Mergers And Cost Management Will Diversify Income And Boost Future Profitability

Key Takeaways

• Strategic expansion in noninterest income and core deposit growth aims to stabilize margins and drive future revenue growth.
  
• Mergers and cost management initiatives are expected to diversify income streams and boost profitability through synergy and improved net margins.
  
• Declining NIM, credit costs, and capital constraints challenge profitability, while geopolitical risks may hamper domestic and international growth.

Catalysts

Operates as a commercial bank that provides a range of financial services to individual, business, and institutional customers in Korea.

• The group is focusing on increasing core deposits and actively managing assets to counteract margin pressure. This should help stabilize and potentially improve net interest margins (NIM) by reducing funding costs and leveraging lower-cost deposits.
  
• There is a strategic expansion of noninterest income through increased profitability in marketable securities and fee income, which has been evidenced by the significant rise in noninterest income. This diversification is expected to drive revenue growth moving forward.
  
• Mergers, such as the one with Woori Investment Bank and ongoing efforts to enter the insurance industry, are anticipated to diversify income streams and create synergy, likely boosting future earnings.
  
• Active cost management through channel optimization and workforce streamlining has resulted in the cost-to-income ratio (CIR) falling below 40% for consecutive quarters. Continued focus on these initiatives is likely to improve net margins.
  
• Proactive capital management initiatives, including measures to improve the Common Equity Tier 1 (CET1) ratio to 12.5% by early 2025, are aimed at enhancing shareholder returns and corporate value, potentially leading to increased earnings per share (EPS).

Woori Financial Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Woori Financial Group's revenue will grow by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 25.9% today to 32.0% in 3 years time.
• Analysts expect earnings to reach ₩3632.6 billion (and earnings per share of ₩5000.76) by about December 2027, up from ₩2573.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 4.9x on those 2027 earnings, up from 4.5x today. This future PE is lower than the current PE for the US Banks industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 0.73% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.82%, as per the Simply Wall St company report.

Woori Financial Group Future Earnings Per Share Growth

Risks

• The group's NIM (Net Interest Margin) is declining due to market interest rate adjustments and cost pressures from increased funding needs, which could negatively impact future interest income and overall profitability.
  
• Sluggish domestic demand and the restructuring of the real estate PF market have raised credit costs, which might erode the group's net margins if not controlled effectively.
  
• Asset growth prioritization and the focus on improving CET1 ratio could limit capital for expansion or shareholder returns, potentially impacting future earnings growth and share price appreciation.
  
• The acquisition of insurance firms and integration of new securities units could present operational challenges and require additional capital, which might strain profit margins and limit potential dividend payouts.
  
• Uncertainty regarding geopolitical risks and economic conditions, such as U.S. presidential elections and Middle East tensions, could affect both domestic and international operations, potentially reducing revenue and net income.

Valuation

• The analysts have a consensus price target of ₩19615.0 for Woori Financial Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩22000.0, and the most bearish reporting a price target of just ₩16800.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₩11358.4 billion, earnings will come to ₩3632.6 billion, and it would be trading on a PE ratio of 4.9x, assuming you use a discount rate of 7.8%.
• Given the current share price of ₩15630.0, the analyst's price target of ₩19615.0 is 20.3% higher.
• 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.