Woori Finance Holdings Co (2WGA) Risk Analysis
Risk Overview Q4, 2023
Source: the company's latest filing for the period ended Dec 31, 2023, filed Apr 29, 2024
Risk Change Over Time
- Share Price & Shareholder Rights - Risk 1Certain dealings in our common stock by us or our major shareholders may adversely affect the market price of our common stock and ADSs and may dilute your investment and relative ownership interest in us.
Some of our major shareholders may choose to sell large blocks of our common stock in a public offering or privately to a strategic or financial investor. For example, IMM Private Equity, Inc., through its special purpose company Nobis1, Inc., owned 40,560,000 shares, or 5.39%, of our outstanding common stock as of December 31, 2023. In March 2024, Nobis1, Inc. conducted a block sale of 12,560,000 of our shares of common stock, as a result of which it owned 28,000,000 shares, or 3.72%, of our common stock outstanding as of March 4, 2024, according to their beneficial ownership report filed with the Financial Supervisory Service on March 8, 2024. Furthermore, we may decide to offer or sell our common stock or ADSs or securities exchangeable for or convertible into such securities in the future, although we do not currently have any plans for such offering or sale. For example, in August 2023, we issued 32,474,711 shares of our common stock in connection with a "comprehensive stock exchange" with certain shareholders of Woori Investment Bank Co., Ltd. and Woori Venture Partners Co., Ltd., as a result of which such entities became our wholly-owned subsidiaries. Such activities or any other offerings by us of our common stock or ADSs in the future could have a dilutive impact on your investment and relative ownership interest in us. Any significant sale of our common stock by a major shareholder, future offerings or sales by us of our common stock or ADSs or securities exchangeable for or convertible into such securities, or the public perception that such an offering or sale may occur, could have an adverse effect on our shareholders' ownership interest in us or the market price of our common stock and ADSs.
- Debt & Financing - Risk 2Significant increases in interest rates could decrease the value of our debt securities portfolio and raise our funding costs while reducing loan demand and the repayment ability of our borrowers, which could adversely affect us.
Interest rates in Korea have been subject to significant fluctuations in the past. The Bank of Korea increased its policy rate from 1.25% to 1.50% in November 2017 and 1.75% in November 2018 in light of improved growth prospects in Korea and rising interest rate levels globally, but it again reduced its policy rate to 1.50% in June 2019 and 1.25% in October 2019 to address the sluggishness of the global and domestic economies. Amid rising concerns of a potential global recession as a result of the COVID-19 pandemic, the Bank of Korea further reduced its policy rate to 0.75% in March 2020 and 0.50% in May 2020. However, as the economy began to show signs of recovery from the COVID-19 pandemic starting from the second half of 2021, the Bank of Korea gradually raised its policy rate to pre-pandemic levels of 1.25% from August 2021 through January 2022. More recently, in response to rising levels of household debt and inflation in Korea as well as globally, the Bank of Korea continued to raise its policy rate to 3.50% from April 2022 through January 2023. All else being equal, increases in interest rates in the future could lead to a decline in the value of our portfolio of debt securities, which generally pay interest based on a fixed rate. A sustained increase in interest rates will also raise our funding costs, while reducing loan demand, especially among consumers. Rising interest rates may therefore require us to re-balance our asset portfolio and our liabilities in order to minimize the risk of potential mismatches and maintain our profitability. See "Item 11. Quantitative and Qualitative Disclosures about Market Risk." In addition, rising interest rate levels may adversely affect the Korean economy and the financial condition and repayment ability of our corporate and consumer borrowers, both domestically and abroad, including holders of our credit cards, which in turn may lead to a deterioration in our credit portfolio. For example, the amount of Woori Bank's non-performing loans to overseas borrowers has increased sharply from ?181 billion as of December 31, 2022 to ?304 billion as of December 31, 2023, reflecting the rise in global interest rate levels in recent years. Since most of our consumer and corporate loans bear interest at rates that adjust periodically based on prevailing market rates, a sustained increase in interest rate levels will increase the interest costs of our consumer and corporate borrowers and will adversely affect their ability to make payments on their outstanding loans.
- Corporate Activity and Growth - Risk 3We have exposure to companies in certain troubled sectors in Korea, and financial difficulties of companies involved in these sectors may adversely impact us.
As of December 31, 2023, the total amount of loans provided by us to construction, real estate development, shipbuilding and shipping companies in Korea amounted to ?6,785 billion, ?3,414 billion, ?245 billion and ?366 billion, or 1.9%, 0.9%, 0.1% and 0.1% of our total loans, respectively. We also have other exposures to Korean construction, real estate development, shipbuilding and shipping companies, including in the form of guarantees extended for the benefit of such companies and debt and equity securities of such companies held by us. In the case of construction companies, we have potential exposure in the form of guarantees provided to us by general contractors with respect to financing extended by us for residential and commercial real estate development projects, as well as commitments to purchase asset-backed securities secured by the assets of companies in the construction industry and other commitments we enter into relating to project financing for such real estate projects which may effectively function as guarantees. In the case of shipbuilding companies, such exposures include refund guarantees extended by us on behalf of shipbuilding companies to cover their obligation to return a portion of the ship order contract amount to customers in the event of performance delays or defaults under shipbuilding contracts. The construction industry in Korea has undergone significant fluctuations in recent years. Following a period of growth from 2015 to 2018, the construction industry had stagnated from 2019 to 2020, caused mainly by the uncertainty resulting from the Korean government's strengthening of mortgage and other lending regulations to control the rising real property prices, as well as temporary suspensions in construction projects due to the COVID-19 pandemic. After a brief period of recovery, the construction industry has experienced a rapid downturn starting in the second half of 2022, caused by a rise in interest rates and the resulting decline in demand for residential property throughout Korea, adverse changes in the price and availability of construction materials due to disruptions in global supply chains caused by, among others, the ongoing invasion of Ukraine by Russia and financing difficulties faced by construction companies as investors became reluctant to invest in real estate. Such decline in demand for residential property and other real estate in Korea has also resulted in a similar downturn for the real estate development industry in Korea since 2022. The shipbuilding industry in Korea has remained relatively stable despite the global downturn of the industry in recent years, mainly due to a large increase in the number of orders for liquefied natural gas carriers. The prospects for this industry currently remain uncertain, however, given the slowdown in the global economy and a rise in shipbuilding costs and resulting prices. In the case of shipping companies in Korea, the COVID-19 pandemic and the ensuing global lockdown caused a severe downturn in the industry in 2020. Although the industry subsequently showed signs of recovery from the pandemic as the levels of consumer spending and global trade began to rise, the industry has again entered a downturn starting in the second quarter of 2022 resulting from a decrease in shipping volume and an increase in the supply of ships. The shipping industry continues to face difficulties arising from, among others, a deteriorating global economy, an increase in global military conflicts, including the ongoing invasion of Ukraine by Russia and the escalating hostilities in the Middle East following the Israel-Hamas war, a decrease in shipping volume and the strengthening of international shipping regulations. The allowance for credit losses that we have established against our credit exposures to companies involved in the Korean construction, real estate development, shipbuilding and shipping sectors may not be sufficient to cover all future losses arising from these and other exposures. If the credit quality of our exposures to such companies declines further, we may incur substantial additional provisions for credit loss, which could adversely impact our results of operations and financial condition. Furthermore, although a portion of our loans to companies in the construction, real estate development, shipbuilding and shipping industries are secured by collateral, such collateral may not be sufficient to cover uncollectible amounts in respect of such loans.
Risk Highlights Q4, 2023
Risk Word Cloud
Risk Factors Full Breakdown - Total Risks 46
- Share Price & Shareholder Rights - Risk 1ChangedCertain dealings in our common stock by us or our major shareholders may adversely affect the market price of our common stock and ADSs and may dilute your investment and relative ownership interest in us.
Some of our major shareholders may choose to sell large blocks of our common stock in a public offering or privately to a strategic or financial investor. For example, IMM Private Equity, Inc., through its special purpose company Nobis1, Inc., owned 40,560,000 shares, or 5.39%, of our outstanding common stock as of December 31, 2023. In March 2024, Nobis1, Inc. conducted a block sale of 12,560,000 of our shares of common stock, as a result of which it owned 28,000,000 shares, or 3.72%, of our common stock outstanding as of March 4, 2024, according to their beneficial ownership report filed with the Financial Supervisory Service on March 8, 2024. Furthermore, we may decide to offer or sell our common stock or ADSs or securities exchangeable for or convertible into such securities in the future, although we do not currently have any plans for such offering or sale. For example, in August 2023, we issued 32,474,711 shares of our common stock in connection with a "comprehensive stock exchange" with certain shareholders of Woori Investment Bank Co., Ltd. and Woori Venture Partners Co., Ltd., as a result of which such entities became our wholly-owned subsidiaries. Such activities or any other offerings by us of our common stock or ADSs in the future could have a dilutive impact on your investment and relative ownership interest in us. Any significant sale of our common stock by a major shareholder, future offerings or sales by us of our common stock or ADSs or securities exchangeable for or convertible into such securities, or the public perception that such an offering or sale may occur, could have an adverse effect on our shareholders' ownership interest in us or the market price of our common stock and ADSs.
- Share Price & Shareholder Rights - Risk 2You may be limited in your ability to deposit or withdraw common stock.
Under the terms of our deposit agreement, holders of common stock may deposit such stock with the depositary's custodian in Korea and obtain ADSs, and holders of ADSs may surrender ADSs to the depositary and receive common stock. However, to the extent that a deposit of common stock exceeds any limit that we may specify from time to time, that common stock will not be accepted for deposit unless our consent with respect to such deposit has been obtained. We currently have not set any such limit; however, we have the right to do so at any time. Under the terms of the deposit agreement, no consent would be required if the shares of common stock were to be obtained through a dividend, free distribution, rights offering or reclassification of such stock. We have consented, under the terms of the deposit agreement, to any deposit unless the deposit would be prohibited by applicable laws or violate our articles of incorporation. If we choose to impose a limit on deposits in the future, however, we might not consent to the deposit of any additional common stock. In that circumstance, if you surrender ADSs and withdraw common stock, you may not be able to deposit the stock again to obtain ADSs. See "Item 4.B. Business Overview-Supervision and Regulation-Restrictions Applicable to Shares" and "Item 10.D. Exchange Controls-Restrictions Applicable to Shares."
- Share Price & Shareholder Rights - Risk 3You will not be able to exercise dissent and appraisal rights unless you have withdrawn the underlying shares of our common stock and become our direct shareholder.
In some limited circumstances, including the transfer of the whole or any significant part of our business and the merger or consolidation of us with another company, dissenting shareholders have the right to require us to purchase their shares under Korean law. However, if you hold our ADSs, you will not be able to exercise such dissent and appraisal rights if the depositary refuses to do so on your behalf. Our deposit agreement does not require the depositary to take any action in respect of exercising dissent and appraisal rights. In such a situation, holders of our ADSs must withdraw the underlying common stock from the ADS facility (and incur charges relating to that withdrawal) and become our direct shareholder prior to the record date of the shareholders' meeting at which the relevant transaction is to be approved, in order to exercise dissent and appraisal rights.
- Share Price & Shareholder Rights - Risk 4Ownership of our common stock is restricted under Korean law.
Under the Financial Holding Company Act, a single shareholder, together with its affiliates, is generally prohibited from owning more than 10.0% of the issued and outstanding shares of voting stock of a bank holding company such as us that controls a nationwide bank, with the exception of certain shareholders that are non-financial business group companies, whose applicable limit was reduced from 9.0% to 4.0% pursuant to an amendment of the Financial Holding Company Act which became effective in February 2014. To the extent that the total number of shares of our common stock (including those represented by ADSs) that you and your affiliates own together exceeds the applicable limits, you will not be entitled to exercise the voting rights for the excess shares, and the Financial Services Commission may order you to dispose of the excess shares within a period of up to six months. Failure to comply with such an order would result in an administrative fine of up to 0.03% of the book value of such shares per day until the date of disposal. Non-financial business group companies can no longer acquire more than 4.0% of the issued and outstanding shares of voting stock of a bank holding company pursuant to the amended Financial Holding Company Act, which grants an exception for non-financial business group companies which, at the time of the enactment of the amended provisions, held more than 4.0% of the shares thereof with the approval of the Financial Services Commission before the amendment. See "Item 4.B. Business Overview-Supervision and Regulation-Principal Regulations Applicable to Financial Holding Companies-Restrictions on Ownership of a Financial Holding Company."
- Share Price & Shareholder Rights - Risk 5Prior sales by the KDIC of shares of our common stock may result in adverse Korean tax consequences for you.
Under applicable Korean tax laws, a non-Korean holder who held Woori Bank's common stock or ADSs prior to our establishment as a new financial holding company in January 2019 pursuant to a "comprehensive stock transfer" under Korean law will be able to defer taxation on any capital gains arising from the stock transfer, by virtue of the Special Tax Treatment Control Law of Korea, or the STTCL, until such holder's sale of our common stock or ADSs received in the stock transfer, at which time the tax basis of such common stock or ADSs will be the acquisition price at which such holder acquired such Woori Bank common stock or ADSs. However, non-Korean holders that are corporations may not defer such portion of tax on capital gains arising from the stock transfer that is attributable to the amount by which the market price of our common stock or ADSs (as calculated in accordance with applicable Korean laws and regulations) is in excess of the market price of Woori Bank's common stock or ADSs. Any such non-Korean holder of our common stock or ADS, including a corporation, which seeks to defer taxation on capital gains arising from the stock transfer will be required to submit a tax deferral application in prescribed form to the Korean tax authorities when filing its tax return for the 2019 tax year. Notwithstanding the foregoing, if the KDIC disposed of 50% or more of the shares of our common stock it received in the stock transfer between the end of 2019 and the end of 2021, the deferral of taxation on capital gains will not be available, and a non-Korean holder who received our common stock or ADSs in the stock transfer will generally be subject to Korean tax on capital gains in an amount equal to the lower of (i) 11.0% (inclusive of local income tax) of the gross realization proceeds (i.e., the value of our common stock or ADSs such holder received in the stock transfer) or (ii) 22.0% (inclusive of local income tax) of the net realized gain. However, such capital gains tax may not apply, or may apply at a reduced rate, if such holder establishes its entitlement to an exemption or rate reduction under an applicable tax treaty or Korean tax law. See "Item 10.E. Taxation-Korean Taxation-Tax Treaties" for information regarding tax treaty benefits. While the KDIC received a tax ruling from the National Tax Service of Korea in June 2019 that the sale of the shares of our common stock it received in the stock transfer will be treated as a sale of shares due to an unavoidable reason (i.e., a disposal of shares in order to fulfil a legally imposed obligation) and that the deferral of taxation on capital gains will continue to apply even if the sale occurred within two years from the end of 2019, there is no assurance that such tax ruling will be followed. Accordingly, if you received our common stock or ADSs in the stock transfer, prior sales by the KDIC of shares of our common stock may result in adverse Korean tax consequences for you.
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