Asia Essentials

Event

SFG released its preliminary 4Q16 net profit of Won612bn, which wasmeaningfully bigger than our estimate of Won435bn and Bloombergconsensus of Won401bn. While the difference in bottom-line profit was mainlyfrom one-off gains/losses, we think SFG posted strong results.

Impact

SFG succeeded in protecting its margin again. Following 1bp QoQ declinein 3Q16 NIM (after the BOK’s rate cut in June 2016), we have estimated a2bp QoQ decline in NIM, which should be a good result considering thenormal 8-10bp loss of NIM two quarters after the BOK’s rate cut in the past.

However, SFG successfully protected its margin in 4Q16, supporting ourthesis on strong NIM momentum from 2017.

Despite Won103bn ERP related costs vs our estimate of Won59bn,SG&A expenses came in line with our estimate: The group laid off 327staff via an early retirement program, which cost Won103bn versus ourestimate of Won59bn. Hence, the group’s continuous efforts to improve itscost efficiency seem to be paying off and should continue to drive its core preprovisionprofit growth in the future.

With inclusion of RCL into CET 1 capital, CET 1 ratio jumped to 12.8%but NPL coverage remained strong at 120%: Most banks’ NPL coverageratio has declined to below 100% due to the exclusion of RCL from LLR.

However, while SFG’s capital position became even stronger (via includingRCL into CET 1 capital), its NPL coverage ratio still remains high at 120%,which should differentiate the group’s risk management culture from its peers.

Credit costs came in 18% smaller than expected despite additionalprovisioning: The group’s credit costs came in at Won294bn versus ourestimate of Won360bn. According to the group’s IR spokesperson, there wasnet additional provisioning of Won44bn including DSME and D’Live, whichsuggests that its core provisioning environment is even stronger than stated.