Woori Bank (WF, Financial)(XKRX:000030, Financial), the $7.7 billion South Korean bank, reported its fourth quarter and fiscal 2016 results in early February. In 2016, Woori Bank grew its net operating revenue by 7.6% to 5.9 trillion won ($5.09 billion).
Despite the 10% increase in general and administrative expenses to 3.5 trillion won, Woori Bank still delivered an impressive 19% profit growth to 1.26 trillion won in 2016.
As observed, Woori Bank was able to record a 79% increase in operating profits from dividend on securities to 185 billion won and experienced reduction mostly in interest expenses and credit loss impairments – a 13.7% reduction to 834 billion won.
Valuation
Woori Bank ADR shares trade at a good discount compared to its peers. According to Reuters data, Woori Bank had a trailing price-earnings (P/E) ratio of 8.12 times (industry figure 16.7), price-book (P/B) ratio of 0.45 times (industry figure 2.3) and price-sales (P/S) ratio of 0.72 times (industry figure 4.4).
Woori Bank had a trailing dividend yield of 2.15%.
Total return
Woori Bank ADR shares outperformed the broader Standard & Poor's 500 index in the near term. According to Morningstar data, Woori Bank registered a total return 59% vs. the S&P 500’s 22% in the past year. Meanwhile, the S&P 500 outperformed Woori Bank over the past five years with 14% vs. 3.7% for the bank.
Woori Bank
According to filings, Woori Bank is the second-largest commercial bank in Korea in terms of total assets (including loans) as of Dec. 31, 2015. The bank's operations include a broad range of businesses including corporate banking, consumer banking, credit card operations, investment banking, capital markets activities and other businesses.
Woori Bank traces its roots from the 1997-1998 Asian financial crisis. Korea Deposit Insurance Corp. (KDIC) – a government entity – bought 95% of Commercial Bank of Korea and Hanil Bank and merged both banks together and formed Hanvit Bank.
In 2000, KDIC wrote down the capital of Hanvit Bank among other banks it purchased to zero and then made a total capital injection of 4.64 trillion won in Hanvit Bank later that year and in 2001 in return for new shares.
In March 2001, KDIC established Woori Bank as a new financial holding company and transferred all the shares in Hanvit Bank along with other banks – Kyongnam Bank, Kwangju Bank, Peace Bank of Korea and Hanaro Merchant Bank – held by the KDIC to Woori Finance Holdings in exchange for the latter’s newly issued shares.
Under several mergers and acquisitions Woori Bank became the sixth-largest bank in South Korea in terms of assets (only) with 308.8 trillion won as of June 2016.
KDIC, as of Jan. 31, owned 21.37% of Woori Bank, down from 51.06% after successfully reducing its stake in hopes of aiming a privatization plan for the bank after bailing it out with $2 billion during the financial crisis.
In review, Woori Bank had the most credit risk exposure in Korea – 95.9% or 365.7 trillion won, followed China with 0.9%, the U.S. with 0.7%, the United Kingdom with 0.2%, Japan with 0.1% and countries in Indonesia, Vietnam, Panama and the European countries with 2.2%.
Financial metrics
Net interest margin
Net interest income is the difference between the revenue that is generated from a bank's assets and the expenses associated with paying out its liabilities (Investopedia).
In 2016, Woori Bank delivered net interest margin that was flat from the prior year at 1.41%.
Return on assets
Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets (Investopedia).
In 2016, Woori Bank delivered an ROA of 0.41% compared to 0.37% in 2015.
Return on equity
Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested (Investopedia).
In 2016, Woori Bank delivered an ROE of 6.36% compared to 5.69% in 2015.
Loan loss provision
Loan loss provision is an expense set aside as an allowance for uncollected loans and loan payments (Investopedia).
In 2016, Woori Bank’s loan loss provision for all of its borrowers fell by 25.8% to 693 billion won from the prior year.
Delinquency ratio
The delinquency rate is simply the number of loans that have delinquent payments divided by the total number of loans an institution holds. Typically, delinquency rates on loans are affected by the credit quality of the borrower and macroeconomic factors such as unemployment (Investopedia).
In fourth quarter 2016, Woori Bank’s delinquency ratio declined to 0.46% from 0.82% back in first quarter 2016.
The South Korean bank experienced a reduction in delinquency in both of its household loans (47.4% of total loan composition in 2016) and SME (32.7% of the total loan). Meanwhile, its delinquency rose by 1.6 times in its large corporation loans.
As per industry, Woori Bank specifically experienced a 333% increase in mining loans – from 1 billion won in fourth-quarter 2015 to 3 billion in fourth-quarter 2016.
NPL ratio
The NPL ratio is the ratio of nonperforming loans in a bank's loan portfolio to the total amount of outstanding loans the bank holds (eHow).
A nonperforming loan (NPL) is the sum of borrowed money upon which the debtor has not made his scheduled payments for at least 90 days. A nonperforming loan is either in default or close to being in default (Investopedia).
In 2016, Woori Bank had an NPL ratio of 0.98% compared to 1.47% in 2015.
Capital adequacy in tier 1 and revenue per risk-weighted assets
Tier 1 capital
Tier 1 capital consists of shareholders' equity and retained earnings. Tier 1 capital is intended to measure a bank's financial health and is used when a bank must absorb losses without ceasing business operations (Investopedia).
Under Basel III, the minimum tier 1 capital ratio is 6%, which is calculated by dividing the bank's tier 1 capital by its total risk-based assets.
On a Basel III basis, Woori Bank reported a 12.8% Tier 1 Ratio for fourth-quarter 2016 compared to 10.43% in fourth-quarter 2015.
Tier 2 capital
Tier 2 capital includes revaluation reserves, hybrid capital instruments and subordinated term debt, general loan-loss reserves and undisclosed reserves. Tier 2 capital is supplementary capital because it is less reliable than tier 1 capital (Investopedia).
In 2015, the minimum tier 2 capital ratio is 2%.
Using figures found in Woori Bank’s Fact Book, the tier 2 capital ratio for fourth-quarter 2016 was at 2.61% vs. 3.24% in the same period the year prior.
Nonetheless, Woori Bank still passed the Basel III requirement of minimum total capital ratio – tier 1 and tier 2 – requirement of 8% with 15.41% in 2016.
Revenue per risk-weighted assets
The Wall Street Journal recently pointed out this metric to see whether banks (any) are finding it tough to attract business while being stingier with their capital or taking less risk.
Woori Bank improved its revenue per unit risk to 1% in fourth quarter 2016 compared to the same period the year prior.
Cash, debt and book value
As of fourth quarter fiscal 2016, Woori Bank had 7.6 trillion won in cash and due from banks and 42.3 trillion won in borrowings and debentures, representing a borrowings to equity ratio of 2.06 times – compared to 2.17 times in fourth quarter fiscal 2015.
Woori Bank also had negligible goodwill and intangible assets comprising its 310.7 trillion won in assets. Nonetheless, the bank had a book value of 20.5 trillion won compared to 19.31 trillion won the year prior.
Cash flow
As per Woori Bank’s annual filing for its 2015 fiscal year operations, the bank has delivered inconsistent cash flow from operations in recent fiscal years.*
*Cash flow figures for the recent fiscal year was not derived by the author at the time of this writing.
As observed, Woori Bank’s free cash flow and cash flow from operations were patchy and would not be favorable for conservative investors.
(Read Woori Bank’s Fiscal 2015 20-F.)
Nonetheless, Woori Bank gains from its free cash flow from its investments. In fiscal 2015, the South Korean bank derived 24.9 trillion won from investment disposals and redemptions including investments in financial assets, investment properties and premises and equipment.
Conclusion
Other than a flat net interest margin performance in fiscal 2016, Woori Bank had an overall improving performance in terms of other financial metrics including lowered nonperforming loan ratio from the prior year.
Woori Bank also met Basel III requirements in terms of capital adequacy. The bank’s book value also has grown despite having a leveraged balance sheet. Nonetheless, cash flow performance represented quite unfavorably as free cash flow has been inconsistently positive.
An analyst that covers Woori Bank had a target price of $26 a share or more than a 26% drop from Friday’s share price of $35.39.
If Woori Bank were to trade to its book value, accompanied by 40% margin, would indicate a possible 84% rise to $64 a share – a level it has achieved prior to the recent financial crisis.
In summary, Woori Bank is a buy with a target price of $45 per ADR share.
Disclosure: I do not have shares in any of the companies mentioned.
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