Woori Financial Group Inc. — 2018 Annual Report (Form 20-F)
Period and reporting basis. Filed April 30, 2019, this annual report covers the fiscal year ended December 31, 2018; it is not a standalone fourth-quarter filing. Woori Financial Group was established on January 11, 2019. Accordingly, the historical consolidated results presented are principally those of Woori Bank and subsidiaries, with specified consolidation modifications. Financial statements use IFRS as issued by the IASB; amounts below are Korean won (₩) unless stated otherwise.
Financial and operating performance
| Metric | 2018 | 2017 | Change or context |
|---|---|---|---|
| Total revenue | ₩11,752bn | ₩10,833bn | Up 8.5% |
| Net interest income | ₩5,651bn | ₩5,221bn | Up 8.2%; net interest margin rose to 1.80% from 1.74% |
| Net fees and commissions income | ₩1,070bn | ₩1,070bn | Unchanged as reported |
| Operating income | ₩2,759bn | ₩2,157bn | Up 27.9% |
| Net income | ₩2,052bn | ₩1,530bn | Up 34.1%; attributable to owners was ₩2,033bn, versus ₩1,512bn |
| Operating cash flow | ₩9,160bn | (₩1,979bn) | Investing cash flow was (₩11,071bn); financing cash flow was ₩1,517bn. Cash and equivalents ended at ₩6,748bn, down from ₩6,908bn |
| Total assets / liabilities / equity | ₩340,447bn / ₩318,494bn / ₩21,953bn | ₩316,295bn / ₩295,730bn / ₩20,565bn | Assets up 7.6% |
| Loans, net | ₩260,820bn | ₩251,523bn | Up 3.7% |
| Customer deposits | ₩248,691bn | ₩234,695bn | Up 6.0%; approximately 82.7% of total funding |
| Borrowings / debentures | ₩16,203bn / ₩28,736bn | ₩14,785bn / ₩27,870bn | Both increased |
| Woori Bank capital ratios | CET1 11.15%; Tier 1 13.18%; total 15.65% | CET1 10.95%; Tier 1 13.03%; total 15.40% | Above stated 2018 regulatory minimums |
Return on average assets improved to 0.62% from 0.49%, return on average equity to 9.36% from 7.25%, and cost-to-income ratio to 59.98% from 60.79%. Total loans were ₩262,034bn; non-performing loans were ₩1,329bn, or 0.51% of loans, down from 0.73% in 2017. The allowance for credit losses was ₩1,778bn, equal to 0.68% of loans.
Material changes and significant accounting items
- Higher interest income reflected loan growth and higher yields; interest expense also rose as deposit and borrowing costs increased. Net interest margin nevertheless improved.
- Impairment losses due to credit loss fell to ₩330bn from ₩785bn. The comparison is affected by adoption of IFRS 9 in 2018, which replaced the incurred-loss model with expected credit losses; the company reported a ₩308bn opening increase in allowances for credit losses and guarantee/commitment provisions.
- Reported net fee income was flat, but 2018 adoption of IFRS 15 reduced both credit-card fee income and related expense by ₩526bn as rewards and points were treated as consideration to customers. The reported declines in gross card fees and commissions are therefore not directly comparable.
- Other net operating expenses rose to ₩395bn from ₩31bn, mainly as foreign-exchange gains fell. Net gains on financial assets rose to ₩296bn from ₩88bn, with the presentation also affected by IFRS 9 classifications.
- Income tax expense increased to ₩753bn from ₩419bn; management cited higher pretax income and an increase in the applicable Korean corporate tax rate. The effective tax rate rose to 26.9% from 21.5%.
Liquidity, outlook, risks and contingencies
Customer deposits remained the principal funding source. Approximately 96.4% of deposits had maturities of one year or less or were payable on demand, creating rollover and funding-cost exposure. Woori Bank’s 30-day liquidity coverage ratio was 104.08% at year-end, above the 100% requirement effective January 1, 2019. The report also presents ₩303,488bn of contractual obligations, including deposits, borrowings, debentures, leases and employee severance obligations; these totals include estimated interest where specified.
Management provided no specific quantified earnings guidance in the supplied filing text. It described the 2019 Korean and global economic outlook as uncertain and identified priorities including improving asset quality and risk management, growing fee-based and non-bank businesses, using the new holding-company structure to pursue synergies and acquisitions, and expanding overseas.
- Credit and concentration: SMEs represented 30.3% of total loans; consumer loans were 44.7%. Management warned of potential deterioration from weaker economic conditions, household debt, higher rates, property-market changes and stress in construction, shipbuilding and shipping. Potential problem loans rose to ₩1,513bn from ₩937bn.
- Interest rates and funding: Higher rates can raise funding costs, affect securities values and impair borrowers’ repayment capacity. Short-term deposit reliance may weaken liquidity if customers do not renew deposits.
- Holding-company transition and ownership: The group depends on subsidiary distributions for holding-company liquidity and dividends. KDIC owned 18.32% after the 2019 stock transfer and expected to sell all or part of its holding; the privatization process could affect governance, strategy and share price.
- Iran-related sanctions and investigation: The filing describes Iran-related account and trade-finance activity, plans to restrict or discontinue certain activity following U.S. sanctions changes, and cooperation with an investigation by U.S. authorities concerning transactions involving sanctioned countries. The outcome was stated to be unpredictable.
- Other matters: Risks include competition, cybersecurity, regulatory changes, geopolitical and foreign-exchange volatility, and legal proceedings. Disclosed proceedings include a hiring-practices investigation involving former Woori Bank employees and an alleged €8bn transfer claim that Woori Bank disputed. The filing states it could not predict the outcome of the U.S. investigation.
The company reported a 2018 cash dividend of ₩650 per share. It also disclosed that April 2019 agreements to acquire interests in two asset-management companies were subject to regulatory approvals and other closing conditions.
Investor verification priorities
- Confirm the predecessor-issuer basis of 2018 results and the impact of IFRS 9 and IFRS 15 before comparing reported figures with prior years.
- Review the audited cash-flow statement and assess the sustainability and composition of the ₩9,160bn operating cash inflow.
- Check current asset quality, expected-credit-loss assumptions, potential problem loans, and credit-card delinquencies including restructured balances.
- Verify updated capital and liquidity ratios, deposit renewal trends, and funding maturities against the 2019 regulatory requirements.
- Monitor developments in the KDIC share sale, holding-company funding and dividend capacity, Iran-related sanctions investigation, and disclosed legal proceedings.