Shinhan Financial Group Co Ltd (SHG) 2006 Q4 法說會逐字稿

[Audio starts in progress]. We will first hear a welcoming comment from our President, In Ho Lee, and then hear a performance presentation by our CFO, Byung-Jae Cho. And then, after the presentation, we will be receiving questions from the audience. First of all, I would like to welcome our President, In Ho Lee.

Good afternoon, ladies and gentlemen. My name is In Ho Lee, the President of Shinhan Financial Group. First of all, I would like to sincerely thank all of you for giving us your trust and support for the last year, 2006. I thank all of our shareholders, analysts and media members.

Thanks to your support, Shinhan Financial Group, despite the difficult conditions presented last year, was able to overachieve our financial targets. Also, we have successfully completed the integration of our bank business. We've also successfully acquired LG Card, which were very important stepping stones in the mid to long-term strategy in enhancing our competitiveness as a financial group.

This year, in year 2007, I ask for your continued support. And with that comment, I would like to briefly give you the highlights of the 2006 financial performance, as well as the strategic direction of the Group in year 2007.

Our net income in the year 2006 started with a fourth quarter net income performance of KRW250.5b. For the full year it was KRW1.832 trillion. And compared to the KRW1.56 trillion of year 2005, our net income in 2006 grew 17.4% year-on-year. The banking business reported a net income of KRW1.668 trillion, which is an 8.5% year-on-year growth.

Our non-bank business also improved its performance quite considerably and was able to increase its net income to KRW512.4b, which was a 163% year-on-year increase. Securities, credit cards and investments and insurance businesses, such non-bank businesses' contribution to our net income grew from 5% in 2004, 11% in 2005 and reached 24% net income contribution in year 2006, which gives us a more full business portfolio as a comprehensive financial group.

On the other hand, our assets have grown with the continued growth of our bank assets, as well as the more remarkable growth of our non-bank business assets. Overall, assets recorded KRW216 trillion, which is an 11.7% growth compared to the end of year 2005.

Also, last year, despite the very competitive banking industry, oversize, we were able to defend our margin decrease within a 3bp scope. We also, on the other hand, were able to grow our banking loans by about 14.9% for our shareholders.

[As was] in any year, in 2007 we believe that there will be continuous change demanded by the financial environment. While the domestic economy is not recovering as quickly as many expected, the global economy is also very likely to go through an adjustment phase. On the other hand, the banking industry has been entering a mature stage and we believe that its growth potential may be stagnant in year 2007. On the other hand, home equity loans, which is a major growth engine of bank loan assets, will also probably grow slower in 2007 due to various regulations.

On the other hand, on the non-banking business side, we believe relative to the banking business we will see more dynamic opportunities for change and growth. With the implementation of the Capital Market Integration act, the government will also follow with various deregulations in the non-banking financial sectors. And I believe that this will accelerate a move of financial assets from the banking industry to the non-banking industry. We also are predicting the emergence of large I -- investment banks by M&A between securities houses and investment asset management companies.

The Shinhan Financial Group in the year 2007 will continue, first of all, to increase our market dominance in its core markets. Number two, to increase the capabilities of our non-banking businesses. Number three, maximize the effects of acquiring LG Card. And number four, upgrade our synergy infrastructure as well as raise the efficiency of our expenses. These are the four major strategy tasks for year 2007, which will be the focus of our overall Group capabilities, dear investors.

Shinhan Bank, after its integration, has been able to fund its margin sacrifice and was able to record high loan growth. And this was proof of our increased and strengthened marketing capabilities. We were also able to successfully implement our next-generation IT system in October year 2006. And when this is in full operation in year 2007, we will be able to use our enhanced competitiveness to further strengthen and consolidate our dominance in the market.

We will be proactively responding to changes in the capital market, which means that we will enhance our competitiveness, especially in the IB business as well as the derivative product areas. We will also improve our product development as well as management capabilities.

Overall, at the Group level we will develop our capability of creating new complex and hybrid financial products. In addition, we will try to identify future engines of growth and identify new sources of profitability. We will continuously move and work towards creating a better, more effective portfolio.

Once the LG Card is brought in as a financial group member, the Group's NIM is expected to go up to 4.2%, ROA to 1.5%. And the contribution of non-bank businesses to the Group's net income will probably surpass the 40% ranges, which means that we will have a more balanced leadership in the market as a comprehensive financial group.

Also, we will use the 10m customers of LG Card, integrate that to our existing customer database and also promote integrated reward systems, incentive systems to further increase cross-sell opportunities. We will increase the share of wallet of the financial group among our customer base.

Lastly, in addition to all of these efforts, we will raise the efficiency of our spending in order to raise our income cost ratios. In year 2006, there were some costs related with integration of the banking business and our expenses did increase higher than the overall recurring scope. However, from year 2007, we will keep our expense increases within the scope of our operating income increase.

With the acquisition of LG Card, we will leverage the economies of scale to reduce our expenses. Also, we will reduce redundancies in IT investments. And we believe that through these efforts we will be able to increase our expense efficiencies very largely.

Ladies and gentlemen, in order to respond to your continuous and unchanging trust and support and in order to enhance our long-term shareholder value, Shinhan Financial Group, all our employees, in year 2007 will do our best. We will implement all of our strategic tasks and strengthen our position as a leading financial group.

Once again, I ask for your continuing support as well as your advice in year 2007. Thank you.

Thank you. Now I would like to invite our CFO, Byung-Jae Cho, who will discuss about the earnings in 2006 as well as the forecast looking into 2007.

Good afternoon. My name is Cho Byung-Jae, the CFO of Shinhan Financial Holding Company. I would like to brief you on the 2006 earnings highlights. But before I go into the main body of the presentation, I have a few announcements or notifications for you. Please turn your attention to page two.

There has been a change in the accounting treatment and, as of December 31, we received a response officially from FSS. And this will have an impact on the accounting results.

Related to recognition of gains from securities disposed by a subsidiary company following an acquisition by a parent company, there will be some accounting changes that are pertinent. So starting from 2006, this will take effect accounting wise. So, prior to the accounting change, our subsidiaries gains from sales of available-for-sale securities after being acquired were posted as gains from sales of AFS securities on a consolidated basis.

But after the change, the consolidated gains from the sales of AFS securities after being acquired as a subsidiary company are readjusted based on the consolidated purchase price. Therefore, we have retrospectively reflected it for the fiscal year 2006 accounting results.

So, therefore, the retained earnings will already have reflected in the fiscal year 2006 and we will also have an impact on the capital adjustment. So for the purpose of comparison we have readjusted the fiscal year 2005 figures for the accounting change taking place already, assuming that that has taken place. So as you can see, before 2004 it was KRW45.9b. Fiscal year 2005, it was KRW171.3b, fiscal year 2006 KRW26b. So again, in 2006, that was already reflected.

So let us move on to the portion after page four. The page four content has been already touched upon by our CEO. So, let me move right on to the details. Let me move on to page eight.

You will find the Group-wide income for SFG. As you heard earlier, on the very bottom of the page we have the net income of KRW1,832.7b. This was a 17.4% increase year-on-year and the amount was an increase by KRW272b. And if you look at the detailed content, please refer to the total operating income, which grew by 6.8% year-on-year. And also, that is a reflection of interest income as well as non-interest income.

Our SG&A has grown by 16.9% year-on-year. And our CEO has talked about it already but this had something to do with the consolidation, integration-related portion, as well as the amortization portion. That accounts for about KRW230b. So, according to analysis, if you exclude that factor, SG&A grew only by 7.4%.

So, accordingly, the operating income currently on this page is shown as minus 2.4% but if you reflect such integration-related cost that would be an increase by about 6.2 percentage points. So, the asset has grown by 8.5% but on the average balance base it grew by about 6%. So, I would say that operating income grew at a level similar to that of net income or net asset increase. And there were some extraordinary factors relating to operating income element and, because that has mainly to do with the banking sector, I will talk about that on later pages.

Pre-provision income has come down. Actually, loan loss provisioning has come down quite a bit and I will talk about that again.

And earnings before income tax have increased 36.6% year-on-year. Because of the tax issues, our net income grew only by 17.4%. So, let me move on to the next page.

Page nine, please. This is income by subsidiaries. If you look at the entire Financial Group, if you look in the middle after consideration of the equity holdings company, we have the net income. And you will see that the consolidated net income stands at KRW2,180.4b and the banking sector was KRW1,668b, non-banking KRW512.4b. And as you can see under the non-banking sectors, most of the non-bank sectors have seen an improvement.

If you look at the goodwill amortization, we had some adjustment factors that have footnotes. For instance, goodwill amortization content and also sales of subsidiaries-related shares and that has to be eliminated from the net income portion. And also we have our non-operating profit and SG&A factors from SFG. So, all together, it's about KRW8b reduction. So, if you exclude overall factors, our consolidated net income after consolidation was KRW1,832.7b.

On the next page, this a year-on-year comparison of the subsidiaries. Compared to 2005, overall this was an increase by about KRW271.9b, increase of -- an increase by 17.4% increase. And if you look at the non-banking sector, it grew by 163% year-on-year but, most notably, Shinhan Life and Shinhan Card. In the case of Shinhan Life, we had some inclusion factors there and also Chohung Card factor took place for Shinhan Card as well. So, despite the fact that we have some factors relating to Chohung Card, it grew still by 7.8%. Next page, please.

This has to do with the pro forma based net income related information for Shinhan Bank. If you compare the net income on the very bottom line, you will see that it grew by KRW332.7b year-on-year. So, percentage wise, 25.7% increase. On the very top we have the total operating income, which grew by 9.7% or KRW381.7b. And SG&A, as you can see, because of the integration cost it increased by KRW346.7b or 19%.

So, as you can see, only 1.6% increase took place for operating income. But if you consider the integration-related costs, we're looking at about KRW180b worth of integration-related expenses. So, if you actually reflect that portion, I would say that operating income from Shinhan Bank grew by about 10% year-on-year. So, that is according to our internal analysis.

And if you look at the non-operating income, it grew quite a bit actually because of the restructuring and sales of the Shinhan-related equity sales. That played an effect. And also loan loss provisioning, as you can see, actually reduced by 34.8%, despite the FSS tightened requirement on the provisioning, was possible because Chohung Bank's asset quality improvement efforts have been quite successful and that is being reflected. Please turn to the next page.

For Shinhan Bank, it is showing the interest income/NIM. As you can see on the very bottom line, interest income grew 8.8% year-on-year by KRW274.8b. Interest revenue increased and interest expense came down. The interest revenue grew because our margin on the loans increased by 42bps. At same time, interest expenses was growing at a lower growth rate at about 38bps, therefore led to better interest income. So, our net average by about KRW7.5 trillion increase took place on the interest-earning assets, so that actually had a positive impact. And also beneficial certificate interest income grew accordingly as well. So, those can be some factors that could explain such increase.

On the bottom of the page we have a graph showing NIM. On the right-hand side, the red line specifies the accumulated bank NIM for the entire 2006. And as you can see, for 2006 it was 2.38% and back in 2005 was 2.41%. So it was a reduction by about 3bps. And if you compare quarter-on-quarter, on the right-hand side if you look at Q3 and Q4 of '06, between the quarters 3bps increase has taken place. And of course, all the one-off factors were eliminated when coming up with these factors. So, on a quarter-on-quarter basis it increased. However, on a year-on-year basis it dropped slightly but we were able to successfully control it.

So, during Q4 of '06 we had an end-of-the-year effect as well but also the competition is easing, while the interest rate is increasing. So, these factors all played a role in helping our margin protection strategy. But as you can see, we are still experiencing quite a bit of competition and we anticipate some more intensified competition going forward as well. So, let me move on to the next page.

This page states the non-interest income for Shinhan Bank. On the top of the page we have the non-interest income, which grew by 13% or KRW106.8b. Mainly -- fee income grew by KRW9.9b. Now, you might think that that's a small amount, but the fund sales is quite activated. As you can see, fund grew by 76.4% or KRW68.2b.

At the same time, Bancassurance portion was not doing as robustly. However, if you look at the entire Bancassurance market, the market is saturated and because of the non-opening of the new types of insurance products for the banking sector that was the reason. But I believe that we will become more stabilized on this portion going forward. And of course we have other reductions that have taken place. But IB or early payment related issue back in 2006, we had some business.

But starting from 2007, our accrual basis accounting system would be changed to monthly allocation system. So -- however, when it comes to brokerage fees for IB business, and also special rates given to sales representatives, will increase more sales we make on these related IB products. However, it will ultimately lead to bigger growth of income or revenue going forward.

And also we had another factor relating to foreign exchange rates. Compared to our expectations, the volatility of FX rate was not as big, especially regarding derivative products. FX-related income compared to the previous year, it had -- we had a reduction by about KRW25b. So, we had a slight decrease of the fee income. However, going forward in year 2007 we will begin to see some actual results, positive results, from -- coming from the 2006 activities.

Now, FX-related -- we had a slight loss of KRW40b last year, which took place from AFS-related securities but this year we have some positive factors as well. On the right-hand side, FX -- foreign currency and others, these grew by about KRW22.2b but at the end of the year we started showing some improvement. Let me move on to the next page.

This shows the SG&A expenses for Shinhan Bank. On the top of the line you can see that it grew by 19% year-on-year and labor costs and also other management costs and depreciation and our taxes and other fees have increased accordingly. So, administration fees grew a little bit there. So, we have conducted analysis and including the IT-amortizing expenses included, I would say that the integration-related expenses came out to be about KRW180b.

If you exclude that factor, SG&A for Shinhan Bank grew by 9.2%. Of that 9.2%, we had branch expansion by 80 branches in 2006. So, [KRW28.3b] worth of rental payments have been incurred. However, because of the increased number of branches our sales results were improved and also IT amortization expenses was a worthwhile investment as well, because we are investing for the upgrading of the IT systems. So, we will ultimately see an improvement of operational efficiency. Therefore we will begin to reap results on those investments.

So, considering those positive long-term effects, I don't think that SG&A increase of 9.2% is that big. The following page -- so that was our P&L.

We move onto our assets on page 16. This is for the entire Financial Group total assets. On the bottom line, our total assets is KRW216 trillion. This is for all the bank and non-bank, including our AUM. Our banking business assets grew by 8.5% to KRW179 trillion. Non-bank grew by 30% in total assets. If you look at the Shinhan BNP investments and asset management, they had more of a synergistic effect in their sales effort. Their AUM has grown quite significantly. Another factor to explain is Shinhan Life and Shinhan Card. They were included and integrated, which explained their large asset growth.

Next page, please, which is of the loan growth at Shinhan Bank. There is a table and if you look at the bottom line, there is the combination of the total loans, A plus B, which grew by 14.9% year-to-date, which increased by KRW12.5 trillion.

Loans in won grew by 12.8%, retail 16.6%, especially mortgages grew by 21.2%. Corporate grew by 8.7%. Under Corporate, SME and Soho grew more significantly than Large Corporate. And so mortgages under retail, despite various real estate industry regulations, continuously grew due to the demand in the retail market. Also, loans in foreign currencies have increased quite significantly.

During the first half of last year, we were focusing more on time loans and in order to divert our competition, we had focused more in the second half -- on the first half on loans in foreign currency. But as you can see, the growth of loans in foreign currency slowed down more significantly during the second half of last year.

And then we move on to the deposits and the debenture issues at Shinhan Bank. Total deposits overall in won grew by about 6.8%, which is KRW5.4 trillion. Especially the low-cost deposits grew more significantly, especially demand. We have some public interested money and some of the liquidity that we have absorbed also under savings.

The time deposits overall grew by more than KRW1.1 trillion year to date. But during the fourth quarter, that decreased quite significantly. This is because the loan competition was a bit easing off during the fourth quarter and so there was less of a demand for us to fund. Also, the time deposits were slightly going up during that period. And so, in a sense, we were trying to avoid time deposits during the fourth quarter in a sense.

The CD issues, [Tamco placed] us about KRW1.6 trillion of CDs, which is included in the figure. Financial debentures were also issued. These are mostly sub-debt issues. And if you look at the bar graph at the bottom, the low-cost deposits' share grew from 42 to 44% between year 2005 and 2006, which means that it is a positive effect on our profitability. Also we will see increasing interest rate. This low-cost deposit base will also have an additional effect on our profitability.

Then the following page is about Shinhan Card. Shinhan Card assets is KRW3.9 trillion, which actually is shown as a decrease of 7.6% year to date. But as we mentioned, overall the domestic credit card assets are decreasing. Especially the purchase card assets, during the integration, were more shifted towards bank loans. And so if you include that, the receivables actually, if you count out the purchase card assets, decrease grew overall.

Also, on the other hand, cash advances and re-aged loans are decreasing. On the other hand card loans, if you exclude the re-aged loan decrease, our card loan assets have been growing year to date. Also, during the quarter-on-quarter, you can see the trends more clearly. Lump sum and installments are in the growing trend quite clearly. So, we believe that they are overall, in terms of sales volume, in a growing mode. Card holders, this actually is an actual card holder number. As you can see, we've grown our cardholders by more than 500,000.

And then we will move on to our asset quality, which is on page 21. Overall, asset soundness at the Financial Group level, if you look at the precautionary and substandard, they have decreased quite significantly. The main reason for the precautionary asset decrease is that during the third quarter, temporarily, there were some precautionary classified assets that were returned to normal, an amount of KRW200b. Ssangyong, LG Card have been reclassified from precautionary to normal. So, that's one factor.

Substandard and below have also decreased quite significantly, mainly because Shinhan Bank has issued ADS or written-off some substandard and below assets. We sold some assets to Tamco, in the size of KRW360b. So, that explains the decrease. And so our substandard and below ratio is at 0.85%, which is quite low, and our coverage ratio is now close to 180%.

As you know, because the FSS has released its provisioning ratio, that is why it's gone up. If you consider that factor, if you exclude the additional provisioning and consider the decrease in our substandard and below assets, our provisioning expense was similar to the previous year. But of course the absolute provisioning expense has gone up due to the increase of FSS' provisioning requirement increase. This is also going to prepare us better for the Basel 2 implementation.

And then on page 22, which is the asset quality and the delinquency ratio of Shinhan Bank. For Shinhan Bank you can see that the substandard and below assets have decreased. Our precautionary assets have decreased due to the same reason, which we explained previously. Substandard and below ratio is at 0.75% NPL ratio and our coverage ratios is 184% at Shinhan Bank. And our delinquency ratios overall is at 0.65%, Retail 0.61%, Corporate 0.98%, Large Corporate 1.82%. There was [HK and Pentag and Turito]. That explains the increase of Large Corporate delinquency ratios going up they went into work out. And so overall, I think delinquency ratio is still far below 1%.

And then the following page, which is the asset quality of Shinhan Card. To summarize the asset situation, the Chohung Card assets were integrated into Shinhan Card as of April 1, and are now being reclassified according to the more stringent Shinhan Card asset criteria. Precautionary, substandard and below have gone up due to that reason. So, it's the same quality of assets, but has been technically been reclassified because we -- our policy was to apply the same strict Shinhan Card quality classifications. And we believe that we have achieved our targets as of June. And our substandard -- our NPL ratio is at 3.16%, our NPL coverage ratio is 171.1%. And our delinquency ratios, overall, is less than one month 1.54% and one month and over is 2.37%.

And then we have our loan loss provisioning and write-offs. Loan loss provisioning during the fourth quarter was quite high, KRW278.2b. This combined Shinhan Bank and Card. Shinhan Bank Corporate was, most of those, due to the increase of the provisioning requirements of the household and the retail side. There was almost about KRW100b of additional provisioning required at the retailing but there was also some reverse of provisioning on the retail side. There were some adjustments that created some retail provisioning reverses. And that is why, netting these two factors, we have a retail -- a loan loss provisioning during the fourth quarter of 14.9%. And so with Shinhan Card's 15.3%, in total during the fourth quarter they came to a provisioning of KRW278b. And, overall, the full-year provisioning was at KRW592.1b, which is about 49bp.

And then we go to the capital adequacy ratios on page 26. First of all, the required capital adequacy ratio is at 137.3%, which is higher than the previous year. Shinhan Bank, our BIS ratio is at 12%, Tier 1 ratio 7.8%.

And lastly, on page 28, which are the key financial indicators. As a Financial Group, our ROA was 1.08%, ROE 17.66%. Our ROE compared to 2005 has been lowered. We've analyzed and it seems our capital, that is the denominator, was increased being the main factor of our overall decrease. Our cost/income ratio at the Financial Group is 52.1% but if we exclude the goodwill amortization, actually our cost/income ratio would be 49.3%. Shinhan Bank ROA 1.08%, ROE 18.56%, cost/income ratio 49.7%.

And as our President mentioned, in 2007 we will be very much paying attention to our cost/income ratio.

And that completes our brief presentation of our performance. The last page is a summary of our investment securities, which we've provided for your reference. Thank you very much.

We will now be taking your questions. For those of you calling, to ask questions please press one and four on your phone, number 14. Then we will be taking your questions in the order you press number 14. For your information, if you want to cancel your question, please press 15, that is one and five. For those of you asking questions in English, we will be providing consecutive interpretation. So, for those of you asking questions in English, please wait a little bit, so that the rest of the audience here can hear your questions in Korean. So, I would like to invite questions.

My name is Kim Jinsang from Nomura Securities. First of all, thank you very much for the earnings presentation. First of all regarding LG Card, there has been a substantial acquisition of LG Card and if you look at the status of LG Card, last year's earnings came out to be quite positive. And the way we look at it, it has reached a peak, actually. And more than anything else, I believe that all the banks and all the monolines in most of the financial companies are feeling a sense of crisis. And because people now see that credit card business is suddenly becoming more profitable, I expect a lot more intensified competition. So, I anticipate some margin reduction. And also, with intensifying competition, the credit card pressure might actually increase quite a bit in a few years. And of course asset size growth will have some limitations because of such fierce competition as well.

So, first of all, I should congratulate you on the successful acquisition. But in terms of realizing the type of profit and net income from this type of business on a long-term basis could be a challenge going forward. So, these three variables, number one, you have to grow the assets, you have to maintain healthy margin. Number three, you have to manage the credit risks. So, these three challenges, how do you propose to handle such challenges?

And also, relatedly, what is your appropriate level of asset size and how much of it in margin reduction will you be able to tolerate? So, if you have any internal targets, could you share them with us as well?

And we saw that low cost deposits grew quite healthy as well, but is this a very sustainable phenomenon?

And fourthly, regarding the sale of NPLs during Q4, how much of the sales of NPLs did take place?

First of all, thank you very much for your excellent questions. Let me address the first question regarding the acquisition of LG Card and going forward how we plan to go about it with our strategy and operating approach.

Last year, LG Card recorded about KRW1.2 trillion worth of net income, I was told. And this year, we're looking at about KRW1.9 trillion worth of net income -- KRW1.19 trillion, that is. But I believe that there has been such high net income because of some one-off factors and extraordinary factors. For instance, there has been some collection of the written-off receivables and those have been disclosed as one of those one-off factors. And also such accumulated loss has led to some tax breaks.

So, considering those factors, I believe that the current asset of LG Card currently stands at about KRW12 trillion, as you know. And as I told you before, the actual numbers almost account for 10m cardholders.

So, if you exclude such one-offs and extraordinary factors, I would say it is about KRW600b to KRW650b worth of net income basis that we are dealing with. That is our estimation.

And when it comes to Shinhan Card, as you are well aware, the actual assets stand at about KRW4 trillion with a membership of about 4m, or slightly more than 4m, in actual active cardholders. Therefore, if you look at the NIM, if you look at the Shinhan Card level, only just about 5% NIM. And in the case of LG Card it is about 10% NIM.

But, once again, it had one-off factors. So if you exclude the one-off factors, I would say that it can be estimated at about 5 percentage level as well. And as you pointed out, we have the competition factor and also there are requests for reduction of fees from our sales representatives/agencies. Therefore, going forward, there exists factors to bring down the net income on the LG Card side going forward.

But, nevertheless, we plan to offset such pressures. We do have monoline card companies and bank card companies. And I believe that monoline companies have certain advantages as well. First of all, in terms of their size, or the scale that is, in the case of banking sector card company tends to be at a less advantageous position compared to the monoline.

In the case of credit card sales activities, economy of scale plays a very critical role. Therefore, once the two card companies get fully integrated, we're looking at about 14m cardholders. And even considering the current asset size, we're looking at about KRW16 trillion asset size. So we will have a larger volume there. And also from Shinhan Bank we could have cross-sell opportunities going forward with our bank customers as well.

And we have to reach certain critical mass in terms of the scale -- size, so that we could fully and efficiently manage segmentation of the customers, so that we could develop better products for the cardholders as well. So we plan to, and we hope to, improve the management and operation efficiencies from the card business. And we will further link credit card business with other affiliated companies in terms of cross-selling activities.

So that is our strategy going forward to overcome different pressures, even from the competition. So even if there is intensifying competition, we will compensate it by the increased size. And also in the past LG Card has gone through very difficult times but they have overcome such difficult periods, and they have now recovered to become a major player in the industry as well.

So I believe that LG Card has a very unique know-how. Especially their CRM or customer relationship management system is a well-respected system in the industry. So they're experiencing very low churn rates. In other words, they're keeping their existing customers quite effectively. So although there will exist fierce competition, again, we feel confident that we could overcome that by scale of economy.

And even if you look at global card players globally, more and more the trend is that the size determines the end results for these card companies. So that's our reference point as well.

So at the end of March, we will be fully acquiring LG Card. And once we acquire LG Card, we will acquire the 10m cardholders from LG Card, and we will also have Shinhan Card's existing 10m cardholders. And even if you exclude the overlapping redundant customers, I am confident that we could develop the services and products to meet the customer needs. So on that point we will continue to work hard to maximize that effect.

And we will try to reduce and minimize cost in terms of the system usage and other expenses. We will conduct, for instance, integration of overlapping or redundant organizations if necessary, so that we could maximize the synergy effect as well. So, again, internal efficiency improvement can overcome the competition pressure as well. And also we will possibly identify new opportunities to create new markets.

So in the coming year, we plan to focus on developing the business more positive. I hope that that answers your question regarding LG Card.

And regarding the second question, Mr. Cho next to me will answer that question.

Regarding your question about the low-cost deposits, well, structurally speaking we do have low-cost deposit structures. In the case of -- annually there is the interested -- public trusted money and including that money which is continuously growing, we see that there is very abundant liquidity in the market. So considering the liquidity aspect of it, we do expect a steady growth coming from the LCD portion as well. So far, our low-cost deposits have been growing quite steadily, I should remind you.

And also, about the third question, during Q4 NPL, it was KRW210.4b sales and KRW65.4b worth of write-offs has taken place as well.

And regarding our low-cost deposits, it is increasing year-on-year. And I would like to remind you that, as Shinhan Bank, they have chosen strategically to focus on the low-cost deposits. And such concentration will continue into the future as well. So if we do that, the current growth rate of low-cost deposits will maintain in the near future.

And another factor is that the LG Card has about KRW70 trillion worth of settlement and transactions taking place on the card transactions. And I believe that currently 10% of such card settlement is being made through Shinhan Bank as is.

So once the card company is integrated to Shinhan Financial Group, I'm sure that we will be able to bring in new bank customers who could settle their card bills thorough Shinhan Bank accounts. And through that process I am sure that we would have a more competitive edge in terms of growing the low-cost deposit base as well.

Next question, please. Please raise your hand if you have any questions. Yes, at the back of the room.

I'll answer first the first question, which is the SOHO loans which have grown in both our third and fourth quarters in 2006. Regarding the soundness or the quality of these SOHO assets, absolutely. We were quite strictly applying our criteria, especially our SOHO assets that grew during the third quarter, which grew about KRW1 trillion during the third quarter of last year. The [inaudible] ratio LCV is about 70%.

And in terms of asset class, they're usually Grade 5 increased by about KRW1.2 trillion in net -- KRW1.2 trillion, excuse me. Which means that the lower grade actually decreased by about KRW400b. So even though our assets on the SOHO side have grown, we were very strictly applying our asset quality standards.

During the fourth quarter our SOHO assets grew about KRW800b. And even though it's not the same ratio, this KRW800b that increased during the fourth quarter, our normal is between Grade 1 to 6. And of this KRW800b, KRW720b was in Grade 5 or higher, which means, in terms of audited and unaudited, that's about Grade 4. And so our assets that grew in the SOHO side were very high-quality assets, and on the LCV side they were higher than our general loan assets. So in terms of quality of our SOHO loans, we were very closely watching the quality.

And the same applies for both the third and fourth quarter, our SME loans. Especially the five key SME industries were where our loans have increased. And their delinquency ratio, for example the construction industry has a delinquency ratio of 1.1%. But excluding the construction industry, most of the four key SME loan increase industries have a delinquency ratio of 0.5 to 0.8%. And so, as we grow our assets, we're very carefully watching our asset quality.

And the reason why we're growing faster than the other peer banks is probably because -- as you can see, it's not only our SOHO assets but our mortgages that have been growing faster. And so we want to have a balanced growth overall in our loan portfolio.

And currently, we have a Deputy Vice President in charge of our SOHO business. So it's very systematic and organized asset growth in the SOHO loans. That's probably the reason why we're -- and regarding the low-cost deposits, let me explain our strategy in more detail.

So I think we can divide our strategy into three major areas. First the retail side, the individual customers. We are thinking of providing lifecycle management financial products to our individual customers to do the individual customers' fund management needs.

On the corporate side, we have various settlement services, high-quality settlement services, as well as escrow accounts that we are attracting.

And the third will be the LG Card integration. That will be an opportunity to increase our low-cost deposits. We will be bringing in a lot of the credit card accounts into Shinhan Bank.

Regarding the cash advance, I've been looking through the past data. And in year 2000, cash advances and other loans accounted for about 50 to 60% in the overall industry. It's now down to about 25% on average for the entire credit card industry. LG Card's share of cash advances is 36%, which is higher than the industry average. So that is true.

But I don't mean that once the receivables increase and cash advances decrease -- I think actually we are at a normal level of the shares of the purchases versus cash advances, even though there could be possibilities of further reducing the share of cash advances in the portfolio.

And when it comes to LG Card, LG Card's CRM system is almost perfect and their risk management systems are being operated properly. That's our view. And currently, as of now, I believe that LG Card is exposed to an amount of risk that they can sustain.

And I think one of the questions were whether there could be potential one-off credit costs when LG Card is integrated into Shinhan Card. According to our analysis, currently LG Card and Shinhan Card's credit cover is similar level, at about 360bp. And so, even if we integrate the two credit card companies, there could be some differences in terms of how they classify their asset soundness or their provisioning. But we don't think that that would cause any additional one-off credit costs.

And their NPL ratio, Shinhan Card is at 170% NPL ratio. And I think that LG is 180% or higher. And so, in terms of provisioning, we don't think that there would be additional provisioning need. What we are watching out for is that, as you know, at the end of December last year there were additional provisioning required for normal and precautionary for credit card businesses under banks which have not yet been applied to monoline.

Now, if this additional provisioning is applied to monoline, that could cause additional provisioning. We are carefully watching for that possibility. But additional provisioning for normal and precautionary, LG Card may have to have about a KRW52b additional, Shinhan Card KRW21b. KRW21b of Shinhan Card has already been provisioned in December last year. And LG Card has not yet made that KRW52b provisioning, but it's still KRW52b, which will not be a significant impact even if it is made.

What's larger is the potential provisioning for the unused credit lines, which may actually be quite large. Shinhan, that will be about KRW150b. LG, that may be about KRW300b if they have to provision against unused credit lines, which is based on the assumption that they'll be maintaining that current credit line.

Now, if that regulation is introduced, probably the monolines will voluntarily lower the line, the credit line, especially to the customers who are not using the additional credit line. And so we believe that the actual impact, even if this regulation is introduced, will be lower than the figures that I have just quoted.

Next question, please.

I'm from Templeton Investments. My name is Chong. I have a few questions about strategy. All the previous comments, you keep mentioning the word competition quite a lot. Going forward, we may think about the banking sector and non-banking sector. The way I look at it, there can be the following three factors which could have a big impact - number one, the management strategy, number two service, number three product.

So, in your view, Mr. CEO, what do you think is the most critical factor that could lead to better profitability of the Financial Group? And in order to improve such factors, what efforts are you making currently? So this is a rather broad, strategic question.

Secondly, regarding the retail loans, especially the mortgage loans, you have increased the portfolio quite large. But, then again, with the government regulations, you reduced it quite rapidly. So, as analysts who get to forecast the future, it is causing a lot of confusion on the analysts' part. So from the perspective of the banks, even with the regulated intervention, what do you expect to be a continual demand for mortgage loans despite the government regulation going forward?

Thank you for your kind comments. First of all, with regard to the first question regarding our strategy, I would like to remind you that we have all collectively overcome the 1997 economic crisis. So collectively the financial industry as a whole has been through such difficult period 10 years ago. Likewise, Shinhan Bank has gone through those challenges. In five years, we have launched the financial holding group structure. So this year marks the fifth year.

So the reason why we chose the holding company structure back then is as follows. If you look at the entire financial industry, we have the banking sector/non-banking sector. And we felt that unless we comprise ourselves with a balanced structure for both of those sectors we will not be able to survive long term. That's we wanted to both have the banking sector as well as the non-banking sector, so that we could emerge as a true universal all-comprising type of bank or financial sectors.

As the competition, or competitive landscape that is, is changing, the consumer needs are changing rapidly as well. The people are asking for more comprehensive and bundled products as well. And even from the financial industry's perspective, we are going towards the integrated financial structure as well. So that is why we felt that our strategy of financial holding company could ensure such success.

Initially, because of the smaller size of our bank, we have acquired Chohung Bank and we successfully integrated the two banks. So then our banking sector -- banking subsidiaries grew quite a bit. And we had limitations in growing the non-banking segment as well, so we tried our best to increase organically our asset size.

But nevertheless, as you saw earlier, in five years the contribution to net income posed by the non-banking sector was only 25%. So we wanted to innovatively, or radically, grow the non-banking segment of our financial holding company. We then decided to acquire LG Card. And we are looking at a cardholder base of 10m. So growing by 10m is an incredible growth. We cannot afford the time or money organically to grow that fast. So we believe that the customer information on the LG cardholders will be indeed a valuable asset that we could use within the rest of the Financial Group as well. And we currently have 20m customers as is.

And based on the customer needs we want to come up with the best possible -- the opening presentation. We would like to provide the more bundled and more complex and customized products that are not common products to meet the customer needs. And we have now secured the necessary channels and we now have the right number of customers. So in order to meet the requirements of the customers, we feel that our future will be up to the sound development of products and services. So that will be the strategic direction.

So we will pursue the current strategy and we will continue to focus on the product and service development. And rather than differentiating these factors separately, we feel that we need to approach all those critical factors together. So we are in the process of achieving those different targets.

So we look at the coming year to be a very critical juncture for us. Using the expanded channels that we now have and using the scale of economy coming from the bigger customer group, we would like to come up with the right type of products and services that can satisfy our customers. So that will be the biggest challenge going forward. And that's why we have the strategic focus on that type of growth as well.

And secondly, yes, EVP. Mr. Cho will answer that question.

You had a question regarding mortgage loans as of 2006. [Inaudible] bank, it grew by 21% or more. On the average, it grew by KRW400b per month on the average in 2006. And last year, as you are well aware, there have been a lot of real estate policies and regulations announced additionally in December. Right before the December announcement, in the month of October and November, it grew by KRW800b per month. So it's kind of paradoxical. Before the government announcement, people had a run for the mortgage loans and then came out the December policies.

Because of the new DTI regulations, that's the income regulations, we expect certain reduction of the demand. Last year, Shinhan Bank was making future plans. And we already had in mind that we had to look at the regulatory pressures and we were quite conservative. So we were planning to grow by 8.8 to 9% per annum this year. Of course there would be reasons for governmental policies. But in the month of February, at least until the middle of February, the government literally suspended all new mortgage loans. So there can be many reasons behind that decision.

So, starting from February, we talked to the many internal parties. Looking at the new DTI regulations, conservatively speaking, even with the regulations we're looking at about KRW200b worth of demand actually taking place. This is a net increase basis. So that is our estimate even from a conservative perspective.

If that is the case, per annum, we will, I believe, meet the annual objective of the growth rate from the mortgage sector that we were planning in the beginning of the year. We're not sure what types of additional regulations might be announced. But because of the fact that there are real demands in the market, we believe that we could safely count on such growth.

Due to time constraints, we will take one last question.

My name is [inaudible] from Shin Young Securities. I have two questions, first is related with LG Card. Second is related with Good Morning Shinhan Securities.

In the case of LG Card, I guess the CI, their corporate identity, will be a question. Have you made any CI? And have you made any progress there?

And you've been talking about the possibility of bringing back some of the credit card accounts, but actually that means that 90% of LG cardholders are using other banks for their credit card settlements. And so you're basically trying to market LG Card customers. But my impression is that -- it is because I am a card user myself, but I don't think that Shinhan Card has made a lot of marketing effort. Probably they're about one step behind. So what are your thoughts about the credit card business and the marketing efforts that you're planning?

Second question is related with the capital increase of KRW500b planned for Good Morning Shinhan Securities. There was some talk -- until last year, actually, weren't you talking about [levering] the efficiency of the capital at Good Morning Shinhan Securities, if I recollect that discussion correctly?

And I guess that was about KRW700b more being binded up by Good Morning Shinhan Securities. This KRW500b of capital increase recap, why was -- or what's the background of that figure? How did you reach this recap figure of 500b?

And Good Morning Shinhan Securities is currently actually lowering the overall Group ROE. Do you think -- what's the time horizon of this KRW500b recap actually being a positive factor on your overall Group ROE? What is your plan for that?

Regarding LG Card, LG Card was announced for sale at the end of March last year. It took a long time for the buyer to be decided. And we only got actually the final agreement -- definitive agreement signed in last -- end of last year.

And so we are in the process of bringing it into the Financial Group. We are discussing with the authorities to receive the approvals. We also have to go through the [GTO] process, which itself takes some time. And so we are currently expecting that everything will be going with a -- we have a target date of about end of March, that it will be brought into the Financial Group.

The CI, the corporate identity, is LG. KBD was the lead creditor bank that managed LG Card. And as the manager, the crediting bank said that the LG name will be given to the buyers only three months tentatively after the purchase. But also we don't think that we can use the corporate identity of LG forever. So once LG Card is brought into the Financial Group as a subsidiary, within a short amount of time it will be merged into Shinhan Card and after that merger we'll have to announce what brand it will use.

Now, we will be having about 25.7% market share of the credit card industry. We will be the number one player. We are not only looking to the domestic market. We also want to receive recognition in overseas markets. We need to have a brand that could deserve -- that will bring us that recognition both domestically and globally. We also have to have a feel for what the customers, the credit cardholders, will respond. And so these are issues that we do need to review as a part of the overall integration. And once LG Card is a part of the Shinhan family, after it's part of our Financial Group, we'll have to figure out a way of maximizing mutual synergy.

Regarding that credit card account, the settlement account, we currently have 10%. Now, we're not targeting to attract 100% of the credit card settlement accounts to Shinhan Bank. Of course we would like to have the credit card settled through Shinhan Bank accounts, which will allow us more closer customer management. That is our hope.

But the problem is there's 10m LG Card customers. There's also 10m existing Shinhan Card customers, or 15m if we count all the entire Financial Group. So we have to think out a larger strategy of how to better synergize these two customer bases, because there are various reward systems that are being offered to different customer bases. And Shinhan Bank currently has its also high-value customers that it treats with offering reward systems and various services too.

And so, from the customers' perspective, I believe that they will be receiving much better services after the integration compared to before. So that will be an issue that we will discuss as a part of the overall synergy strategy of how to connect these two customer bases for better profits for us and better services for the customers.

As we mentioned, the contribution to the Group's net income by the non-bank subsidiaries has gone up to 25%. And I believe our synergy business opportunities have played a very important role in bringing that contribution up. And with the addition of LG Card, the contribution of our non-banking businesses will be explosively increasing.

And of course that would also open up opportunities of lowering our cost base because we can use our bank channels more. LG Card is a monoline and it therefore had a relatively weak channel. We believe that, by tapping our Shinhan Bank channel, we could overcome that weakness and find opportunities of lowering our cost base while doing the same or more effective sales activities. We are looking for a way of improving our profitability as well as providing better service to all our customers.

So, when it comes to the credit card settlement accounts, I'm not sure what the other banks are doing. But what we're looking for is to provide not only the good service provided through LG Card but, on top of that, also the bank services. And I believe, if we provide that offering, a lot of the LG cardholders will respond positively.

Regarding the Good Morning Shinhan Securities, since the acquisition of LG Card the Financial Group will probably have its net income contributed by the non-banking financial -- or non-banking subsidiaries go up to about 42% by year 2008, the remaining 55 to 57% coming from the banking business. Now, I think that remaining figure that will take the non-banking share to 42% has to come from the securities side of the business. And in that scheme, we're focusing on Good Morning Shinhan Securities as well as [SFG] Asset Management and BNP Asset Management, the joint venture.

We are currently preparing a strategy of how to respond to the changes of the financial market because we believe that is where the additional net income contribution should come from. So actually it's not only the Good Morning Shinhan Securities but it's also an effort that includes the other asset management companies, so it's a larger picture.

And, as a start, this recap of KRW500b will be used to increase its investment banking business. We will also do a lot of restructuring internally to increase its limits in the investment banking side. And so, fundamentally, what we're looking to do is to make an active response to the restructuring of the capital market that we expect to happen.

We want to have the most competitive securities house, the most competitive asset management companies under the Financial Group. And we're currently figuring out -- thinking out what will be the most optimal structure for our securities and asset management businesses and subsidiaries. And we do internally have a task force team studying that important topic within the Financial Group.

And so, with our credit card business number one in its market, with our bank number one in its market in terms of channels, next focus would be the Good Morning Shinhan Securities and the asset management businesses. We want to make this, the securities and the asset management companies, also number one in its respective market.

And about the ROE, Good Morning Shinhan Securities' ROE is around 12 to 13%. Group ROE is 18%. It is lower considerably than the Group ROE. And so some investors are concerned, I've heard, about this recap. But we've just heard about the overall strategy behind that, the thoughts behind that.

And even if we increase the capital by about KRW500b, I don't think that will help Good Morning Shinhan catch up with the 18% Group ROE. We think that, after 2009, it would probably come up to 15% but still it will be lower than the Group overall ROE. But I think that Good Morning Shinhan Securities increased capital, how to fund that increased capital, will also be a critical issue. We are thinking of perhaps having a borrowing from the Financial Group. And so, at the Group level, our capital is not going up by KRW500b.

And so, in a sense, we will be using leverage. So, at the Group level, the ROE will not be diluted through this recap of Good Morning Shinhan Securities.

And if I may add a few comments, in the case of the integration of Chohung Bank and Shinhan Bank integration, we paid a lot of attention and now we have paid a lot of attention on the LG Card acquisition. So in the past, we didn't pay enough attention on the securities company.

Last year, at the beginning of the last year, a new CEO was appointed at the securities affiliated company. And since then their capital efficiency was pointed out to be needing some additional improvement. So ever since his appointment there have been a lot of efforts to improve that ratio. And if you look at the background situation, because we did not have too much focus on the securities business, we did not do much for efficiency improvement in the past.

But after the recent sense of urgency being shared among the players, our -- we actually issued subordinated debt and we wanted to foster growth that way. However, we have been seeing some healthy results coming from the growth. And recently we hear some encouraging stories coming from the securities subsidiaries. So we're looking at about KRW500b in terms of recapitalization. So if you look at the industry average, it's not that big of an amount, even if we put in that KRW500b.

As I mentioned earlier, by 2009 we're looking at about 15% or higher ROE level. So using the KRW500b as seed money, we plan to increase the asset size by KRW2.3 trillion. So by year 2009, we hope to have about KRW6.5 trillion worth of assets for the securities arm. So if that is the case, I'm sure that we will be able to narrow the gap between our subsidiary versus the leading players. That's why we have had the resolution on the KRW500b in terms of recapitalization.

Now, regarding this point, of course, in the financial industry we have to always keep in mind that if you just stay still you will always lag behind. Yes, we have a strategic alliance with BNP Paribas. But of course, if necessary, we will get support from that partner. But when we cannot get that assistance, we should develop our own products. So we wanted to open all the options open. That's why we wanted to come up with such decisions.

If you have additional questions, I would like to invite you to please contact our IR department and we will try to get back to you the best we can. So this concludes the earnings conference. Thank you very much.

Speaker statements on this transcript were Interpreted on the conference call by an Interpreter present on the live call. The Interpreter was provided by the Company sponsoring this Event.