Good afternoon. Thank you for joining the earnings Conference Call of Hana Financial Group. This is Geun-Hoon Park, the IR Team Leader at Hana Financial Group. I would like to thank all of you for joining this conference call through video, internet as well as a telephone. Now we will start the earnings conference call for 2023 first quarter. We have the CFO of Hana Financial Group, Jong-Moo Park, present for today's call. We have the executives of the group as well as the main affiliates. We will start with the presentation of the earnings by the company, followed by a Q&A session. Now, our CFO, Park Jong-Moo , will take you through the first quarter earnings results of Hana Financial Group.
Good afternoon. This is Jong-Moo Park, CFO of Hana Financial Group.
I would like to go over the 2023 first quarter business results. First is the key business highlights of Hana Financial Group, which is on page 3 of the presentation. Hana Financial Group reported net income of KRW 1,102.2 billion in Q1, which is a 22.1% growth Y-o-Y and a 56.8% growth Q-o-Q. Our first quarter net income came in above market expectations. Despite the heightened risks from domestic and global economic slowdown and the financial market instabilities, the group was able to achieve healthy performance, thanks to the securities disposition gains that effectively leveraged interest rate changes, an increase in fee income by securing greater customer base, and a decrease in one-off ERP-related expenses.
In terms of the quality of our income, even though the pace of interest income growth decreased and provisioning expenses increased, overall income increased YoY, driven by the healthy performance of our non-interest income. While fee income is yet to deliver greater tangible results, it has turned around from the low point in Q4, and our fee income continues to focus on building a cumulative fee income foundation, such as retirement pension products in Hana Bank and Hana Securities and operational lease fee income by Hana Capital. Our cost-income ratio in Q1 was 37.5%, which is a decrease year-over-year. Hana Financial Group again proved its industry-best cost efficiency. Our ROE was 12.07%, again, delivering industry-leading profitability and capital efficiency.
In Q1, we made preemptive and additional loan loss provisioning against domestic real estate project financing loans to further build up our loss absorption capacity. Furthermore, today, the Hana Financial Group board of directors approved a quarterly cash dividend of KRW 600 per share. The quarterly dividend is a continuation of Hana Financial Group's tradition since launch of paying out interim dividends and offers our shareholders the added benefit of regular cash flow and better dividend visibility. Going forward, Hana Financial Group will continue to study various shareholder return plans to enhance shareholder value based on the mid to long-term shareholder return policy announced during the last earnings call. Now please turn to page 4. In Q1, the group's NIM was 1.88%, which is an 8 bp decrease from Q4.
Hana Bank's NIM was 1.68%, which is a 6 bp QoQ decrease. The NIM contraction of Hana Bank in Q1 is mainly explained by the dissipation of the one-off upside factor that was existing in Q4, related with the early termination of time deposits. However, when compared with a normalized Q4 NIM of 1.67%, NIM in Q1 actually increased by 1 bp at Hana Bank. Despite some changes in the funding side, such as funds shifting from low-cost deposits to time deposits, this reflects the effects of loan asset repricing as demand for funds continues, especially around large corporates, and also the average lending rate of our Korean won loan book increasing quarter-over-quarter.
Hana Financial Group's first quarter interest income decreased by 10.6% QoQ due to NIM contraction, fewer number of days per quarter, and the effect of Hana Life's accounting change with the introduction of IFRS 17 in the insurance business. This is a 7.8% increase YoY. On the right-hand chart, this shows that within Hana Bank's Korean won loan book, corporate loans increased by 1.3% from year-end, but household loans decreased by 1%, resulting in an overall stagnant loan growth of only 0.2%. Next is the non-interest income.
For the non-interest income, the group reported non-interest income of KRW 778.8 billion in Q1, which is the highest in the recent five-year period. Particularly, the disposition and valuation gain was KRW 480.1 billion, which is a KRW 277.1 billion increase YoY. Gains from securities trading increased by more than KRW 180 billion YoY by effectively leveraging changes in market rates. According to changes in insurance business accounting standards, approximately KRW 86.9 billion that used to be accounted under interest income has now been put under disposition and valuation gain. On the other hand, due to higher exchange rates during the quarter, the FX translation loss of KRW 44 billion was reflected in the disposition and valuation gain.
We will continue to focus on maintaining a healthy level of disposition and valuation gain using investment strategies that effectively leverage market volatility and portfolio improvements. Fee income in Q1 was KRW 445.2 billion, which is a significant improvement quarter-over-quarter. Securities-related fee income and IB commissions are yet to recover as investment sentiment remains subdued. However, asset management fees, including fee income from retirement pension funds and bank insurance, has increased, and fee income from operational lease, lending, and foreign exchange also increased, resulting in an 18.6% increase QoQ. Moving on to page five.
The group's NPL ratio in Q1 2023 increased 6 BPS QoQ to 0.40% due to the non-bank subsidiary's Korean real estate PF exposure. The group delinquency ratio also increased to 0.40%, which is 10 BPS higher QoQ due to rising delinquency ratios of non-bank subsidiaries. The total delinquency ratio, including the sales and write-off of the quarterly NPL assets, went down by 4 BPS QoQ to 51 BPS. The group's Q1 credit cost ratio increased by 17 BPS YoY to 36 BPS. This can be explained by the preemptive provisioning. We will continue to contain this year's credit cost ratio within 30 BPS. As of quarter end, the group's CET1 ratio has decreased by 30 BPS QoQ to 12.84%. It still maintains a fair level compared to the regulatory ratio.
For your reference, during the quarter, Basel III was introduced, affecting the calculation of market and operating RWA, leading to a one-off decrease of 21 BPS. Other than that, the decrease in the CET1 ratio is mostly due to an increase in credit RWA, such as FX rate rise and an increase in marketable securities and corporate loan assets. Let me now address some additional points about this year's plan for asset quality management. We're mindful of the market's concern over possible deteriorating asset quality indicators going forward. This year, more than anything, we are looking closely into risk management. Not to mention US Silicon Valley Bank collapse and the widening current account deficit in Korea, financial market instability in and out the country persists. Our subsidiaries' delinquency rates have gone up, and the potential risks have increased more than ever.
To prepare against the weakening asset quality, Hana Financial Group is focused on implementing the following four risk management measures. First, we improved the non-bank subsidiaries' early warning system so that signs of deterioration can be identified preemptively, allowing for early response. Under different scenarios of various macroeconomic indicator levels, we are managing intensively a set of preselected marginal borrowers. To reduce potential NPL exposure, we are constantly operating a delinquency management task force, and we stepped our efforts for monitoring real estate PF exposure. We are strengthening risk management not only in Korea but also for overseas. We're providing customized audits suitable for the overseas subsidiaries. We have refined each sector's credit line management depending on the industrial risk by country. We also reinforced overseas alternative investment risk management in case global prices fall.
We will continue with the preemptive provisioning that we have done for the past three years. We will reflect the future economic outlook scenario in a more conservative light, conduct early credit review for the marginal borrowers, so that we can gain additional loss absorption capacity against any uncertainties. With these risk management measures in place, we will make sure that asset quality metrics are managed soundly while controlling the credit cost ratio within the annual guidance level, even if some marginal assets suffer from quality deterioration. Page nine, subsidiaries income. Hana Bank, the group's major subsidiary, realized a net income for the quarter of KRW 970.7 billion, which is a 45.5% increase YoY. Items in the general operating income, including fee income, improved overall.
At the same time, SG&A and credit cost provisioning showed robust cost control capabilities, leading to better performance. Hana Securities net income for Q1 recorded KRW 83.4 billion. The net income decreased YOY due to increased provisioning. Compared to the previous quarter, IBC and brokerage fees increased, and also disposition and valuation gain improved. Hana Capital realized net income of KRW 65.6 billion in the first quarter. On a YOY basis, their net income fell by KRW 25.7 billion due to increased funding costs and provisioning. With the improvement in fee income and disposition and valuation gain QOQ, the net income increased by KRW 20.3 billion over the quarter. Lastly, Hana Card's general operating income increased. However, due to an increase in provisioning, the Q1 net income recorded KRW 20.2 billion, a decrease YOY.
For future risk management, we will focus on high quality assets with a relatively lower delinquency ratio, such as auto finance, and we will strengthen unused credit line and high-risk multiple borrower management. Please refer to the document for further information. This concludes Hana Financial Group's Q1 2023 earnings presentation. Thank you very much.
Thank you very much. Now we will proceed with Q&A. Let me explain how this works. In order to participate in the call, you needed to have called in to the number that we have notified or log in to the website and listen to the call through the internet, the webcast. For those of you who are participating online, if you need to ask a question, you need to call in using your telephone. Now we will take questions. The first question comes from Mr. Kim Do-ha of Hana Securities. Please go ahead.
Thank you very much for taking my question. Your net income came up above, significantly above market expectation. If we break that down, it's the disposition evaluation gain that had the greatest impact. Interest income, which was the more fundamental side of the business, actually it decreased more QoQ than expected. Because the disposition evaluation gain may not be a repeating factor, even though first quarter earnings are very good, going forward, should we not account for that by lowering our expectations going forward? What is your view regarding your income second quarter, third quarter? Because we think that there will be some impact given the fact that your insurance business does not account for a large part relatively.
Do you think that, the interest income would maintain at the lower level going forward? Or do you think your interest income has some room to bounce back? Yes. While we prepare the answer, please give us a moment. Yes, thank you very much for your question. I think your question was mainly about the comparison of disposition valuation gain versus interest income. We agree with your points, but I think we can share some details. In Q4, first of all, our NIM had some one-off, and that accounted for about 7 BP in Q4. This was already explained in the presentation. One is our guidance on NIM going forward. We think that in Q2 and Q3, NIM will probably continue a slightly declining trend.
There will be the repricing effects of our loans and deposits that will drive a slight upturn in the NIM in Q4. On a full year basis, we think that 2023 NIM will be slightly improved versus the NIM in last year, in 2022. I think that would have answered your question, and we will move on.
We don't have a question on queue yet. We will give it a moment.
We'll take the next question. It's from NH Investment & Securities. We have Mr. Yong Suk Jun on the line. Please go ahead.
Hello. I am Yong Suk Jun from NH. Thank you for giving me the opportunity. I'd like to ask you about the quarterly dividend. The DPS is, amount that's higher than expected. In Q1, Q2, Q3, will this continue?
For shareholder return policies and your treasury share policies, do you have any ideas as to how you plan to go about it? Do you have any standards or changes to your treasury planning?
Thank you for the question. We will be right back with the answer. Yes, thank you for the question. We did give it a lot of thought, and we decided on the quarterly dividend at today's BOD meeting. For Q2 and Q3, of course, we'll have to go through a decision-making process. We will be trying to keep up with the quarterly dividend trend. This is going to remain consistent from the beginning of the year policy. We are focused on the consistency of our dividend policy, and we would like to provide a better shareholder return or better payout compared to the previous year.
As for the treasury buyback, it is in connection with the quarterly dividend and the final year-end dividend. We will look into the numbers. As of 2022, of course, it's not on a FY basis. 31.5% was the dividend payout ratio, and we believe that will be the guidance going forward. Thank you.
Thank you for the answer. We will take the next question. It's from JPMorgan, Jihyun Cho. Please go ahead.
Good afternoon. Thank you for taking my question. I have a question about your asset quality and loan growth.
About the asset quality, in Q1, you did take a large provisioning. You said that you will try to keep credit costs below 30 BP for the full year, which means that in the second quarter and third quarter, I'm wondering what your provisioning outlook is. On the other side, do you have plans of increasing your provisioning target?
There is possibility that the credit situation may worsen. If you look at your precautionary exposure or I'm sure internally you have a sense of changes in the risk level, I think that would also help us gain a bit more color on the asset quality going forward. About the... I think there was a request that these financial groups form a council.
Do you think that there will be any impact by this council on your earnings? About your loan growth. In Q1, your loan growth was subdued, very subdued. I'm wondering what your full-year loan growth target is. Can you divide that into your corporate versus household loans?
Thank you very much for those questions. Please give us a minute to prepare the answers.
Yes, this is the CRO. I'd like to answer your question. Same as last year, this year, there is the issue of additional provisioning may becoming necessary. Although it was COVID and asset quality was stable, there are still questions of whether that is genuine, and that is why we took preemptive provisioning last year. This year in 1st quarter, we took provisioning, as did other banks.
The full year credit cost, you've asked that question. It's difficult to forecast given the large size of provisioning. We think that if we remove, for example, one-off reversal of provisioning or one-off special provisioning, we think that excluding these one-offs, our credit cost still targets 30 BP, and we think that that is a sufficiently attainable goal. About project financing loans, Hana Financial Group's project financing loan, including bridge loan, is about KRW 7.9 trillion. Now, bridge loans, if the lenders do not agree, that may temporarily go into delinquency. There could be some delinquencies which are trying to be downgraded to substandard and below, and that sort of creates a monthly fluctuation in the substandard and below asset size.
The bank does not have any substandard and below bridge loans, but there would be securities, or capital that has temporarily downgrading to substandard and below, but we have already provisioned or have decreased the value of it. Going forward, we expect only a very limited size of impact. About a council among creditors. There are so many interested parties involved in a bridge loan, and the purpose of having this council is to promote the effective communication of lenders. There is talk of this council among lenders kicking in from April. I think once that council takes off, this may actually reduce significantly the amount of delinquencies coming from real estate private financing. Your second question was about the loan growth. In Q1, our Korean won loans increased by around KRW 500 billion.
Household decreased by KRW 1 trillion, and most of the growth came from corporate loans. Overall, our Korean won loans grew by around KRW 500 billion in Q1. Going forward, I think household loans, there's still some subdued sentiment in terms of real estate investment among retail customers or securities investments, stock investments, or co-investment. Unless that sentiment recovers, we think that loan demand from household will remain subdued. Once that bounces back, maybe we can look for some upside in the second half. On the corporate side, companies still have demand for liquidity. We think that that demand will stay around for some time. For the full year 2023, we are aiming loan growth at nominal GDP growth rate, and that stands still remains valid.
Yes, thank you for the answer.
We will take the next question. It's from Goldman Sachs, Park Sin Young. Hello, you're online. Please go ahead.
Hello, I am Park Sin Young from Goldman Sachs. Earlier, you talked about loan growth a little bit. I have an additional question about that. When you talk about loan growth, you mostly focus on the bank, but considering the circumstances, non-bank or card, I think you are focused on risk management. I think the loan growth is subdued in the non-banking subsidiaries. The interest-bearing asset growth, could you talk about it more broadly? Because interest income is shrinking, that gives me and the market concern, and thus the question. Thank you.
Yes. Thank you for the question. We will be back with an answer soon.
Yes, I am the CFO, Jong-Moo Park.
I don't know if this will answer your question, but earlier we talked about the bank's loan growth, and other than that, you're asking about non-banking, including Card, Capital, then we have F&I. The loan growth is taking place slowly but steadily. In order to meet the overall interest income target, we need to have the non-banking subsidiaries work on the RWA and grow the loan book so that we can meet the target interest income. That's what we are working on. Thank you.
Thank you for the answer. We'll take the next question. It's from Hanwha Investment & Securities, Kim Do Ha . Please go ahead.
Thank you for giving me a follow-up question opportunity. We've talked about the PF, and this is a follow-up to that, the project financing.
You said that there is a bit of amount that comes into substandard and below, goes out on a month-to-month basis. That said, I think as of end of March, there was an increase of around KRW 270 billion at the group level. I think it's meaningful to break that down into different components. How much of the NPL substandard and below increase is attributed to project financing? You also said you took additional provisioning in Q1, I don't think you mentioned the exact amount. Can you give us how much of provisioning you took in Q1 additionally, and how much of that is attributed to project financing loans?
Thank you very much for those questions. Please give us a minute to prepare the answer.
Yes, thank you very much for that question.
I'll take that question. The substandard and below in Q1 increase attributed to project financing. There was no increase at Hana Bank, but there was a total of KRW 100 billion increasing in Hana Capital and Hana Securities. There were some projects that were not selling. The housing units were not selling. In those cases, we so classify them as substandard and below, even though the loan itself did not go delinquent. Even if we count that in, that's KRW 150 billion. We also took additional provisioning, and that is related with project financing. As mentioned, there is no substandard and below project financing loans at Hana Bank. There are some projects that either are not making construction progress as planned, or have not been selling, and those we have taken KRW 40 billion provisioning for.
Yes, thank you. We'll take the next question from Daishin Securities, Park Hye-jin. You're online. Please go ahead.
Hello. Thank you for giving me a chance to ask the question. I am quite interested in credit cost, and that's what I'm going to focus on. There was KRW 100 billion of credit cost in the Hana Card. Looking at the delinquency ratio, the Card's delinquency ratios went up in general. For Hana, we don't see a visible or trend as much as the others. Did you preemptively provision against Card? On an annualized basis, could you give a guidance for the provisioning only just for Card?
Thank you very much. We will be back with an answer soon. Please hold.
Yes, I'm the CFO of Hana Card. Let me answer the question.
KRW 60 billion of provision was written off, KRW 2 trillion of card loans increased. The loan size grew from KRW 9 trillion to KRW 12 trillion, the asset quality deteriorated at the same time. This happened in parallel, thus we have a larger credit cost. The delinquency ratio compared to the other competitors are lower, we are managing asset quality, we have an active write-off policy. Going forward, we will be able to relieve the asset quality issues. As for the credit cost, the loan growth was compared to the first quarter last year and then going to Q2 and Q3 this year. We believe that this will also be relieved. The credit cost issue for card is not worrisome, we will be managing it better than the competitors.
Thank you very much for the answer.
We don't have any questions on queue just now.
It seems there are no further questions. We will conclude 2023 Q1 Hana Financial Group's earnings presentation. You may check the website for the IR presentation once again, and the IR data book will also be uploaded on the website. If you have any additional questions, please contact the IR team and we will do our best to answer your questions. Thank you for listening. Thank you.