Business Context and Reporting Period
Company: Woori Financial Group Inc. (Woori Bank)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2016
Accounting Basis: International Financial Reporting Standards (IFRS)
Key Context: The company is the second-largest commercial bank in Korea by total assets. The reporting period reflects the ongoing implementation of the Korean government's privatization plan. The Korea Deposit Insurance Corporation (KDIC) reduced its ownership stake to 21.37% following sales in late 2016 and early 2017. The company merged with its former holding company, Woori Finance Holdings, in November 2014, and financial data for 2012-2014 excludes discontinued operations related to the spin-off of Kwangju Bank, Kyongnam Bank, and other subsidiaries.
Key Financial Metrics (Year Ended Dec 31, 2016)
| Metric | Value (KRW Billion) | Value (USD Million) |
|---|---|---|
| Total Assets | 310,683 | 258,106 |
| Total Liabilities | 290,137 | 241,037 |
| Total Equity | 20,546 | 17,069 |
| Net Interest Income | 5,020 | 4,170 |
| Total Revenue | 10,675 | 8,868 |
| Net Income (Continuing Ops) | 1,277 | 1,061 |
| Net Income Attributable to Owners | 1,261 | 1,048 |
| Impairment Losses (Credit) | (834) | (693) |
| Cash and Cash Equivalents | 7,591 | 6,307 |
Profitability and Efficiency Ratios
- Return on Average Assets (ROAA): 0.41%
- Return on Average Equity (ROAE): 6.26%
- Net Interest Margin (NIM): 1.71%
- Cost-to-Income Ratio: 66.48%
- Non-Performing Loan (NPL) Ratio: 0.88% (of total loans)
- Capital Adequacy Ratio (Total): 15.29%
Material Changes vs. Prior Period (2015)
- Revenue Decline: Total revenue decreased by approximately 1.1% to KRW 10.675 trillion, driven primarily by a decline in interest income (down 2.1% to KRW 8.512 trillion) due to lower interest rates and yield compression.
- Net Income Growth: Despite lower revenue, net income from continuing operations increased by 18.8% to KRW 1.277 trillion. This was primarily due to a significant reduction in impairment losses due to credit loss, which fell by 13.7% to KRW 834 billion.
- Asset Quality Improvement: The NPL ratio improved significantly from 1.28% in 2015 to 0.88% in 2016. Total non-performing loans decreased by 28.5% to KRW 2.080 trillion.
- Loan Portfolio Growth: Total loans increased by 4.2% to KRW 236.801 trillion, with growth in consumer loans (up 12.1%) and foreign loans (up 19.3%), partially offset by a decline in domestic corporate loans.
- Deposit Growth: Customer deposits grew by 5.7% to KRW 221.020 trillion, maintaining a stable funding base with an average cost of deposits declining to 1.17%.
Guidance, Outlook, Risks, and Contingencies
Management Commentary and Strategy
Management emphasizes a strategy to diversify revenue sources beyond net interest income by expanding fee-based businesses (investment banking, asset management, bancassurance) and enhancing fintech capabilities (e.g., WiBee Bank, K bank partnership). The company aims to maintain strong asset quality and optimize capital management.
Key Risks and Contingencies
- Iran Sanctions: The company maintains limited activities related to Iran, including accounts for the Central Bank of Iran (CBI) and export-import financing. While the company states these activities comply with current sanctions relief under the JCPOA, it faces ongoing investigations by the U.S. Department of Justice and the New York State Attorney General. There is a risk of penalties or loss of access to the U.S. financial system if activities are deemed sanctionable.
- Privatization Plan: The KDIC is expected to sell its remaining 21.37% stake. The company notes that the loss of the government as a controlling shareholder and the sale of shares could impact credit ratings, business strategy, and management stability.
- Asset Quality Concentration: Significant exposure to small- and medium-sized enterprises (SMEs) (28.9% of total loans) and specific sectors like construction, shipbuilding, and shipping. Deterioration in these sectors could lead to increased provisions.
- Interest Rate Risk: A sustained increase in interest rates could decrease the value of the debt securities portfolio and raise funding costs, while potentially reducing loan demand.
- Geopolitical Risk: Tensions with North Korea and political instability in South Korea (following the impeachment of President Park Geun-hye) pose risks to the broader Korean economy and financial markets.
- Auditor Sanctions: The company's auditor, Deloitte Anjin LLC, faced sanctions from Korean regulators regarding an audit of a third party (Daewoo Shipbuilding). While the firm is permitted to continue auditing Woori Bank for 2018, there is a risk of impairment to the audit process or future filings.
Important Facts for Investor Verification
- Iran Sanctions Investigation Status: Verify the current status of the U.S. DOJ and NY Attorney General investigations regarding CBI accounts and potential penalties.
- KDIC Share Sale Timeline: Confirm the timeline and terms for the sale of the KDIC's remaining 21.37% stake and the identity of potential strategic investors.
- Non-Performing Loan (NPL) Coverage: Review the adequacy of the allowance for credit losses (KRW 1.851 trillion) relative to the NPL portfolio, particularly for the construction and shipbuilding sectors.
- Interest Rate Sensitivity: Assess the impact of potential interest rate hikes on the fair value of the KRW 37.454 trillion securities portfolio and net interest margin.
- Discontinued Operations Comparability: Ensure financial comparisons with pre-2015 periods account for the exclusion of discontinued operations (Kwangju Bank, Kyongnam Bank, etc.) which were spun off in 2014.