[Im Jong-ryong 200 Days] Will Woori Financial, Subject to 'Big Bath' Theory, Rebound in Performance in the Second Half?

First Half Report Card Shows 'Earnings Shock', Some See It as Base Effect
Focus on Corporate Loans Instead of Household Loans, Emphasis on Global Finance
Brokerages Needed but Expected to Wait for Large Sell-offs

Will Woori Financial Group's performance rebound in the second half of this year? As Chairman Lim Jong-ryong's 200th day in office (October 10) has passed, whether he can get Woori Financial Group back on track is one of the major concerns in the financial industry. In terms of net profit for the first half of this year (January to June), Woori Financial Group (1.5386 trillion KRW) lagged behind NongHyup Financial Group (1.7058 trillion KRW).

As Woori Financial Group fell to the bottom in net profit among the five major financial holding companies, the industry speculated about a 'Big Bath' at Woori Financial. Big Bath refers to a practice where new management reflects losses incurred during the previous administration as much as possible in the accounting books to clear past management mistakes. If performance improves afterward, it can highlight the achievements of the new management.

Applied to Woori Financial, it can be analyzed that Chairman Lim increased the loss scale early in his term to create a performance growth curve during his tenure. Chairman Lim is expected to aim for a performance rebound in the second half by strengthening corporate finance and global operations.

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Performance Deterioration Early in Term... Expecting a Base Effect?

Woori Financial Group's performance hit bottom in the second quarter (April to June). It recorded a net profit of 625 billion KRW (based on controlling interest), down 32.3% year-on-year and 31.6% quarter-on-quarter, significantly missing market expectations. Choi Jung-wook, a researcher at Hana Securities, evaluated, "Woori Financial recorded earnings shock-level results, significantly below consensus." This contrasted with KB Financial and Hana Financial, which posted net profit increases of 23.9% and 11.9% year-on-year, respectively.

The main cause of the negative growth was loan loss provisions. Woori Financial set aside 556 billion KRW in loan loss provisions in the second quarter alone. This included 50 billion KRW for Hanwha Ocean (formerly Daewoo Shipbuilding & Marine Engineering) provisions and 54 billion KRW related to a Hong Kong real estate private equity fund. At the time of the earnings announcement, Woori Financial explained, "This year, we plan to focus on asset soundness management rather than growth."

An internal Woori Financial employee said, "From the perspective of the new management (Chairman Lim Jong-ryong), a picture of increasing performance is necessary, so they may have tried to increase costs early in the term to lower performance." A market bank official also said, "Loan loss provisions are discretionary and have been used for performance adjustment in the past."

However, there is also a view that it is difficult to see the provision accumulation as intentional. After COVID-19, as non-performing assets increased, financial authorities ordered strengthening of asset soundness. In this context, they have continuously demanded additional provision accumulation. A financial industry official said, "Additional provision accumulation is a common issue across banks, so it is difficult to conclude it as the cause of a Big Bath."

Woori Financial's loan loss provisions more than doubled from 262 billion KRW in the first quarter to 556 billion KRW in the second quarter this year. However, compared to the loan loss provisions of other financial holding companies in the second quarter (KB Financial 651.3 billion KRW, Shinhan Financial 548.5 billion KRW, Hana Financial 450 billion KRW, NongHyup Financial 550.4 billion KRW), it was not particularly large.

Future Strategy?... Acquisition of Securities Firm Premature

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Woori Financial's strategy for a profit rebound in the second half of this year lies in expanding corporate loans. Unlike two to three years ago, household loan expansion is currently impossible, so corporate finance is critical. The predecessor of Woori Bank was Hanbit Bank, formed by the merger of Hanil and Commercial Banks, which had a high proportion of large corporate transactions. Because of this, Woori Bank was once considered a strong player in corporate finance, but now it ranks fourth in the corporate loan market share.

Chairman Lim's plan is to "regain second place in corporate loan market share next year and achieve first place by 2027." As seen in the remark, "Assets without margin are not quality assets" (Kang Shin-guk, Head of Corporate Investment Finance Division at Woori Bank, September 7 briefing), the goal is to increase assets centered on highly profitable corporate loans.

Woori Bank plans to raise the proportion of corporate loans to 60% of total loan assets by 2027. The annual average loan growth rate targets are set at 30% for large corporations and 10% for small and medium enterprises. Strategic branches have been established mainly in regions where major companies are concentrated. In July, the Banwol·Siwha BIZ Prime Center opened. Additional plans have been made to open branches in Namdong·Songdo and Changwon·Noksan areas.

Global operations are also emphasized. At the Woori Financial management strategy workshop held in July, Chairman Lim set "strengthening global business competitiveness" as a new management task. A dedicated global business organization was newly established to support subsidiaries' overseas mergers and acquisitions (M&A) and business plans. Woori Bank also established the 'Southeast Asia Growth Business Division,' responsible for branches in Indonesia, Vietnam, Cambodia, India, and Bangladesh. The 'Global Investment WON Center' was also opened to attract foreign investment.

The acquisition of a securities firm, necessary to strengthen the non-bank portfolio, is unlikely within this year. Acquiring a securities firm serves the purpose of strengthening non-bank operations but can also be a key to improving Woori Financial's Achilles' heel?its capital ratio. This is because capital expansion can be achieved through a rights offering fueled by securities firm M&A. From Woori Financial's perspective, the larger the M&A target, the better. A financial industry official said, "Chairman Lim is more likely to wait for a large deal rather than acquiring a small securities firm immediately."

[Image source=Yonhap News]