[Stock of the Week] Why Have Target Prices Been Raised for Hana Financial Group Despite Missing Expectations?

Hana Financial Group's "Value-Up" Roadmap Shines Beyond Earnings
Signals Strong Commitment to Profitability Improvement and Enhanced Shareholder Returns

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Despite quarterly earnings that fell short of market expectations, there is a stock for which securities firms have raised their target price one after another: Hana Financial Group, one of Korea's four major financial holding companies. Typically, higher target prices for financial holding companies are based on earnings forecasts, but the focus this time is not just on financial results. It is "Value-Up 2.0," a plan to enhance corporate value and elevate shareholder return predictability. Under this strengthened value-up strategy, there are growing expectations that a 50% total shareholder return rate will be achieved this year.

According to the financial investment industry as of July 29, the share price of Hana Financial Group closed at 123,000 won in the regular session the previous day. Although this was a decline from the previous session, it is more than 12% higher than the 109,000 won recorded a month ago—an increase of around 30% since the start of the year.

Currently, there is a trend among brokerage firms toward raising their target prices for Hana Financial Group. In July alone, nine securities companies, including KB Securities, have revised their target price upward. Notably, six of them raised their target price simultaneously after the release of the second-quarter earnings and Value-Up 2.0 on July 24. KB Securities raised its target from 160,000 won to 170,000 won, and Heungkuk Securities from 157,000 won to 165,000 won. LS Securities and Daol Investment & Securities set their new target at 160,000 won, while iM Securities set theirs at 153,000 won. Yuanta Securities also raised its target price from 170,000 won to 175,000 won in less than a month.

Underperformed expectations, but... "Very strong content-wise, including NIM growth"

This movement is somewhat at odds with the second-quarter net income alone, as Hana Financial Group's second-quarter controlling interest net profit was 1.1928 trillion won, falling short of market consensus. This was largely attributed to additional losses of approximately 200 billion won, primarily due to non-monetary foreign exchange loss of 27.5 billion won caused by currency fluctuations, about 74.9 billion won in provisions related to the central group, and 52.4 billion won in one-off expenses stemming from revision of actuarial assumptions for insurance.

However, securities companies mostly considered these to be one-off variables. Upon closer examination, the core business indicators are judged to be superior to competitors. Choi Junguk, an analyst at Hana Securities, analyzed, "Although the result was below consensus, the substance itself was very strong." Kang Seunggeon, an analyst at KB Securities, also noted, "Second-quarter controlling interest net profit was 4.2% below consensus," but pointed out, "Won-denominated loans grew 2.0% quarter-on-quarter, and NIM (net interest margin) rose by 3bp (1bp = 0.01 percentage point), delivering net interest income growth exceeding that of peers." Excluding the effect of variable insurance account substitution, net interest income growth reaches 3.6%.

It is also worth noting that despite the inclusion of non-recurring factors such as currency translation losses, group non-interest income increased by 76.4% quarter-on-quarter. Fee income, primarily in the asset management (WM) division of the securities subsidiary, jumped by 46.7% year-on-year. Jeon Bae-seung, an analyst at LS Securities, commented, "Despite recognizing additional losses, core earnings remained solid," adding, "With expectations of a benchmark rate hike and exchange rate stabilization in the second half, profits from securities, card, and capital subsidiaries are recovering, so positive earnings momentum is expected to continue both in banking and non-banking sectors."

"Ambitious Value-Up Target" - 50% shareholder return rate expected this year

Securities firms raising their target prices share the view that Hana Financial Group has announced a value-up policy that is a notch stronger than before. The Value-Up 2.0 plan released last week contains three key points: ▲raising the return on equity (ROE) target from the previous 10%+ to 12%, ▲setting a shareholder return target of 50%+ while increasing total cash dividends by more than 10% until the payout ratio reaches 40%, and ▲maintaining a common equity tier 1 (CET1) ratio of at least 13%.

In particular, introducing a new shareholder return framework based on ROE and risk-weighted asset (RWA) growth rate, namely '1-(RWA Growth Rate/ROE)', is seen as having improved the predictability of shareholder returns. This structure goes beyond simply increasing dividends, as it links ROE improvement, enhanced capital efficiency, and expanded share buybacks and cancellations in a coordinated way.

Yoo Jun-seok, an analyst at Heungkuk Securities, described it as "a leap towards a new framework," emphasizing, "The focus is on increasing shareholder value through qualitative advancement of business." Analyst Jeon Bae-seung added, "With an ambitious value-up target, the intent to use CET1 capital exceeding 13% for shareholder returns despite RWA fluctuations due to outside factors such as exchange rates demonstrates a strong commitment to both improving profitability and enhancing shareholder returns."

However, in order to achieve the ROE target of 12%, normalization of non-banking subsidiaries’ performance is essential. As of last year, the group’s ROE stood at 9.2%. The ROE of non-banking subsidiaries also remains below 10%. Kang Seunggeon, analyst at KB Securities, said, “Faster normalization of non-banking subsidiary performance is required to achieve the target,” adding, "If the shareholder return rate exceeds 50% and the RoRWA (return on risk-weighted assets) of non-banking subsidiaries rises, the shareholder return rate can increase further." Seol Yongjin, analyst at iM Securities, also pointed out, "With the current level of ROE, the total shareholder return rate is expected to be about 50-60%. Further upside requires higher profitability in the non-banking segment."

Securities analysts are predicting the possibility of further year-end dividend increases, factoring in more than 200 billion won in additional share buybacks or tax-exempt benefits during the fourth quarter. Kim Ji-won, an analyst at Daol Investment & Securities, said, "The theoretical range for total shareholder return rate this year is estimated to be 50.0–54.5%. To reach this, annual dividends must increase by 10% and additional share buybacks and cancellations in the second half are necessary."  Jeon Bae-seung added, "With improved profitability and expanded shareholder returns, the undervaluation will continue to be corrected. We forecast 29% from dividends and 21% from share buybacks, resulting in a 50% shareholder return rate. The shareholder return yield is expected to reach 6%."

This content was produced with the assistance of AI translation services.