Business context and reporting period
Woori Bank filed this audited Form 20-F on April 30, 2018, for the fiscal year ended December 31, 2017. The filing is an annual report, not a standalone 2017 fourth-quarter report; it does not provide a clear quarterly breakdown. The consolidated financial statements are prepared under IFRS as issued by the IASB. Unless noted, amounts below are in billions of Korean won (₩); the filing’s year-end conversion rate was ₩1,067.4 per US$1.
The filing identifies the registrant as Woori Bank, although the request metadata names Woori Financial Group Inc. Woori Bank is a Korean commercial bank with consumer, corporate, credit-card, investment-banking and capital-markets operations. At year-end it reported 876 domestic branches and 301 overseas branches and offices.
Financial performance and position
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Interest income | ₩8,551 | ₩8,512 | +0.5% |
| Net interest income | ₩5,221 | ₩5,020 | +4.0% |
| Net fees and commissions | ₩1,070 | ₩937 | +14.2% |
| Operating income | ₩2,157 | ₩1,574 | +37.0% |
| Net income | ₩1,530 | ₩1,278 | +19.8% |
| Net income attributable to owners | ₩1,512 | ₩1,261 | +19.9% |
| Basic and diluted EPS | ₩1,999 | ₩1,567 | +27.6% |
- Total revenue, as defined by the filing, was ₩10,833, up 1.5%. Net interest margin was 1.74%, versus 1.71%; net interest spread was 1.69%, versus 1.65%.
- Operating expenses, as defined in the profitability table, fell to ₩7,891 from ₩8,267; the cost-to-income ratio improved to 60.79% from 66.48%. General and administrative expenses nevertheless rose 1.5% to ₩3,531, including higher employee benefits and ₩300 of redundancy payments tied mainly to an early-retirement program.
- Impairment losses due to credit loss fell 5.9% to ₩785. The filing’s allowance roll-forward reports ₩1,770 at year-end on its loan measure; the audited statements report total allowance for credit losses of ₩1,830. These figures use different presentations and should not be treated as identical.
- Return on average assets was 0.49% and return on average equity was 7.25%, compared with 0.41% and 6.26%, respectively, in 2016.
Balance sheet, funding and capital
- Total assets were ₩316,295, up 1.8%; loans and receivables were ₩267,106, up 3.4%. Deposits due to customers increased 6.2% to ₩234,695.
- Total liabilities rose 1.9% to ₩295,731 and total equity was broadly unchanged at ₩20,565. Borrowings fell 21.2% to ₩14,785, while debentures rose 18.3% to ₩27,870.
- Customer deposits represented 82.7% of total funding. Approximately 95.8% of customer deposits had maturities of one year or less or were payable on demand, exposing the bank to rollover and withdrawal risk.
- Year-end capital ratios were 10.95% Common Equity Tier 1, 13.03% Tier 1 and 15.40% total capital, all above the stated 2017 minimums of 6.25%, 7.75% and 9.75%. Woori was designated a domestic systemically important bank; the filing describes a higher additional capital requirement for 2018.
- The 30-day liquidity coverage ratio was 100.87% at year-end, above the 95% regulatory minimum applicable in 2018. Cash and cash equivalents decreased to ₩6,908 from ₩7,591.
- Net cash used in operating activities was ₩1,979 in 2017, versus ₩4,905 provided in 2016. Investing activities provided ₩1,884, compared with ₩4,226 used in 2016; financing activities used ₩61, versus ₩333 provided. These cash-flow movements should be interpreted in the context of a bank’s lending, deposit and securities activity.
- Contractual obligations totaled ₩287,051, including ₩238,250 of deposits; ₩246,407 was due in less than one year. Off-balance-sheet loan commitments and related items were ₩85,306, and confirmed and unconfirmed guarantees were ₩11,402 combined. Provisions for possible losses on credit-related commitments were ₩249.
Material changes versus the prior comparable period
- Profitability improved: net income rose to ₩1,530 from ₩1,278, supported by higher net interest income and fees, lower credit-impairment expense and lower net other operating expenses.
- Interest income grew only modestly as loan growth was partly offset by lower yields on investment securities. Interest expense declined 4.6%, primarily because deposit costs fell. Average loan yield increased to 3.30% from 3.26%, while average interest-bearing liability cost decreased to 1.16% from 1.24%.
- Asset quality improved on headline measures: non-performing loans declined to ₩1,853 from ₩2,080, and the NPL ratio fell to 0.73% from 0.88%. The allowance for credit losses as a percentage of total loans declined to 0.70% from 0.78%.
- Other comprehensive income turned negative: total comprehensive income fell to ₩1,253 from ₩1,355, principally reflecting a ₩208 loss from foreign-currency translation and a ₩85 loss on valuation of available-for-sale assets.
- Market-related results were uneven. The bank recorded a ₩105 net loss on financial assets at fair value through profit or loss, partly offset by a ₩193 gain on available-for-sale assets. Derivatives trading revenue was a net loss of ₩53, versus net gains of ₩176 in 2016.
- Segment results diverged: consumer and corporate banking net income increased to ₩264 and ₩918, respectively; credit-card net income declined to ₩101. Other operations’ net income fell sharply to ₩22, while capital markets returned to ₩92 net income after a small loss.
Outlook, commentary, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management describes the 2018 and longer-term outlook for Korea and global markets as uncertain, and emphasizes asset quality, risk management, fee-income diversification, digital capabilities, operational efficiency and overseas expansion.
- Key credit risks include exposure to Korean SMEs, household debt, real estate and vulnerable construction, shipbuilding and shipping borrowers. SMEs represented 29.6% of total loans; consumer loans represented 43.2%. Management cautions that deterioration in economic conditions, borrower finances or collateral values could increase delinquencies and provisions.
- Other material risks include intense competition and margin pressure, interest-rate and foreign-exchange movements, dependence on short-term deposits, liquidity and capital requirements, cybersecurity, regulatory change, and geopolitical and economic conditions in Korea. The government’s continuing privatization plan may affect ownership, strategy and the share price; KDIC held 18.43% at the filing date and expected further sales.
- IFRS 9 became effective in 2018. Management expected earlier and higher expected-credit-loss allowances and described a one-time increase in allowances and reduction in retained earnings. Its year-end impact analysis estimated an allowance increase of approximately ₩306; the filing also warns that results and capital could be affected, while its accounting note says it did not expect a significant impact on regulatory capital ratios.
- The bank disclosed limited Iran-related services and ongoing U.S. investigations concerning transactions involving sanctioned countries. It stated that the outcome could not be predicted and that sanctions or restrictions on U.S. correspondent banking could be consequential.
- Other unusual or material matters include a Korean prosecutors’ investigation into alleged hiring irregularities, with six current or former employees indicted in February 2018; and an AJ Energy lawsuit seeking an alleged EUR 8 billion transfer that the bank says it cannot verify and believes is based on forged evidence. The bank also reported a separate U.S. investigation into sanctioned-country transactions.
Most important facts an investor should verify
- Confirm the issuer and reporting scope: the filing is Woori Bank’s FY2017 annual report, not a standalone Q4 filing for a company named Woori Financial Group Inc.
- Reconcile IFRS 9’s eventual opening allowance, retained-earnings and regulatory-capital effects with the filing’s preliminary estimated ₩306 allowance increase.
- Assess whether improving NPL ratios and lower credit costs are sustainable, particularly as consumer and SME exposures grow; review restructured credit-card balances and coverage.
- Check the quality and concentration of earnings, including the losses in fair-value assets and derivatives, negative foreign-currency translation and weaker credit-card and other-operations results.
- Review liquidity and refinancing sensitivity: deposit maturity concentration, near-term contractual obligations, LCR compliance and off-balance-sheet commitments.
- Monitor the outcomes of the U.S. sanctions investigations, Korean hiring investigation and AJ Energy lawsuit, as well as KDIC share sales and related governance changes.
- Verify the fiscal-2017 dividend: the filing reports ₩600 per share declared for the year, including a ₩100 interim dividend; payment timing differs from the selected-data table’s cash-dividends-paid figure.