Woori Financial: This High Yielder Is No Longer A Value Trap (NYSE:WF)

As one of Korea’s big banks, Woori Financial Group Inc. (NYSE:WF) looks poised to benefit from some very powerful tailwinds ahead. The key to Korea’s trade-dependent economy has always been export growth and on this front, recent data points to a very positive rate of change; this, in turn, bodes well for near-term credit growth. There’s also an exciting new corporate ‘value-up’ initiative (à la Japan’s reforms) being implemented that could benefit bank investors – both by narrowing the persistent book value discounts throughout the sector and ramping up shareholder returns.

So far, progress has been very positive, with banks like Woori and KB Financial (KB) (see coverage here) already responding. Unlike the latter, though, Woori has more caveats, given its smaller excess capital position gives it a lot less room to maneuver. But price counts for a lot, and what Woori lacks in quality, it more than makes up for with a stark valuation (over 60% discount to book) and fundamental (~10% return on equity (ROE)) disconnect. Also on the table is a well-covered high-single-digit % dividend yield (not including buybacks), which means investors get compensated very well to wait.

Ahead of a catalyst-rich year ahead, both from “value up” traction and rate cuts later this year (positive because it helps to unwind the overly punitive provisions the bank has taken on), Woori’s equity offers a compelling balance of risk and reward.

Korea’s Corporate “Value-up” Program is Taking Shape; Banks Poised to Benefit

Korea’s Financial Services Commission, in conjunction with other government bodies, took another big step toward pushing its corporate “value up” program forward in recent weeks. The intention here is to reform capital market policies and address Korea’s widespread discount (defined by low P/Book and P/E multiples).

Early details indicate a Japan-like set of initiatives, mainly via improved corporate disclosure recommendations and targets (slated to start from H2 2024), as well as more concrete roadmaps to improve RoEs and long-term profitability. In turn, corporates are incentivized with institutional inflows via new “value up” related equity indices and ETFs (also in Q3/Q4 2024), as well as a dedicated website for investors to track and benchmark corporate progress.

It’s still far too early to underwrite a Japan-like outcome here, but recent announcements show positive commitment by regulators. Assuming they keep at this pace post-April elections, it certainly bodes well for Korean stocks to re-rate a lot closer to their global peers.

The “value up” readthrough is particularly positive for banks, where the valuation disconnect has traditionally been widest. Case in point – Woori trades at a 60-70% discount to book despite delivering steady earnings and dividend growth through the cycles. Yes, Woori, like its banking peers, operates in a mature economy where credit growth is unlikely to run above the low-single-digits %. Yet, the current valuation discount is so punitive that there really is no need for growth here; even incremental improvements to efficiency and a greater willingness to return excess capital would likely be enough to re-rate the stock quite significantly.

To be clear, Woori doesn’t screen as highly on fundamentals as peers like KB Financial – both on quality and capital return potential. Valuation-wise, on the other hand, it may be among the most leveraged names to Korea’s “value up” theme. Going forward, positive progress, either internally or externally (e.g., Korean bank regulators easing up on capital requirements) should extend Woori’s year-to-date outperformance.

A Good Start in Q4; Shareholder Returns Already Ramping Up

Like the rest of the sector, Woori has seen its fair share of margin pressure in recent quarters. Q4 saw even more bottom-line headwinds, largely due to additional provisioning against asset quality risks (e.g., project financing and real estate), as well as ‘national service’ requirements (note Korean banks allocated ~10% of net profits to social donations in 2023). For the most part, though, the level of provisioning Woori has had to set aside to satisfy regulators seems very conservative. Also worth factoring in is the bank’s limited exposure to equity-linked securities (relatively speaking), as well as its well-controlled asset quality so far – both mitigating factors that bode well for an eventual unwinding of these provisions going forward.

While headline earnings were down for the year, largely on account of provisions, Woori’s payout was up. For context, the total shareholder return for 2023 was almost eight percentage points higher YoY at ~34%, comprising ~30% for the cash dividend and ~4% for treasury cancellation (i.e., buybacks). Including the purchase of Korea Deposit Insurance Corporation’s ~1% remaining stake (to be subsequently retired), though, the actual payout ratio was even higher – a marked shift from Woori management’s conservativeness in prior years.

The caveat is that Woori’s payout ratio has probably hit a ceiling, given management’s guidance for a 30-35% total shareholder return range going forward. The issue is balancing dividends and buybacks with capitalization requirements (the CET1 ratio is targeted to remain within an 11.5-13.0% range vs 11.9% currently), which limits any incremental bumps to the payout. Also potentially weighing on future shareholder returns are management’s M&A appetite, as well as a new debt service ratio framework from regulators to cool household debt levels. Still, a payout cap in percentage terms isn’t all bad news, given the bank is still growing its earnings; by extension, total dividends (and buybacks) should increase in tandem. With Woori stock already yielding high-single-digits, there’s a path to yields eventually approaching the ~10% mark for patient investors.

Final Thoughts

Korean banks have long been more “value trap” than “value,” but things are finally changing now that the government has committed to a corporate “value up” program aimed at addressing the “Korea discount.” As the sector with the widest P/B-ROE disconnect, banks are in pole position to benefit, with Woori Financial, even after its year-to-date rally, standing out for a particularly deep book value discount. The broader setup isn’t half bad either – Korea’s macro is benefiting from a cyclical upswing in exports, while upcoming rate cuts look poised to ease asset quality pressures throughout the economy (which entails fewer provisions and a bigger capital headroom for banks).

Investors willing to wait out the Woori Financial Group Inc. story also get downside protection in the form of a very safe high-single-digit % dividend yield. Net-net, the odds look pretty good here.