WF - Woori Financial: It's All About Valuations

Summary

• Among its peers, Woori Financial trades at the lowest forward P/E multiple and boasts the highest dividend yield.
• Woori Financial's share price performance was impacted by an employee embezzlement case and the sale of its shares by a key shareholder, but these issues should eventually blow over.
• I rate WF stock as a Buy, considering its depressed valuations.

Elevator Pitch

I raise my investment rating for Woori Financial Group's ( WF ) [316140:KS] stock from a Hold to a Buy.

I previously highlighted in my prior July 15, 2021 write-up for WF that Woori Financial was inferior to "its peers in areas such as low cost deposits, cost efficiency and capital adequacy." But I believe that Woori Financial's current valuations have priced in all the negatives for the stock. The market currently values Woori Financial at less than a third of its tangible book value and a low single-digit forward P/E metric. In my opinion, Woori Financial's shares are now sufficiently cheap to warrant a Buy rating.

Woori Financial's Undemanding Valuations And Positive Dividend Outlook

Woori Financial's stock price fell by -28.5% in the last one year, which implies WF has underperformed the broader market significantly over the same period. As a comparison, the S&P 500 was down by -16.3% in the past year. Woori Financial's valuations have become very attractive now following the substantial share price correction.

Peer Valuation Comparison For Woori Financial

Source: S&P Capital IQ

Woori Financial has the highest forward dividend yield and the lowest forward P/E metrics among the Korean financial services companies as indicated in the peer comparison table presented above. Its historical trailing price-to-tangible book value ratio of 0.31 times is also very appealing on an absolute basis, and lower than that for four of its peers.

It is important to note that Woori Financial's consensus forward next twelve months' dividend yield of 10.6% is likely to be achievable and unaffected by regulatory issues.

At the company's Q3 2022 results briefing on October 26, 2022, WF assured investors that "we are going to do our best in order to maintain a stable dividend payout ratio." In addition, Woori Financial emphasized at the most recent quarterly earnings call that "from the regulatory side, there is no particular guideline as to what we are going to do with our dividends" and stressed that "we satisfy all the regulations so with regard to capital adequacy."

As highlighted in its third quarter earnings presentation slides , Woori Financial's BIS (Bank for International Settlements), Tier 1, and CET1 (Common Equity Tier 1) ratios as of September 30, 2022 were reasonably healthy at 14.3%, 12.7%, and 10.9%, respectively. In comparison, the minimum BIS ratio regulatory requirement for Korean banks is much lower at 10.5% . This is consistent with the company's comments that it should meet the regulatory requirements in terms of "capital adequacy."

Separately, Woori Financial increased its dividend payout ratio from 19.9% in fiscal 2020 to 25.3% for fiscal 2021, and analysts expect the company to raise its payout ratio to 25.8% and 26.4% for FY 2022 and FY 2023, respectively as per S&P Capital IQ's consensus data. This is aligned with management guidance of having "a stable dividend payout ratio" going forward.

In summary, Woori Financial's valuations are undemanding, and the outlook for the stock's future dividends is positive with expectations of a rising dividend payout ratio.

Negative News Flow And Events

Woori Financial's share price performance was adversely affected by specific bad news and negative events.

A July 26, 2022 news article published by The Korea Times cited the "Financial Supervisory Service's" comments that "Woori Bank (Woori Financial's banking arm) had a serious defect in its self-regulatory control system when securely managing customers' money." The Korean financial regulator's remarks relating to Woori Financial were in response to a case of "embezzlement" committed by one of Woori Bank's staff first reported in an earlier April 28, 2022 Korea JoongAng Daily article .

It is inevitable that such negative news flow does suggest that there might have been inadequacies with respect to Woori's internal controls, and this could have affected investor sentiment towards the company's shares.

Another recent event worth noting is Woori Financial's key shareholder has been actively reducing its stake in the company which has led to substantial selling pressure. A Business Korea article published on July 15, 2022 noted that "stake sales by Korea Deposit Insurance Corp" was the key event "in 1H22 that dragged down (WF's stock price) performance."

However, Korea Deposit Insurance's sale of its shares in Woori Financial has nothing to do with the company's business fundamentals. In June 2019, Korea's Financial Services Commission had already issued a press release highlighting its intention to "sell the remaining 18.3% stake in Woori Financial Group, owned by the Korea Deposit Insurance Corporation, from 2020 to 2022." This is part of the Korean regulators' plans to have Woori Financial become a privately-owned company by the end of this year.

In a nutshell, the negative publicity brought about by an embezzlement case at Woori Financial's banking subsidiary, and the divestment of Korea Deposit Insurance Corporation's equity interest in WF were a drag on the company's shares. Looking ahead, Woori Financial's share price should eventually see a recovery. By the end of 2022, Korea Deposit Insurance Corporation should complete its divestment of Woori Financial's shares. Separately, investors and customers are likely to regain confidence in Woori Financial and Woori Bank over time, as new internal control measures are put in place to reduce the risk of future employee embezzlement cases.

Concluding Thoughts

Woori Financial deserves a Buy rating. The negatives for the stock have been fully factored into WF's share price and valuations.

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