Shinhan Financial Group Co., Ltd.
Q4 2019 Earnings Call Transcript

Published: 5 Feb 2020

[Cheol Woo Park:]

[Interpreted] Greetings, everyone. I am Park Cheol Woo, Head of IR. I would like to thank all the participants in our Business Results Presentation and begin the 2019 Q4 Earnings Release. We have here with us our CFO, Yu Sunghun; CSO, Park Woo Hyuk [ph] and Kim Tae Youn, Head of Finance. We will first start the 2019 business results presentation by our CFO, Yu Sunghun, and then have a Q&A session.I would like to invite our CFO, Yu Sunghun, to deliver the 2019 business results presentation.

[Yu Sunghun:]

Greetings. I am CFO, Yu Sunghun, heading the Group Finance from this year. First, I would like to thank all the shareholders, investors, analysts, and journalists in and out of Korea for participating in our 2019 business results presentation. I would like to walk you through the major highlights of Shinhan Financial Group's 2019 business results.Please look at Page 3 of our material, and I would like to cover the major highlights. Shinhan Financial Group 2019 net income posted KRW 3,403.5 trillion and grew 7.8% Y-o-Y, excluding the Q4 one-off items, the normalized net income posted around KRW 3.46 trillion.The 2020 SMART Project strategy, which was implemented consistently for the last 3 years lead [ph] to fruition and led to the record high full year earnings. On the other hand, Q4 quarterly net income posted KRW 507.5 billion, a 1.1% drop Y-o-Y. This is due to the one-off items, including the main depository bank for city government intangible asset-related expenses and slightly increased Y-o-Y.I would like to summarize the 5 major highlights of the 2019 earnings. First, the bank and non-bank net income all had balanced growth compared to the previous year, and the growth trend has been continuing for sixth consecutive years from 2014.In particular, through the strengthening of non-banking global business, Shinhan's differentiated and stable earnings generation base was confirmed once again. As a result of focusing on strengthening our profitability for a long time, the group's global net income grew 23.3% Y-o-Y and posted KRW 397.9 billion.Along with the solid global growth of the bank, Shinhan Vietnam, a consumer financial company was launched, and with this opportunity the group's overseas income contribution grew to around 12%, accelerating our strategy to localize our non-banking business.Also in the case non-banking business based on our One Shinhan advancement strategy it recorded KRW 1,211.2 trillion, a 15.3% increase Y-o-Y and expanded the income contribution to 34%.Second, in the case of the group's interest income, [indiscernible] solid asset growth based on balanced loan portfolio, it grew 4.8% Y-o-Y. In particular, loans and One [ph] asset through the sales drive continuing from the beginning of the year grew 7.4% Y-o-Y, centering on SMEs and SOHO.On the other hand, group and bank NIM was influenced by the market interest rate drop, which continued from last year and defined by [indiscernible] and APT [ph] respectively, but with the gradual stabilization of the market interest rate, the range of market fall [ph] is being stabilized.The group's non-interest income, along with our successful net Matrix structure in place and through organizational efficiency, improvement and portfolio diversification grew 33.3% Y-o-Y, and contribution also expanded to 28.3% [ph] which is the third point.In addition, Orange Life and as Asia Trust were successfully merged, and our insurance and real estate earnings base became expanded. Going forward, we will treat a sustainable successful model through linking and expanding between our channels and groups subsidiaries.Fourth, to manage human resources based on group productivity-centered organization and channels, Shinhan Financial Group has been continuously implementing ERP this year. In Q4 of last year there was 335 employees who received ERP packages from the bank, card [ph] and investment, and around KRW 120 billion of expenses were recognized through our high-cost structure improvement recruitment efforts.Cost efficiency and cost profitability going forward will be additionally improved. And within the group, a organizational structure and system which can then be [ph] respond to the market environment changes caused by digitalization will firmly be established.The group's CI ratio posted 46.1%, the lowest level in the industry, through increase in stable operational profit, work process improvement, including digital customer basis expansion and cost management. Thus cost efficiency and profitability improvement has been continued for two consecutive years.Lastly, despite the asset quality deterioration concerns following the economic slowdown, which has been heightened from the previous year on the back of appropriate group strategy and preemptive provisioning policy seeking with – into consideration, led to the group loan [ph] ratio and NPL ratio posting 30 bp and 152%, respectively, continuing systematic risk management.Looking at the graph on the left, the group’s interest income is explained in more detail. Looking at the graph on the left, the group’s interest income posted around KRW 8 trillion, a 4.8% growth Y-o-Y. Bank loans and bond [ph] through balance growth between household and corporate grew 2.0% in Q4 and 7.4% Y-o-Y and with expansion of selected asset expansion, centering on client SMEs is maintaining a solid growth rate.Banks net interest margin with the October base rate cuts and debt release conversion loan posted 1.46%, a 7 bp drop Q-o-Q. On the other hand, the bank consolidated NIM including overseas branches posted 1.52%, still reporting high profitability compared to the domestic situation and led to the overseas interest income growth. We will do our best towards our solid interest income flow can continue through AL [ph] management seeking profitability into consideration.Now on to Page 5. The group's non-interest income rose 33.3% Y-o-Y to KRW 3,151.7 trillion, showing growth in all of fee income as well as securities and insurance-related income. Despite the lowered merchant fees and decreased trading value on the stock market, the group fee income grew 10.5% Y-o-Y due to an increase in investment finance and lease assets.In the securities related category, due to an increased gain from IP investment and bonds, there was a Y-o-Y increase of 29.7%, driving the group's growth momentum in the non-interest income. As for this year's insurance-related income with the acquisition of Orange Life remaining stakes completed, we are expecting additional growth.Moving on to SG&A. The group's SG&A increased 8.3% Y-o-Y, driven by an increase in salary and employee benefits with Orange Life and Asia Trust coming on board. But if we exclude that factor, the annual SG&A growth rate is around 3.4%.Going forward, we'll be actively managing the costs through efficient channel strategies and digital process improvements. The group and the bank's CI ratios are 46.1% and 46.5%, respectively, each showing an improvement of 1.4 percentage points and 0.8 percentage points Y-o-Y, which is a great achievement. This is the lowest CI ratio recorded in history.And now the group's credit costs. The group's credit cost ratio was 30 bp, 9 bp’s improvement over the last 5 years average but an increase of 4 bp’s Y-o-Y. This is because of the steady growth in the bank's loans and One card loans, instalment and lease assets. It is also due to our preemptive provisioning in light of market uncertainties at home and abroad. Going forward, in order to minimize risk volatility, we'll continue our efforts for credit risk management and asset rebalancing.Page 6, group’s asset quality. As of December end last year, the group's NPL ratio had improved 0.01 percentage point Y-o-Y, recording a historical low of 0.52%. This was possible because of qualitative growth strategy focusing on sound [ph] assets continued. Shinhan Bank's delinquency ratio went up by 1 bp Y-o-Y to 0.26% but is being maintained at a stable level, considering the steady asset growth.As for Shinhan Card, delinquency ratios of card loans and cash advance has stabilized since the second half of last year. And the card delinquency ratio was a record low of 1.26%. As of year-end, the group’s and the bank's BIS ratios were estimated to be 14% and 16%, respectively, and the CET1 ratio, 11.2% and 13.4% each.The group’s CET1 ratio had gone down by 1.4 percentage points due to the acquisition of Orange Life, Asia Trust and treasury buyback. However, starting from this year, CET1 ratio will steadily recover based on stable earnings power without any further debt. Orange Life, now being a fully owned subsidiary, the group BIS ratio will be affected to a minimum as the treasury stocks has been disposed of and new shares have been issued.The BOD had proposed a dividend for 2019 of KRW 18.50 per share, and if it is passed at the Annual General Meeting, we could expect a dividend payout ratio of 25% and dividend yield of 4.1%.There has been consistent efforts made to enhance shareholder value by implementing various capital policies such as a M&A and treasury policy. We will continue to enhance shareholder value further through a flexible and proactive capital policy.Now lastly, on Page 7, I'd like to share with you what has been achieved so far regarding the 2020 SMART Project. First, in terms of the group’s balanced growth strategy, the 2020 strategic platform bore fruit. In so doing, there was harmonized growth improvement between bank and non-bank, driving sound growth momentum. Compared to the previous year, the bank's net income increased by 2% and the non-banks by 15%, accelerating the earnings growth pace.Interesting income, non-interest income also grew by 5% and 33% each. With the acquisition of Orange Life's remaining equity, the earnings base of non-bank and non-interest income will continue to expand further.Second, the global business achieved the highest income quarter-after-quarter, accounting for 12% of income contribution. We are continuing to see stable results in the core ECM markets. In addition, global card and investment corp. are accelerating their globalization strategies in Vietnam and Hong Kong, and the 2019 net income increased by KRW 24.4 billion Y-o-Y. Going forward, we will continue to create differentiated results from the non-bank side.Lastly, concerning the upgrade to digital Shinhan. During 2019, the group expanded into new businesses such as innovative financial services and created a digital ecosystem through alliance with many ICT companies. Digital's contribution to income steadily increased, marking KRW 1.380 trillion, up KRW 184.1 billion Y-o-Y.Going forward, we'll respond proactively to the changes brought on by the Fourth Industrial Revolution such as open banking and revision of Personal Information Protection Act and other act.We'll focus on building Shinhan's unique innovation ecosystem to secure our new growth engine. This year, we'll be completing the 2020 SMART Project successfully, and we will produce more visible results to get us closer to world-class Shinhan. Please refer to the remaining slides for detailed information on key financial indices of the group and the subsidiaries.Thank you very much. And now we'll be taking your questions.

[Operator:]

[Operator Instructions] We’ll take the first question from DB Securities. We have Byung Gun Lee on the line.

[Byung Gun Lee:]

Hello. I'm from DB Securities. My name Byung Lee. In a difficult environment, thank you for showing good earnings. I would like to ask you two questions. The first question is regarding the previous year. And on the 14th of November, you will retire your shares - treasury shares. And actually, you mentioned plans to retire them.And regarding the acquisition of Orange Life, there was 100% completion into a subsidiary. So can you tell us about your future schedule for retirement of treasury shares? And there is bound to be some ratio changes. And can you tell us about the consolidated amount of the treasury shares because there will be an influence? And regarding the retirement of treasury shares or cancellation of NIM, can you tell us about how it will impact your CET1 ratio so that it will be pulled up?Second question is related to NIM, N-I-M. To our knowledge in Q4, well, it seems that there were not many executions, and it seems that there was not a big influence. But in the case of the conversion loans for that belief, and there are plans to actually securitize them in February and March by a housing fund. So can you tell us about what type of impact you will receive? It seems that the impact hasn't been reflected yet. And there is a possibility that the BOK can actually cut the base rate. If we take into consideration whether the BOK or remains the current interest rate, can you tell us about how you will be impacted and how you will respond to if the rates are cut or not? Thank you.

[Yu Sunghun:]

Regarding the treasury shares, I would like to answer them. On the 28th of January, there was a treasury swap, and we are planning to re-list them. And according to the capital market law, regarding the treasury shares that we own, we had a share swap with those shares. So that it means that we retire or cancel the shares that Shinhan has. And we need to have at least three months that taxes. After that, we'll also acquire new treasury shares.This means that January 28 will be three months. So it means that from April 28, we can acquire additional treasury stock. This means that the amount of retirement of the treasury shares will be discussed at our BOD, so that within three months' time, we plan to have some of the cancellations or retirement.Regarding the consolidated CET1 Orange Life influence, the acquisition of the 40% shares that is remaining, well, there is the treasury shares that we have, and we had the new type of capital of - right offering that was the method. So there is no visible impact to the capital adequacy rate - capital rate.So regarding the sale of treasury shares, it means that our shareholders equity have increased accordingly. So it means that there will be no CET1 changes even if it becomes fully incorporated wholly owned company. And in the - in Q3 of the previous year, during the earnings release, there was a question, and we mentioned that on a recurring basis, Q3 would be the lowest level.As it means that in Q4, the shareholder rates fell because KRW 850 billion fell because of dividend. So it was just a temporary happening. So on an annual basis for the CET1 basis, 30 to 40 bp’s is expected to grow annually. I believe that I have covered the treasury share of question with this answer.And regarding the BOK rate cut possibility, in our financial plan, we also have assumed that there will be additional 21 - 25 [ph] bp cut, and if 25 bp is cut, then we believe that in our financial plan we will have 3 bp NIM drop.In addition, in the case of debt relief conversion loan, I would like to elaborate. Until Q4 of 2019, KRW 1.2 trillion was dealt with - by a tender by us. And we have KRW 3.7 trillion that is with us. And we have KRW 2.5 trillion that hasn't been transferred and is remaining, and we will have execution in Q1 or Q2 that will be transferred.And we believe that the margin impact is minimal, and about 4 bp’s is what we are expecting. And regarding the conversion of the debt release [ph] conversion loans, we believe that we can have more growth because [indiscernible] related loans or other loans have higher profitability, possibilities. So we will actually have growth based on further market demand. So it was actually 0.47 bp’s.

[Operator:]

Next question will be from Mr. Kim Jin-sang from Hyundai Motor Securities.

[Kim Jin-sang:]

Hello. I have two questions. In Q4, there was the impairment loss on the main depository banks for city government and ERP. And considering those KRW 150 billion and KRW 120 billion in investment core recurring income considered, of course, there is the seasonal factor in Q4, but it seems that the numbers are lower.And what are some of the one-off that we need to take note of? What about line and exposure to other schemes? So because of the risky assets, are there more provisionings or any more possibilities of provisioning against such risky assets? And will that impact the fee income? And have you had a chance to look into these matters?And my second question is about the CI ratio. It is maintained at a very low level. So this year, next year, in the mid-term, is the 46 a defendable number? And to keep that CI ratio, what are your efforts going to be? And how much do you think that SG&A will increase this year? Thank you.

[Yu Sunghun:]

Thank you for the questions. What were the Q4 one-off? Even if we consider the one-off, on a recurring basis, the numbers seem to be low. That was the question. So other than the one-off, on a recurring basis, we had KRW 100 billion of loan conversion and KRW 150 billion of main depository bank for city government's amortization, and other than that, there was the disposition of assets, the one-off and a write-back. So on a recurring basis, the recurring income was about KRW 690 billion.So our quarter is not unusually low compared to the other quarters. We did not categorize this as a one-off, but you did mention Line [ph] And Shinhan Corp. had provisioned KRW 56 billion against Line. And this is related to the valuation amount of the securities, and we didn't consider it as a one-off.As far as exposure that we have against Line, I am sure you saw it in the media. There is due diligence by the accounting companies, Samil PwC. But we wanted to be more conservative. We wanted to be on the conservative side. So we had provisioned preemptively a high amount of KRW 56.6 billion. That was the maximum provision that we could set aside.So we don't know if t here's going to be additional provisioning or if there's going to be a write-back, but we were on the preemptive and conservative side. And so yes, that is the situation with the provision.I'd like to now hand all the question about the fee income and how sustainable the CI ratio is. We have our financial plan, and it says that this year's CI ratio will be in the mid-40 range. And in the non-interest income, 5% will be the contribution level, and there will be cost-cutting effort through digitalization. So we want to achieve and maintain the CI ratio of mid-40s this year.

[Operator:]

We don't have any questions on queue. [Operator Instructions] The next question from [indiscernible] Investment & Securities, we have Kim Doha [ph] on the line.

[Unidentified Analyst:]

Thank you for giving me the opportunity. And regarding your plan for 2020, I believe that you have a business plan, bank cards, life insurance and securities. Can you tell us about your annual income target - earnings target? And can you tell us about the assumption you had to bake [ph] this scenario?

[Yu Sunghun:]

For 2020, regarding our financial business plan, I would like to answer your question. As you are well aware, uncertainty is expected to grow this year. And we have a very conservative plan for asset growth. In the case of that bank, the loans in won growth, we expect to be about 3%. However, in the case of cards, there is lease financing. So we believe that there will be more than 6% of asset growth centering on lease financing.In the case of interest income, because we expect interest rates to go down, and we will try to safeguard the NIM, but we believe there will be downward pressure. However, for non-banking subsidiary income - interest income, we believe that it will be expanded. And for non-interest business we believe that this year we will have 5% growth. As I mentioned before for SG&A, the CI ratio, we believe to be around the mid-40% level.

[Unidentified Company Representative:]

We are waiting for questions to come. Please stand by. We seem to have no further questions. We will conclude Shinhan's Financial Group 2019 earnings release. Thank you for participating in the earnings call despite your busy schedule. Thank you.