Shinhan Financial Group Co Ltd (SHG) 2006 Q3 法說會逐字稿

[Interpreted]. Good afternoon, ladies and gentlemen. We will be starting the third quarter earnings conference of Shinhan Financial Group. First, we will ask our President In Ho Lee to greet us and then ask our CFO, Byung-Jae Cho, for a presentation on our third quarter business performance. And then we will receive questions from the audience.

Now I would like to ask our President, In Ho Lee, for his remarks.

[Interpreted]. Good afternoon, ladies and gentlemen. My name is In Ho Lee and I am the President of Shinhan Financial Group. I would like to first of all sincerely thank all of you for attending our webcasting earnings conference despite your busy schedules. Thank you very much, shareholders and analysts for attending the third quarter earnings conference.

First of all, I would like to present the brief highlights of our third quarter performance. In the third quarter of 2006, Shinhan Financial Group recorded a net income of KRW510b for the third quarter alone. And on accumulated basis as of end of September, our net income is at KRW1,582.2b, which is actually a 25% growth year-on-year, compared to the KRW1,265.9b at the end of the last year September.

On the banking side, our accumulated net income was KRW1,420.9b, which is a 24% year-on-year growth. On the non-bank side also, our net income was KRW417.5b, which was 206% year-on-year growth. And this has increased the profit contribution of our non-bank businesses to 23%.

We also have been experiencing fierce competition among banks to grow size. And our loan assets have grown by 10.4% compared to the end of last year. We've already overachieved on our annual asset growth target as of end of September.

Also, excluding credit cards, our banking business net interest margin has only been decreased by 3 bp. It's at 2.38%. And we have been able to achieve stable growth with minimum sacrifice on our margins.

Considering our business performance until the third quarter, I believe that we will be able to achieve both our internal and market expectations in terms of net income and size growth for the entire year.

Dear shareholders, Shinhan Financial Group has been implementing strategic initiatives in order to strengthen our dominance over the market and to continuously raise shareholder value despite the rapid changes in the financial industry and the fierce competition.

As you well know, as of October 9, Shinhan Bank has successfully completed its next generation IT system project. And this was a final completion of the integration of the banking business that has started three years ago with the acquisition of CHB. Through this three-year process, we have been able to complete an upgraded system. In 20 or so areas, we have also been able to integrate our next-generation IT system that would help improve the productivity of Shinhan Bank and also give it a more stronger competitiveness and differentiation.

Also the LG Card acquisition that is currently underway will contribute in terms of diversifying the Financial Group's profit source, also raising the competitiveness of the non-banking business and also expand the customer base and maximize the value of our existing customer base. It is a very critical strategic opportunity.

Detailed due diligence is currently underway. We are expecting to sign the final contract during December and also complete the stock acquisition as well as the process of bringing LG Card into a subsidiary until around March of next year.

As you well know, three years ago, Shinhan Financial Group acquired CHB, which gave it the foundation to become a leading financial institution. The acquisition of LG Card will, once again, strengthen our position as a leading financial institution and also provide another opportunity to dramatically enhance our shareholder value.

The competition among banks that had overheated the loan market seems to be now spilling over to the credit card market. There are some concerns in the market about the decreasing market share of LG Card and its worsening profitability. But we believe that LG Card as the number-one card company in Korea, with the differentiating capabilities in marketing, customer management and risk management will be a valuable asset within the overall Shinhan Financial Group umbrella.

Also we would leverage the existing channels and customer base of Shinhan Bank and create a synergy in terms of increased accessibility and cost reduction.

Once again, I would like to sincerely thank all of our shareholders both domestic and overseas for your continued trust and support to Shinhan Financial Group. All members of the Shinhan Financial Group will always work as best in order to maximize the long-term value of our shareholders.

Once again, I ask you for your support and advice for the further success of the Company. Thank you.

[Interpreted]. We will now hear the earnings presentation by our CFO, Mr. Cho Byung-Jae.

[Interpreted]. Good afternoon, ladies and gentlemen. My name is Cho Byung-Jae, the CFO of Shinhan Financial Group.

Let me address the earnings highlights and performance of SFG for the third quarter. I will begin with the income statement highlights followed by the balance sheet highlights, asset quality, capital adequacy and key financial ratios. Please refer to the distributed document.

First of all, regarding the Group overall financial highlights, that has been pretty much covered by our CEO, so let us move on to page seven.

On page seven, it states the income statement highlights for the entire Group. As mentioned earlier the net income improved by about 25% year on year for the Group, recording accumulated KRW1,582.2b. And for total operating income for the accumulated up to Q3, was KRW4.125 trillion. And the SG&A has gone up 18.7%.

Now our operating income increased KRW63.9b, which is a 3.2% increase to record KRW2,089.2b. Of course the SG&A increase was due to the integration-related expenses, which was one off. But excluding such integration expenses, actually our overall operating income has improved quite significantly.

When it comes to the non-operating income, it increased about KRW243b. And also the provisioning has come down quite a bit as well. So if you look at the pre-tax earnings, during the third quarter of this year compared to the second quarter, the earnings before tax actually increased.

But when it comes to net income quarter on quarter, we saw a slight reduction. That is because of the deferred taxes from the second quarter that is now reflected. But as you can see the pre-tax earnings has increased quarter on quarter.

Let's go on to the next page, page eight. This is the income statement by subsidiaries. Per subsidiary, it states the contribution includes in the overall net income of the Group. If you look at the bottom line on a consolidated basis, the net income for all the subsidiaries was KRW1.85 trillion.

Now for the bank it was KRW1.428 trillion. And non-bank was 22.7%, which is quite high, to record about KRW424.6b. As you can see most notably, the Good Morning Shinhan Securities, life insurance and card and capital, they all have increased.

And if you look at the others column, Shinhan Bank has a minus factor of about KRW131.3b. Some of the treasury shares have been offloaded and the goodwill amortization has been a decreasing factor. And also for non-bank we had some amortization factors -- goodwill amortization factor as well.

On the next slide, per subsidiary, this is a comparison. And if you look at the second from the bottom line, this is a simple addition of net income per -- for all the subsidiaries, which was an increase by KRW554.7b increase.

From the bank it was an increase of KRW273.6b. From the non-bank it was KRW280.9b increase year on year. And, most notably, GMS Securities, Shinhan Life, Shinhan Card and Shinhan Capital they all increased. Of course, we had also a new -- some new assets that had been put into the subsidiaries. But organic growth contributed quite a bit.

From page 10, I would now like to talk about the main subsidiary, Shinhan Bank on a proforma basis in more detail. The overall proforma profitability for Shinhan Bank was as follows. The net income for the third quarter or the accumulated total was KRW1.377 trillion which was a 43.6% increase year on year. And on the very top line, the total operating income has increased to 10.8%. And interest portion and the non-interest portion each increased. And SG&A has also increased.

But however the profit side has surpassed the speed of growth compared to the expenses. And as with the rest of the Group, we also have had to consider the integration-related expenses for its SG&A. So if we exclude that factor, it would then increase by about 11%. If you look at the non-operating income and also the loan loss provisioning, as you can see, they all saw an improvement, leading to increased net income.

One more thing, regarding the loan loss provisioning, we had some plus/minus items, especially extraordinary items. Actually these things are positive to our net bottom line. And the minus KRW297.9b reduction from the loan loss provisioning was because of the improvement of the assets from the Chohung Bank side.

Let's move on to page 11. On this page it is showing the interest income and NIM of Shinhan Bank. As you can see on the table, the interest income compared to -- year on year it was an increase by 9.1%. Compared to the increase of interest revenue, the interest expense didn't grow as much. So, overall, the interest income is increased by KRW209.1b.

And also regarding NIM, if you look at the accumulated NIM, which is shown in red line, this year, accumulated to Q3, was 2.38, which was a reduction by 4 bps. However, if you look at -- if you compare year to date, it was a reduction by 3 bps from 2.42 down 2.38. And compared to the same period last year, it was an 8 bps reduction. But during Q3, considering the loan increased by 6.7% during the quarter, compared to our competitors I believe that we defended our margin quite successfully.

Let us move on to page 12. This is showing the non-interest income of Shinhan Bank. Overall it was an increase by about KRW106.4b increase, reaching KRW707.7b. And from trust side, we recorded -- or it increased by KRW0.2b. And for FX commission and others, it was KRW70.7b. For FX, we reduced the bond-related losses quite a bit. Up to Q3 of this year, we almost realized new losses from that area. And also we had an inclusion of dividend from [NPL], so that has contributed as well.

Let's move on to page 13. This is showing the SG&A expenses for Shinhan Bank. Compared to the previous year same period, it was an increase by KRW250.8b. That includes the special bonuses for Chohung Bank that added to some increased portion. That's most of it. It includes the labor costs and administrative expenses and depreciation and amortization. All reflect such special bonuses for Chohung Bank employees respectively.

And as part of the integration project, we had to deal with branch increase or some increase of labor as well, so that is included in there as well. But it's all part of integration. And also we added the performance-based pay portion as well. So that has added a little bit. But in the future, we will further increase efficiency through such factors, so that is a long-term positive factor.

Cost/income ratio of Q3 was 47.1%. Last quarter was 46.5% which was a slight increase. But up to the year end, our aim is to maintain up to 49.5% or less than 50%.

So that -- let us move on to the next section on balance sheet highlights. Please refer to page 15. If you look at the group-wide asset growth, if you look at the bottom line in the middle column, KRW217 trillion asset total is stated there, of which Bank took up KRW183 trillion and non-bank KRW32.7 trillion. So the non-bank portion is 15% currently.

At the time of establishing the holding company, back then we only had 5% share coming from the non-bank subsidiaries. But, as you can see, that 5% portion has increased to 15%.

On page 16, you may find the consolidated balance sheet. Respectively, they are each KRW180 trillion for total asset and total liabilities. So year to date there was an increase for asset by KRW19.8 trillion.

As you know the loans in Won and foreign currency and securities have all increased by about KRW13 trillion. And also on the liability side, we have the deposits in Won and foreign currency and debentures, taking it to about KRW12 trillion.

So that was an increase in shareholders' equity by KRW767.9b year to date. We had to first of all redeem preferred shares in the amount of KRW700b this year. Excluding that extraordinary factor, that increased portion compared to the end of last year was KRW767.9b increase.

On page 17, you may find loans of Shinhan Bank. On the very bottom line it is showing the total loans. As you can see with an increase year on year by 10.4% or KRW8.7 trillion, of which loans in Won increased to KRW6.1 trillion. And loans in foreign currency increased by KRW2.6b, of which KRW3.5 trillion increase came from mortgage, which is a 14.2% increase.

If you compare the past three years, it was CAGR of 15% gradually. So I believe that 14.2% increase is not at all an excessive growth rate.

Coming -- looking at the corporate side, we saw an increase of KRW2.1 trillion coming from SME. On the bottom graph, as you can see the retail loans quarter to quarter is steadily increasing. On the right-hand side it is the corporate loans in Won and in foreign currency as well.

During the first quarter it saw an increase of 1.3%. And we saw almost no increase during the second quarter. During the third quarter, it was, quarter to quarter, 8.6% growth. But on an accumulated portion it was 9.9% growth. So during the first half it was an increase by 4%. But year to date the loan increase of 6.4% has taken place.

On the next page, page 18, please refer to the deposit and finance debentures. Overall, year to date, that was an increase by KRW2.8 trillion, of which about close to KRW1 trillion increase has taken place for low cost deposits. And also debentures in Won has increased by KRW2.4 trillion. Loans in Won and also KRW2.4 trillion from debentures are supporting the other side of the balance sheet.

And we now move on to the managed assets at Shinhan Card. Year to date the managed asset reduced by KRW345.4b, which was 8.2% decrease. It was partly because of a KRW280b reduction coming from the corporate purchase cards. It was mostly converged to other types of purchase-related loans at the banks. And also regarding re-aged loans, structurally it is being reduced as well.

But during the quarter, if you look at the overall revenue, the overall long-term credit purchases, as you can see, has grown quarter to quarter by 4.1%. And I believe that we are on a normal trend. Again, cash service and the installment type of credit purchase is reducing in proportion.

Let me now move on to asset quality. Now we're on page 21. First is the asset quality of the entire financial Group. Substandard and below increased by KRW188.7b year to date. And we are at an NPL ratio of 1.15%, which is a 3 bp increase year to date. However, as of end of June, which was 1.28, that is a 13 bp improvement.

I think we mentioned this at the previous quarter's earnings conference that a large corporate loan -- one specific large corporate loan went under court receivership, which had this impact. I think that is going to be improving. Our coverage ratio for NPL is 142.3%.

On page 22, which is of the asset quality of Shinhan Bank. Shinhan Bank substandard and below ratio is at 1.01%. Very stable. And the NPL coverage ratio is 140% ranges. And the delinquency ratio is at 1.02% for our total loans. So it is in the very low 1% range maintained stably.

If you look at the loans there is a slight increase in, for example, corporate loans that's increasing. But there is a larger volatility there because mainly there is a large portion of credit loans. But this is within the credit control ranges that are specified according to our credit management policy.

Now we have the asset quality of Shinhan Card. And you can look at the substandard and below ratio. On the right there is the June substandard and low -- below ratio, which was 5.99. It's now down to 4.7. It's 1.3 percentage point decrease. This is related with CHB Card being merged on to Shinhan Card. In that merger process we had enforced a stronger asset qualification standard for CHB Card assets. But that is also being gradually integrated. And we have a coverage ratio of 128%, which is also an improvement.

If you look at the delinquencies, we have actually a 10 bp increase on the delinquency ratio. But this is within the manageable range. And we believe that it will be brought down to 3% before the fourth quarter. And we will bring that delinquency ratio which is [one day and above], within 5% before the end of the year.

And then we have the loan loss provisions and the write offs. Provisioning overall during the third quarter for both Shinhan Bank and Shinhan Card, there was a KRW40.6b of provisioning. Shinhan Bank provisioned KRW38.5. If we divide that actually there was a reversal of provisioning of KRW15.8b on the retail side.

There was a temporary improvement based on expected loss. There are some improvements on the assets that we manage on an EL or expected loss basis that were reversed. But on a recurring basis on the third quarter, I think on a recurring basis our provisioning expense would have been KRW12b.

Shinhan Card had a provisioning expense of KRW2.1b in the third quarter. But if you look at the second quarter there were some card loans that required about a KRW54b of additional provisioning during the second quarter. But we did not need that additional provisioning in the third quarter. And that is why card had only KRW2.1b to provision. Write offs in total during the third quarter was KRW93.7b.

Now we will look at the capital adequacy ratio, which is on page 26. First, for the financial group, the required capital ratio is at 133.6%. We have been maintaining the 130% range. Shinhan Bank's BIS ratio is 11.6%. Our Tier 1 is at 8%.

And then the key financial ratios, which is on page 28. At the Shinhan Financial Group level our ROA is at 1.26%, ROE 20.88%. And BVPS is at KRW26,309. EPS at KRW5,107. Cost/income ratio of the Group is 49.4%. But the 46.6% is when we exclude the effects of the goodwill amortization.

Our KGAAP will be changed to IFRS standards. And according to the IFRS the amortization scale could drastically be reduced, or we may not need to have any additional amortization of our goodwill. And so once the KGAAP is revised, the 46.6 [lower] cost income ratio would be more relevant.

And at Shinhan Bank ROA was 1.29%, ROE was 21.68%. Our loan to deposit has been quickly approaching the 100%. And we have closed the third quarter with 103.2%. There was a cost/income ratio of 47.1, which includes the various expenses due to the integration.

And then we have, on page 30, the investment securities, which has a valuation gain of KRW1.9 trillion. But this is a very conservative valuation. Based on our market valuation, it would be far exceeding KRW2 trillion in terms of a valuation gain on our investment securities. This KRW1.9 trillion, is for your reference. It's also a conservative valuation.

And that completes the presentation of our third-quarter performance. Thank you.

[Interpreted]. We will now take the questions from the participants.

[OPERATOR INSTRUCTIONS]. For those people asking questions in English we will provide consecutive interpretation. So those of you asking questions in English I would like to ask your patience while your question is translated into Korean at the site. There is a slight time lag before you actually get to ask the question after pressing the button, so please bear with us. Currently there is no participant waiting with a question. So we will be waiting a little longer to take more questions.

The first question is from Deutsche Securities, Mr. [Scott Lee]. Please go ahead, sir.

[Interpreted]. My name is Scott from Deutsche Securities. My first question is the following. As you entered into Q3, I believe that you -- I am wondering -- I believe that you've [recovered] part of loan growth momentum as far as the market share lost earlier.

Nevertheless I see that you are safely defending your NIM. So I'm wondering how that was possible. Especially when comparing to your peers in the industry, your margin was quite sound. So can you share with us how you were able to achieve that? That is my first question.

And secondly, the delinquency ratio even at a small rate it seems to be either flat or increasing slightly. So I'm wondering whether you ended up taking on more risks so that you were able to get more [rate] margin for the net-in side. Is that right, do you think?

And also regarding the one-off interest income or interest expense items, if there are any, could you share them with us.

And also on page nine of your presentation material it shows the profit per subsidiary during Q3. It seems the credit card by net income has decreased quarter on quarter quite a bit. I understand why that was so for the securities subsidiary. But why, quarter on quarter, such big decrease of 35.3% has taken place for card side, I am wondering?

And also you said there were a lot of integration-related expenses that are reflected in Q3 so that your expense ratio increased. I'm wondering in the next quarter do you also anticipate the same situation?

[Interpreted]. Let me first answer your first question. During Q3 we increased the market share and we were still able to defend our margin. And you asked why that was possible. The way we look at it, one of the big factors for such positive results was number one, the competition in Q3 was easing slightly.

I believe that domestic banks in Korea have entered into too much of a fierce competition during the first half. And they all, I am sure, realized that this could not be sustainable. So I believe that all parties refrained. So in this easing competitive landscape we unleashed our competitive edge to the maximum. And we were able to achieve those figures.

Also in terms of the margin, in terms of the deposit and loan side I believe that we were quite selective. For instance in deposits -- on deposit side we didn't offer any special rates particularly. Of course we had some internal support rate system. But we only applied such low rates to sound companies only -- large corporations only. And at the time of maturity, we selectively extended certain loans also. So I believe that our strategy was quite effective so that we were able to defend our margin.

Regarding your question about the slight increase of delinquency rate. And you asked whether we took on more risks in our new assets. And you asked whether that was the reason for our increased margins.

Regarding the SME loans during Q3, we increased that asset size. But if you look at the details of the SME loan increase, overall the loans in Won increased by KRW2.2 trillion, of which SOHO took up about KRW1 trillion. And while we increased the SOHO-related loans the so-called [Grade 6] customers, we reduced the asset size by KRW400b, while we increased the high-grade customers portion by KRW1.2 billion -- trillion that is.

That is why we were able to still maintain healthy asset growth as was during the first half, while we maintained also the risk quite tightly as well. So the way we look at it, the margin defense was not due to higher risk taking. But rather I believe that we were able to obtain healthy margins based on appropriate level of risk taking. So we don't see any problems with that portion.

Regarding interest income or expenses, you asked whether there were some one-off factors. Regarding the interest side, during Q3, [NPL ABS] receivables were actually brought in in the amount of about KRW2b -- KRW2.5b that is. Or in the amount of KRW25 billion, excuse me.

And during Q3, compared to Q2, the net -- you asked about the reduction of the net income. Deferred corporate tax from Q2 was about KRW82b that was reflected already in Q2. So that was an extraordinary factor, whereas in Q3, we recorded about KRW67b without such extraordinary factors. So these are the recurring levels that you could assume.

And also during Q3, we had to reflect additional integration-related expenses. During Q2 we had special bonuses to CHB employees. And during Q3 we had to deal with general recurring depreciation and amortization, which will persist until the rest of the year.

But during the Q2 period we saw [an especial] surge. So if you look at the cost/income ratio the Q2 point was quite high, which still had a spillover impact on Q3. And I believe there will be some residual impact on Q4 as well. I hope that answered your question.

[Interpreted]. Let me also elaborate on the delinquency rate. My name is Lee Dong Hwan from the IR team. If you look at page 22, as mentioned by Scott earlier, the corporate delinquency ratio is slightly edging up. Year to date, I believe that 40 bps increase in delinquency ratio has taken place.

If you refer to page 24, please refer to the write off about KRW200b that has taken place last year. And this year, on the corporate side, it has been reduced down to KRW62b. So the increase in the delinquency ratio is because of the reduction of the write-off portion. So it seems that way. But when it comes to the quality of the actual operation or the asset quality, those [items] have not been deteriorated as all. So it was simply because of those factors.

We'll take the next question from Shinhan Securities, Mr. Lee. Mr. Lee please.

[Interpreted]. Thank you very much for the wonderful performance. And I have two questions. The first is that, quarter on quarter, the loan growth was significant. And then what will be your policy next year? How should we interpret that for next year's policies on your loan growth?

Relatively speaking, other banks are -- I think some banks are [presenting] a more conservative loan growth next year. Others are more aggressive. Considering that you have completed your integration, would you be more aggressive in the loan market next year?

The second question is about the cost/income ratio, which is 47.1. You said that it could go up to 49.5 by the end of this year. If you -- considering your strengthening of sales capability, I guess it could only be natural that it continues to go up even until next year, so what should we expect in terms of your cost/income ratio next year? And then what will be the level that you will see intending to control it at on the long term?

[Interpreted]. As you know, next year the economic growth rate is expected to be a bit -- is expected to slow down, starting from the second half of this year. Probably it will be in the lower 4% in terms of GDP growth rate next year. And because the banking industry is, to a certain extent, approaching the limits of its organic growth, there will also probably next year very fiercely competitive in the banking industry and financial services. Net interest margin or ROE, it will not be an easy year to maintain our profitability in terms of NIM or ROE.

But still, next year, Shinhan Financial Group will -- well, this year we have grown at about 10.4% by September. By year end of this year, we are expecting to have an asset growth of around 12%. Next year, at least, if the nominal economic growth rate is 7%, also, considering that this year we spent much of our resources integrating and upgrading our IT systems, next year, with a nominal economic growth rate of 7%, our loan growth will be around 10%, even though our business plans for next year are still being drawn up.

Our household side until now had grown at about an annual 14%. And so household assets would grow a bit more than 10%. Corporate would grow at around 7 to 8 to average out with an overall banking asset growth of around 10% last year and this year.

Next year we will continue to be focused more on stable growth, that is growth while maintaining our margins, rather than aggressively growing. Next year we'll also, at the Financial Group level, focus on raising the capabilities of our non-banking businesses, so that our non-banking businesses grow into a profit source and complement our bank business.

Also, with the acquisition of LG Card, next year would be the year to maximize and focus on creating synergy with our new member of LG Card. I think that would also be a great opportunity to raise the profit contribution of our non-banking businesses.

And the second question was the cost/income ratio? Shinhan Bank, until the end of this year, is expected to have a cost/income ratio of 49.5. As of end of third quarter, we had a cost/income ratio of 47.1. And 47.1% includes a large share of the integration related expenses. But the bonus itself was KRW90.7b, which was paid out as of April 1, which will not happen next year. And so if you take out that point, it's at 44.2% cost/income ratio as of September, if we exclude that special bonus for the integration.

Of course, next year we'll need to invest or spend in raising our sales capabilities. But I think we'll be able to more than cover the investment or expenses that are necessary for sales capabilities within this special bonus amount we paid out this year.

Actually, next year we are planning a major initiative to raise the efficiency of our operation. And so, overall, next year's cost/income ratio, actually it could be lower than this year. We think that this year would be the peak of our cost/income ratio. And we will control our cost/income ratio according to that target.

[Interpreted]. The next question is from Nomura Securities, Mr. Kim Jin San. Please go ahead, sir.

[Interpreted]. Thank you very much for the presentation. First of all, of the things you mentioned earlier, if you talk about KRW25b receivables on NPLs that actually came in which added to the overall income category. So as margin decreased slightly and assets increased, so I believe that the NIM was rather sound. So looking into next quarter, in your opinion, on a quarter on quarter, how do you anticipate the direction of the margin next year? What will be your plans and what is your expectation?

And because the loan loss was quite good during -- the loan growth was quite good during Q3, then during Q4, can I safely assume that your net interest income will increase.

And also, regarding monthly margin trend, even if it's just a rough figure, could you share with us a broad direction?

And also regarding LG Card acquisition, would that impact the dividend policy for this year? What is your dividend policy?

And lastly, in the case of Hana and [Uri] they are growing the loans quite aggressively and they are fueling the competition on rates. And next year both of these competitors are still looking at about average 10% growth for loans next year. And also for KB, although they slowed down slightly compared to this year, next year I believe they will be much more aggressive.

And as mentioned by the CEO so far, and you plan to still defend the margin and still grow by 10%. And I believe that that will not be easy since everybody wants to grow. So from Shinhan Financial Group's perspective, what is the outlook for NIM reduction next year and how low can you actually accept it, or are you going to go with flat rate? So what is your basic direction?

[Interpreted]. Your first question was the margin improvement because of the NPL receivables actually being recovered. And the way we look at it, on the average what was reduced could impact up to 4 -- Q4, leading to a possible 1 or 2bps reduction, some people think.

But the way we look at it, during Q4, we have some annual interest income that comes in during Q4 and also typically the interest income is closed in terms of the books because that's the end of the year. So people tend to work harder. And also the market rates are on a slight increasing trend. So that will have an impact as well.

So, overall, the sense I get is this. NIM will be either flat or it will slightly decrease in the fourth quarter. But basically we are confident that we could defend it nevertheless.

And next year we will pursue growth and, at the same time, we will definitely try to defend our margin. And you asked how we could still protect the margin and grow by 10%. As we mentioned earlier, we will have to deal appropriately to the market changes with appropriate strategies.

And the way we look at it, even if we go for aggressive growth strategy, as mentioned earlier, the loans to deposit ratio, if it is too high, then it is not sustainable. So if we use other funding sources then the funding costs will be too high and the margin contraction will be too rapid. So I don't think that other domestic banks in Korea will pursue as fierce a competition as we saw during the first half of this year.

So, compared to the first half of this year, going into next year, I believe that we will be able to maintain or defend our margin more easily. Let me elaborate.

Probably going into next year, I believe that the margin in the banking sector, as with other matured markets, will have to shrink. It is inevitable. Therefore we need to [have a] strategy of balancing the profit contribution between the banks and the non-bank subsidiaries. So we could possible overcome such challenges through those efforts.

10% asset growth and possible reduction of the margin, I believe, can be compensated since, after the LG Card acquisition, the Group-wide NIM will be around 3% level. So what is reduced from the banking side can be compensated by the non-bank side. So I believe that that strategy will be effective going forward.

And also regarding the dividend policy direction change, possibly because of the LG card acquisition, as you are well aware, after establishing the holding company, we have maintained a very consistent payout policy for the past five years, including M&As. We did our best to maximize the shareholder value. We continue to identify growth engines and have done our best to maximize the corporate value.

As mentioned earlier, through the acquisitions of [CHP] and LG Card, we issued certain preferred shares. So about 30% of the net income had to be used to redeem those preferred shares. And you are well aware of the fact that that partially is inhibiting our ability to give out more dividends. Nevertheless, we are doing our best to maximize the shareholder value.

And regarding next year's prospects, we will have to see the book closing at the end of this year. But the pay out for next year, I believe, should be at least the level that we saw last year. So that is my thought. I hope that answers your question.

[Interpreted]. We'll take the next question. The next question is from Goldman Sachs, Mr. Philippa Rogers. Please go ahead, sir.

Hi. Yes. Good afternoon. I have a question. You prefaced your statements this afternoon by mentioning the increasing credit card competition. Could you comment on where you're seeing that, either in the margin side or in the marketing cost and what you expect in terms of the competitive environment over the next 12 months on credit cards? Thank you.

[Interpreted]. Credit card industry, recently you've seen our acquisition of LG Card. And also with KB of hiring -- [KEB] it seems the credit card industry now has large players and so the standalone borderlines or other bank related or BC card businesses, bank card businesses are now trying to catch up with the larger players with very aggressive marketing. And so we believe that if we combine Shinhan Card and LG Card, we would have about 26.4% of market share currently on pro forma basis.

And even though there are various competitive factors outside, LG Card is the number-one credit card company in Korea. It holds, therefore, the capabilities in terms of acquiring new card holders as well as retaining its existing cardholders. We are very fortunate to have that company as a member.

And once LG Card becomes a member of Shinhan Group, we will be able to leverage the Shinhan Bank channels, the resources, the access of the Financial Group, but also leverage cross-selling opportunities to further sustain and reinforce its position as the leading credit card company in Korea.

[Interpreted]. We will now move on to the next question. The next question is from [SH Asset Management], [Mr. Chong]. Please go ahead sir.

[Interpreted]. Good afternoon, I am from SH Asset Management. I also have an LG Card related question. I believe that everybody on the session is on the synergies that are possible between LG Card and Shinhan Financial Group. So we -- I understand it, if you look at the LG Card settlement account, that KB and NHCF together take up about 50% and Uri takes up certain settlement account as well.

So, relatively speaking, Shinhan's share in the settlement account seems to be smaller for LG Card, credit card holder. So bringing all those settling accounts that currently reside in other competing banks, if they are all brought into Shinhan Financial Group for credit card holders, then that would have an impact. And to do that some additional expenses might take place. And I'm wondering whether that involves some strategic changes going forward.

Secondly, KB currently is pursuing a very aggressive marketing. For instance [big] TV promotions and advertisements are being launched full fledged. So, going into next year, how do you foresee the marketing expense prospects for Shinhan card into next year? Will that increase the marketing expenses?

And thirdly, could you share with us the [larger story] of LG Card acquisition in the future?

[Interpreted]. First of all, let me answer the milestone question. On August 16 we were selected as a preferred bidder. Originally we were supposed to begin the detailed due diligence study from September 1, but it was delayed slightly. So we began from September 14. We are in the middle of the detailed due diligence. We are near completion of that due diligence. And the final contract signing we expect to be around the beginning of December.

We will have to receive the preliminary approval from [SSS]. We have to go through the open bid. And settlement will be deferred to maybe February or March of next year. So in March next year we will receive the full approval from SSS so that we could include LG Card as our full subsidiary. So that's the timetable going forward.

Also regarding LG Card, related acquisitions and the ensuing synergy effect was your question earlier. First of all, we have non-bank subsidiaries. And I believe that LG Card will bring up the financial contribution within the financial group will be -- and it will be quite significant.

LG Card currently has over 10m cardholders. And this customer base can be linked to the Shinhan Financial Group existing customers. We could create card selling opportunity. Or we have 15m customer base within the Financial Group alone and that customer group can be leveraged in the marketing efforts of LG Card as well. And we could always utilize the bank-related existing channels as well. So we could create enormous synergy effect.

And, as mentioned by yourself, the LG Card credit card holders have individual bank accounts through which they settle the credit card statements, of which we only have about 10% share. So if we could secure more of those settlement accounts, or the settlement accounts for the merchants, I believe that could also lead to significant synergy in terms of expenses.

By sharing channels together or call centers or collection departments, activities can be integrated and consolidated, which could further reduce expense factors. And also we could even share the IT system. Then using the bank channels we could offer various additional services. So considering those factors, not only the financial synergy impact, but other strategic and non-financial values can be enormous. So that is what we expect.

You also asked a second question regarding KB and how other banks are strengthening the credit card marketing, and how our plans are going forward. Once LG Card is acquired, because we are operating under the Shinhan Financial Group holding company structure, I believe that we always have some room to leverage the Shinhan Bank's channels. So in terms of marketing we are not at all behind other peers.

For your information, during Q3, LG Card earnings results were disclosed. During Q3 this year, year on year, 7% asset growth has taken place for LG Card. And currently, even within LG Card, I believe that they are fully realizing their growth strategy. So we do not harbor any such concern regarding the marketing capabilities in the future.

[Interpreted]. We will take the next question, which is from Shinhan Securities. Mr. Lee has a follow up question. Please, sir.

[Interpreted]. I have two simple questions. On page 13, non-interest income, there is a fund sales fee income, roughly which had a decrease on a quarter to quarter. Is that because of a decrease in the fund balance or is it because of a change in the mix of the fund sales? I think other banks have also seen a decrease quarter on quarter in terms of funds, or investment product sales commissions. What is the reason for that?

For LG Card acquisition the second point is that yes, on a long term, it is a plus, but then that will bring on various depreciation, amortization and the equity method valuation, loss or gain. So, on a short-term basis, what would be the bottom-line impact because of the LG Card acquisition, looking into next year?

[Interpreted]. Related with the savings type fund sales fee, income decreasing, that is something that is happening with other banks as well. It's not because of the fee rates being decreased. But in terms of the sales volume, I think there is overall decrease in that savings type fund sales. Especially during the third quarter, as you know the stock market performance has been a bit sluggish compared to the first half of this year. That will be another factor. The other is I think there is a decrease of overseas fund demand during the third quarter. That also was one of the factors behind the fee income decrease.

And LG Card, if we bring that on as a subsidiary on March, LG Card 2007 profit targets, how that [inaudible] would have some amount of an impact, but we currently think that because LG Card will be reporting around KRW1.2 trillion in net income this year, it closed the third quarter with around KRW940b, and so next year, we're seeing next year as a KRW99b to KRW1 trillion year for LG Card as well.

We need to amortize about KRW40 -- about KRW450b every year for goodwill. And then we would have to pay about KRW400b for the funding costs related with that acquisition. Still we would have about a KRW50 to KRW100b benefit or a plus on our bottom line. Then, of course, we have some options of when to reflect these expenses. But KRW220b for the dividend payments is something that we could do after we record the net income. And so, on the P&L, in 2007 we would have a contribution of KRW250 to KRW300b from LG Card.

And the fund sales fee, actually in addition to the decrease in the actual sales volume, also we had a change of strategy from a lump sum fund to a savings type fund, which means that the fee income is now approved on a more dispersed time schedule. That was another factor why we saw a quarter-on-quarter decrease.

We have no other questions on queue?

[Interpreted]. Then this concludes the earnings conference call for Shinhan Financial Group. I would like to thank all the participants for being with us despite your busy schedule. Thank you very much.

Portions of this transcript that are noted “interpreted” were interpreted on the conference call by an Interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.