Good afternoon. This is Han Hong Sung, Head of the IR department at Woori Financial Group. I would like to express my sincere gratitude to you all for taking the time to join Woori Financial Group's earnings call today, despite your busy schedules. In today's conference call, we have with us the Group CFO, Mr. Lee Sung- Wook, CDO, Mr. Ouk Il-Jin, CRO, Mr. Park Jang-Geun, Head of M&A and Business Portfolio, Mr. Kim Gun Ho, and Woori Bank's Head of the Global Business, Mr. Yoon Sung Mo. Today's call will begin with the presentation by the Group CFO, Mr. Lee Sung- Wook, followed by a question and answer session. Additionally, I would like to inform you that simultaneous interpretation is available for our international investors. Let us now begin Woori Financial Group's third quarter of 2023 earnings presentation.
Good afternoon. I am Lee Sung- Wook, CFO and Head of the Financial Division at Woori Financial Group. I will provide an overview of Woori Financial Group's performance for the third quarter of 2023. Please refer to page three of the third quarter management performance material available on our website. First, let me elaborate on the group's net income. Woori Financial Group's cumulative net income as of third quarter of 2023 decreased 8.4% year-over-year to KRW 2 trillion, 438.3 billion. While the group maintained strong earnings performance, this decrease can be attributed to preemptive expenses, such as additional provisions in the second quarter. Meanwhile, third quarter net income increased by 43.9% quarter-on-quarter, reaching KRW 899.4 billion, which is in line with the performance year-on-year.
This Q3 performance demonstrates Woori Financial Group's solid revenue generation and stable risk management capabilities that have once again proven to the market. Let me now move on to costs, including SG&A expense and credit costs. The group's cumulative SG&A expense amounted to KRW 3 trillion, 48.4 billion, up 3.8% year-on-year. However, cost to income ratio remains stable at 40.6%. Despite ongoing global instability and resulting inflationary pressures, the group continues its efforts to enhance management efficiency. The group's credit cost as of third quarter recorded KRW 1 trillion, 78.6 billion, with credit cost ratio of 0.41%. While large scale preemptive provisioning led to a temporary but significant increase in credit costs in the second quarter, third quarter credit cost stands at KRW 260.8 billion, managed in a stable fashion within the expected range of current credit costs.
As economic uncertainty is increasing, some preemptive provisioning took place in the third quarter. However, with improved performance of managed companies led to write backs or reversals in provisioning, placing the group's key quality indicators well within manageable limits. Next is on the capital ratio and shareholder return policy. As of the end of September 2023, the group's common stock ratio, or CET1 ratio, is expected to slightly exceed 12%. Despite increased macroeconomic volatility, including exchange rates and asset growth, solid earnings and active risk-weighted asset management efforts have resulted in capital adequacy ratio being managed at stable levels. Meanwhile, Woori Financial Group confirmed and announced today a quarterly dividend of KRW 180 per share, the same as the second quarter. Furthermore, the company plans to retire or cancel on October 30th approximately KRW 100 billion worth of treasury shares acquired from the second quarter.
To prevent any overhang risk, the group plans to buy back Woori Financial Group shares owned by Korea Deposit Insurance Corporation by 2024. This is in line with the shareholder return policy mentioned earlier this year, demonstrating the group's ongoing commitment to enhancing shareholder value in the future as well. Allow me to delve into the group's performance by division in more detail. Please refer to page four for more details. Let me go over interest income and net interest margin earning. The group's net interest income as of Q3 of 2023 was up 4% year-on-year, recording KRW 6 trillion 600 billion. In Q3, the bank's NIM was 1.55%, while the group's NIM, including the credit card business, stood at 1.81%, both showing a 4 basis point decrease quarter-on-quarter.
This decrease is attributed to the ongoing funding site repricing continuing on into Q3 and the impact coming from the withdrawal of Iran-related deposits. However, recent upward movements in market interest rates and taking into account that funding site repricing has entered its final stages, margin decline in the fourth quarter is expected to decrease compared to Q3. Meanwhile, despite the decline in NIM, Woori Financial's third quarter net interest income remained similar to the previous quarter, recording KRW 2 trillion 187 billion, maintaining solid profit generation.
Now I'd like to discuss our asset growth and loan status. As of September in 2023, the bank's total loans stood at KRW 304 trillion, showing a 2.8% increase compared to June end. Corporate loans, primarily focused on prime assets, continued their robust growth, recording KRW 168 trillion, which is a 4.6% increase compared to June end. Leveraging over a century of financial expertise, Woori Financial Group actively explores loan demand in emerging growth industries and high-quality enterprises, contributing to sustained growth in the corporate finance sector. Given the ongoing uncertainty in both domestic and international markets, we prioritize asset soundness and capital adequacy to minimize potential risks associated with asset growth, and we are committed to managing the group's asset growth level effectively. As for retail loan, it increased by 1.1% over the quarter to KRW 133 trillion, with a focus on real demand-driven housing related loans.
Next, let's discuss the group's non-interest income. The group's non-interest income YTD reached KRW 897.8 billion, although there was a slight decrease in capital market related income due to higher exchange rate and interest rate volatility during Q3, the core fee income continued to grow each quarter, maintaining a steady trend in our business operations. Additionally, Woori Financial Group is focusing on enhancing competitiveness in the non-banking sector. We plan to improve revenue generation primarily through core fee income by expanding synergy within the group and exploring new business opportunities, even in the face of macroeconomic volatility. Moving on to cost and capital adequacy on page five. The group's SG&A, YTD amounted to KRW 3 trillion 48.4 billion, showing a 3.8% increase year-on-year. However, in Q3 alone, the SG&A was KRW 990.5 billion, a 3% decrease quarter-on-quarter.
This is the result of group-wide efforts to improve overall cost efficiency, and the cost to income ratio remains stable at 40.6%, well within the group's annual target of 45%. As inflationary pressures persist, we plan to continue and strengthen our cost efficiency efforts proactively. Let me now address credit cost. The group's credit cost YTD amounted to KRW 1 trillion and 78.6 billion, which includes KRW 263 billion in preemptive provisions made during the second quarter. The group's Q3 credit cost recorded KRW 260.8 billion, which resulted from the write-back of provisions related to Kumho Tire and adjustments made in the LGD for credit loans. Excluding one-time factors such as preemptive provisions, the credit cost ratio YTD remains stable at around 33 or 34 basis points. Looking at the recent market conditions, it is expected that high interest rates will persist for a considerable period.
Therefore, Woori Financial Group is reevaluating the group's risk factors and committed to ongoing risk management, ensuring that high-risk groups distressed loans such as real estate PF and marginal borrowers do not spread to other areas. Next, I will explain the capital adequacy indicators and shareholder return policy. As of September end, the group CET1 ratio is stably managed at around 12%. Woori Financial Group, mindful of the economic conditions such as interest rate and exchange rate, is strengthening loss absorption capacity through proactive RWA management and robust profit growth. Additionally, as mentioned earlier this year, we are striving to enhance shareholder value. In addition to the previously mentioned KRW 100 billion worth of treasury stock retirement, we are increasing the predictability of dividend payments through quarterly dividends.
On October 5th, Woori signed a basic agreement on stock transfer with the KDIC to purchase approximately 1.2% of Woori Financial shares held by KDIC as treasury stock in the future. This effectively resolves concerns regarding overhang risks related to KDIC. Going forward, Woori Financial Group will continue to manage its capital adequacy indicators and pursue various measures to enhance shareholder value. These will be my concluding words. In this quarter, we achieved a quarterly net income of approximately KRW 900 billion, demonstrating a stable profit level even in the face of challenging conditions. This reaffirms our strong capacity for revenue generation and effective risk management. Based on these fundamentals, we will focus on diversifying our portfolio to create a new growth foundation, all while continuing our shareholder value enhancement policy as previously communicated. This concludes Woori Financial Group's earnings presentation for Q3 2023. Thank you very much.
Thank you very much. We will now begin the Q&A. If you have a question, please press star and one on your phone. To cancel, please press star and two. Yes, from Hanwha Investment & Securities, Kim Do-ha, you have the floor. Please ask your question.
Hello. Thank you very much for the opportunity. I have two questions. First of all, with regard to provisioning, I think that with regard to Kumho Tire, I would like to ask how much was the write-back in terms of the amount? You've also mentioned about LGD. In the fourth quarter, especially in terms of the area of collateral, are there additional provisioning plus alpha that would be necessary, and what would be the expected amount? With regard to loan loss reserves, something that I would like to add is that next year, with regard to normalized CCR, how do you see the level for next year? The second question that I have is with regard to RWA, with regard to exchange rates and with corporate loans. I believe that it seemed higher than usual. Would we still be able to manage capital ratio?
What will be your plans? I believe that there's a lot of interest in terms of total shareholder return. If you can give us more information on maintaining capital ratio, that would be great. Thank you.
Yes. Thank you very much for the question, and please bear with us for a moment as we prepare to answer your question.
Good afternoon. I am Park Jang-Geun in charge of risk and the CRO. Let me answer your question. With regard to Kumho Tire write-back in September, KRW 70 billion was the reversal that took place. With regard to credit LGD, there was KRW 26 billion preemptive provisioning that took place, and in addition to that, in terms of the loans, with the rolling of maturity, there was KRW 59 billion, which was on the base of COVID-19.
It was around KRW 85.5 billion of provisioning that was added to our loan loss reserves. In the case of the fourth quarter, in the case of real estate LGD, out of the collateral LGD, within the fourth quarter, we're going to provide provisioning. We haven't yet decided on the amount. However, we believe that it will be within KRW 100 billion. Next year with regard to CCR, the normalized CCR, we're thinking of 35 BPs for next year. Yes, and as you have mentioned, Q3 risk assets increased by KRW 7 trillion. One of the reasons behind this is that if you look at the bank asset growth, approximately KRW 3 trillion-KRW 4 trillion has been added, and exchange rate impact. As of June, there was an impact which has added about KRW 1 trillion-KRW 2 trillion. Basically, as you have mentioned, corporate loans assets increased.
Compared to retail corporate loans, their RWA is higher. Therefore, relatively speaking, our risk-weighted assets are to increase. However, in order to manage that, in terms of corporate loan growth, not only that, but in terms of non-use credit lines, retail loans, and especially non-bank loans where risk management will be key, would be areas of our focus. We'll be actively managing our capital ratio going forward. All in all, our target capital ratio is something that we would like to maintain in the long run, and we'll put in our best efforts to do that. Thank you.
Next question is from Jeong Tae-joon from Yuanta Securities. Please go ahead.
Hello, I am Jeong Tae-joon from Yuanta Securities. I have a question about M&A. In the press, there is talk of Sangsangin Savings Bank acquisition, and have you reviewed anything in detail? Please share that with us. Could you share with us your future M&A strategies? Thank you.
Thank you for those questions. Please hold as we prepare the answer.
I am Kim Gun Ho, and you did ask about the acquisition of Sangsangin Savings Bank and whether we are reviewing that option. Yes, we are reviewing this, and we do have Woori Savings Bank, and it's based in the Chungcheong area. At FSC, they gave us some. One of the possible candidates for M&A is they gave us some recommendations as to acquisition of further savings bank where. As for the future M&A strategies, is there any change compared to the past? It is still consistent. Savings bank, securities, insurance. If there are good candidates, then we are going to go for the acquisition. Thank you.
Thank you very much. Next question is from KIS. Mr. Baek Doosan , please go ahead with your question.
Hello, I am Baek Doosan from Korea Investment & Securities. I have a question with regard to your margins. In the case of this quarter, with regard to the margin, I would like to understand the impact of that. Recently, with regard to time deposits, I do know that it's nearing maturity. With regard to that, and also with the increase of market rates in terms of management returns and loans, I would like to understand for this quarter and going forward, what will be the NIM prospects of the group?
Yes. Thank you very much for the question. Please bear with us as we prepare the answer.
I am Lee Sung-Wook, CFO. Recently, with regard to around deposits, we had around KRW 1 trillion. It was a low-rate deposit, but it did have an impact on NIM. The reason why for the decrease of NIM had to do with the interbank rates. The funding rates also increased quite significantly, as you have indicated. In addition to that, our core deposit, we've been seeing this increase in retail, but because of the high interest rates, it's true that the proportion of core deposits also went down. The NIM for 3Q was 1.5%. It was a decrease of 4 bps QOQ. In the case of term deposits, compared to previous quarter, it increased by 6 BP. Also KRW loans, the rates increased by 3 bps. With regard to the margin, it decreased by 3 bps between deposits and loans for KRW.
With the interest rates on the rise, we believe that the current situation in the fund rates will continue on. With regard to the margin and disclosure related requirements, and also the loan service, and the reservicing service could all of course lead to further competition amongst the banks. Therefore, we believe that there will be downward pressure continuously on NIM. But as was mentioned, we have corporate loans with higher interest rates. Compared to retail, corporate loans have a higher interest income. In addition to that, if we do increase corporate loans, we believe that we would have more active corporate customers, which will help us minimize any NIM decrease, through the assets coming in from the corporate side.
As you have already mentioned, the fourth quarter of 2027, it was 1.55%, but we believe that the margin decrease will be more modest for the fourth quarter, but it will go down further, and we believe that it will be in the lower side of 1.5% or so. In 2024, what we anticipate, it is very difficult to anticipate, but we believe that 1.5% would be what we would like to maintain and safeguard. We will do our best to do that. Thank you.
Thank you very much. From NH Securities, we have Jung Jun-Sup on the line. Please go ahead with your question.
Hello, I am Jung Jun-Sup from NH Securities. Thank you for giving me the chance. I have two questions to ask of you. One is, according to the recent media, global contribution is 25%, and compared to other financial groups, what is your differentiation strategy for your global business? How this will affect your capital ratios? The second question has to do with shareholder return. As you mentioned earlier, you now signed an agreement with the stock transfer with KDIC, and that will probably take place next year as a treasury buyback. Is this included in your next year's shareholder return? Including that, what will be the shareholder return ratio? What is your target? Thank you very much.
Thank you for those questions. Please hold as we prepare the answers. Thank you.
Yes, I am Yoon Sung Mo, in charge of global business at Woori Bank. As for the contribution of global profits, our differentiation strategy vis-à-vis other financial groups is we want to be selective, and we want to target in areas where we can be more profitable, and we want to increase the weight of the business in those key strategic markets. As for how that will impact the capital ratio with the Basel III adoption this year, recapitalization, and M&A, well, compared to the previous years, the impact has reduced by one-third. There is KRW 500 million of recapitalization, and the impact was about 9 bps. That has been lessened compared to the past. Going forward, I think we can be more proactive in our M&A efforts.
Yes. You did talk about the global business, and I'd like to add to that. The 25% is our long-term target, and in the global businesses, the top three areas will expand, but we will still be selective and be concentrating, and that will not affect the overall capital ratios. As for the dividends, by acquiring the KDIC shares, KRW 100 billion of treasury buyback took place. So KRW 110 billion, and probably early next year
When the final decision is made, the treasury buyback, maybe we could replace that with the acquisition of shares from KDIC. It's not been finally decided yet, and that's how we will figure out the shareholder return ratio. As of now, the 30% is being maintained as we speak. The CET1 ratio as of September end was 12.1%, and we cannot predict accurately year end. We have not exceeded much higher than 12%, so we believe that the shareholder return, the TSR, will be around 30%, and we have some buffer capital. If that is in place, then we will be reviewing further options. Thank you.
Yes, thank you very much. Seol Yong Jin from SK Securities, you have the floor. Please go ahead with your question.
Thank you very much for the opportunity. I want to ask a question with regard to dividend for this year. In Q2, you've had a preemptive provisioning, which has impacted the performance, and through the acquisition of the investment bank NBC, you've had to issue common stock, and I think that this has actually led to an impact on the DPS. I'd like to understand how are you going to deal with DPS going forward for this year. Some more information on that, please. Thank you very much for the question. Let us prepare the answer to your question.
Yes, I am Lee Sung-Wook, CFO. At year-end, the quarterly dividend was KRW 360, and we have the year-end dividend to go. If we do go for TSR, buyback of treasury stocks and dividend would be all brought together and taken into consideration. Currently, the DPS is KRW 360. In 2Q, the provisioning did take place as mentioned, and therefore, there would be an impact coming from this preemptive provisioning. However, we still have to discuss this over with the regulatory body, but we will do our best to make sure that we can maintain the DPS. Thank you.
From Hyundai Motor Securities, please go ahead with your question.
Hello. Thank you for giving me the chance to ask. I only have one question. Starting this year, it seems that there are some changes made to your dividend policies. For year-end dividends, will that be changed? Could you share your plans with us?
Thank you very much. Please hold as we prepare the answer.
Hello, I am the CFO. Last year, I did talk about. We did improve the dividend process by changing the articles of incorporation. As was just mentioned, that will be after confirmation of the dividend by the investors, then they will be making the investments accordingly. Following that, starting with this year's dividend, we will implement the revised dividend process for the year-end dividend. For the quarterly dividends, the Capital Market Act is being revised. After the revisions are completed, we will be adjusting the articles of incorporation next year, and if that is delayed, then it will be reflected accordingly to the schedule. Thank you.
Thank you very much. The next question is from Won Jae Yong of HSBC Securities. Please go ahead with your question.
Thank you for the opportunity. I have two questions. First has to do with NPL coverage ratio. It seems that it's going down quite rapidly, so I would like to understand, was there a reason why there is an increase in the substandard and below loans? With regard to delinquency rate, I can see that it's also on the rise quite quickly, so I would like to understand what are the reasons behind this increase in delinquency rates?
Yes, thank you for your question. Please bear with us for just a moment.
I am Park Jang-Geun, let me answer your question. With regard to NPL coverage ratio, it's 180%, and yes, there was increase in substandard and below, and this was not in the bank side, more so on the non-bank side that where we've seen the increase. In the non-bank side, we have credit loans and real estate PF where we've been seeing delinquencies. With regard to that, the amount or the scale of the PF is not that big, and then the credit loans ratio is not that high, the proportion. We're thinking of write-offs on that, which will actually, in terms of NPL coverage ratio and NPL, it can be managed within manageable limits. Delinquency in banks, there wasn't a great increase on the bank side.
However, in the retail side and corporate side, there were interest costs due to the high interest rates, so especially marginal companies have actually suffered from that. In terms of the size or scale, there wasn't a great increase on the banking business. As I already mentioned, the high interest rates and with the persistence of the rates, that has actually been overwhelming for the borrowers. That has led to the rate increase. Thank you.
There are no more questions in queue. With this, we would like to end the Q&A. If you have any additional questions, please contact the IR team and we will do our best to answer your questions. With that, we will conclude the earnings presentation for Woori Financial Group, Q3 2023. Thank you.