South Korea Banking Will Struggle Under Digital Pressures

Key Takeaways

• Demographic shifts and digital disruption are set to weaken traditional banking demand, eroding Woori's revenues and pricing power.
  
• Heightened regulation, ESG pressures, and sector concentration present profitability and credit risk challenges, increasing earnings volatility.
  
• Strategic digital investments, business diversification, and prudent risk management are improving revenue stability, profitability, and shareholder returns while positioning the company for sustainable long-term growth.

Catalysts

Operates as a commercial bank which provides various financial services to individual, business, and institutional customers in Korea.

• South Korea's aging and shrinking population will likely reduce long-term demand for traditional retail banking, mortgages, and consumer loans, leading to structurally slower loan growth and weaker fee income for Woori Financial Group, which poses a direct challenge to revenue and earnings expansion.
  
• Escalating digital disruption from fintechs and large technology conglomerates such as Kakao and Naver threatens to erode Woori's pricing power and customer base, especially as digital adoption accelerates, putting sustained pressure on both net interest margin and fee income over the coming years.
  
• Increased regulatory scrutiny and heightened ESG expectations are pushing compliance costs higher for Woori Financial Group, while simultaneously restricting investment in certain high-return but non-ESG sectors; this combination is likely to compress net margins and limit overall profitability.
  
• Heavy reliance on lending to South Korea's property and SME sectors exposes Woori to rising credit risk, particularly as economic growth slows and delinquency/NPL ratios trend upward; this vulnerability heightens the risk of elevated loan losses and net income volatility going forward.
  
• Persistently low interest rates in Korea, coupled with intensifying competition from both fintech entrants and traditional peers, are expected to compress net interest margins well into the future, which will undermine core profit generation and long-term return on equity.

Woori Financial Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Woori Financial Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Woori Financial Group's revenue will decrease by 0.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 24.4% today to 29.6% in 3 years time.
• The bearish analysts expect earnings to reach ₩3221.3 billion (and earnings per share of ₩4547.07) by about July 2028, up from ₩2715.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.1x on those 2028 earnings, down from 6.7x today. This future PE is lower than the current PE for the US Banks industry at 7.8x.
• Analysts expect the number of shares outstanding to decline by 0.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.18%, as per the Simply Wall St company report.

Woori Financial Group Future Earnings Per Share Growth

Risks

• Woori Financial Group is making significant investments in digital and IT competitiveness, including a super app and expansion into online services, which could lower cost-to-income ratios and result in stronger net margins and stable earnings growth over the long term.
  
• The company is actively diversifying its business mix, notably by expanding into securities and insurance, which can lead to more recurring fee-based income and reduce its reliance on net interest margins, supporting overall revenue stability and growth.
  
• Strategic focus on asset rebalancing and shifting toward prime corporate loans, along with strong provisioning and risk management practices, have maintained healthy capital adequacy and asset quality, which enhances loss absorption capacity and underpins long-term earnings potential.
  
• Woori's continued execution on robust shareholder return policies, including increased quarterly dividends and share buybacks, signals confidence in its financial strength and may support share price appreciation via capital return and improved investor sentiment.
  
• The growing customer base through digital initiatives, such as telecom-banking bundling and a universal banking platform, positions Woori to benefit from long-term digitalization trends and capture new revenue streams, which can drive sustainable improvements in revenue and profitability.

Valuation

• The assumed bearish price target for Woori Financial Group is ₩18000.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Woori Financial Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩33500.0, and the most bearish reporting a price target of just ₩18000.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₩10888.6 billion, earnings will come to ₩3221.3 billion, and it would be trading on a PE ratio of 5.1x, assuming you use a discount rate of 8.2%.
• Given the current share price of ₩24950.0, the bearish analyst price target of ₩18000.0 is 38.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.