014, we have made continuous efforts to adjust our loan portfolio, so that our exposure to large companies has declined, while SME loans including SOHO have shown steady growth.
Household loans. Having transferred KRW4.3 trillion of Korean Housing Finance Corporation mortgage loans during Q1 fell 3% QoQ realizing KRW85 trillion.
Deposits are at a similar level to last quarter, posting KRW196.6 trillion. As a result of continued efforts to improve our funding structure, core deposits grew 2.1% QoQ and 20.4% YoY. While time deposits, the funding channel that entails high interest expenses, grew only 2.1% QoQ and 1.9% YoY. At the end of Q1 of 2016 LDR stands at 97.5%.
Next on page 16, the Group's asset quality.
The group's total loans at the end of Q1 of 2016 comes at KRW227.4 trillion and NPL stood at KRW3 trillion. Total loans declined 2.4% over the previous quarter, while NPL loans fell 0.5% QoQ. As a result, at the end of Q1 of 2016 the group's NPL ratio rose 3 bp QoQ to reach 1.30%, and the NPL coverage ratio fell 6.4% QoQ to stand at 125%.
If you look at the upper right-hand side of the slide, during Q1 total NPL growth before write-off sales and debt to equity swaps, ensure the growth of new NPL was down 14.7%, posting KRW307 billion due to the overall decline in new defaulted despite the ratings adjustment of shipbuilding and the shipping sector.m
Let me provide you with more details concerning the Bank's asset quality on the next page.
Page 17, KEB Hana Bank asset quality.
KEB Hana Bank's total loans as of the end of Q1 of 2016 fell 2.8% YTD to come to KRW203.4 trillion, and NPL loans were down with 0.1% QoQ to reach KRW2.5 trillion. As a result, the NPL ratio is up 3 bp QoQ coming to 1.24% and the NPL coverage ratio fell 7.1% QoQ posting 121.9%. The delinquency ratio of the KEB Hana Bank at the end of Q1 2016 stands at 0.60% rising 7 bp QoQ, but still at a quite stable level
Next on page 18, credit loss provisions.
The Group's credit cost ratio as of the end of Q1 of 2016 reached 0.37%, down 10 bp QoQ. On the back of a clear trend toward improving asset quality with the credit cost ratio of KEB Hana Bank reaching 0.29%.
Finally, on page 19, capital adequacy.
As of the end of Q1, 2016 the groups expected BIS and Tier 1 ratio were 13.39% and 10.88% respectively. The group's CET 1 ratio is 10.35% up 56 bp QoQ moving into the 10% range. For more details of other subsidiaries and major financial indices, please refer to the appendix.
With this, I now conclude the earnings presentation of Hana Financial Group for Q1 of 2016.
Thank you very much.