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Country: Korea
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Fundamental View
AS OF 17 Mar 2023Business Description
AS OF 17 Mar 2023- Hyundai Motor Co., Ltd. engages in the manufacture and distribution of motor vehicles and parts. It operates through the following business areas: Vehicle, Financial and Others. The Vehicle division offers motor vehicles. The Financial division provides financing, leasing and credit cards. The Other division includes manufacture of railways. The company was founded on December 29, 1967, and is headquartered in Seoul, South Korea.
- Hyundai Capital America benefits from a support agreement with Hyundai Motor (HMC). HCA investor relations confirmed its support (keepwell) agreement contains a fixed charge coverage provision that it views as particularly strong compared to other peers. HCA’s support agreement stipulates that HMC will make cash contributions to HCA if the fixed charge coverage is below 1.1x, allowing the company to mitigate the impact on capital from losses. Key provisions of the support agreement listed in the business update include (1) HMC agrees it, its controlled subsidiaries, and entities subject to joint control, will own 100% of HCA, (2) HMC will cause HCA and its subsidiaries to maintain positive consolidated tangible net worth, (3) HMC will take all necessary actions to ensure HCA maintains a minimum Fixed Charge Coverage of 1.1x, and (4) Third-party enforceability rights.
Risk & Catalysts
AS OF 17 Mar 2023- Management targets consolidated revenue growth of 10.5% to 11.5% in FY23, driven by higher wholesale volumes and an increase in average selling prices related to improving mix. Its FY23 consolidated operating margin target of 6.5% to 7.5% compares to 6.9% in FY23 and should benefit from high plant capacity utilization (96.8% in 4Q22) and mix. At the same time, management called out expected margin headwinds including limited global demand growth, sales incentive normalization, and market uncertainties such as currency and interest rate hikes.
- We estimate the combination of revenue growth and low end of its operating margin target would yield profit growth in FY23 in the mid-single-digit range. The increase in margin dilutive eco-friendly vehicle sales from 5% of global wholesales units in FY22 to 8% in FY23 is another factor that could weigh on its consolidated margins in FY23, especially considering its U.S. EV sales will likely not qualify for consumer tax credits based on our current understanding of the Inflation Reduction Act.
Key Metrics
AS OF 17 Mar 2023| KRW bn | FY18 | FY19 | FY20 | FY21 | FY22 |
|---|---|---|---|---|---|
| Revenue | 75,265 | 82,487 | 80,577 | 94,143 | 113,718 |
| EBIT | 1,467 | 3,161 | 890 | 5,459 | 9,464 |
| EBIT Margin | 1.9% | 3.8% | 1.1% | 5.8% | 8.3% |
| EBITDA | 5,228 | 7,173 | 5,272 | 10,216 | 14,547 |
| EBITDA Margin | 6.9% | 8.7% | 6.5% | 10.9% | 12.8% |
| Total Liquidity | 17,050 | 15,975 | 17,082 | 19,745 | 26,639 |
| Net Debt | (8,350) | (6,749) | (4,453) | (5,202) | (11,035) |
| Total Debt | 6,995 | 7,628 | 10,920 | 12,569 | 12,940 |
| Gross Leverage | 1.3x | 1.1x | 2.1x | 1.2x | 0.9x |
| Net Leverage | -1.6x | -0.9x | -0.8x | -0.5x | -0.8x |
CreditSights View
AS OF 21 Jun 2023Our Outperform recommendation on Hyundai notes is based on relative value, expectations of growing market share in developed markets, its innovative EV product offerings that we believe should fuel further share gains, solid free cash flow generation, and resilient automotive profit margins. Hyundai targets increased light vehicle wholesales in 2023. While vehicle affordability concerns are expected to weigh on light vehicle demand in 2023, we believe Hyundai’s value-oriented light vehicle offerings could be somewhat insulated from affordability concerns and may benefit from a customer trade down effect. Hyundai and Kia are independent automakers that are aligned through cross-ownership, common governance structures and chairman, and joint ownership of captive finance subsidiaries.
Recommendation Reviewed: June 21, 2023
Recommendation Changed: January 13, 2023
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India
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Fundamental View
AS OF 16 Feb 2023Hana FG (Hana) had struggled for several years to make a success of its acquisition of the former Korea Exchange Bank, but from 2015, results improved dramatically as revenues grew and cost efficiencies improved.
It has produced particularly strong results since 2020, and is the most improved of the financial groups. Non-bank subsidiaries have done well and accounted for ~26% of group net income in 2021, but dropped to 12% for FY22 due to fee challenges and better bank income.
Capital is becoming its key strength with a narrowing gap with the highest peer KBFG. It also has the highest CET 1 ratio target amongst the four FGs. Asset quality is well under control with low credit costs, ROE is in the double digits and the cost-income ratio is in the low 40%’s.
Business Description
AS OF 16 Feb 2023- Hana is the third-largest financial group in South Korea. From small origins as a finance company in the 1970s, after the 1997 Asian crisis Hana grew through M&A by acquiring three other banks, including the much older Seoul Bank which had a banking and trust management business.
- Hana bought Korea Exchange Bank (KEB) from Lone Star in 2012 after overcoming many hurdles, but was unable to merge it with Hana Bank until 2015 due to staff union opposition.
- Hana's overseas business is smaller than peers and is complemented by KEB's extensive international operations. KEB was started in 1967 as a government-owned bank specialising in foreign exchange. It has a leading share in FX transactions and trade finance among Korean banks.
- Hana has shown good growth in its credit card and securities non-bank businesses, but is less diversified than larger peers KB and Shinhan, which have also acquired insurance companies. Its latest acquisition (in 2019) was a 15% stake in Vietnam's state-owned Bank for Investment & Development (BIDV).
Risk & Catalysts
AS OF 16 Feb 2023Hana FG’s asset quality is sound. FY22 credit costs almost doubled to 31 bp (but 14 bp consists of pre-emptive provisions); we would expect them to be no more than 40-50 bp in FY23.
The group is looking for inorganic growth in its non-bank businesses as it has fallen behind vs. Shinhan FG and KBFG in this area, but it has so far shied away from a large acquisition.
Hana had some recent risk management mis-steps: it took provisions in 4Q19 for a JV investment with China Minsheng Investment and for potentially mis-selling high-risk investment funds to retail investors, and in 2Q20 for a private equity exposure, with limited further details.
Key Metrics
AS OF 16 Feb 2023| KRW bn | FY22 | FY21 | FY20 | FY19 | FY18 |
|---|---|---|---|---|---|
| Pre-Provision Profit ROA | 1.10% | 1.07% | 1.07% | 0.99% | 0.97% |
| ROA | 0.67% | 0.74% | 0.61% | 0.60% | 0.61% |
| ROE | 10.3% | 10.9% | 9.0% | 8.8% | 8.9% |
| Provisions/Loans | 0.31% | 0.16% | 0.30% | 0.27% | 0.18% |
| NPL Ratio | 0.34% | 0.32% | 0.40% | 0.48% | 0.59% |
| CET1 Ratio | 13.2% | 13.8% | 12.0% | 12.0% | 12.9% |
| Equity/Assets | 6.4% | 6.8% | 6.7% | 6.7% | 6.9% |
| Net Interest Margin | 1.83% | 1.66% | 1.60% | 1.75% | 1.84% |
CreditSights View
AS OF 02 May 2023Hana FG has grown through acquisitions but only in 2015 was it able to merge its two main bank units to form KEB-Hana Bank. Hana’s management has a good record but for some years struggled to extract value from its acquisitions in a challenging operating environment. Its recent performance has improved significantly, and its fundamentals are looking stronger. It reported the strongest profit growth for 1Q23 among the four FGs. Asset quality indicators are trending downward at the group level but Hana Bank’s asset quality remains stable. Reserve cover was weaker than peers but is sufficient. The group CET1 ratio dipped to 12.8%, below its 13-13.5% target (the highest amongst the FGs), while the bank CET1 ratio jumped to 16.1%, the highest amongst the banks.
Recommendation Reviewed: May 02, 2023
Recommendation Changed: April 24, 2017
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India
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Fundamental View
AS OF 16 Feb 2023Woori’s performance record had been less consistent than some of its more commercially focused peers, but has shown a good improvement from 2021 onwards. Woori FG posted the strongest profit growth amongst the four FGs in FY22.
Asset quality is good and credit costs are the lowest amongst the four FGs, but capital at the group level remains weaker.
Partial ownership by Korea Deposit Insurance Corp (3.6%) and the National Pension Service (8%) has been a credit positive, but KDIC has continuously been selling down and aims to exit completely. Government support continues to be assured if required.
Business Description
AS OF 16 Feb 2023- Woori's predecessor banks were rescued by Korea Deposit Insurance Corporation (KDIC) following the 1997 Asian Financial Crisis.
- Woori Bank is one of the 'Big Four' commercial banks in Korea. It previously owned two regional banks, Kwangju and Kyongnam, but these were spun off in 2014. Woori also sold its stake in Woori Investment Securities, as well as its savings bank and life insurance arms to NH Financial Group.
- Woori set up a HoldCo (Woori FG) in Jan-2019 to expand into more diversified business lines, particularly investment banking. It used to have a HoldCo, but it was dissolved in 2014 when it was merged with Woori Bank.
- Its main subsidiaries are 100%-owned Woori Card and 60%-owned Woori Investment Bank and the group is looking to acquire more non-bank financial businesses. Woori FG acquired 74% of Aju Capital, a vehicle leasing business, in September 2020 and renamed it Woori Financial Capital.
Risk & Catalysts
AS OF 16 Feb 2023Woori was for many years majority owned by the Korean government via the Deposit Insurance Corporation (KDIC), but the KDIC has steadily been selling down its shareholding and is currently left with 3.6%. That said, Woori remains a large, systemically important bank with strong potential government backing if needed.
Woori is much less diversified than peers, with most of its earnings coming from the bank; there are relatively small contributions from the card and leasing businesses. As a result, it has been on the lookout for acquisitions, but it has to be particularly mindful of its CET1 ratio, which is ~120-180 bp lower than its peers.
Asset quality is a key strength with credit costs in the 20-25 bp range from FY21 into FY22.
Key Metrics
AS OF 16 Feb 2023| KRW bn | FY22 | FY21 | FY20 | FY19 |
|---|---|---|---|---|
| Pre-Provision Profit ROA | 1.14% | 0.99% | 0.75% | 0.90% |
| ROA | 0.76% | 0.72% | 0.47% | 0.58% |
| ROE | 12.8% | 11.5% | 7.1% | 9.4% |
| Provisions/Loans | 0.25% | 0.17% | 0.28% | 0.14% |
| NPL Ratio | 0.31% | 0.30% | 0.42% | 0.45% |
| Woori Bank CET1 Ratio | 12.7% | 13.0% | 13.1% | 11.0% |
| Equity/Assets | 6.59% | 6.45% | 6.70% | 7.05% |
| Net Interest Margin Bank + Card | 1.84% | 1.62% | 1.57% | 1.70% |
CreditSights View
AS OF 02 May 2023We have a Market perform recommendation on Woori financial Group (Woori FG). Woori FG was for some years the weakest of Korea’s Big 4 Financial Groups with a less consistent track record of managing risk and returns. But as its operating performance has shown an improvement for the past few years, and as capital ratios have improved to only slightly behind Shinhan FG and Hana FG, we now see no credit differential between Woori FG and the other three FGs. Asset quality is a credit strength, with the lowest NPL ratio and the highest NPL coverage ratio among the four FGs.
Recommendation Reviewed: May 02, 2023
Recommendation Changed: April 24, 2017
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India
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Fundamental View
AS OF 15 Jun 2022KDB was established in 1954 to finance the reconstruction of South Korea after the Korean war and it financed the rapid industrialization of Korea from the 1960s.
In 2009, KDB was restructured, spinning out Korea Finance Corp and KDB was due to be privatized but the next government scrapped the plan and revised the KDB Act to re-merge KDB and KoFC which was done at the end of 2014. Its policy role has been re-affirmed and, as such, KDB remains a quasi-sovereign bank. Its credit standing is based on the strong likelihood of government backing.
Business Description
AS OF 15 Jun 2022- In 2009, KDB was restructured and the aim of the government at the time was to eventually privatise KDB, which was seen to have long outgrown its policy role and to be competing with the commercial banks.
- The Park Geun-hye government subsequently reversed this plan which was opposed by KDB and was impractical given KDB's poor returns and non-commercial management culture.
- KDB's new policy role is to support start-ups and SMEs, as well as large-scale overseas projects. Its vision is summed up as: "An advanced policy bank, at the forefront of Korea's sustainable growth". It also acts as a "market safety net", helping with the restructuring of troubled industries.
- KDB is 100% owned by the Korean government. Under Article 32 of the KDB Act is required to offset any annual losses that exceed the banks' reserves. This is a solvency guarantee and the government has in practice always undertaken proactive moves to ensure the bank remains not only solvent but also adequately capitalised.
Risk & Catalysts
AS OF 15 Jun 2022The KDB Act continues to include a solvency guarantee from the government which is committed to supporting the bank and to keep its stake above 50%.
KDB is therefore viewed as a Korean quasi-sovereign entity and its ratings of Aa2/AA/AA- are in line with Korea’s sovereign ratings.
KDB has regularly incurred bad debts due to both poor risk management and its role of helping corporate Korea through difficult times, and in 2020 it stepped up to help businesses hit by the COVID-19 downturn.
The profitability of its banking business is low and it regularly needs and receives capital injections from the government.
Key Metrics
AS OF 15 Jun 2022| KRW bn | FY21 | FY20 | FY19 | FY18 | FY17 |
|---|---|---|---|---|---|
| Pre-Impairment Operating Profit / Average Assets | 0.92% | 0.71% | 0.39% | 0.68% | 0.65% |
| ROAA | 0.69% | 0.67% | 0.11% | 0.84% | 0.21% |
| ROAE | 4.8% | 4.7% | 0.8% | 6.3% | 1.9% |
| Provisions/Average Loans | 0.29% | 0.84% | (0.11%) | 0.07% | 0.95% |
| Nonperforming Loans/Total Loans | 1.70% | 2.48% | 2.71% | 4.23% | 3.49% |
| CET1 Ratio | 13.7% | 14.3% | 12.1% | 12.7% | 13.2% |
| Total Equity/Total Assets | 13.82% | 13.44% | 13.05% | 13.27% | 11.31% |
| Net Interest Revenue/Ave. Assets | 0.62% | 0.54% | 0.52% | 0.83% | 0.71% |
CreditSights View
AS OF 08 Feb 2023We have a Market perform recommendation on KDB as we see it trading in an appropriate band for the quasi-sovereign credit that it is, with robust state support. KDB is 100% owned by the Korean Government. As with most policy banks, KDB has not sought to maximise returns, and together with its lending bias towards large companies, its margins are thin and asset quality is volatile. However, strong government support underpins the weak credit, including a solvency guarantee and timely capital injections received in the past.
Recommendation Reviewed: February 08, 2023
Recommendation Changed: September 22, 2020
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India