Shinhan Financial Group Co Ltd (SHG) 2006 Q2 法說會逐字稿

[translated] Good afternoon ladies and gentlemen, my name is Dong Hwan Lee in charge of Investor Relations at Shinhan Financial Group. I welcome all of you to the first half earnings conference call.

Today's conference call first of all will start with our CFO Byung Jae Cho's presentation of the first half performance and then receive the questions from the attending audience. For your reference the performance that was released as of around 3 pm has the Shinhan Bank performance as of the [inaudible] of Chohung and Shinhan Bank. Also we have assumed the performance based on assumptions that the Chohung Card has been spun-off and merged into Shinhan Card.

With that note we will go into the presentation by our CFO, Byung Jae Cho.

[translated] Good afternoon ladies and gentlemen. My name is Byung Jae Cho, I'm the CFO of Shinhan Financial Group. I will be introducing to you the first half performance of Shinhan Financial Group. As you can see on the highlight page I would like to briefly mention our performance by jumping to page 7.

Page 7 is a summary of the income of the Financial Group as a total. On the bottom row the net income of the Group in the first half was 1,072.1 billion won which is a 24.9% growth year-on year. The first -- second quarter performance -- the second quarter net income was 595.7 billion. Our operating income increased and despite the increases on our SG&A our non-operating income increased and our provisioning expenses have decreased significantly as well. The details will be explained later on in the presentation.

Next on page 8. This breaks down the income situation of each of our subsidiaries. For each of our subsidiaries the net income is first of all written on the first column. And then we have the adjustments that are made during the consolidation. Shinhan Bank had a goodwill adjustment of 81.1 billion won. This is related with the gains on the sales of treasury stock of Shinhan Bank, also goodwill amortization and others. Overall the adjustments during the -- in the consolidation are -- was minus 81.1 billion at Shinhan Bank.

Good Morning Shinhan Securities, Shinhan Life Insurance, Shinhan Card are -- these adjustments in the consolidation process are either goodwill amortization or gains on selling of treasury stock. And after we take out these adjustments, that's the column number 4, we have the contributions in terms of the consolidated income statement. There was also expense at the Financial Group level of 37.9 billion won.

On the following page, page 9, we have the income compared year-on-year and quarter-on-quarter for each of our subsidiaries. On page 9 we also divide the businesses into Bank and Non-Bank businesses. The performance share of the Non-Bank businesses have increased. As you can see most of the Non-Bank businesses have recorded significant improvements in performance year-on-year. What I would like to highlight on this table is that on the last column, fiscal year 2005, the Non-Bank income was 900 -- 194.8 billion. This year however in the first half only the Non-Bank had an income of 277.3 which means that the Non-Bank businesses are improving in their performance and also contributing a larger share in the Group's consolidated income.

On page 10 we look at Shinhan Bank in more detail. The purpose of -- because this is a -- the purpose is to compare -- on page 10 we have a pro-forma based income statement. There was a net income growth of 35.8% year-on-year which is in line with the Group's consolidated income growth.

Total operating income increased and despite the SG&A expense increase of around 20% our operating income has increased and also pre-provisioning income has improved greatly because of the [Autung] Bank's remarkable asset management and [soundness]. And that is why our net income year-on-year has increased quite significantly; the details will be explained later on. But the non-operating income increased by 207.1 billion won year-on-year. One factor would be the gains on selling of Hynix, also the reversal of provisioning related with the Hyundai Construction. And also the gains by selling the Shinhan Bank's holdings of Shinhan Financial Group shares.

Next page please. This shows the NIM and interest income of Shinhan Bank. Interest income increased by 151.7 billion won year-on-year. And this is because the margins on the loans have improved. Interest rates have also increased and the loan assets have also increased by around 6 trillion won. On the other hand the interest expense -- the margins have grown relatively less than the interest income margin.

And then on the bottom of the page there is the net interest margin. According to the FSS reporting basis in the first quarter, which will be the second column from the right, the net NIM was 2.81. The second quarter of 2006 was a cumulative basis 2.61 which is a 20bp decrease. This is because the credit card business, the Chohung Card was spun-off and merged with Shinhan Card. And because the card business was separated from the Bank business, that caused a 20bp decrease in our NIM on an FSS reporting basis. If we isolate that factor our NIM overall was stable over the first and second quarters because the net interest margin on the second half which excludes the credit card business and the extraordinary factors.

If we compare the end of 2005 with first quarter and second quarter of 2006 our NIM has been maintained quite stably over that period of time. In the first quarter there was recovery of interest from Inchon Refinery, if we exclude that extraordinary factor and also exclude the credit card business and its impact on our margin. You can see that the actual net interest margin of the Bank business itself has been maintained quite stably over the period.

On page 12 we look at the non-interest income. There was an increase of 87.4 billion. Fee and commissions have increased by 30 billion and trust fees have decreased by 1. If you look at the fee and commissions, on the Fund there was an increase of 48 billion won. On the others there was an NPL dividend income of 64 billion won and that was to be the meter item under others.

Next page please which looks at the SG&A expense of Shinhan Bank. The SG&A, compared to the first half 2005, increased by 19.9% year-on-year. The increases were mostly labor and administrative expenses. Also the administrative expenses increased by 109.9 billion won. The meter factor behind this increase is related with the integration. There was 90.7 billion won of integration related expenses that was executed during the second quarter. Also, as a part of the consolidation and integration strategy, we have opened 30 new branches. Also we have hired about 240 more people to support these new branches and that is a major factor in the administrative expense increase. Then there are other integration related expenses that fall into or fall under the administrative expense. And so most of this increase in administrative expenses are related with the integration, which we believe will provide a foundation for higher productivity and profitability in the future and therefore should be considered to be more as an investment rather than an expense.

And then page 15, if you look at the Group wide asset growth. Please find on the very bottom of the page that the total asset size for SFG stands at 207 trillion Korean won which is an increase by 6.9% year to date. On the very top you will find that the bank asset has increased by 5.7% even after the car business was spun off. Non-Bank has increased by 17.2%.

Please go onto the next page. On this page we are showing the SFG consolidated balance sheet so please refer to the details, but if you look at the loans in won and loans in foreign currency and securities have all increased. Credit card portion has decreased, of course I will elaborate on it on later pages but it has some factor to do with the purchase card portion reduction. And shareholder equity has been reduced by about 137.3 billion. Despite the fact that the net income has increase, we have given out a dividend during the first half and also redemption of preferred shares in the amount of 700 billion has been reflected for -- which will be taking place in the second half, which has had an impact on this. So in the second half we will see an increased asset in general.

On the next page you will find the Shinhan Bank loan growth. As you can see, compared to the end of last year, 4% increase in total loans has taken place. Loans in won have increased by 2.4% year to date.

More detailed items; so the mortgage portion has increased by 9.3% under retail while corporate sectors has seen a reduction by 881.1 billion won in reduction. And the SOHO and the SME's and large corporations have seen reductions. There can be -- a couple of factors, there have been some temporary pay off of outstanding loans by large corporations and also, in terms of SOHO, the former Chohung Bank has had efforts to improve the asset quality and that effort has continued to lead to this type of a situation. And also in the case where the SOHO's future credit outlook is uncertain, some reduction in the outstanding asset has taken place. So if you exclude all that we have seen still a 4% increase, and in the second half we expect to see continuous growth. So against the annual guidance, I believe that asset growth is taking place on track.

So let me go onto the next page, page 18, regarding to total deposits in won for Shinhan Bank, overall about 2 trillion won was reduced. Of that amount, low cost deposit has increased by 220 billion while the demand deposit has decreased quite a bit. But if you look at the total low cost deposit at the end of last year, you will see that the figure, as of the end of 2005, was over-exaggerated because the last day of last year was a holiday. So some fund that had to be taken out was not taken out in that number but in general, we have seen an increase in general.

At the same time other savings, under the installment type of time deposits we have seen some stable effect and other deposits have decreased quite a bit and the CD's decreased quite a bit. However, loan to deposit was 147% during second quarter and 142% during first quarter. So we are managing these portions efficiently.

And you will find on the next page Shinhan Card information. In total the asset side is about 3,882.4 billion, which was a reduction by 338 billion compared to the end of last year and among that 274 billion reduction has taken place on purchase card assets. It says 274 billion reduction there on the table; a lot of that portion has been transferred as the purchase loans under the bank business. So if you exclude that, about 52 billion won worth of receivables have increased, in other words asset has increased by that much. During the first half, the usage volume has increased quite a bit; about 700 billion usage volume has increased compared to the previous year. So in general, the credit card business is under operation in a quite normal fashion.

And on the next page I will talk about the asset quality, please move to page 21. If you look at the Group's asset quality, in the middle portion you will find the substandard and below portion and NPL ratio has increased by 0.17% year to date. The reason is that some reclassification of assets from the previous substandard and below portion to NPL has taken place. As I told you before, about 80 billion won worth of loans under large corporations has been reclassified as substandard and below. And that portion has been reclassified as NPL in some portions but -- so it's just a matter of reclassification but the overall impact on the asset quality is not that big. And also NPL coverage ratio stands at about 140% so it's quite stable.

Please move onto the next page. Regarding Shinhan Bank's asset quality and delinquency ratio, I will elaborate a little more on this page and the following page. NPL coverage ratio is about -- NPL ratio is about 1.09%. Precautionary reduction by 259 billion has been reclassified as substandard and below. HK is the company's name whose loan amount was about 80-some billion Korean won and the company's is currently under court reorganization order. So we have reclassified the previous precautionary loan for that company as the substandard and below loans.

Already back in 2003, at the time of the merger, this problem was known to the two parties and we have been managing this issue together and now that issue is beginning to re-emerge. But in the meantime we have been setting aside provisioning for this matter. So NPL ratio was considered when issuing ABS and so we will be handling this issue with the issuance of the ABS. So that ratio will reduce in the future but for now, the ratio has increased for NPL. And also for delinquency ratio because we added one more company to be included in this segment from the large corporation sector so that seems to be an increase there under delinquency ratio. But again, once this company goes under court receivership officially, then that will be handled.

So going forward, we do not expect this to be a continuing problem and the write off has been reduced quite a bit this quarter. Because of that, the delinquency and also the substandard and below ratio have increased.

On the next page, on page 23, you will find the asset quality of Shinhan card and also the delinquency ratio. NPL ratio portion on card was 5.99% which was an increase by 2.62%, and Chohung card and Shinhan card assets used to have different asset reclassification standards. As Chohung assets became a part of Shinhan card, I believe that Shinhan card have reclassified the Chohung assets in a very strict manner and that's why we have seen an increase in NPL ratio.

And also the re-aged loans from Chohung Bank, if those transferred assets have the qualifications to have the right repayment capabilities then they were able to be re-categorized as the precautionary loans, and they had two conditions for such reclassification. And from the Bank, one of the two such conditions being met was sufficient to be reclassified as the precautionary but from the card business, both criteria had to be met fully. So that's why those loans that could have been classified as precautionary are now classified as substandard and below. So it's a matter of reclassification of existing assets.

Again on the delinquency ratio, again this has to do with redundant counting. Chohung card or Chohung Bank used to have the re-aged loan portion which have been transferred to Shinhan. And also Shinhan card usage amount for those related loans have been more strictly reclassified so that's why we have seen an increased delinquency ratio here as well. So again, going forward, more strict delinquency management and NPL management have begun for the merged two banks. So in the near future, all these differences will be ironed out and there are no significant fundamental impact on the asset quality.

Please find on page 24, we have the loan loss provision and write-off. If you look at the loan loss provisioning on the top table, Shinhan Bank has the total -- subtotal of 174 billion which have been provisioned and Shinhan card 99 billion. So together it's the total of 273.3 billion won in loan loss provisioning.

Per quarter, there have been a couple of extraordinary factors. For instance if you look at the corporate side, there is a minus 89 billion and minus 3.6 billion and that portion is a reversal aspect which has taken place. So per quarter, we have the ordinary income and from the retail side it's about 50 billion and corporate side it's about 30 billion. So it's about the normal ordinary situation for loan loss provisioning for the bank.

And please go to page 26 regarding capital adequacy. First of all for SFG, the required capital adequacy is, as you can see, it's quite healthy at the current ratio. Shinhan Bank has a BIS ratio of 11.8% and for the entire Bank, ROE/ROA figures can be found on page 28. BVPS and EPS compared to the previous year is quite positive and cost income ratio is about 49%, which includes the amortization of the goodwill portion. Under Shinhan Bank again, these figures are quite sound. Loan deposit ratio is about 104.2%; internally we are managing it within 100% ratio. Cost income ratio for that is 46.5%. Until the end of the year, we expect that figure to increase slightly but starting from next year we expect such figures to be more normalized.

On the last page we have the appendix item for your reference. So this concludes the first half 2006 earnings highlights. Thank you very much.

[translated] Now we will take questions through the conference call. [OPERATOR INSTRUCTIONS]. The English questions will be consecutively translated therefore please excuse if there is a delay during which the question in English will be translated into Korean. Now we will take your questions.

Our first question comes from researcher Jae-won Lee of Shinhan Securities. Please go ahead sir.

[translated] Well thank you very much for the wonderful performance. My first question is related with the one-off factors. Could you explain what sort of one-offs there were? I've heard that there were quite a lot. Could you explain us all of the one-offs? And also excluding that, what would be your recurring base performance?

It is also a second related topic but on page 10, your interest income has actually decreased from the first quarter to the second quarter but your asset balance has increased. And so of course, yes the Inchon Refinery was a factor in the first quarter but overall, especially looking at your NIM trend, it really doesn't make a lot of sense. So on a recurring basis, what would have been your interest income? And if it had decreased on a recurring basis, why would it have decreased? And your pre-provision income of 42.4 billion won, what exactly is the detail of that figure?

[translated] Well, first of all, about the one-off factors, if I may go into the detail of that, there were several one-offs on the non-operating side. In the second quarter there was a gain on the sales of the Hynix shares which was 83.9 billion and the reversal on Hyundai Construction which was 83.1 billion. And then Shinhan Bank had a gain by selling its shares of Shinhan Financial Group but that would go under only the Bank and not be consolidated onto the income statement of the Financial Group.

And then on the provisioning, there were some one-offs or special factors in the second quarter. The Inchon Oil -- no that's the first quarter -- and then the expected loss rate -- no that's also a first quarter special factor. There was a reversal of Ssangyong which was around 81 billion and LG Card related; a reversal of 18 billion so these are reversal of provisioning during the second quarter.

[translated] And then other provisioning -- the other provisioning was 42.4 billion that you mentioned. I think you mentioned that it was 42.4 billion of other provisioning.

[translated] Well there was a tax order related matter that we had provisioned for so it's not a reversal but it was provisioning expense of 46.7 billion. And then there's an MSS loan, which required additional provisioning of around 50 billion during the second quarter. Those would be some one-off factors of the second quarter.

And then, I guess this does tie in. In the interest income there were some special factors on that end; during the second quarter the beneficiary certificate interest income was reduced by about minus 7 billion won, but on the other hand during the first quarter the beneficiary certificate interest income recorded about 18 billion plus because of a special factor, and so that would be factored in on a quarter-to-quarter basis. And then there was a recovery of 22.4 billion of interest that was recovered from Inchon Oil, so that's the interest side of the income. So if we consider all of these one-off factors and calculate a recurring base performance, in the -- we would be -- we are estimating a recurring base income of 620 billion won -- roughly around 620 billon won.

But then there's also the deferred corporate tax. And there's also an issue of how to interpret the corporate tax factor when you calculate an assumed recurring base performance. But if we take a very conservative position, a very conservative recurring base estimate would be closer to 450 billion on a very conservative stance. I hope that has answered your question.

During the first half there were some non-recurring factors which we will write up and distribute separately. And we'll take the next question.

[translated] Next question is from Mr. [Jin San Kim] from Nomura Securities. Please go ahead sir.

[translated] Thank you very much for the presentation and your answer. NIM before and after adjustment is shown on page 11. Earlier in your presentation you said that if you exclude the credit card, that's the figure. After adjustment are you excluding only Chohung card portion or are you excluding also the Shinhan card as well?

And secondly, regarding the loans, same as the credit card business, the loan amount, because it's based on the ending balance, you said that it is sub-trading so much, but from an average outstanding balance base during the first quarter and second quarter of this year, what was the outstanding average balance for credit card for first quarter and second quarter? And also the same thing for loans; can you share with us the average balance for first quarter and second quarter for the loans and credit cards?

[translated] First of all if I may share with you the situation with NIM. On page 11 we have the adjustment criteria and this has to do with Shinhan Bank's NIM I would like to remind you, so the credit card portion. Now Chohung card used to be included during the first quarter, but during the second quarter because of the integration, the Chohung card portion has been spun-off, to be included under Shinhan credit card. So here what's remaining is excluding Chohung card portion. So if you look at the adjustment portion there is no element that remains that has to do with credit card business period, because credit card business is only handled now by Shinhan credit card. So Shinhan card used to be separated to begin with, so again I would like to remind you that this is an NIM for Shinhan bank.

And secondly, you asked about the average balance based amount. I'm afraid that I do not have that detailed information right at this moment. And according to a working level staff the credit card asset we do not calculate a separate average balance based figures for credit card business. So we do not have information on the outstanding average balance right now, so I would like to distribute that information on a later occasion.

[translated] As was mentioned we will follow up on that question separately. We'll take the next question which is from [Gean SG], [Mr. Chong].

[translated] Thank you very much for your performance and I have three questions. The first question is related with page 16. Your foreign currency loans have increased by about 1.5 trillion won. With your loan in won being stagnant I guess you're focusing on foreign currency loans, but what is the impact of foreign currency loans on an increase on the NIM? Would it be our foreign currency loan structure more profitable for the bank? Related with that, in the second half what is your strategy on the loan asset?

The second question is about cost; you mentioned that the cost will be more normalized. What would that mean in terms of a cost income ratio?

And then the third question. There was an 18 billion of a reversal related with LG Card. Is that because you reclassified the credit quality or the asset quality? If not, how is that asset classified on your books currently?

[translated] In the second quarter the foreign currency loans have increased because during the first half there was quite a lot of competition among banks related with corporate loans. Actually this increase in foreign currency loans was more strategic from our position because we have two benefits to gain. Number one is that usually a Korean won requires 40bp of contribution to the deposit security fund which is exempt on a foreign currency loan. And therefore when providing the same loan by providing foreign currency loans we can save that much of a contribution to the guaranteed fund.

Also the Korean corporates would also need to buy Korean won and foreign currency swap to cover the exchange risk which we can also add as an additional business, and therefore with that we believe that a foreign currency loan would give us about a 70bp additional profit. Of course we could give a part of that to the customer and the rest will be kept by the bank as an extra margin. So that is the reason why that we have strategically being focusing on foreign currency loans. Also this -- I'm in charge of the financial planning department and we've analyzed the impact the foreign currency loans have on our NIM. And in terms of quarter-on-quarter the foreign currency loans' NIM has improved by about 20bp and has contributed in stabilizing the overall total loan NIM.

And in the second half loan strategy -- well during the first half, household loans have grown by about 7%. And so considering that growth we believe that the second half could also record similar levels of growth in the household sector. The problem is the corporate side. We in the first half focused on increasing foreign currency loans in the first half but that also ties into our ceiling of foreign currency borrowing, so there is a limit to how much foreign currency loans we can increase.

So in the second half when it comes to corporate loans we will focus on increasing Korean won loans to Korean corporates, but as you know that is a business line that has various challenges in terms of margins. And as a quality that's all tied in and so it's difficult for us to tell you here and now what is our growth target in terms of a corporate Korean won loan. Our overall asset growth target for the year is 8%, and so our corporate loans would be in the second half, capped in a certain level to meet that annual target.

And then cost income ratio, yes, this year was a bit special because of the various integration related expenses. The Group cost income ratio at the end of the year is likely to be closer to 50%; the Shinhan Bank cost income ratio will be closer to 45%. There will be a 5 percentage point difference in the cost income ratio of the Group and the Bank because of various reasons. There was a goodwill amortization which contributes to about a 5 percentage point higher cost income ratio at the Financial Group versus the Bank. The cost income ratio of the Financial Group at the end of the second quarter was 49%. Actually if we take out the goodwill amortization it will be closer to 48%.

Next year recurring base cost income ratio, it's not so easy to predict or project now but once again we believe that this year will be the peak in terms of the cost income ratio. Perhaps next year we could expect about a 2 percentage point decrease in our cost income ratio next year.

About the reversal of provisioning for LG Card, it's because they have been reclassified from precautionary to normalized. There was a reclassification of about 70 billion and therefore we had a reversal of provisioning.

[translated] And we'll take the next question from Deutsche Securities, Mr. [Scott Lee].

My name is Scott from Deutsche Securities. Regarding the foreign currency loans, yes, I thank you for your answer, it answered my question anyway. So I don't have any further questions.

[translated] So I assume that you have no further question then?

[translated] The next questioner is from Landmark Asset Management, Mr. [inaudible] Kim.

[translated] Yes, I have two questions. If we look at the income for the Group, we have the loans and NIM and while the NIM looks quite sound and loans have increased, in terms of the interest compared to the previous quarter for the Group it has reduced a little bit. Could you share with us why?

And also regarding the non-interest side, it has reduced quarter-on-quarter as well.

And also regarding the asset quality I understand why on the corporate side but also on the retail side I see an increase of delinquency ratio there as well. What are the reasons for that increase?

[translated] For the interest portion and the non-interest portion and for the Group's income portion, on a quarter-on-quarter basis there has been a slight reduction. I believe that our CFO, Mr. Cho has commented on it already but during first quarter of 2006, the interest portion was about 1.1 trillion which includes Inchon Refinery portion of about 22 billion and beneficiary certificate portion between first quarter and second quarter has reduced by about 22 billion. So altogether we have the non-recurring factors affecting 45 billion. So if we exclude such one-off factors, although it is quite small, it has been actually an improvement.

Income from the non-interest portion, of course there has been some explanation earlier but during first quarter we had some dividend payout on the marketable securities in the amount of 64 billion which came in during the first quarter. And also this had to do with the NPL related dividends but it was not there for the second quarter so that was a difference. So again if you exclude that one-off factor there, it has been actually an improvement by about 40 billion Korean won for the Group in general, an improvement that is.

And there was another question regarding asset quality. Under retail you said that the asset quality is deteriorated but the main factors was that in the second quarter the write-off reduced quite a bit. So year to date that is, there has been quite a bit of reduction. Compared to Q4 last year the Q2 write-off this year has been reduced quite a bit; it's about 2.3 billion Korean won. The reason is that the Chohung Bank's assets as they were merged with Shinhan Bank's assets, things have changed. In the past under Chohung umbrella even if it is doubtful they did early write-offs with 100% provisioning quite a bit, but as it was merged with Shinhan Bank, the policies changed. So estimated loss and 12 months or longer delinquency have to be made before. With FSS approval we could actually write-off such assets so Shinhan Bank followed a more strict principle for write-offs. That's why we reduced the amount of write-offs.

So on the surface and in numbers only it may look like asset quality has deteriorated however in actuality we are allocating 100% necessary provisioning. And when necessary we could always write it off so once write-offs take place actually this figure will reduce quite a bit. So on a quarter-on-quarter basis and even on a year-on-year basis, it will actually come down if you reflect the same type of principles as the past. And also the asset growth speed in the case of general asset has slowed down quite a bit so the denominator reducing has also impacted the delinquency ratio.

[translated] The next question will come from [Mr. Yu] of Media Asset.

[translated] Because there are so many previous questions I will only ask one. In the second half related with your margins, your NIM, what is your prospects or outlook? Some media articles have mentioned that they have used KPIs and it seems that in the second half you are going to be focusing on corporate loan increases. And it seems that foreign currency loans that had contributed to defending your NIM in the first half are at a limit in a certain sense. And so based on your business plan in the second half what would be your suggestion of the NIM? Or what is your prospects? Or could you give us a guidance on your second half NIM?

[translated] Well, if I may respond, I'm the person in charge of the financial planning team and -- well there were some media reports that says that Shinhan Bank have had some sales strategy focusing more on size and volume. That is the newspaper article. But that is because in the first half our corporate loans were a bit sluggish so it won't be such a drastic change, it will be just a response to the relatively sluggish corporate loan in the first half. We do not have any media changes in terms of our policies, however, there are some factors that would squeeze us because we would focus in the corporate loan growth, but actually we are expecting the competition to ease off a bit in the second half.

And about the interest rate. If the interest rate shows a slightly increasing trend then we would able to enjoy the mismatch effect on our NIM. And so in the second half we do not see the possibility of any concerning situation such as a drastic drop in our NIM.

[translated] If I may add to that comment, lending in the first half was stable and we were able to grow in line with our targets. But as you mentioned the Korean won loans, if we just look at the won in Korean -- or loans in Korean won that was a bit sluggish. We made up for that by foreign currency loans. In the second half we do believe that we would need to achieve our targets in Korean won loans, in the second half as well especially if the competition starts to cool off a bit in the second half we should take that as an opportunity to increase our assets. However, we are not willing to sacrifice our margins too much for the sake of loan asset growth. But if the competition in the second half rather grows more fierce, margin squeeze would be something that we would inevitably have to bear if there is fiercer competition because Shinhan Bank cannot consider itself to be immune to an industry-wide situation. But of course we would always have the total profitability in mind when waging any policies.

[translated] The next questioner is from Goldman Sachs Hong Kong, Mr. [Phillipa Roger]. Please go ahead, sir.

Yes good afternoon it's Phillipa from Hong Kong I've got two quick questions for you. The firstly is on credit spread since June. Have you seen any recovery in the credit spread in lending in your portfolios or in the new portfolios?

And secondly, have you seen any deterioration in SME asset quality? I am particularly pointing to the reduction in SME lending in 2Q and is that on any evidence of early deterioration in asset quality? Thank you.

[translated] After June -- I assume that you are talking about after July, that is?

Yes, after the end of June, in July.

[translated] In the month of July and August the credit spread trend, well because we didn't have too much time, I don't think we were able to capture that trend already. But the way we look at it, we don't see any early signs for such credit spread increase significantly. We hope that in the second half that the competition in the market will decrease, however, it is too early for us to tell whether it is leading to credit spread increase.

And secondly, you talked about the SME loan size reduction. The reason for such reduction is not necessarily because we are trying to curtail loan extension to SMEs because of any early warnings, but rather, as we mentioned briefly in the presentation, most of that reduction came from SOHU loans. As you are well aware among the SME sector SOHUs have the highest risk especially the SOHU loan exposure from the former Chohung Bank. Compared to the former Shinhan Bank, SOHU asset quality have some differences there. So partially because of the differing criteria for SOHU loans between Chohung and Shinhan Bank we, on some part, intentionally de-marketed some of those existing loan customers. But I don't think that that means that asset quality's deteriorating however.

Thank you.

[translated] The next question will be from [Mr. Chan] of Bear Stearns. Please go ahead sir.

First of all I wanted to say congratulations [inaudible]. My question is about LG Card. We know from the press that there could be a mandate for general offer for LG Card in any of [inaudible] were trying to get. And I just wanted to get some -- I understand the rules but if you could give us some color [inaudible] if Shinhan Group about a piece of background, LG Card. And will there be any hesitation if there will be a general offer mandate from the regulator if Shinhan wants to push through in the acquisition process? Thank you.

[translated] We regard to LG Card, it's already been confirmed that it will be a tender offer. The potential bidders have already been reported in the press. The potential bidders are to submit their preliminary bid until August 10 according to a tender offer. The message has to be a tender offer now, it's inevitable. And so how keen we are in acquiring I'm not sure how I should answer that question but originally, from the start, as we have always said Shinhan Financial Group is interested in raising the competitiveness of its Non-Bank businesses and also diversifying its business portfolio. Also we are always very much interested in diversifying our customer base and so we do have these objectives in mind when we pursue this deal. And so do we have as much as a strong commitment to this deal as other bidders, but what is important is price and other conditions and terms that we present.

[translated] Thank you.

[translated] The next question is from [Hunguk Investment Securities] Mr. [Chan-Lu Choi], go ahead, sir.

[translated] My name is [Jin-ju Lee] actually, I have a question about margin squeeze you keep mentioning. If you look at the interest rate trend since the end of last year the CD rates have gone up quite a bit. So the market rates however has gone up and come down and come up again, so against that backdrop, I would think that your existing assets would contribute greatly to your margin. So even if you aggressively increase your loan asset I think that in the second half we could expect a lot higher margin improvement. What do you think about that?

[translated] As you are well aware, during the first half the interest rates have gone up twice. According to our internal analysis during the first half as the two interest rate hikes have taken place and we looked at how such interest hikes have impacted the NIM and we think that between 6 to 10bps improvement, most have take place according to our internal analysis. What that means is that if we do not have the fierce competition in the market, in the case of Shinhan Bank that is, I'm sure other banks are similar but in the case of Shinhan, NIM would have increased by about 6 to 10bps without the competition.

As mentioned by Mr. Chan already, fortunately from the Bank's perspective we believe that interest rate upward trend is expected to continue into the second half. If the competition cools down compared to the first half there will definitely be the margin increase. But the problem is that, yes we do expect the competition to ease off a little bit but depending on how easing the competition is the margin increase or squeeze might be impacted accordingly. So we will have to watch carefully.

[translated] We'll take one last question from [Kepler] Securities, Mr. [Kim].

[translated] Yes good afternoon. In the first half your SOHO loans have decreased and you also said that in the second half loans in Korean won would be of a special interest. Will SOHO loans increase according to that plan?

Also, even though LG Card is still open what is your overall dividend policy that you're expecting for this year?

[translated] In the second half our SME loans would need to increase and within the SME business line the SOHO asset loans have decreased by about 320 billion won in the first half. And the increase there would be -- to SOHOs in the real estate industry or retail, those would be the areas that we would selectively try to increase our loans to. Also the audited SMEs, the relatively stronger higher quality SMEs, if they do have a higher demand for loans depending on the market situation, we would, depending on the market situation, try to increase loans to these audited SMEs as well.

Your last question about the shareholders' equity in the first half have decreased because of the 700 billion preferred shares coming due. And that is why it is not in the shareholders' equity yet. But in the second half, if we record net income of 1 trillion or more our shareholders' equity would be recovered and we currently have about 2.4 trillion. And so in 2006 dividend policy-wise, of course the major factor in determining the dividend for 2006 would be what happened to the LG Card deal, whether we succeed or not, that will be a major factor.

But we think that last year we paid out 800 won per share and our current thinking is that we should at least keep the tradition of never lowering our dividend, compared to the previous year, so we would be able to maintain a dividend of 800 won at least per share this year too. But of course, as we mentioned, there are various factors that we need to consider before determining the final amount. What happens to LG Card and our ROE forecast, if we acquire LG Card, we'll have to look at that too before we give you a final decision on the dividend.

So at this point in time, what I can say about the dividend policy is that we would be able to maintain similar levels to last year.

[translated] If there are no further questions we would like to conclude the first half earnings conference for Shinhan Financial Group. Thank you for taking part for such a long time. Thank you very much.