Hana Financial: Positive Surprise With Interim Dividend Maintained (OTCMKTS:HNFGF)

Elevator Pitch

I maintain a Bullish rating on Korean financial services group Hana Financial Group, Inc. (OTC:HNFGF) [086790:KS].

It came as a positive surprise that Hana Financial did not omit or cut its interim dividend for 1H 2020. Hana Financial’s 2Q 2020 results were above expectations, thanks to stable net interest margin, a good performance for the company’s non-banking businesses, and decent cost control. I retain my Bullish rating on Hana Financial, as the stock’s valuation is still attractive, in my opinion.

This is an update of my prior article on Hana Financial published on May 19, 2020. Hana Financial’s share price has increased by +19% from KRW24,900 as of May 18, 2020, to KRW29,550 as of August 3, 2020, since my last update. Hana Financial trades at 0.31 times P/B and 4.4 times consensus forward next twelve months’ P/E, and it offers a consensus forward FY 2020 dividend yield of 6.5%.

Readers have the option of trading in Hana Financial shares listed either on the Over-The-Counter Bulletin Board/OTCBB as ADRs with the ticker HNFGF, or on the Korea Exchange with the ticker 086790:KS. For Hana Financial shares listed as ADRs on the OTCBB, note that liquidity is low and bid/ask spreads are wide.

For Hana Financial shares listed in Korea, there are limited risks associated with buying or selling the shares in terms of trade execution, given that the Korea Exchange is one of the major stock exchanges that is internationally recognized and there is sufficient trading liquidity. Average daily trading value for the past three months exceeds $45 million and market capitalization is above $7.2 billion, which is comparable to the majority of stocks traded on the US stock exchanges. Institutional investors who own Hana Financial shares listed in Korea include The Vanguard Group, BlackRock, Norges Bank Investment Management, and Schroder Investment Management, among others. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage such as Interactive Brokers or Fidelity, or international brokers with Asian coverage like Hong Kong’s Monex Boom Securities and Singapore’s OCBC Securities.

Interim Dividend Being Maintained Was A Positive Surprise

In my prior article on Hana Financial published on May 19, 2020, I noted that there was a possibility that Hana Financial could omit its interim dividends for 1H 2020, given management’s comments at its 1Q 2020 earnings call on April 24, 2020, the challenging operating environment, and regulatory pressures to cut dividends. Notably, Hana Financial had stood out from its peers as the only listed Korean financial services group with a policy of paying out dividends on a semi-annual basis. Prior to Hana Financial’s 2Q 2020 financial results announcement, it was feared that Hana Financial’s could suspend its interim dividend in 1H 2020, and this might lead to the other listed Korean banks and financial services group suspending or cutting their final dividend for FY 2020 as well.

It came as a positive surprise that Hana Financial chose to pay an interim dividend for 1H 2020, and the interim dividends per share of KRW500 for 1H 2020 were the same as what was paid out in 1H 2019. At the company’s 2Q 2020 earnings call on July 23, 2020, Hana Financial highlighted that it was able to maintain the interim dividend payout “based on improved performance from non-bank and global (businesses) as well as on better business results (made) possible through cost management.” The bank also added at the recent earnings call that it will “continue to enhance shareholder value by strengthening our shareholder return policy.”

Prior to COVID-19, Hana Financial disclosed at the company’s FY 2019 earnings call on February 4, 2020, that “we do have some plans or ideas of actually raising it (dividend payout ratio).” COVID-19 and its associated economic fallout could possibly put Hana Financial’s dividend payout increase plans on hold in the near term, but a rising dividend payout ratio remains a potential re-rating catalyst for the stock in the medium term. Nevertheless, sell-side analysts still see Hana Financial’s dividend payout ratio increasing slightly from 25.8% in FY 2019 to 26.3% in FY 2020.

Hana Financial offers consensus forward FY 2020 and FY 2021 dividend yields of 6.5% and 6.8%, respectively. Market consensus expects Hana Financial’s dividends per share to decline by -9% YoY from KRW2,100 in FY 2019 to KRW1,913 in FY 2020, prior to increasing by +5% YoY to KRW2,017 in FY 2021.

2Q 2020 Results And FY 2020 Outlook

Hana Financial reported a better-than-expected set of financial results for 2Q 2020 on July 23, 2020. The company’s operating income grew +16% QoQ and +11% YoY to KRW2,218 billion in 2Q 2020, while its net profit increased +5% QoQ and +4% YoY to KRW688 billion in the most recent quarter. Stable net interest margin, a good performance for the company’s non-banking businesses, and decent cost control were the key factors driving Hana Financial’s better-than-expected financial performance in the last quarter.

Hana Financial’s group net interest margin remained flat QoQ at 1.62% in 2Q 2020, despite the fact that there has been a -75 basis points reduction in South Korea’s benchmark interest rate since March 2020. The company’s banking business, Hana Bank, saw net interest margin decrease by -2 basis points QoQ to 1.37%, but this was offset by growth in credit card fee income and an increase in low-cost funds as a proportion of the bank’s total funding base from 35.1% in 1Q 2020 to 37.3% in 2Q 2020.

The company’s non-banking businesses performed well in the most recent quarter. Net income for the non-bank subsidiaries grew by +9% YoY in 2Q 2020 and accounted for approximately 30% of Hana Financial’s group net profit. Between FY2017 and FY2019, non-bank subsidiaries contributed a relatively lower 20%-24% of Hana Financial’s group earnings.

Separately, Hana Financial’s cost optimization efforts have continued to pay off, as the company’s cost-to-income ratio has been on a declining trend in past quarters, as per the chart below.

Hana Financial’s Group Cost-To-Income Ratio

Source: Hana Financial’s 2Q 2020 Financial Results Presentation Slides

Looking ahead, market consensus expects Hana Financial’s net profit to decrease by -10% YoY from KRW2,392 billion in FY 2019 to KRW2,161 billion in FY 2020. Sell-side analysts see Hana Financial’s net interest margin declining to 1.52% and 1.51% for FY 2020 and FY 2021, respectively.

Notably, Hana Financial’s credit cost increased by +14 basis points QoQ to 0.27% in 2Q 2020. The company registered approximately KRW165.5 billion in preemptive provisioning, taking into account that “COVID-19 cases are on the rise again” and “to respond to a possible recession” as per its comments at the recent 2Q 2020 earnings call. Additional provisions in 2H 2020 could pose downside risks to Hana Financial’s full-year FY 2020 earnings. Nevertheless, Hana Financial’s asset quality and capital adequacy metrics remain decent, as per the charts below.

Hana Financial’s Asset Quality And Capital Adequacy Metrics

Source: Hana Financial’s 2Q 2020 Financial Results Presentation Slides

Updates On Diversification Into Non-Banking Businesses And Overseas Markets

Similar to many other South Korean financial services companies, Hana Financial has been active in diversifying into non-banking businesses and overseas markets in recent years. Hana Financial continued to engage in such diversification activities in the past few months.

Hana Financial launched its new digital insurance business, Hana General Insurance in June 2020, via its 70%-owned subsidiary, The-K Non-Life Insurance. Hana Financial had earlier acquired its stake in The-K Non-Life Insurance in April this year for an acquisition consideration of KRW77 billion. In terms of overseas expansion plans, Hana Financial signed a memorandum of understanding with Shinhan Financial Group Co., Ltd. (SHG) [055550:KS] in May 2020 with the aim of “global business partnership”, as reported by news portal Business Korea on May 26, 2020. In the same article, Business Korea quoted a commentator from a Korean commercial bank highlighting that the memorandum of understanding will prevent both companies “from competing with each other in overseas markets.”

As mentioned above, the good performance of Hana Financial’s non-bank subsidiaries was one of the key drivers for the company’s better-than-expected financial results in 2Q 2020. However, there are still concerns regarding Hana Financial’s and other Korean financial services companies’ diversification activities. This is because investors will prefer that Hana Financial return capital to shareholders via dividends or share buybacks, rather than allocate capital to diversification activities in an aggressive manner that may or may not be value-accretive for shareholders.

Valuation

Hana Financial trades at 0.31 times P/B based on its share price of KRW29,550 as of August 3, 2020. In comparison, the bank’s historical five-year and 10-year mean P/B multiples were 0.44 times and 0.52 times, respectively.

Hana Financial is also valued by the market at 4.4 times consensus forward next twelve months’ P/E, versus its historical five-year and 10-year average forward P/E multiples of 6.1 times and 6.6 times, respectively.

Risk Factors

The key risk factors for Hana Financial are larger-than-expected provisions in 2H 2020 and beyond, diversification activities that do not create value for its shareholders, and lower-than-expected dividends for 2H 2020 and beyond.

Note that readers who choose to trade in Hana Financial shares listed as ADRs on the OTCBB (rather than shares listed in Korea), could potentially suffer from lower liquidity and wider bid/ask spreads.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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