Business Context and Reporting Period
Company: Woori Finance Holdings Co., Ltd. (Woori FG)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2013
Accounting Standards: International Financial Reporting Standards (IFRS)
Ownership: The Korean government owns 56.97% of outstanding common stock through the Korea Deposit Insurance Corporation (KDIC).
The company is currently executing a government-mandated privatization plan. This involves the spin-off of Kwangju Bank and Kyongnam Bank into new holding companies and the sale of various non-banking subsidiaries (including Woori Investment & Securities, Woori Asset Management, and Woori FG Savings Bank). Consequently, these entities are classified as "discontinued operations" in the 2013 financial statements, significantly impacting year-over-year comparability.
Key Financial Metrics (2013)
Note: Figures exclude discontinued operations unless specified. Currency is in billions of Won (KRW) unless noted.
| Metric | 2013 Value | 2012 Value (Restated) |
|---|---|---|
| Total Assets | 340,690 | 327,102 |
| Total Loans | 193,766 | 221,028 |
| Total Deposits | 175,324 | 204,210 |
| Net Interest Income | 4,492 | 4,848 |
| Total Revenue | 11,185 | 12,847 |
| Operating Income | 240 | 1,549 |
| Net Income (Continuing Ops) | 253 | 1,281 |
| Net Income (Total) | (713) | 1,847 |
| Net Income Attributable to Owners | (538) | 1,633 |
| Return on Average Assets | (0.22)% | 0.67% |
| Return on Average Equity | (3.45)% | 10.46% |
| Non-Performing Loan (NPL) Ratio | 2.58% | 1.70% |
| Cost-to-Income Ratio | 59.30% | 50.79% |
Material Changes vs. Prior Period
- Net Loss vs. Profit: The company reported a net loss of KRW 713 billion in 2013, a sharp reversal from the KRW 1,847 billion profit in 2012. This was primarily driven by a loss of KRW 966 billion from discontinued operations (related to the privatization plan and asset disposals), whereas 2012 included KRW 566 billion in income from these same operations.
- Continuing Operations Performance: Even excluding discontinued operations, net income from continuing operations dropped significantly from KRW 1,281 billion in 2012 to KRW 253 billion in 2013. This decline was caused by increased impairment losses on credit losses (KRW 2,277 billion in 2013 vs. KRW 1,799 billion in 2012) and a decrease in net interest income.
- Asset Quality Deterioration: The NPL ratio increased to 2.58% in 2013 from 1.70% in 2012. Total non-performing loans rose to KRW 4,996 billion. The increase is attributed to financial difficulties in the construction and shipbuilding sectors and exposure to the STX Group.
- Revenue Decline: Total revenue decreased by approximately 13% to KRW 11,185 billion, driven by lower interest income and a loss on available-for-sale financial assets.
Guidance, Outlook, and Risks
Privatization and Restructuring
The company is actively disposing of subsidiaries to facilitate the KDIC's exit. Key transactions completed or agreed upon in early 2014 include the sale of Woori Financial, Woori Asset Management, Woori F&I, and a collective sale of interests in Woori Investment & Securities, Woori Aviva Life Insurance, and Woori FG Savings Bank. A spin-off of Kwangju Bank and Kyongnam Bank is planned for May 2014.
Management Commentary
Management emphasizes a strategy to improve asset quality and strengthen risk management. However, they acknowledge that the privatization process may divert management attention and result in labor unrest. The company failed to meet certain financial targets (ROA, expense-to-revenue ratio, NPL ratio) set in its memorandum of understanding with the KDIC for 2013, though no sanctions were imposed at the time of filing.
Key Risks
- Credit Risk: Significant exposure to small and medium-sized enterprises (SMEs), construction, and shipbuilding sectors. Specific concern regarding the STX Group, where credit exposures totaled KRW 1,268 billion with allowances of KRW 529 billion.
- Regulatory and Sanctions Risk: The company maintains limited accounts for the Central Bank of Iran (CBI) to facilitate trade. While the company believes these activities are exempt from U.S. sanctions under specific determinations, there is a risk of future sanctions or loss of access to the U.S. financial system if regulations change or exemptions are not renewed.
- Market Risk: Exposure to interest rate fluctuations and foreign exchange volatility (KRW vs. USD).
Investor Verification Checklist
- Discontinued Operations Impact: Verify the final sale prices and timing of the subsidiaries classified as discontinued operations (Kwangju Bank, Kyongnam Bank, Woori Investment & Securities, etc.) to assess the true impact on future earnings.
- STX Group Exposure: Monitor the restructuring progress of the STX Group and the adequacy of the KRW 529 billion allowance set aside for these exposures.
- Iran Sanctions Status: Confirm the status of the U.S. government's "significant reduction" determination regarding Korean oil imports from Iran and any potential changes to the exemption status of the CBI accounts held by Woori Bank.
- Capital Adequacy: Review the company's capital ratios post-disposal to ensure compliance with Basel III requirements and KDIC targets, particularly given the recent net loss.
- Dividend Policy: Note that no cash dividends were paid in 2013. Verify future dividend capacity given the holding company structure and reliance on subsidiary distributions.