[Click eStock] "Meritz Financial, 50% Net Profit Return to Shareholders Means 4,300 KRW per Share"

Significant Capital Increase Expected Upon Full Subsidiary Integration of Securities and Fire Insurance Companies

Jo Jeong-ho, Chairman of Meritz Financial Group

[Asia Economy Reporter Ji Yeon-jin] If Meritz Financial Group absorbs Meritz Securities and Meritz Fire & Marine Insurance as wholly owned subsidiaries through a share exchange with minority shareholders, the capital of the holding company is expected to increase significantly. Meritz Financial Group plans to use 50% of its consolidated net profit for shareholder return policies, which, based on recent performance, is analyzed to amount to 4,600 KRW per share.

Seung-geon Kang, a researcher at KB Securities, said on the 22nd, "Meritz Financial Group announced a share exchange with Meritz Securities and Meritz Fire & Marine Insurance through new share issuance," adding, "They are promoting the full acquisition of minority shareholders' stakes in Securities and Fire & Marine Insurance through the exchange, and once this process is completed, Meritz Fire & Marine Insurance and Meritz Securities will be delisted."

The exchange ratio is 0.161 shares of Securities and 1.266 shares of Fire & Marine Insurance per one share of the financial holding company, with reference prices of 27,132 KRW for the financial holding company, 4,361 KRW for Securities, and 34,342 KRW for Fire & Marine Insurance. Assuming all minority shareholder stakes in Securities and Fire & Marine Insurance are exchanged, the number of new shares issued by the financial holding company is estimated to increase by 83,302,037 shares, with an estimated scale of about 2.2602 trillion KRW.

This transaction is expected to significantly increase the controlling shareholder's capital of Meritz Financial Group relative to total capital. As of the third quarter of this year, the total capital was 5.6 trillion KRW, and the controlling shareholder's total capital was 3 trillion KRW. After the new share issuance, the total capital is expected to increase by about 1.7 trillion KRW to 7.3 trillion KRW, and the controlling shareholder's capital is expected to increase by 4.3 trillion KRW to 7.3 trillion KRW compared to the third quarter of this year. Researcher Kang explained, "Because the funds are raised through new share issuance to purchase minority shareholder stakes in subsidiaries, the effect of converting non-controlling interests into controlling interests is also reflected."

As of the third quarter of this year, the book value per share (BVPS) was 24,610 KRW, and reflecting the increased number of shares, the BVPS after the capital increase is expected to rise sharply to 36,635 KRW. On the other hand, the return on equity (ROE) is expected to decline.

Meritz Financial Group announced through a fair disclosure that it will use 50% of its consolidated net profit for shareholder return policies. Annualizing the profit of the third quarter of this year results in 1.8 trillion KRW, and if 50% of this is used for shareholder returns, it amounts to 4,600 KRW per share. Reflecting the closing price of the previous day, the shareholder return rate per share is about 17.3%. Researcher Kang said, "Before this capital increase, the major shareholder's stake was 75.07%, and considering that the stake will decrease to about 49.3% due to the new share issuance, there is a possibility that the proportion of treasury stock repurchase and cancellation will be higher initially," but added, "However, since Meritz Fire & Marine Insurance's profits will be calculated based on IFRS17 from next year and there is an issue with surrender value reserves, and since 50% of consolidated profits will be paid as dividends, to manage double leverage, Fire & Marine Insurance and Securities need to maintain a dividend payout ratio of over 50%, so it is necessary to confirm the realization process."

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