[ANALYST REPORT] Woori Bank: Stronger earnings fundamentals

2Q16 net profit of controlling interests in line with consensus at W307bn (+35.8% YoY)

Won-based loan growth stood at 1.6% QoQ in 2Q16, which is generally in line with the annual target (5-6%). Loan growth for households came in at +4.6%, big businesses -4.8%, and SMEs +0.4%. Growth was sluggish for big businesses due to disposal of NPLs. 

Meanwhile, household loans are growing faster than the annual target rate. The pace is likely to be adjusted in 2H16. NIM dropped 2bp QoQ due to the increase in household loans that carry relatively low margins.

One-off loan loss provisions are estimated at about W219.2bn. The bank set aside provisions in full for some bad loans, including loans extended to Hanjin Shipping. 

Additional provisions for Daewoo Shipbuilding & Marine Engineering will likely have amounted to W6.6bn (8.7% provision coverage ratio). Reversal of loan loss provisions came to W187.6bn, offsetting most of the one-off factors. Ordinary loan loss provisions came to about W220bn, far below the consensus of W267bn.

3Q16 net profit of controlling interests estimated at W334bn (+8.8% QoQ, +3.3% YoY)

Woori Bank is expected to post 3Q16 net profit of controlling interests of W334bn (consensus of W339bn, +4.8% YoY). Quarterly earnings are on a YoY growth track in 2016. Earnings visibility is high considering the reduced bad debt provisions and the anticipated sale of Haufu Building in China. The 25bp benchmark rate cut should reduce annual margin by about a mere 3bp. The NPL ratio should be kept in the low-1% range, similar to the peers’ levels.

KDIC expected to sell 30% stake in August-September

The sale of Woori Bank stake (30%) held by Korea Deposit Insurance Corporation is expected to proceed in August-September. 

The change of ownership from the public to private sector should lift productivity. Privatization will be a boost to the share price. The dividend yield at the year-end is estimated at 4.9% assuming W500 per share. 

The bank should be able to pay dividends similar to last year’s level, considering net profit of controlling interests estimated to grow by more than 20% YoY.

Source: Shinhan Investment