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, who are joining in today's earnings release via phone or the Internet.
Let us now begin the fiscal year 2017 Hana Financial Group business results presentation. Let me first introduce the Group management, who are here with us for the business presentation.
From Hana Financial Group, Vice Chairman, Kim Byoung-ho; and SEVP and CFO, Kwark Cheol-seung has joined us. Deputy President and CRO, Hwang Hyo-sang is also here with us. Next from KEB Hana Bank, Planning and Management Group, SEVP, Lee Seung-lyul is here with us. From Hana Financial Investment, Management Planning Group SEVP, Lee Sang-hoon is here with us. Lastly from Hana Card Management Support Division Head, Kwon Kyung- taek is here with us.
Today's agenda will consist of introductory remarks from our Vice Chairman, followed by CFO, Kwark Cheol-seung's business results presentation, and then a Q&A session via phone. First, we will hear introductory remarks from Vice Chairman, Kim Byoung-ho.
Greetings, I would like to express my deepest gratitude to you for your interest in Hana Financial Group and for participating in today's earnings presentation. There were many political events last year including the launch of the Trump administration and the Korean Presidential Election along with the BOK interest rate hike, many central banks around the world implemented QE tapering or hinted to do so. Accordingly with the following monetary and political changes, the financial markets volatility increased.
Hana Financial Group's last year earnings results showed additional improvement following 2016 and posted very solid results. In particular, I'm very glad to announce that for the first time since Hana Financial Group was established in December of 2005, our yearly net income exceeded KRW 2 trillion. There were several reasons for these results. The bank's integrated synergy accelerated leading to a continuous downward stabilization of normalized loan loss provisions and SG&A. And at the same time in the top line with a favorable interest rate environment, there was highly profitable assets undergrowth, expansion of core low-cost deposit contribution and other asset and liability improvement leading to a continuous upward trend of interest income. Profit generation capability also strengthened with overall fee income maintaining a sound growth trend as well.
Through today's earnings results, we find it quite positive that our strengthened fundamentals will be confirmed through our earnings. This year, there are number of uncertainties facing the global economy with major countries are normalizing their monetary policy is leading to tighter liquidity and protectionist policy is extending. Domestically as well the financial industry is expected to undergo significant changes, including accelerating digital innovation and more support to propel income led growth and expansion of productive finance. To cope with the changes, risk management respond to changing financial market environment including interest rate hikes and strengthening the non-banking subsidiaries competitiveness by shoring up their fundamentals and enhancing the synergies between the subsidiaries will be at the heart of our strategy to improve profitability and maintain stable capital structure.
All the employees of our Group will continue to put in their utmost efforts towards this end. Also, we plan to continue bolstering our Group's mid- to long-term strategies to enhance shareholder value reinforcing the shareholder return policy and ensuring efficient deployment of capital, so we ask for your continued support and interest in Hana Financial Group going forward. For further details on the Group's business results, our CFO, Kwark Cheol-seung will give a presentation.
Thank you very much. Now, we will hear our 2017 Hana Financial Group earnings presentation by our CFO, Kwark Cheol-seung.
Greetings, I am CFO Kwark Cheol-seung and let me now walk you through the FY 2017 business results.
First Group's 2017 major highlights. Please refer to page 3.
Hana Financial Group's 2017 net income posted KRW 2,036.8 billion, a 53.1% increase YoY, posting record earnings since December 2005, when Hana Financial Group was established. In particular Q4 net income, which is volatile due to seasonal factors and others posted KRW 495.8 billion despite one-off costs in provisioning and maintained a solid level.
Let me now elaborate on the major highlights of the FY 2017 business results. First, the Group's core earnings increased 11.4% YoY and also posted record results since the Holdings Company was established as was in the case was for net income.
Major factors were profit-oriented portfolio adjustment, the NIM, which rose for four consecutive quarters under a favorable interest rate environment, as well as sound loan growth, as a result interest income continued its upward trend. In addition, overall fee income grew evenly centering on asset management-related fees and credit card fees.
Second, in the case of provisioning with aggressive risk management efforts, as a result of continued stabilization of normalized provisioning, despite the DSME one-off provisioning in Q1, Group's 2017 end credit cost ratio posted 33bp, a 1bp decline YoY and is maintaining the lowest level since the acquisition of KEB. For your information, 2017 Group's credit cost ratio, excluding the one-off DSME provisioning is around a 20bp level. Lastly, Group's SG&A rose QoQ due to one-off including additional performance linked compensation following the over achievement of the annual performance compared to the business plan set forth in early 2017, as well as the special ERP implemented at the end of the year. However, with the Group's continuous cost cutting and efficient resource management efforts, Group's C/I ratio is being managed at a stable level going down two years in a row including an 8.5% drop YoY. Accordingly, the Group's 2017 cumulative ROE and ROA posted 8.77% and 0.60% respectively, and the Group's C/I ratio posted 53.1% and went down slightly QoQ. However, this was just a one-off income drop effect following the aforementioned costs and the overall business indicators showed a great improvement YoY.
Next, please refer to page 4. First, the NIM.
Group's 2017, Q4 NIM consisting of KEB Hana Bank and Hana Card posted 1.95%, a 1bp increase QoQ. This was due to the stronger loan deposit pricing management in a favorable interest rate environment and efforts to improve into a profit-oriented portfolio. With the NIM surge and sound loan growth, interest income posted KRW 5,109.5 billion, a 10.1% growth YoY. In the case of interest income, despite the additional merchant fee reduction, credit card fees increase YoY with increase in credit sales and on the back of even growth of the overall fee income item centering on asset management fees, fee income posted KRW 2,026 billion, a 15.1% increase YoY. On the lower right hand side of the slide, bank's loans in won growth continued with the robust growth of SOHO loans and household loans and posted KRW 188.2 trillion, a 5.3% YoY and 0.5% QoQ increase.
Please go to page 5.
2017 end Group's NPL ratio posted 0.78%, a 5bp increase QoQ, but this was a one-off caused by the reclassification of Kumho Tire asset quality, Group's delinquency ratio posted 0.39%, a 1bp drop QoQ and is maintaining a consistent downward trend. In the case of provisioning, there was an increase QoQ with one-off provisioning including Kumho Tire additional provisioning, but with the Group's continuous risk management efforts, stabilization of a normalized level of provisioning is continuing. Despite the Q1, DSME provisioning, Group's end 2017 C/I ratio posted 33bp, a 1bp drop YoY and is at a very stable level. Group's CET 1 ratio is forecast to post 12.75%, a 3bp increase QoQ and is expected to maintain a stable level of capital adequacy following the previous quarter.
Next are the Group's consolidated earnings in more detail. First, refers to page 7, the Group's consolidated P&L statement.
First, the Group's general operating income. Interest income among the general operating income with four consecutive quarters of NIM increase and household loan growth continuing along with SME loan growth, centering on SMEs posted 10.1% YoY, a 4.3% increase QoQ. Fee income rose, 15.1% YoY and 1.2% QoQ. The major reason for the interest income rise was as aforementioned. Despite the additional merchant fee decline, credit card fees increased 10.4% YoY with the increase of credit card sales.
In addition, another factor was the overall even growth of fee income item centering on the sound growth of asset management related fees following the robust sales of beneficiary certificates and trust products.
Disposition and valuation gains increased 47.4% YoY and 227.8% QoQ, despite the one-off impairment loss recognition including KRW 52.4 billion of additional impairment loss recognition against KCI, the SPC for D'Live, the reason why it rose by a large degree was due to one-off gains including KRW 254.6 billion of SK Hynix share disposition gains and KRW 167.8 of non-monetary translation gains following the strong won.
In the case of SG&A, as aforementioned with the one-off cost including KRW 126.5 billion of bank's additional performance in compensation and the KRW 96.9 billion of ERP following the special retirement for employees, who are scheduled for wage peak in 2018 that took place in late 2017 with group-wide cost cutting efforts and efficient resource management efforts, SG&A went down 0.9% YoY and is showing a downward trend for two years in a row.
In addition, as was mentioned in the previous quarter's earnings release, according to the revised performance linked pay method, there will not be recognition of additional performance linked compensation costs for 2017 and 2018.
The credit loss provisions increased QoQ due to one-off provisions such as additional provisioning of KRW 59.5 billion for Kumho Tire. However, the recurring provision continued to stabilize on the back of sustained risk management efforts at the Group level on an annualized basis, despite the provisioning for the DSME in Q1, provisions fell 8.5% YTD.
Next page, 8. Net income of subsidiaries.
A major subsidiary of the Group, KEB Hana Bank's net income in 2017 reached the core breaking level since the launch of the integrated bank and is up 53.2% YTD posting KRW 2,103.5 billion. In the case of Hana Financial Investment, balanced growth of the commission's income driven by asset management in the IB segment led to 68.8% increase YTD realizing KRW 146.3 billion. The net income of Hana Card in 2017, despite the cut in merchant fees in the second half of the year reached record levels since the launch of the integrated card company owing to increases in credit purchases and cost efficiency gains. It is up to 40.7% YTD posting KRW 106.4 billion. For more information on other subsidiaries, please refer to the presentation materials.
From page 9 to 11, you will find more details of the NIM, net interest income and SG&A, I've spoken about earlier. Please refer to the presentation materials.
Next page on 13, Group's total assets, liabilities and equity.
As of the end of 2017, the Group's total asset stands at KRW 360.1 trillion and Group's trust asset KRW 95.3 trillion is included, the total assets of the Group come to KRW 455.4 trillion among the Group's total assets. KEB Hana Bank's total asset including trust assets is KRW 369.6 trillion. The Group's total liabilities is KRW 335.3 trillion and equity KRW 24.8 trillion.
Next page 14, KEB Hana Bank's, Korean won loans and deposits.
As of the end of 2017, KEB Hana Bank's loans in Korean won grew 5.3% YTD and 0.5% QoQ posting KRW 188.2 trillion. A breakdown of the loan growth composition shows, corporate loans is up 6.5% YTD and large corporate loans reached KRW 14.4 trillion, down 5.9% YTD due to the year-end effect and 6.1% QoQ. The growth led by SOHO loans continued and SME loans grew 9.9% YTD posting KRW 73 trillion. In the case of retail loans, our demand for Group loans remained strong growing 4.2% YTD realizing KRW 99 trillion.
Korean won deposit is up 5.0% YTD and 0.7% QoQ, reporting KRW 194.1 trillion. Among Korean won deposits, low cost core deposit is up 6.4% YTD, but time deposits or high interest rate funding vehicle grew only 4.3% YoY demonstrating continued improvement in these funding structure. For your information, as can be seen from the lower half of the graph on the right side, LDR as of the end of 2017 is 98.8%.
Next page 16, Group's asset quality.
The Group's total credit is up 3.9% YTD posting KRW 245.8 trillion and NPL amount in down 11.9% to YTD, realizing KRW 1.9 trillion. The Group's 2017 NPL ratio is thus 0.78%, down 14 bp YTD continuing the downward stabilization.
If you look at the upper right hand side of the slide during Q4, the total new NPL formation before write-off in sales and debt to equity swap is KRW 351.8 billion somewhat increased over Q3. However, this is a temporary increase due to Kumho Tire exposure being re-rated and now included under NPL asset category and recoveries from collateral disposal declining compared to last quarter. So for your information in 2017, total increase in NPL was lower by KRW 190.3 billion over last year 2016 showing that the asset quality continues to be improved. Regarding the quality of the bank, let me provide a more detailed explanation on the next page.
Next, page 17, KEB Hana Bank asset quality.
Total credit of KEB Hana Bank as of the end of 2017 is up 3.1% YTD posting KRW 217.3 trillion and NPLs are down 10.4% coming to KRW 1.6 trillion. As such, the NPL ratio is down 11bp YTD posting 0.73% and excluding loan loss reserves based on the regulatory changes from 2016 year-end, the NPL coverage ratio at the end of 2017 is 75.9%, up 3.1% YTD. KEB Hana Bank's delinquency rate as of the end of 2017 is down 10bp YTD reaching 0.29%.
Next, page 18 provisions.
As has been noted previously, recurring provisions have continued to stabilize, so that on a cumulative basis as of the end of 2017, the credit cost ratio is down 1bp YTD realizing 0.33% despite the impact from the DSME provisions and KEB Hana Bank's credit cost ratio also is down 1bp YTD, reaching 0.25%.
Finally, on page 19, capital adequacy.
As of the end of 2017, the Group's BIS ratio and Tier 1 ratio is expected to come in at 14.97% and 13.29% respectively. In the case of CET 1 ratio, it is up 3bp QoQ, expected to stand at 12.75% maintaining a fair level. For your information, today the Board of Directors meeting of Hana Financial Group has decided that 2017 year end cash dividend at KRW 1,250 per common share. During the regular General Shareholders' Meeting, if that is approved, then end of 2017 fiscal year, the total cash dividend per common share, including the already paid out interim dividend of KRW 300 comes to KRW 1,550 and dividend payout ratio is 23.4% and dividend yield 3.11%.
Going forward, we will strengthen our shareholder return policy to enhance shareholder value and continue to focus on increasing the dividend, in keeping with improving business results. For more details on the subsidiaries performance and key financial indices, please refer to the appendix.
With this, I will conclude Hana Financial Group's 2017 full year earnings presentation. Thank you for your attention.