[ANALYSIS] Hana faces widening foreign exchange losses

KB, Woori to suffer less impact from won’s sharp depreciation

By Lee Min-hyung

The sharp weakening of the won against the dollar is dealing an unexpected blow to Hana Financial Group. The Korean lender’s foreign exchange losses are expected to widen during the third quarter as a result of the strengthening dollar.

In order for a parent company to figure out accounting gains and losses of its overseas subsidiaries, their financial statements using foreign currencies must be converted to the head office’s reporting currency.

This process, called “foreign currency translation,” is done using the current exchange rate. So when the won strengthens in value against the dollar, companies usually report foreign currency translation gains, and when the won weakens, their foreign currency translations show losses.

Hana Financial Group, the nation’s third-largest financial holding firm by market capitalization, reported 149.3 billion won ($125 million) in foreign exchange gains during the fourth quarter of last year when the won strengthened against the dollar.

But the gains turned into losses due to a weakening won against the dollar during the January-March period of this year. Hana’s foreign exchange losses reached 82 billion won during that period.

The lender, however, did not report additional losses in the second quarter when the foreign exchange market showed signs of stabilization, with the won-dollar exchange rate experiencing little volatility. This led Hana to report second-quarter foreign exchange gains of 8.1 billion won.

Hana is most vulnerable to the won’s weakening, due to its relatively higher portion of assets and liabilities denominated in foreign currencies compared to other financial holding firms here, after the lender took over Korea Exchange Bank back in 2012.

Data showed Hana’s rivals have been impacted less by fluctuating foreign exchange rates during the same period.

KB Financial Group, the nation’s largest financial holding firm, said its first-quarter foreign exchange losses reached 7.8 billion won and the figure declined to 960 million won during the second quarter.

KB’s combined foreign exchange losses in the first half of 2021 came in at 8.74 billion won, which is much lower than the 74 billion in losses Hana suffered. Shinhan and Woori also reported lower financial losses due to exchange rate fluctuations during the same period compared to Hana.

But of particular note is the sharp weakening of the won against the dollar during the third quarter. The Korean currency rose above 1,200 won per dollar at one time on Tuesday for the first time in about a year.

This means there stands an ample chance of Hana suffering even more foreign exchange losses in the third quarter than the first quarter.

“Hana Financial Group is expected to continue reporting solid earnings in the third quarter amid increasing interest margins, but the company is estimated to have reported foreign exchange losses of around 85 billion won during the same period due to the rise in the exchange rate [weakening the won against the dollar],” eBest Investment & Securities analyst Jun Bae-seung said.

The securities firm, however, remained optimistic about Hana’s overall earnings outlook, expecting the lender to have achieved 831.4 billion won in net profit during the same period. Hana reported an earnings surprise in the second quarter with a net profit of 917.5 billion won, up 33.2 percent from the same period the year before.

Even if the possibly widening foreign exchange losses during the July-September period will temporarily halt Hana’s robust earnings growth momentum, expectations are that the group will be able to report an annual net profit of more than 3 trillion won this year for the first time due to an improvement in its net interest margin and overall growth of its non-banking operations.

But the exchange-related risk will continue to remain throughout this year.

Most market experts here forecast the won will not strengthen significantly against the dollar at least for the next few weeks and possibly for the rest of this year, which is a negative signal for Hana.

“The exchange rate will hover at a high level of between 1,180 and 1,205 won per dollar before the widely expected benchmark rate hike in November,” Eugene Investment & Securities analyst Kim Yeon-jin said. This is because escalating inflation concerns, oil price hikes and global supply chain disruption will keep enhancing the dollar’s valuation in the foreseeable future, according to the analyst.