Chairman-designate Sohn Tae-seung of Woori Financial Group. (Photo: Woori bank)

Woori Bank, a major South Korean commercial lender, said recently its third-quarter net profit soared 113 percent from a year earlier on the back of interest margin growth. Net profit came to 604.5 billion won ($529.2 million) in the July-September period on a consolidated basis, up from 280 billion won from a year earlier, the lender said in a regulatory filing.

Its operating profit in the third quarter also jumped 141 percent on-year to 765.8 billion won, though the quarterly sales fell 10 percent to 4.16 trillion won, according to the lender.

During the first nine months of the year, its net income hit an all-time high of 1.90 trillion won, up 38 percent from the previous year. The solid growth is attributable to a rise in its interest income from increasing loans to small business entities, as well as larger amounts of deposits and strong performances of global businesses, the banker noted.

Woori Bank reported 597.5 bn won in 3Q18 net income (+113% YoY, -17% QoQ), beating the consensus of 565.5 bn won.

Notable events in 3Q include: 1) a KRW52bn gain related to STX Corp; and 2) 47 bn won in non-operating income related with Kumho Tire.

Group NIM remained flat QoQ but banking NIM rose by 1bp QoQ. Loan growth was 0.8% QoQ. Meanwhile, net interest income grew 6.1% YoY and 2.5% QoQ on solid NIM and an increase in loans.

Non-interest income fell 19.7% QoQ due to: 1) a tough base caused by 2Q18’s massive gain from securities disposal ahead of the introduction of IFRS9; and 2) a decline in securities valuation gains amid stock market corrections. However, commission income slid only 3.7% YoY despite weak credit card sales. The credit cost ratio improved by 24bps YoY to 13bps.

Even after stripping off the provision writeback on STX Corp, it is still fairly low at 21bps.

The absence of new NPLs confirms the company’s outstanding management of asset soundness. Even with the decreases in interest rates and non-interest income, Woori managed to maintain earnings momentum through steady NIM and modest interest income, which we find impressive. We reiterate BUY and our target price of 24,000 won.

The company plans to complete a transition into a holding company structure by Jan 2019, after receiving approval from the financial authority on Nov 7. It has acquired the trademark rights for various businesses (securities, insurance, asset management, real estate trust, etc) to incorporate them as subsidiaries.

The CET1 ratio is expected to fall temporarily due to the adoption of a standardized approach as it turns into a holding company. Management plans to keep the 2019 DPS intact by reenacting an internal ratings based approach (IRB) next year. A reduction in credit card merchant fees will likely reduce the credit card net income by about 19 bn won annually.

Nevertheless, credit card net income should surpass the annual target of 80 bn won.

Management aims to generate 100 bn won annually through higher billings and market.

Woori Bank Co., South Korea’s third-largest commercial bank, said it will transform itself into a holding company by early next year to as part of effort to expand its business portfolio. Woori Bank said the decision is aimed at expanding its businesses from traditional banking to asset management, real estate and other financial services.

The bank, which is 18.5 percent owned by the government, said it aims to establish the holding company by early 2019, taking consideration of time needed for regulatory procedures and the market condition. The Financial Services Commission will review its application.

“Once converted to a holding firm structure, Woori Bank will be able to invest a wide range of profitable businesses, including securities, asset management and real estate trust, which could raise the company’s value.” the lender said. Under regulations, local banks are prevented from investing over 20 percent of their assets into other units.

It is the nation’s only commercial bank that hasn’t changed to a holding firm structure due to the delayed process of its stake sales. Other banking groups have banks, securities, insurance, card and asset management units under their wings to create synergy between their financial services.

Woori currently owns seven subsidiaries, but only two companies - Woori Card Co. and Woori Investment Bank Co. - produce net profits. The government poured 12.8 trillion won ($11.5 billion) into Woori Bank to keep it afloat in the wake of the 1997 Asian financial crisis.

It has recovered 8.2 trillion won so far and plans to pull out the remaining 4.8 trillion won by selling the stake.

The government has made four failed attempts to privatize the bank since 2010, having had difficulty in finding a single qualified owner for the controlling stake.