Good afternoon. I am Han Hong Sung, the Head of IR at Woori Financial Group. Let me first begin by thanking everyone for taking time to participate in this earnings call for Woori Financial Group. On today's call, we have the Group CFO, Lee Sung-Wook, Group CDO, Ouk Il-Jin, and Group CRO, Park Jang-Geun.
Before starting, let me walk you through today's agenda. Woori Financial Group had a general shareholders meeting on March 24th, during which there was a significant change in our management team. Thus, we would like to take this opportunity to have the newly appointed Chairman and CEO, Yim Jong-Yong, to say some introductory remarks and go over the future management direction of the group. After his remarks, we will present the financial performance and then go into Q&A. Please note that the Chairman will not be available during the Q&A session as he has other external commitments. Now let me pass it over to Chairman Yim Jong-Yong for his introduction.
Good afternoon. I am Woori Financial Group Chairman, Yim Jong-Yong. I feel very happy and honored to have this opportunity to introduce myself to the stakeholders who have shown unwavering support and confidence in Woori Financial Group. The financial markets in Korea and globally are experiencing an increase in volatility on concerns about a global economic recession. Uncertainties that make it challenging to predict even the near future continue. In addition, the regulatory environment in the financial sector is changing, and we need to be prepared to operate in a business environment different from the past, including increasing demands for larger social role by financial institutions.
I would like to take today's call as an opportunity to share the key focus areas that Woori Financial Group would like to pursue in this quickly evolving environment. First, we are planning to reshape our corporate culture to dramatically improve our group fundamentals. In particular, we will continue bold innovation to create a new corporate culture, such as in the areas of internal control and corporate governance, to ensure we become the most trusted financial group in the market. It will be the starting point of our long-term efforts to become the most trusted financial group. Second, we will continue to strengthen the competitiveness of the group's non-bank business. We will quickly expand our non-bank portfolio, such as securities and insurance, and diversify our business structure to create a more balanced profit structure for the group.
By identifying the opportunities amid a crisis, we will accelerate the competition of our non-bank portfolio. Third, we will continue to enhance our risk management framework to ensure we identify a wide variety of risks in advance and address them appropriately. Due to the recent rate hikes, there has been concern about asset quality with focus on the non-bank financial sector. Woori Financial Group will exert all efforts in risk management and prepare for a market downturn by further strengthening our capital base to a more stable level.
Fourth, in line with the new regulatory environment, we will continue to identify new growth drivers in non-financial areas to heighten our future competitiveness. The development of digital technology has led to the creation of new industries, and we expect the regulatory environment in the financial sector to also change dramatically. We will ensure the lower barriers between industries can become a new opportunity for our business.
Lastly, we will try to fully support the Korean people and businesses. In order to provide real assistance to companies in a difficult situation and vulnerable populations, Woori Financial Group will not only provide credit, but will also provide a wide range of other assistance, including business consulting. In addition, we will put in our best efforts to ensure this support can also lead to stronger confidence in our group. Dear investors, amid a challenging business environment in Korea and abroad, Woori Financial Group has been able to continue posting solid performance. This was possible because of all of the interest and support that you have shown us across the years.
Thus, on April 21st, our board of directors decided for the first time since establishing the holding company, to buy back and cancel KRW 100 billion in treasury shares. Due to sound profit generation and stable asset quality management efforts, our CET1 ratio has improved to 12.1%, representing a stronger capital base. In addition, going forward, Woori Financial will continue to increase its loss absorption capabilities to prepare for possible market downturns, while also continuing efforts to enhance shareholder value.
In addition, I also want to have more opportunities to interact, not only with investors in Korea and abroad, but also a wide variety of market participants, including analysts. Woori Financial will continue to strive to become the leading financial group in Korea, and we look forward to your continuous interest and support. Once again, I would like to thank everyone for participating on today's call and hope you all the best in health and happiness. Thank you.
Next, our Group CFO, Lee Sung-Wook, will give you a presentation on the recent earnings performance.
Good afternoon. I am Lee Sung-Wook, CFO of Woori Financial Group. Now, let me dive into the first quarter 2023 performance of our group. Please turn to page four of the presentation, which is available on our website. Let me first begin by going over our net income. For the first quarter of 2023, Woori Financial Group's net income was KRW 911 billion. This is an 8.6% increase year-over-year. Even though market rates showed more volatility, we were able to post this performance due to stable profitability management and continuous efforts to increase cost efficiency, such as our cost-income ratio.
In addition, our group net operating revenue was up by 7.6% year-over-year to post KRW 2,551,000,000,000 , maintaining healthy profit generation capabilities. Next, let me move on to expenses such as SG&A and our credit cost. In the first quarter of 2023, the group SG&A was KRW 1,037,000,000,000 , representing an increase of 6.1% year-over-year, but the cost-income ratio was 40.4%, which is a 0.8% point decrease versus the previous year. In addition, first quarter 2023 group credit cost was KRW 261 billion, and the credit cost ratio was 0.31%. Next, let me touch upon details on share buyback and cancellation. As the Chairman aforementioned, on April 21st, Woori Financial Group's board of directors confirmed and announced a share buyback and cancellation plan worth KRW 100 billion, equivalent to 3.2% of the annual profit in 2022.
Meanwhile, as of the end of March 2023, the group's CET1 ratio is expected to reach 12.1%, placing the ratio in excess of 12% for the first time in the group. Such result was driven by solid net income growth and all around risk management efforts that have been pursued thus far, leading to improvements in market risk as well as credit risk. Let me now elaborate on the group's business performance in further detail by category. Please refer to page five. First, allow me to go into the group's net operating revenue and net interest margin. In the first quarter of 2023, the group's net operating revenue increased by 7.6% year-on-year to KRW 2,551,000,000,000 .
Meanwhile, the bank's first quarter NIM stood at 1.65%, down 3 basis points from the previous quarter, and the group's NIM, including the card business, was 1.91%, down 1 basis points quarter-on-quarter. With the drop in market interest rates, further improvement in loan yields was limited, and increased funding costs resulting from a decrease in low-cost deposits led to narrowing margins. As the base rate hike is expected to come to an end, we will further strengthen our efforts to improve our profit structure. Let me now move on to asset growth and loan portfolio. As of the end of March 2023, bank loans totaled KRW 293 trillion, down 0.8% from previous year end. Due to rising interest rates and a decrease in housing transactions, retail loans decreased 2.2% from last year end to KRW 131 trillion.
On the other hand, corporate loans continued its robust growth, rising 0.6% versus last year end to KRW 159 trillion. As economic uncertainty grows, stable management is key. Accordingly, Woori Financial Group will continue to maintain its record high prime asset rate at 85% and above, while in line with economic conditions, faithfully fulfill its role as a liquidity provider. Next is on the group's non-interest income. The group's first quarter non-interest income reported KRW 332 billion. In the second half of last year, market volatility greatly increased and thus impacted the size of non-interest income. However, in the first quarter of this year, the continued growth trend centered on fees and commissions and improvements in head office business performance led to an even growth in all non-interest income categories. Woori Financial newly incorporated Woori Venture Partners as a subsidiary in March.
Going forward, by expanding the non-banking sector through M&As, the group plans to lay the foundation for a balanced profit structure between interest income and non-interest income. I will now elaborate on expense and capital adequacy. Please refer to page six. This is on the group's SG&A expense. In the first quarter of 2023, the group's SG&A expense increased by 6.2% year-on-year to KRW 1,037,000,000,000 , and the cost to income ratio stood at 40.4%. Inflation concerns are growing worldwide, and the group's SG&A expense is under increasing pressure. However, Woori Financial Group's company-wide efforts to reduce SG&A expense over the past few years have paid off, resulting in a continuous improvement in its cost to income ratio.
This year as well, the group, while making bold investment for future growth through efficient cost management, plans to manage the annual cost to income ratio below the mid- 40% range. Moving on to credit cost. In the first quarter of 2023, the group's credit cost recorded KRW 261 billion , with the credit cost ratio standing at 31 basis points, still stably controlled within the manageable range. Due to the recent steep hikes in interest rates and sluggish real estate market, concerns over the asset quality of related loans such as real estate PF are increasing. There may be a temporary increase in the delinquency rate during the rising interest rate period. Referring to various indicators, we are witnessing increased delinquency rates centered on the non-banking sector, and considering the expeditious rate of increase, a more active response is necessary.
Accordingly, Woori Financial Group, since the second half of last year, has already shifted the group's business focus to risk management and is further strengthening monitoring by individual industry, borrower, and project. As uncertainties home and abroad are expected to continue for the time being, the group, based on the risk-focused sales culture well established within, plans to focus its capabilities on asset quality management. Let me now move on to capital adequacy. As of the end of March 2023, the group's CET1 ratio is expected to reach 12.1%, up 0.5 percentage point from previous year end. In the meantime, Woori Financial Group has dramatically improved its profit generation and risk management capabilities, resulting in a rapid increase in its capital adequacy indicators. Recently, asset quality and liquidity risks surrounding the financial environment are on the rise, and thus greater importance is being placed on capital adequacy indicators.
The group plans to further improve capital adequacy through solid financial performance, but as we mentioned in our last earnings call, we will continue to pursue and promote the group's capital allocation and mid to long-term shareholder return policy. Dear investors, with the launch of a new management team, Woori Financial Group, particularly in the first half, will focus its capacity on not only robust capital and risk management, but also mutually beneficial business management and corporate cultural innovation as way of building the foundation for a greater leap forward. We ask for your interest and encouragement in Woori Financial Group's strong leap forward this year as well. This concludes Woori Financial Group's earnings presentation for the first quarter of 2023. Thank you.
Now we will start the Q&A session. For those of you who have questions, please press star and one on your phone. If you would like to cancel your question, please press star and two on your phone. The first question will come from Hanwha Securities, Kim Do-ha. Please go ahead.
Yes. Thank you for the presentation. I have two questions that I would like to ask you. One of the things that the chairman mentioned, and also was mentioned during your presentation, was that on the non-banking side. Right now, since you now have a new chairman in place, I do believe that in terms of capital allocation, I do think that there is also valid that you will continue to focus on M&A in terms of your priorities.
In addition, even within the non-bank sector, if you look at securities as number one, and then I think that the last priority was on the insurance side, but does this still stand valid under the new leadership? The second is that you also changed your articles of incorporation to allow quarterly dividends. Does that mean that from the second quarter of this year, you will start to pay out quarterly dividends as a result of that?
Yes, thank you for your question. If you could give us a couple of seconds while we wait and prepare your answer. Thank you.
Yes, this is the CFO, Lee Sung-Wook, and maybe I can address first your question about M&A. On the M&A side, the basic principles that we have is that by maintaining an adequate capital adequacy ratio, we want to make sure that we improve our ROE, increase synergies, and also have an appropriate level of shareholder return. As a result of that, on the securities side, would be an area that we are interested in terms of securities firms that are available in terms of target. We do need to look at targets that would enable us to have more balance with our existing business areas, and also would be of a mid to larger size.
On the insurance side, because IFRS 17 has been adopted, the accounting standards have changed, and as a result of that, we want to wait and see what the impact of that, and then look at strong insurance companies in which the overall capital impact would be low. As a result of that, on an overall view, the first priority would be on the securities firm side, the second would be on the insurance side, and I think that this priority has not changed.
Secondly, in terms of the quarterly dividends that you have asked about, for quarterly dividends, I think I can say that the articles of incorporation did take place during the general shareholders meeting in March, and that has been completed. However, in terms of the actual dividends, it's something that will have to be discussed at the BOD level. Internally, we have reviewed that maybe we will start talking about this in the second quarter, and somewhat after the second quarter, it will start to take place, and then we will disclose such accordingly. Thank you.
The next question is from NH Investment & Securities, Jung Jun-seob. Please go ahead with your question.
Good afternoon. I'm Jung from NH Investment & Securities. Thank you very much for this opportunity. I have a question with regard to shareholder return. I have two questions, basically. You did recall the quarterly dividends. In terms of the KRW 100 billion of share buyback and cancellation, if this is included in 2022, I do believe that there may be another plan for share buyback and cancellation going forward, and if so, would that be within this year, or would it be this time around next year? If there's a specific guideline or plan with regard to future share buyback and cancellations, please do let us know. You've mentioned about the interim dividend payout. With regard to TSR, I do remember in the previous call, TSR at 30%, so I would like to ask, are there any changes to this plan of TSR 30%? Thank you.
Yes, thank you for your question. If you could give us a couple of minutes to prepare and then answer. Thank you.
Yes, this is the CFO, Lee Sung-Wook. I think that we did have a resolution to do a share buyback and cancellation, and that was of KRW 100 billion on April 21st. This is something that we announced to the market, so that in February we did announce that the TSR would be 30%, including dividends and share buybacks. For this 30%, this is what we wanted to maintain, to maintain our confidence. This year is KRW 100 billion, whether this is FY 2022 or 2023. This is an overall calculation issue. As a result of that, I think it's on the borderline between this year and next year.
As a result of that, going forward, whether it will be the second half of this year or the first half of this year, I do think that this is something that we will have to review. As a result of that, maintaining a 30% TSR is something that we will continue to maintain. In addition to that, in February, another thing that we announced was that in terms of our shareholder return policy, of course, we will up and maintain and honor that overall commitment that we have announced. Yes.
For the next question, it will be from Yuanta Securities, it will be Chung Tae-joon . Please go ahead with your question.
Yes, thank you for your presentation. I would like to ask about your credit cost. Risk management is something that you have continued emphasizing, and in terms of the overall CCR, which would be the maximum amount of that? In addition to that, if you look at your recent numbers, I do think that in terms of the performance, the overall reserve ratios that you have included into your overall capital ratios, what would be that would be in terms of the numbers for specific buckets? Thank you.
Hello. This is the CRO, Park Jang-Geun, and maybe I can address your question. First, at the group level, if we look at the credit cost ratio, as of the first quarter it's 0.31%. However, in 2023, because interest rates continue to rise and there is concern about recessions, on the non-bank side, we do see and we do expect that the credit cost will increase. However, that have been said, we are going to maintain our growth at appropriate levels and also ensure that we continue to manage our high-risk PF assets.
We do believe that as a result of that, we can maintain a credit cost ratio in the low 0.3%. In terms of the provisions, of course, the regulatory body is asking that we provision appropriately, and at the group level, we have taken adequate action. If we look at the reserves that we have set aside right now, on an independent basis, on a non-consolidated basis, we have done advanced provisioning to the necessary level. In the second half of the year, from the financial supervisory body, there might be some changes in the RC ratio. As a result of that, as those changes take place, we will take action accordingly.
Yes, thank you. The next question is from DS Investment & Securities, Na Min-w ook. Please go ahead with your question.
I'm Na Min-w ook from DS Investment & Securities. Thank you very much for the good performance. I do have one question. In the first quarter, if you look at the group's loans growth, it was quite limited. But in the second quarter, in terms of retail and corporate loans, is there a specific forecast you have internally, and could you share that with us?
Yes, thank you. Please bear with us for just a moment as we prepare to answer your question.
I'm Lee Sung-Wook, CFO. As of the end of March, the total assets stood at KRW 478 trillion, which was a drop by KRW 2.6 trillion. This is based on the risk management measures of the group. Banks and primary subsidiaries have seen a moderate decrease in assets, and especially with regard to won denominated loans due to increased funding rates. We've seen an increase of corporate loans by KRW 1.1 trillion. However, we've seen a drop of KRW 3 trillion in retail loans. In the future, economic sluggishness and other volatility in the financial market would have to impact our management, and that's why we really want to focus on stable management. Starting from July of last year, overall, we've been taking into consideration any recession-related factors and been focused on stable management. In the second quarter, we do believe that it will be challenging as well.
Until the first half of the second quarter, we do believe that support for essential corporate loans would take place. However, all in all, we will be focused on risk management in the loan portfolio. In the second half, we will be seeing some moderate growth. On an annual basis, there is a target of 4% that we have set forth. On an annual basis, it is at 4%, and we will manage at such levels. Overall, in 2023, it would be about a growth of 4%, but we will be focused on risk management. When it comes to capital ratio and risk factors, these are the items that we would be focusing our capabilities on. Thank you.
Yes, thank you. For the next question, it will be from Goldman Sachs. It will be Park Shin-y oung from Goldman Sachs. Please go ahead.
Yes, thank you for the opportunity to ask questions. There are two questions that I would like to ask you. The first question is that recently from the financial authorities to strengthen loss absorption, there is discussion about introducing a stress buffer in addition. If we look at what has been shared in February, you said that the total shareholder return would be maintained if your CET1 ratio reaches 12%. For this 12% of CET1, is there a possibility that you would uplift or increase this 12% benchmark that you have?
The second question also is on the retail side. I do believe that there continues to be pressure to lower pricing levels. As a result of that, there was also the mutual beneficiary plans that you announced in March, and there also continues to be a downward level of pricing in terms of your mortgage loans and also retail products. Could you talk about your outlook for the full-year in terms of your pricing levels on your loan products?
Thank you for your question, and while we prepare the answer, if you could just wait for a short period. Thank you.
Yes, this is the CFO, Lee Sung-Wook. Last time around when we said that as of the first quarter, our CET1 exceeded 12%, and we also said that if our CET1 reached 12%, that we would actually revamp our total shareholder return policy and revisit it. In terms of that stance in itself, there is no large change. However, what has changed is, as you have mentioned, that from the authorities, the stress test capital buffers and also the countercyclical counter buffers and other measures are also being right now discussed to strengthen capital adequacy.
Of course we will maintain our existing stance. However, according to whether or not stress capital buffers are adopted or not, these factors of course do need to be taken into consideration. If, for example, these new measures are adapted, whether it is 1% or 2%, factors such as that, and also for the countercyclical buffer, it is at 2.5% max, maybe it could increase by 0.5% to 2.5%. If that does take place, then we would have to look at the overall situation and then come to a conclusion at that point of time.
Also in terms of Jeonse loans and also in terms of mortgage loans that we have, and also the overall mutual beneficial financing packages that we have released, we do think that around one third of our assets would be subject to some changes. Because of the lowering in mortgage pricing, this is not something that only our bank has been doing, but all of the banks within Korea are currently engaging upon. I do think that there will be a small impact from that.
As a result of that, according to the trends that we exist, we do think that 1- 2 basis points may be the impact for this year. As a result of that, for Jeonse loans, we do think that there will be around KRW 500 billion originated and at around 2%. The overall impact would be only around KRW 10 billion . It would not be a very large amount, around 2 basis points would be the overall impact that we are assuming.
Thank you. Next question is by Baek Doo-s an from Korea Investment & Securities. Please go ahead.
Good afternoon. I am Baek Doo-s an from Korea Investment & Securities. I have a question with regard to the prospects for NIM. In the first quarter, NIM dropped 3 basis points quarter-on-quarter, and I would like to understand some of the factors behind this decrease. Of course, it probably would have to do with the reduction of core deposits that probably had the greatest impact. With regard to core deposits or low-cost deposits, the balance and NIM, what would be the prospects of how that would impact NIM for second quarter and onwards?
Yes, thank you very much for your question. Let us get ready to answer your question. Please bear with us for just a moment.
NIM for first quarter dropped by 3 basis points from 1.65%. As you have mentioned, it is true that the greatest impact had to do with the movement in core deposits. That was the greatest factor that impacted the drop. If you look at the loan interest rates for first quarter, it will probably be reflected from second quarter and onwards. If you look at the core deposits, last year until December, we could see a significant reduction. In February, we have seen KRW 4 trillion - KRW 5 trillion decrease from last December. Then we have seen a rebound of KRW 2 trillion -KRW 3 trillion in March. Right now it is maintained at such levels. Our forecast is that going forward, we will be seeing an increase in core deposits rather than a decrease, because our long-term market rates are decreasing.
We are seeing a change there, and we are witnessing a pullback of rate hikes. We believe that the impact from the decrease of core deposits on NIM is dwindling, and it is coming to an end. All in all, my response would be that in the second half, right now it is 1.65%. NIM, due to some further impact in the third to fourth quarter, it is probably to drop to early 1.6% levels. That is the forecast that we have in place. On an annual basis, it would be 1.6% on the earlier end of 1.6% or to mid-range of 1.6%. That is our outlook. The financial environment is quite volatile, so that will also have to be taken into account in the future. What we are trying to do is maintain such levels. Thank you.
Yes, the next question will be by Daishin Securities, Park Hye-jin. Please go ahead with your question.
Yes, hello. I am Park Hye-jin from Daishin Securities. I also would like to ask about credit cost. As mentioned before, with regards to the PF side, you said that that was why you were keeping your provisions robust. If you look at the recent trends in the non-banking factor right there now, I do think that there is some more losses that have been generated there. As of the end of the first half, what is the outstanding project finance balance as of the end of the first quarter? For your outlook going forward, if we were to break it down between the bank side and the non-bank side, would you be able to share the outlook that you have for the future? Yes.
Thank you for your question. If you let us prepare for a couple of seconds, please wait for a minute.
Yes, this is the CRO, Park Jang-Geun. On the real estate PF, on the overall exposure, maybe just to break it down in more detail. We have KRW 2.9 trillion at the HKO as the head, and we have issued HUG guarantees that are excluded, and if we exclude that, it's around KRW 1.6 trillion. If we include bridge loans, then bridge loans would be around KRW 480 billion. If we were to add the KRW 2.9 trillion to around KRW 480 billion, then that would be KRW 3.4 trillion in total. If we exclude the KRW 1.3 trillion that have guarantee certificates, then that would reach KRW 2.1 trillion in terms of the balance.
In terms of the credit cost outlook going forward, I would have to say that on the bank side, right now, the delinquency rate on the bank side and on other areas continues to rise. However, from a big picture level, if we look at the bank side, it's actually at an absolutely very low level. As a result of that, the group as a whole, in terms of its delinquency, won't see a significant increase. For the delinquency, we actually look at the three-month delinquency rate, in which there would be a change in the asset quality categorization. If we look at the increase there, in most cases, it's backed by a guarantee certificate. There's also a lot that is backed by real estate.
As a result of that, even though there is a slight increase in the delinquency, we don't believe that that will lead to an increase in credit costs. On the bank side, we don't believe that our provisioning will increase. However, on the non-bank side, we do think that the biggest issue would be on the real estate project finance side. To see how that plays out will probably be the most important issue. But as I have mentioned in more detail in the beginning, in the non-bank side, with our affiliates, if we look at the project finance side there, from the group level on a relative basis, it's not a very large amount. As a result of that, we do believe that the provisioning that will be increased would be limited because of that reason.
Thank you very much. We have one last question of the day from HSBC Securities, Jae Woong Won . Please go ahead with your question.
Yes, thank you. In a very challenging environment, despite the environment, thank you very much for the good performance. I have two questions. The first question has to do with CET1 12%, so it's now in excess of 12%. The impact of Basel III and foreign exchange, I think that there may be some impact, so please break that down for us. That would be great. The second question, this is a question that was already posed, but it has to do with the shareholder return policy. When you were mentioning that policy in this February, you mentioned about a TSR of 30%. But if we look at share cancellation, if it includes 2022, if it actually befits the 30%, would that be that going forward you will always be matching a TSR of 30%? Would that be your target going forward? Thank you.
Yes, thank you for your question. If you give us a couple of seconds, we will prepare the answer and then address it.
Yes. First, to answer your second question about the shareholder buyback and cancellation. As we have promised in February, if we do reach a CET1 of 12% and maintain it, then 30% as the TSR is something that we will maintain. So as a result of that, including interim dividends or maybe quarterly dividends, year-end dividends, all in all, and also the share buyback, will also be calculated. Then we will be able to see on a full-year basis, that we will be able to reach the 30% on a total basis consistently.
So at the end of the year, if we are able to reach 12% on the CET1 ratio, then taking into consideration regulatory changes like the stressed capital buffer, of course, we will revisit this situation. Also, if we look into the factors driving the increase in the CET1 ratio as of the end of first quarter, the first was that on the net income side, there was around KRW 900 billion. So five basis points leads to around a 45 basis point increase. In addition to that, we have the OCI, Korean Won loan valuation losses, which were less, which also drove it. Also at the same time, there was the final Basel III plans.
As a result of that, our risk-weighted assets decreased by around KRW 2 trillion, and as a result of that, there was a 0.1 basis points increase in our overall market and also operating risks. So as a result of that, at the end of the day, our risk-weighted assets decreased by KRW 2 trillion, and our overall assets increased by 0.1%. Also there was the acquisition of Woori Venture Partners, which increased our risk-weighted assets. So at the end of the year, there was an improvement of around 50 basis points versus the end of last year as a result of that. So, thank you for your questions.
All in all, thank you for the Q&A. If you have any additional questions, please do not hesitate to ask our IR team. Thank you again for your participation in today's call.