Shinhan Financial Group Co., Ltd.
Q3 2014 Earnings Call Transcript

Published: 28 Oct 2014

[Sung Hun Yu:]

Greetings. I am Yu Sung Hun, the Head of IR. Thank you for taking part in Shinhan Financial Group's Business Results Presentation for 2014 Q3 despite your busy schedules. Let me now begin the 2014 Q3 Shinhan Financial Group Earnings Release Presentation. We have here with us our CSO, Kim Hyung-Jin; our CFO, Min Jung Kee; and our Finance Head, Jeon Young-Kyo. First, CFO Min Jung Kee will walk us through the 2014 Q3 business results presentation, and then there will be an interactive Q&A session. Now I'd like to invite CFO Min to begin the 2014 Q3 business presentation.

[Jung Kee Min:]

Good afternoon. This is Jung Kee Min, CFO of Shinhan Financial Group. First, allow me to thank investors, analysts and journalists from home and abroad for taking the time out to listen in on to SFG's Q3 2014 earnings release. I will present on our Q3 results with a focus on major items. First, on the group's income on Page 6. SFG's Q3 YTD net income reached KRW 1,768 billion with Q3-only income standing at KRW 632 billion. This is up 13.4% Y-o-Y and 9.4% Q-o-Q. To talk about major features of Q3 earnings

[Sung Hun Yu:]

Now we are ready to take your questions. [Operator Instructions] Those of you who ask a question in English will be provided with consecutive translation. After asking a question, please wait until the translation is completed. We will then provide an answer to your questions. I also would like to inform you that today's presentation materials are downloadable to your tablet, PCs and mobile phones via -- on IR-dedicated application. Android application users can search Shinhan Group IR or SFG IR to download this application. This is a application that you can utilize to download all of the IR presentation materials to your devices. Apple users can enter in your search fields m.shinhangroup.co.kr or com to download IR-dedicated application. This is an application that we developed to maximize your convenience. I hope many of you can make use of this application. Thank you. We will be standing by until a question is placed in the queue.

[Sung Hun Yu:]

I don't believe that there is a question that is placed in the queue. We are still standing by and waiting for your question. Yes, we're ready to take the first question that comes from Mr. Hwang Chan Young from Macquarie Securities.

[Chan Hwang:]

I have 2 questions. First, compared to our expectations, provisioning seems to have been lowered quite significantly when compared to asset size. I believe that it's just about 50 bp. I wonder whether this is a level that you believe is sustainable. Or do you believe that this is something that you can go -- that you believe that will go up or go down? Secondly, Shinhan Financial Group or Shinhan Bank is a leading bank in Korea's financial industry, and I believe that a lot of investors have great expectations on the bank. So what is your policy on dividends going forward? This is a question that is often posed by global investors. So can you address this question?

[Jeon Young-Kyo:]

My name is Jeon Young-Kyo, and I am in charge of finance team. Let me address the question regarding credit costs. As you mentioned, this year, Shinhan's credit cost is at its historical low. The reason that we are doing so well on this front is because there was not much that newly arose in terms of bad debts. But at the same time, we were able to collect quite significantly from the past written-off debt. So in terms of future sustainability of this level, given the group's portfolio, problematic loans have been resolved to a great extent in construction, shipping and shipbuilding. These were high-risk sectors, and we have a much cleaner portfolio in these sectors. So I don't believe that there will be much NPL to be generated from these sectors. And regarding write-backs, although I am not too confident, this year has seen a great rise in the write-backs. And going forward, we expect to see a same phenomenon. Regarding the asset quality of credit card business, I believe that there is a slight worsening trend, but this is not something that you should be concerned about too much. Therefore, down the road, the group's credit cost ratio, we plan to maintain it at this year's level. Thank you.

[Jung Kee Min:]

Next, regarding your dividend policy question. Every year, Shinhan Financial Group has made a lot of efforts to provide dividends at a level that meets your expectations. Over the past several years, we have been maintaining a dividend payout ratio of 15%. As of 2014, it was 14.3%. And last year, the dividend payout ratio was 16.3%. As you must be well aware, a bill on income tax -- a bill regarding the revision of income tax is currently pending before the National Assembly. Regarding financial institutions regarding retained earnings, there is a discussion regarding whether those retained earnings should be taxed as well at financial institutions. In order to drive local economy, I believe the financial institutions will probably have to consider a dividend policy that meets our investors' expectations. Dividend for this fiscal year will be paid out next year. And to give you an explanation regarding the policy, at this moment, our annual income has not been finalized, so it might be too premature. But there are certain factors that might contribute positively to dividend payment. First, regarding the regulatory ratio status of the group, I believe that our circumstances have become more favorable than before. At the same time, next year's business plan and capital efficiency will be the factors that we'll also take into account. And we do not want to see great volatility in terms of the dividend payment level to our investors across different years, so we would like to make sure that our dividend policy or dividend level is something that we can sustain going forward. As I mentioned previously, in order to drive local demand in the Korean market, the government is making a lot of efforts, and this is something that we will consider as well. And we also need to consider ROE. So looking at all these different factors, we’ll do our best to push up our dividend payout ratio. But on the other hand, there are basically 3 capital requirements, which will become stricter for us. So we will have to give consideration to all of these factors to become more flexible in our dividend policy. Thanks.

[Sung Hun Yu:]

Next question, it's from Dongbu Securities, Lee Byung Gun, Team Leader.

[Byung Gun Lee:]

I'm Lee Byung Gun from Dongbu Securities. I have 2 questions. My first question is as follows. Compared to other banks, I think you had a big difference in credit cost, but your loan growth was quite consistent and healthy. And for conforming loans, it's not that much biased, but it is very balanced growth. In Q3, I'm curious about -- in consideration of conforming loans, what was the breakdown? And we are hearing news that household sales are quite good in October. So in mortgage loans or in retail loans, I would like to know the trend. My second question is about credit card. It's also applicable for NIM as well. And I think that your credit card business is doing very well, so it's contributing to the NIM healthy numbers. And I think that you have also cut down on a lot of SG&A. However, for next year, I think credit card companies' positions may change. I'm also curious about credit cards' SG&A prospects in the future.

[Jung Kee Min:]

Regarding growth, I would like to answer your question. As you mentioned, in Q3, we did not have a big growth in conforming loans, so the liquidation of conforming loans until Q3 was about KRW 860 billion, and new conforming loans in this quarter was about KRW 340 billion. As you previously said, in creating our growth, we haven't increased a great ratio of mortgage loans or conforming loans, and we use this strategy for many reasons. First, in terms of profitability, we wanted to grow our own loans, and that was a more important factor for us. Second, regarding mortgage loans, our deposit -- our loan strategy is to follow the demand of the market. The second reason is because of the fixed interest rate and for the nonfixed-rate loans. And it's about 90.3% for fixed. And for nonfixed, it's about 21%. So for this year, we believe we will easily meet our target. And thus, we haven't been very active in our conforming loan sales, it's true. However, going forward, I believe that overall loan demand as was seen partly this year will -- had more emphasis on corporate loans, and SME's growth was formed this year compared to other companies. I believe that this trend will continue in Q4 as well. For your information, this year, in the case of SOHO loans, we have grown 7.8%, so it has gone up by KRW 2.1 trillion. Shinhan's growth strategy was mostly focused on SOHO loans from the past. And as was mentioned in the introductory remarks, our consistent loan strategy is being continued, so I believe maybe that led to better loan growth compared to our competitors. Regarding credit card, there is SG&A and marketing costs that will probably continue to act as a burden. It seems that the overall income will not grow without limitation. But fortunately for Shinhan Card, our market share, based on credit sales, is being maintained quite stably. As of Q3 end, market share is being maintained at 22.9%. Secondly, what is fortunate is that each quarter, based on the credit card sales numbers, it seems to be growing. In Q3, KRW 35.9 trillion, went up. And in Q2, it went up KRW 34.8 trillion, so we had KRW 900 billion plus compared to the previous quarter. If we have a recovery in our domestic economy soon, then stable credit card growth is expected to follow. I believe that it's a fortunate factor for us.

[Sung Hun Yu:]

We will now take the next question, which will come from Mr. Lee Sin Young from HMC Securities.

[Sin Young Lee:]

A number of questions were related to the bank, so I would like to ask questions related to the Shinhan Financial Group -- Shinhan Investment. Actually, the fee income seems to have increased, and you have sold a lot of financial products. What were the main products that you sold the most? Also, related to Shinhan Insurance, what is the latest development?

[Jeon Young-Kyo:]

My name is Jeon Young-Kyo from finance team. This year, overall, on an annual basis, nonbanking subsidiaries' performance have been rather sluggish. But as we began Q3, Shinhan Investment and Shinhan Life seemed to have been performing better. In the case of Shinhan Investment, the biggest contributor to the income growth in Q3 was because of the strong trading business performance. Due to a cut in interest rates, it was able to gain much from its fixed income position. And also, on the asset side, I believe that its growth rate was one of the highest in the industry. At the group level and also at the Shinhan Investment level, I believe that we are focusing much on driving a greater share of financial product sale. I don't believe that we are performing at a satisfactory level yet. In the case of the products that have been launched by Shinhan Investment, they have been received very well in the market. To summarize, mid-risk, mid-return products are the main products that are being sold by Shinhan Investment. We are combining derivatives in order to increase returns, but we are also trying to moderate the risk level. Actually, the details of the financial products are too much to give to you at this moment. But if you request, we can give you the details later on. Now regarding Shinhan Insurance, compared to last year, this year seems to be a better year for the company. On a quarter-to-quarter basis, the biggest impact was due to the tax imposition by the tax authorities in the previous quarter. Regarding the operating performances, I don't believe that there has been much change this quarter. Well, I believe that there is a room for further increase in the interest income going forward. But when it comes to the other types of yields, I believe that we can see a stable trend. Thank you.

[Sung Hun Yu:]

We will take the next question. The next question is from UBS Securities, from Researcher Lee Junho.

[Junho Lee:]

I have 2 questions. My first question is as follows. For low-cost deposit growth, I think it has grown a lot, helping you guard the NIM. I'm curious about what kind of promotions you have for low-cost deposits and how long are you going to continue because I don't think that it can go up forever. Second is connected to the previous question, is about the recovery of provisioning. And I'm curious about where is it coming from. Is it retail, large corporations, SMEs, SOHOs? And if it's large corporations, can you tell us what industry? Please give me further guidance.

[Jung Kee Min:]

Regarding low-cost deposits, I would like to give you an answer. We have core liquidity deposits or low-cost deposits that are growing. Last year, it grew nearly 12%, about 11.7%. And until Q3 of this year, it grew KRW 6 trillion -- actually, KRW 11.5 trillion. And demand deposits went up 6.8%. And we also had growth in other deposits as well. It is growing continuously, following the previous quarter, because of the synergy effect that comes from within our company. Also, in the case of credit card, check card transaction volume is consistently growing. Also, we are providing loans. And in the case of credit card, our merchants are using Shinhan Bank's accounts as their main settlement accounts. So SOHO liquidity deposits this year has gone up KRW 2.4 trillion, among the KRW 6 trillion that has gone up this year. For institutional deposits, it is continuously growing, KRW 3.2 trillion, has grown substantially. Going forward, we believe that the synergy will take place because if we best utilize our current customers, this year and next year, we will have continuous growth of core low-cost deposits. Of course, regarding the growth rate, it will not be maintained at such a high level as 12% this year. But within our company, within our group, we will try to find out other places where, well, we can add to the growth, and I believe that we can enjoy substantial growth going forward as well. Regarding provisioning and write-back, each quarter, we have some write-back. And in Q1, for write-back, we had KRW 53.4 billion, one big case of write-back. And in Q2, we had some smaller amounts of write-back. It was about KRW 14.7 billion. For Q3 overall, we had about KRW 40 billion of write-back, and most of it was -- the big lump size were about real estate development. And within the group, we had more SME loan write-back for corporations. As was mentioned previously, regarding our provisioning, it is true that we had a very conservative building up of loan loss reserves. So with the recovery of the macro economy, we are seeing continuous small-sized write-backs. So because of these factors, the absolute amount of our loan loss reserves, or provisioning was quite higher than what the market expected.

[Sung Hun Yu:]

We are ready to take the next question, which comes from Mr. Choi Chung Uk from Daishin Securities.

[Chung Uk Choi:]

My name is Choi Chung Uk from Daishin Securities. I find your growth and income very satisfactory, and I believe that your net income -- noninterest income performance was quite favorable. And there was some NPL sale or the gains from sale of securities. And if I look at Q1 and Q2, the recurring net income of quarter seems to be stabilizing. Do you believe that this is going to increase going forward? What do you believe is the recurring level of income? At the same time, I believe that Q3 YTD growth rate was 5.6%. And if you include Q4, the annual growth rate seems to be quite high. Although it might be too premature, what is your expectation for growth next year? And regarding margin, because you've done well this year, maybe your margin will suffer a little next year. So what is your take on this front?

[Jung Kee Min:]

Regarding securities, I appreciate your question. In Q3, concerning sale of securities, there has been some gains in Q3. As you must be aware, one of the big gain was related to Visa card and MasterCard. In the previous quarter, we recorded KRW 55 billion. And this quarter, this figure was KRW 59.4 billion. And also, the bank received KRW 60 billion gain on securities sale. And also, this includes a gain on sale of fixed income, which is KRW 12 billion. So this quarter, the gain on sale of these securities was KRW 120 billion. Actually, there is not much difference from the previous quarter. There has been a slight drop in the gain on sale of securities this quarter when compared to the previous quarter. The reason that we were able to post better income this quarter was not really related to the gain on sale of securities. The biggest factor was a drop in the loan loss provisioning. For your reference, related to Visa card and MasterCard, last year, our gain was about KRW 123 billion throughout the year. And this year, we also sold about KRW 100 billion. Therefore, we don't believe that there is much more to come in Q4. Then overall, regarding the recurring level of quarterly income, that is a question that you asked. I believe that it will range between KRW 510 billion to KRW 520 billion. There has been a slight increase this quarter from the previous quarter because the overall loan growth was stronger this quarter. Concerning your third question, actually, our growth rate is already 6.3%. According to the business plan for this year, loan growth rate was targeted at about 4%. The reason that we were able to outgrow our target, maybe this is something that is very satisfying for us. Regarding your question concerning our future projection for next year, we are still in the process of planning for the future or planning for next year, so I believe that the growth rate itself could be slightly decreased next year. As soon as we complete our business planning for next year, we will explain about this later on. Thank you.

[Jeon Young-Kyo:]

My name is Jeon Young-Kyo from finance team. Your question was very difficult. We are currently working hard to develop a business plan for next year. Regarding growth, I don't believe that it's not easy to tell you a clear direction for the future, but I believe that we can probably do the same things based on a continuation of the things that we did in the past. Until 2012 -- for about 3 years until 2012, our growth rate was higher than the industry average growth rate because our focus was mainly on SMEs. But if you look at the year 2013, our operations was rather stable. We underperformed the market. Especially in the case of the household loans, especially in the case of mortgage loans, we were not so aggressive. And at the same time, we also tried to rebalance our loan portfolio in 2013. In the case of this year, compared to market, I believe that our growth is higher, and we are trying to develop new markets these days. Next year, I believe that our sales power is very stable. And macroeconomically, I believe that next year's environment will be more favorable to us. Next year, given these factors, based on our competencies and capabilities, we would like to strengthen our market position further. This is a trend that we expect to continue next year. Thank you.

[Sung Hun Yu:]

Next question, it's from Franklin Templeton, Mr. Jung Moo Il.

[Moo Il Jung:]

I'm Jung Moo Il from Templeton. I would like to ask you about your strategic direction, and I would like to give you 6 words

[Hyung-Jin Kim:]

I'm Kim Hyung-Jin, in charge of strategy. In the financial industry, many things are changing, and the development of ICT actually will have a great impact on finance, and we are all curious about what it is. In case of Shinhan Financial Group, we believe that ICT's changes are changing the demands of the customers, so the services used by the customers will be influenced by this development. In particular, for credit card, marketing using big data has been a focus for us from early this year with the establishment of a big data center. We are actively accommodating the changes, and we had great performance because we changed our marketing methodology. In addition, our existing channels need to nimbly change to the patterns of our customers. And we know that the digital banking is being done at state-of-the-art financial companies, so we are doing some research into this. So channel transformation TF team has been established in omni-channels, or many different types of channels and products will be ready by next year. Moreover, for mobile banking and smart banking, the numbers of users are going up. We will actively accommodate these changes, and we have smart banking research lab to actively respond to the changes. For Bank Wallet Kakao or Kakao Pay, it's based on the existing Kakao customers, leading to more credit card transaction volume. So we are trying to come up with measures, and we are also looking into how to make the security tighter. I believe that in the short term, we will not have a big impact, but we need to follow the changes of the customers, of the markets. And smartphones, after they were launched in Korea in December of 2009, it has been exerting a great influence on different industries, and we are well aware of this. So Shinhan was the first to have Internet banking, leading to innovative growth. So we will also pay attention to the changes in ICT. Thank you.

[Sung Hun Yu:]

I don't believe that there is a question waiting to be answered. With this, we would like to wrap up our Q3 2014 earnings release. I would like to thank you for your active participation. Thank you.