Woori Bank:Taking stock after 4Q16results,Maintain Buy on WOORIB sub-debt

Reiterate Buy on WOORIB 4.5% AT1 and 4.75% B3T2

    In this note, we discuss the results of the progress that Woori Bank has madein the past two years (since Moody’s downgrade) to turn around the bank andput the legacy problems behind it. Even though Moody’s changed the outlookon Woori Bank to stable from negative in Nov 2016, the positives have not yetbeen fully reflected in the spreads of Woori’s sub-debt, and 2024s B3T2 inparticular (as they slipped into split-rating category earlier). Instead the bondhas underperformed and lagged the rally vs. Chinese B3T2 such as BoChina24s and ICBC 25s. Woori 24s have traded in-line with (or even inside of) thetwo Chinese B3T2s for most of 2016, but Woori 24s now trade 15bp wider.

    Cinda 24s used to trade 40bp wider than Woori 24s a year ago vs. trading flatspread-wise currently. We also believe 35-40bp is too wide a spreaddifferential vs. KEB Hana 24s and Shinhan 26s it would have looked fair at~20bp. We maintain Buy on Woori Bank 24s (103.1/198bp ask price/G-spr).

    Woori Bank’s 4.5% Perp c21s looks undervalued in the Asian context mainlydue to the following observations (YTC-wise): 1) Cinda Perp c21s used to trade30bp wider than Woori AT1 21s as recent as three months ago, but now-tradein-line, 2) SBI Perp c21s are now trading ~5bp tighter than Woori Perp c21s vs.

    ~90bp wider four months ago; 3) Woori Bank has lagged other AT1 peers inthe rally since Dec-16, its yield differential with its own Perp c20s is ~55bp. Webelieve a yield contraction of at least 25-30bp should make it look fairer; hencereiterate Buy on Woori Bank Perpc21 AT1s (97.6/5.1% ask-price/YTC).

    4Q16 results impacted by privatisation-related one-offs, credit profile is robust

    One-off costs related to the privatisation suppressed results of Woori Bank in4Q16 as witnessed by a 29.1% YoY decline (56.3% QoQ decline) in net profit toKRW155bn. Once the impact of these one-time severance and bonuspayments worth KRW86bn and KRW84bn respectively is removed, thequarterly results appear resilient. FY2016 NII, PPI and Net Income all recordedstrong YoY growth: 5.5%, 4% and 19% respectively. The bank continued todeliver visible recovery in asset quality with Gross NPL levels consistentlyimproving from 1.47% at the end of 4Q15 to 0.98% at the end of 4Q16. It alsosimultaneously improved its LLR buffer levels. The halving of delinquency ratiofor loans from 0.82% in FY15 to 0.46% in FY16 signals potential furthersustenance of the low credit costs. The bank maintains its focus on consumerloans, which helped keep NIM stable YoY. Woori Bank’s NIM contracted 4bpQoQ to 1.37% in 4Q16 while retail loans grew 3.3% QoQ vs. 1.9% QoQ declineof large corp. and SME loans. Retail loans now account for a substantial 47.3%of the total loan portfolio, up from 43.7% at the end of 4Q15.

    Committed management in place, its efforts to drive further improvement

    The newly-appointed five external directors showed their committed tostability of Woori Bank after the privatisation and have renewed the term ofexisting CEO Lee Kwang-goo for two years. The CEO embarked on a missionto come up with new employee evaluation system by June to boost businessefficiency, which should drive further improvement in C/I ratio (it has alreadyreduced steadily from ~60% in FY14 to 56.2% (excluding one-offs) in FY16.

    Despite the fact that the bank is already compliant with the fully-loaded Basel-III minimum equity ratio (Tier-1 + CCB) of 10.5% (kicks-in by Jan-19), CEO hasset an ambitious plan to add 0.5% to Tier-1 capital each year until then bytargeting to achieve KRW1.3-1.4tn in profits annually. We believe management can accomplish this task given its proven track record of improving creditstrength over the past two years.