Woori Financial Group Inc.

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 4/5

Woori Financial Group is a South Korean financial holding company with a wide range of banking and financial services, including retail and commercial banking, investment banking, and asset management, but a fragmented home market and regulatory pressure limits its competitive strength.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Woori Financial Group Inc. (WF) is a South Korean financial holding company. It’s a major player in the Korean financial market, providing a diverse range of services through its subsidiaries:

Banking: Core business is retail and commercial banking through Woori Bank. Provides loans, deposits, and related banking services to individuals, small-to-medium enterprises, and large corporations.
Investment Banking & Securities: Underwriting, brokerage, and asset management services. Offers a broad range of investment and financial advisory services to domestic and international clients.
Credit Card: Offers various credit card products including customized cards with promotions, loyalty programs and also offers cash advances, installment payment plans.
Asset Management: Through its subsidiaries and investment vehicles, the group manages assets and investments for its customers and own account.
Other Financial Services: These include other types of finance activities such as insurance, venture capital, real estate asset management and other related services.

Industry Trends: The South Korean financial market has been facing increasing competition, technological changes, and regulatory changes. Competition from both domestic and foreign banks is also intensifying. There’s a rising trend of digital banking, along with the increased use of online payment services.

Margins: Net interest margins have recently seen large swings, increasing in 2022 and decreasing from 2023 due to government initiatives to bring inflation down. Net interest margins and average yields will vary greatly between different business lines, but the overall industry is seeing an increase in non-interest related income. There is also a push for lower fees and more transparency, which will negatively affect profits of banking and financial service companies.

Competitive Landscape

WF operates in a highly competitive and fragmented market in South Korea. The main players it competes with include both domestic and international banks. Key competitors include KB Financial Group, Shinhan Financial Group, Hana Financial Group, and foreign financial institutions operating in South Korea. Competition is particularly intense in:

Retail Banking: Competition is high, and customers are offered similar products across all different banks. Loyalty is not too high, and customer satisfaction depends on speed and service, both of which can be easily replicated.
Investment Banking: This is also a highly competitive field, with a handful of well-established global banks. These banks often hold more credibility and are preferred by large clients, both domestic and international.
Online and Mobile Banking: There is intense competition in the digital space, with multiple well-established FinTech companies.

What makes WF different:

Established Brand: Woori Bank has an old established brand image that enjoys some consumer recognition, though the brand name doesn’t offer much moat for the company. It’s not a premium brand, and the company needs to rely on its operational efficiency in order to compete effectively.
Government Linkage: Government ownership or indirect influence through policies and regulations can provide some stability, but it is also a barrier for other government-influenced companies.
Wide Range of Products and Services: WF offers a diversified portfolio of financial services across all segments of the market. They try to integrate services with existing and potential customers.
Extensive Branch Network: WF has a wide branch network in its home market, while also expanding in emerging markets such as Cambodia and Vietnam.
Technological Adoption: They are trying to invest more in digital transformation and the transition toward technology. They have established a credit evaluation system on top of the recent technological implementation.

Financials

Recent Results (2022-2023):

Income Growth: The latest quarterly reports for Woori Bank, including the third quarter of 2023, show significant growth in interest income, primarily driven by increased interest rates, however, net interest income saw large swings, as rates were more volatile. Other income is growing steadily.
Net Income and Profitability: While interest income is the key revenue source, their overall profitability is volatile, and they have to focus on a larger profit margin due to the volatile nature of the industry.
Debt Growth: Their loan portfolio has steadily grown over 2022, but this growth has stabilized at around 5-7% in the previous two years.
Expenses: They have seen an increase in provisions for credit losses, although, they have started to decline in the most recent months. Operating expenses have also increased due to inflation and employee salaries.
Dividend & Buybacks: Management is focused on improving shareholder value, by focusing on high-returning assets, maintaining high levels of capital, and providing steady dividends.
Net Interest Margins (NIM): As interest rates have increased, the bank’s net interest margins increased in 2022, but are starting to fall slightly in 2023, and this remains one of the main drivers of the company’s profitability.

Profitability and Efficiency: Profitability can be defined by ROIC, ROE, or profit margins. All of these metrics measure returns and profitability, and as such, WF needs to balance these aspects. The overall return on invested capital is good, yet not among the best in class. The ROIC does not consider the goodwill and intangible assets that the company has acquired which can be viewed as a negative, since the company will have less profitability with those assets included. While the profitability is decent for the banking industry in general, many competitors in developed markets such as the US and Europe, enjoy better ROIC and Profit margins. Operational Efficiency: The bank’s cost-to-income ratios for the past several years show that it has moderate operational efficiency. Management can certainly attempt to streamline processes in order to make the company better on efficiency, but it is unlikely that there will be drastic improvements to operating margins over the longer-term.

Cash Flow The company’s cash flows are consistently positive, showing an ability to generate enough cash for funding their current operations and investments.

Balance Sheet Health: 4 / 5

Equity and Debt: They are primarily funded by deposits and equity, showing that the company has a good liquidity and debt structure. They also hold a significant amount of cash in order to hedge risks.
Asset Quality: Some parts of their assets are exposed to financial distress and they are continuing to diversify their assets. Loan portfolios are mostly to low and medium-risk sectors such as mortgage or consumer loans. The most volatile asset group are those in the corporate sector, but these loans typically provide higher interest income.
Capital Adequacy: They hold more than sufficient capital ratios in their core operations. However, since their assets are concentrated in Korea, the local regulations and financial conditions affect them greatly.

Moat Rating: 2 / 5

While Woori Financial Group has several advantages, it’s not considered to possess a wide economic moat for the following reasons:

Brand Recognition: While recognized, the Woori brand is not enough to command pricing power. There are very similar offerings with other banks, so brand loyalty is low in the industry. The brand name has to also compete with the perception of Korean banks and other financial institution in Korea.
Switching Costs: Customer switching costs are generally low, which makes clients easier to move to competitors.
Scale: The company has some economies of scale, especially in its home market, but is limited when operating internationally. They do not have a competitive edge over other larger or more established financial institutions.
Intangible assets: Some investments in technology and intangible assets can add value to the company, but these assets are also easily replicable, and there is no guarantee that they will generate future profitability.
Regulatory Influence: Regulations make it harder for them to price their products as they want, because of the constant interference from the government in the financial markets.

Therefore, they are assigned a narrow moat of 2. This shows that while the company can generate excess profits, they are limited in duration, and also by the current economic and industry conditions.

Business Resilience

Strong Core Business: Woori Bank has a strong core banking business, which provides some stability even during crises.
Diversification: Diversifying operations across segments in the financial industry helps to reduce dependence on a single revenue stream.
Balance Sheet Strength: They hold high levels of liquidity and a diversified asset base, allowing them to weather external shocks.
Management Competency: Management has a good track record and has been making the right steps to improve operations and create value for shareholders.

Risks That Can Harm the Moat & Resilience

Regulatory Changes: The South Korean government has been implementing regulations, and the financial sector needs to adapt in order to comply with them. It could lead to increased costs and decreased profitability.
Economic Volatility: The Korean economy has faced major difficulties lately, including increasing inflation and interest rates. Changes to the economy will affect the profits and revenues of all Korean banks.
Credit Risk: The increase in defaults and the growing financial distress of some consumers is worrying to the bank. A high level of defaulted and unrecoverable loans will hurt overall profitability.
Technological Disruption: Financial markets are rapidly changing, and as such, banks need to make improvements on digital banking and payments. Failure to adapt to changing technology and consumer preferences will cause the loss of customers and a reduction in profits.
Competition: Competition from other banks and fintech players is intense, and any missteps or inaction will cause loss of market share and customers.
Geopolitical Risks: As North Korea is next to South Korea, any unexpected conflicts may disrupt operations and threaten investor confidence.

Understandability: 4 / 5

Woori Financial Group’s business is very complicated to grasp for general investors. Here’s a breakdown of what to consider when making a judgment:

Business Complexity: Financial institutions, especially those that operate across different industries and markets can be very complicated to grasp. There are complex operational structures, balance sheets, and income statements. It can be hard to keep track of all the different products and services and their implications.
Operational Structure: With many different subsidiaries and partnerships with other businesses, it can be difficult to gauge the whole operating structure of the company.
Accounting Nuances: The accounting of financial institutions can be challenging, because of the large amount of leveraged assets, and derivative contracts. Regulations such as FASB and IFRS further complicate the financial statements.
Global Operations: Operating in different markets means there are more variables to consider, such as exchange rates, trade restrictions, and varying taxation rules.

Therefore, they are rated a 4 in understandability.