Shinhan Financial Group Co Ltd (SHG) 2007 Q1 法說會逐字稿

[Interpreted]. Good afternoon, ladies and gentlemen. My name is Sung Hun Yu from the IR team. We will now begin the Q1 2007 Shinhan Financial Group earnings conference. We will begin with our CEO, Mr. In Ho Lee's opening remarks, followed by our CFO, Mr. Byung Jae Cho, presenting on the earnings highlights. Then we will follow with a Q&A session. Let me first invite our CEO, Mr. In Ho Lee.

[Interpreted]. Good afternoon. My name is In Ho, the CEO of Shinhan Financial Group. Let me extend my heartfelt appreciation to all the analysts and investors from home and abroad for taking part in today's earnings conference of SFG for Q1 2007.

As you are well aware, the general tender offer for LG Card share was completed legally during Q1, and LG Card officially became a Shinhan Financial Group subsidiary as of March 23. Also, as of the end of February, LG Card financial statements are now consolidated with the Group's financial statements, reflecting LG Card acquisition on the Group's P&L starting from March.

Let me take this opportunity to thank all the shareholders for your unwavering support throughout SFG's efforts to acquire LG Card. We will do our best to successfully complete the integration with Shinhan Card as soon as possible, to solidify the number one position in the card business.

Let me first begin with the earnings highlights for Q1 2007. The net income for Q1 2007 was KRW959.8b, which was a 102.8% increase from Q1 '06 figure of KRW473.4b, or 257% higher than the previous quarter's KRW268.9b.

The net income from Shinhan Bank was KRW832b, which was a 92.5% increase year on year and 236.7% increase quarter on quarter.

Including the one month income from LG Card, the net income from the non-bank subsidiaries also grew 103.4% year on year and 109.7% quarter on quarter to reach KRW198.9b

The asset side for the Group was KRW240 trillion, which was 11% higher than the KRW216 trillion [sic -- see documentation] at the end of 2006. The Bank's loans in won grew 3.6% year to date, showing a sound asset growth rate. The Bank's NIM, due to the intensifying competition and the rising funding rate, edged down 8 bps quarter on quarter, including the deposit rate. However, because of the LG Card acquisition, the total Group NIM has rose -- has risen by a whopping 116 bps, which was from 2.9% at the end of last year, recording 4.15%.

Dear investors, since the beginning of 2007, the mortgage market contraction slowed down the Bank's growth in the loan area as well. The ensuing price competition to secure customers is narrowing the NIM.

Additionally, the Bank disintermediation, which started with bancassurance in installment type funds in 2004, is being accelerated by the CMA accounts from the securities firms. With the implementation of the Capital Market Integration Act in 2009 and the Severance Pension Act in 2010, such bank disintermediation trend will accelerate even further. As we have communicated with you numerously, SFG has established the following strategic direction to preemptively address these changes in the financial environment.

We will continue to expand the non-bank sector to diversify the profit structure as a full spectrum financial group. In order to maximize the Group's share of the customer wallet, we will significantly improve our integrated financial product development capabilities.

The Bank business, which is equipped with the extensive customer base and network, will serve as a distribution channel for the entire Group integrated financial products. To that end, we will build differentiating capabilities and competitive edge. In order to secure a new growth engine, we also plan to continuously look into global expansion and new business opportunities.

Dear investors, as mentioned earlier, the year 2007 will be the first year of tangible results from the LG Card consolidation into Shinhan Financial Group in both financial and strategic ways. Despite the narrowing NIM trend from the Bank sector, the LG Card acquisition helped SFG maintain the highest group NIM and ROA in the domestic financial industry.

As the LG Card 10m customer base integrates with Shinhan Financial Group's synergy infrastructure, the Group's synergy creation capacity will be further upgraded, on top of the enhanced competitive edge for LG Card. As we have promised to the investors during the LG Card acquisition last year, all of us at Shinhan Financial Group will do our utmost to make the LG Card acquisition instrumental in making SFG a top multi-line financial group to significantly boost the shareholder value.

I ask for your continuous support and advice going forward. Thank you.

So, now on, we would like to invite Vice President, CFO, Byung Jae Cho, for his earnings business results presentation.

[Interpreted]. Good afternoon. My name's Byung Jae Cho from SFG. I would like to walk you through the business highlights regarding the first quarter of 2007. Our CEO has already mentioned the important aspects of the highlights, so please refer to the document. I would prefer to move right onto page seven, which has a more detailed breakdown of the profit and loss situation of the Group.

If you look at the P&L situation of the Group, at the very bottom you see that KRW959.8b is the consolidated net income. In terms of operating income, we were able to achieve KRW1,559b. And if you look at our loan loss provision, it's minus KRW15b and pre-tax profit KRW1,581b. And also, with respect to the income tax, there was minus KRW163.9b. If you look at net income before the acquisition of the subsidiary company, the number is KRW768.6b. And also, right after that, you see the total net income number.

We will go into the details later on, but here I would like to mention that the loan loss provision you see is a negative figure and that is due to the reversal provisioning. It is related to the LG Card and we will go into the details later on.

And if you look at the income tax line item, it's minus KRW163b, and that is because when there was an acquisition accounting there was a deferred tax credit of KRW551.1b, and that reflected -- that number is reflected. And also there has been some revision in the accounting standards.

If you look at the net income line item, here we've got the net income of subsidiaries before the purchase date. With the acquisition of LG Card for January and February, the actual accounting is based on January 28. And also that portion is supposed to be deducted and that is KRW768.6b. And, as you can see on this slide, that's why the consolidated net income is KRW959.8b.

If you turn to the next page, you see the P&L situation for each of the subsidiaries under the Group. At the very bottom, in the middle, you will see that the consolidated net income including the -- reflecting the ownership, it's KRW1,030b. The Bank is KRW832b and non-bank is KRW198b, and that is about 19.3% of the total.

To delve a little bit more into the detail, if you look at the end of last year, the non-banking aspect was about 23.5%, and that percentage has decreased. And the reason is because some of the characteristics relating to the Bank, with respect to the valuation gains on the LG Card shareholding or the shares, if we reflect that portion, it will -- the percentage will be around 29%. But we believe by the year's end it will be about 36%. And, starting from next year, that percentage is going to be further increased to 40%.

Including LG Card and five non-bank subsidiaries, you see that the income and the profit is quite significant. The non-bank aspect currently has achieved KRW200b.

If you move onto the next page, page nine that is, this is also a P&L situation for each of the subsidiaries based on different quarters, so there is a quarterly comparison. For first Q of 2007, the numbers are the same. Compared to year-on-year basis, there has been a significant increase, especially for the non-banking area. That increase amount is a little higher than KRW100b. And it's attributable of course to, to some extent, the LG credit card aspect. And we believe that this number, going forward, is also going to increase significantly.

And if you move onto the next slide, I would like to look at the Shinhan Bank and LG Card and Shinhan Card aspect in a little more detail. If you look at profit and loss situation for Shinhan Bank, this here shows the overall P&L situation. For Shinhan Bank, the net income is KRW827.8b. On a year-on-year basis, it's an increase of KRW432b. And main reasons behind this is, if you look at the line items, the non-interest income aspect has increased by KRW633b.

Despite the increase in SG&A and also despite -- but there had been a charge-back regarding the loan loss provision, that's a minus figure, and that's why we were able to record this historical figure of KRW827b. And I will delve into the details later on.

The decrease in the loan loss provision is that, overall, it's about KRW100b. According to the tax audit, there's an additional loan loss provision. And also we were effectively able to manage the non-used portion of the loan loss provision, and that is about KRW57b. So, as you can see, the total loan loss provision is KRW52b.

Moving onto page 11, it shows NIM and interest income aspects. You will see that total interest income is about KRW879b, and that's about 4% increase. You will see that it's due to the increase in interest revenue as opposed to the interest expense.

If you look at NIM, as the CEO has mentioned, from a total Group perspective it is about 4.15%. On accum basis, it has -- it's an increase of 1.16%, and this is due to special drivers or reasons, a significant portion is due to that reason.

And in terms of Shinhan Bank, you will see that, if you look at the quarterly figure, it's 2 point -- it was 2.36% and in this quarter it moved to 2.28%. It's about 8 basis points decrease. On accum basis, it's been a 10 basis point fall from 2.38% to 2.28%.

Regarding this point, in the previous quarter, which is fourth quarter of 2006, there was a special element. It was about KRW18.6b and the margin effect is about 5 basis points. So, considering that, this is not a significant decrease, but we believe that, going forward, because of the competitive landscape, I believe that on a quarterly basis it will continue to contract by 1 or 2 basis points.

Moving onto page 12, this is non-interest income related items. In total, it has -- there has been an increase of KRW633b, so the total number you will see is in the -- on the slide. And you will see that the income from the fund aspect is quite significant. Bancassurance, however, we believe that the market is quite saturated and has reached maturity. So we are maintaining our previous level. But in terms of fund, individual's financial assets are moving to this segment in the market.

Related to securities, there has been an increase of KRW623b. And, because of the change in the accounting standards, that was the main reason behind it, relating to the securities, especially relating to valuation of the LG Card. It used to be included in the non-operating income line item, but with respect to the profit and loss from the loans area you are now to include and re-categorize this under the operating income line item. And that number can be explained by that change in the accounting standard. So, because of the securities-related aspect has increased, you see that the non-interest income has also increased.

If you look at FX side, we've seen an increase of KRW58b. If you look at credit insurance and deposit insurance, you -- it was in the magnitude of about KRW70b, so that's why you see the figure here as a negative number.

Moving onto the next slide is SG&A expenses for Shinhan Bank. Compared to last year, there's an increase of KRW97.4b, and the figure is KRW553b [sic -- see documentation]. But this is not a significant increase because in the integration period or integration process there were different types of payment methodologies. We were -- and with the merger, we integrated the whole approach and that's why for this quarter there has been a slight increase.

And the admin costs, some of the aspects of the admin costs was included under the labor cost line item. But through the integration process there was an IT investment and the depreciation for that IT investment was a little significant, in the magnitude of about KRW19.6b. So that depreciation number is reflected in this number, the increase.

So, in reality, there has not been a de facto increase of the expenses, but we believe that -- from the second quarter we believe that this increased rate for the SG&A will be -- would increase.

This is profit and loss for LG Card. This -- LG Card's income has been reflected to our financial statement. Its March number has been reflected, and here you will see the overall impact. At the very bottom you will see that for LG Card, first quarter of 2007, their net income is KRW865.4b.

Operating income is KRW258.9b. And you will see that there's been significant reduction in the loan loss provision. So from an EBIT perspective, net income is KRW345.4b. The operating income reduced because in the credit card aspect cash advances and revolving segment or volume is reducing. And from the loan business there has also been some reduction. It's because of the reduction in the re-aged loan.

And if you look at 'others', all the collection of the -- with respect to the collection aspect, there has been a decrease in the interest rate. And also, if you look at the loan loss provision, as a result, by recovering the written-off receivables or assets that had been reflected, so in the first quarter it's about KRW707b -- KRW77b, excuse me.

And also, if you look at the income tax, it's minus KRW520b. With respect to the deferred tax credit, the amount of KRW556.1b had been accounted for in this line item. And on the deferred losses we have captured that as the type of an asset, and that has, as you can see here, written as a minus on the income tax line item. It's reflecting the deferred tax credit.

Moving onto Shinhan Card profit and loss situation. Net income is KRW54.2b. SG&A, significant increase. However, at the same time the operating revenue has increased significantly as well. It is KRW72.5b. And also there has also been a reversal of the provisioning, so that's why the loan loss provision is written as a minus figure.

Net income is KRW54.2b. We believe that, compared to Shinhan Card's target, our progress rate is 24%. So we are incurring income as scheduled.

Let me now move onto the balance sheet highlights. Let me move onto page 17, which shows Shinhan Financial Group's asset growth. On the very bottom, it says, in the middle column, our total assets at the end of March 2007 is KRW240 trillion, which is an increase by about 11% year to date.

If you look at the Bank side, it grew by 4.7%, reaching KRW187b -- trillion, excuse me. And [profits] grew by 36.6%, reaching KRW48 trillion. With LG Card, KRW9.8 trillion was included in that amount. Of course, accounting wise, it actually had impact of about KRW11 trillion, but because this is a reporting basis, this was this amount.

And on the very bottom, if you look at the Shinhan BNPP ITMC and Shinhan Asset Management together, AUM has increased by KRW1.1 trillion year to date.

Let me move onto page 18. It shows Shinhan Bank's loan growth. On the very bottom, total loans, including the won and foreign currency, it increased by 3.6%. To be exact, KRW3.4 trillion increase. So, at the end of March 2007 it reaches KRW99.88 trillion, of which the loan in won was KRW92.8 trillion, which was an increase by KRW3.2 trillion.

And also for the retail portion, actually it reduced slightly because of the tight management of the collateral. Now, from the corporate it grew slightly, of which SME grew by 9.6%, so whole Group by 9.1%.

Moving onto next page, you have the deposits and finance debentures for Shinhan Bank. If you look at the total deposits in won, it grew by 2.3% year to date. Low-cost deposits and also other savings grew by 2.6% and 5.6% respectively, of which the demand deposit actually reduced by 7.2%. And the reason why such demand deposits reduced by KRW900b was because, at the end of last year, because of the end of the year seasonal effect, it had a slightly peaking trend. So if you just compare from the average monthly balance basis, we did not actually see a reduction per se, but it actually grew by KRW100b.

And if you see the other savings item, we had special promotions for time deposits. That's why we saw increase there. And also for savings under low-cost deposits, that was because of the corporations saving more in the beginning of the year.

Moving onto next page, this shows the status of LG Card. Our total assets under management perspective, it has KRW11.69 trillion in assets, of which receivables, compared to the previous year same period, it is increasing quite a bit. But I believe that such growth rate is similar to the market average.

Now cash services, cash advances and card loans are reducing, and also the quarterly sales volume is showing similar trends. If you look at the active customer numbers, at the end of the first quarter 2007 the figure was 10.56m subscribers, which was a 564,000 customer increase on a year-on-year basis.

Moving onto page 21, it talks about Shinhan Card's status. If you look at the managed assets, the outstanding balance is KRW3.8 trillion. Again, the receivables are growing slightly but purchase card, cash advances, card loans are reducing.

If you look at the active customers, for Shinhan Card it's about 4.99m, which was a 623,000 customers increase on a year-on-year basis.

On page 22, this is the status of the integrated credit card company. This is a simple addition of the two companies. The total assets is KRW15.5 trillion [sic - see documentation], of which receivables was 46%, cash advance 23%, card loans 21%, installments/lease 10%.

Moving onto page 24, which talks about the Group's asset quality, if you look at the big picture I believe that the asset quality is quite sound. Substandard and below is about a 27 bps increase compared to the previous year. Now, NPL ratio, that is, NPL ratio for the quarter was 1.12%. So if you exclude the LG Card factor, it's about 0.51%, which is actually less than the previous quarter's NPL ratio.

Now, if you look at the substandard and below and also doubtful and estimated losses, most of these assets' increasing came from LG Card. And also the NPL coverage is about 183%.

Moving onto page 25, asset quality of Shinhan Bank. Also for Shinhan Bank the NPL ratio is similar to the previous quarter, which is 0.74%. NPL coverage ratio, 185%. Delinquency ratio, 0.7%, of which retail is 0.64% and also corporate 1.07%. For large corporations we saw a slight increase because we had reduced the denominator in the equation by about KRW270b. So, in other words, it did not actually have a significant asset quality impact on the large corporations portfolio.

Moving onto page 26, we have asset quality of LG Card. Here we have about 4.58% NPL ratio, which is slightly higher than that of Shinhan Card. If you look at the classifications of card assets, we have precautionary assets increasing by KRW581b on a quarter on quarter, but it's not because of the deteriorating asset quality but because of the reclassification requirements coming from FSS. There is an accounting change. So, when it comes to re-aged loans, these loans are now recategorized as precautionary. That's what is leading to increase KRW581b.

As you can see, substandard and below, we have no change from the previous quarter. So the NPL coverage ratio is about 181%, which is quite sound. And delinquency ratio of one month or over is 4.4%.

On page 27, we have Shinhan Card. We have 2.53% NPL ratio, and also NPL coverage ratio of 200%. To be more exact, it's about 199.7%. And also 2.3% delinquency ratio of one month or over.

On page 28, we have the integrated credit card companies. We have the top line LG Card 4.6% NPL ratio, integrated 4.1%, Shinhan Card 2.5%.

On page 28, it shows the provisioning and write-off status. As you can see, we have the loan loss provisioning which shows minus KRW35.1b, which means we had a lot of reversals here. As mentioned briefly earlier, from the Shinhan Bank side, we had -- we have about KRW100b recurring provisioning. But this time we have about KRW32b coming in from other categories, and also the KRW25b which was reversed from the LG Card matter. And also we had a collection of the written-off assets from LG Card, amounting to KRW93b.

So, altogether, from LG Card we had a minus effect, we had a reversal impact of minus KRW82.3b. And so those reversal items impacted the overall negative figure on this quarter. But if I exclude the one-off factor, and if I just only look at the recurring factors, the provisioning I believe is between 55 bps and 60 bps.

From LG Card, the written-off assets amount to about KRW6 trillion. But we are steadily collecting such written-off assets, considering such improving collection ratio. Because this trend will continue into the near future, I believe that the overall provisioning will be between 45 to 49 bps going forward -- 40 to 45 bps, that is.

Going onto capital adequacy, the BIS ratio 11.9%, risk-weighted assets KRW117 trillion for the Bank. And on the related details regarding LG Card, we will give you a more detailed report upon receiving more information and guidelines from the FSS.

Going onto page 33, ROA for the Group was 2.11%, ROE 27.28%, which is quite high. We had a gain from the valuation of the LG Card asset, which has significantly contributed to such improvement. BPS was KRW33,661, EPS KRW8,492 and also cost/income was 37.6%. If we exclude the goodwill amortization, it amounts to 35.1%.

As I mentioned earlier, it is because of the one-off factors coming from the accounting rule change which has taken place in Q1. So going into Q2, Q3, we anticipate that cost/income ratio will go up again. But I believe that it will be in the early part of 40% range.

Likewise, for Shinhan Bank, especially for Shinhan Bank we have the loan-to-deposit ratio of 106%, which is slightly higher than usual. But we are trying to increase the SME assets, so this is a temporary phenomenon that is taking place. However, it is under our control.

Cost/income ratio was about 33%, as I mentioned before.

We have included a couple of appendix items on page 35. On the very bottom it talks about the KRW1.3 trillion in gain, valuation gain, on the securities holdings we have. Please refer to that.

On page 36, this states details about the acquisition of LG Card asset. As you are well aware, we have completed such acquisition in February. Again, our ownership is now at 35.7% [sic -- see documentation]. So the acquisition cost was KRW7.2 trillion. Again, the tender offer price was KRW67,770, but shares held by Shinhan Bank was valuated at KRW59,000.

So we conducted fair value of total assets, which was KRW3.99 trillion. The goodwill was, again, KRW3.9971 trillion. We have provided preferred shares of KRW3.75 trillion and also corporate bonds amounting to KRW2.93 trillion. And the amortization of the goodwill will be conducted in the straight method of the amortization, KRW285.5b per year. So IFRS standard will be introduced to Korea in the near future, so we are reviewing the possibilities of changes of the amortization method. But beyond 2011, we anticipate that we will no longer have the amortization factor on the goodwill.

On the final page, we have a loan status for SMEs. Overall, it's about 58% [Ltd] and also about 72% is taken up by wholesale retail, real estate and manufacturing. And the delinquency rate in that category is about 0.85%.

For the SOHOs, the collateral ratio is about 72%. So, overall, we are trying to increase the portfolio of SMEs, but at the same time we are paying close attention to sound credit management. So we are managing the situation quite prudently. And, as you can see in these figures, we do not anticipate any major problem going forward.

So this concludes the earnings highlights for Q1 2007 for Shinhan Financial Group. Thank you very much.

[Interpreted]. From now on we will take questions. [OPERATOR INSTRUCTIONS]. The first question is from Mr. Kim from Nomura Securities. Please go ahead, sir.

[Interpreted]. Hello. Thank you very much for your presentation. With respect to the LG Card acquisition, I believe that if you just look at Shinhan Bank there has been a decrease of about 8 bps for the NIM. So compared to the previous quarter's one-off incidents, 5 bps is already a very low level because for Shinhan Bank it is at 2.4%. So I think it is a quite significant decrease. And if, going forward, you think that there is going to be a reduction of 1 or 2 basis points, considering -- I think that is what you said, what are some of your measures to protect your market?

And also, in the same vein, with respect to LG Card, I think also there margins should have a decrease. We don't have LG Card specific numbers but, compared to the previous quarter or on a year-on-year basis, what has been the change in the LG Card NIM number?

And also, with the consolidation law and the capital market, I believe because Shinhan has certain competitive advantage you may be placed in a more advantageous situation or position. So, from Shinhan Group's perspective, what do you think is the impact of the integration law of capital markets in Korea when it gets adopted? And what is your rationale for the assessment of the opportunity that you may capture? And what could be some of the risk factors in the face of the implementation of this new law?

And, lastly, LG Card's one-off incidents, I think it's about 100 -- KRW370b considering other -- I would like to ask you to delve into the rationale and the reasons behind that number and also the other line item.

[Interpreted]. With respect to the acquisition of LG Card, the Bank's NIM reduced by about 8 basis points. And I believe that going forward, due to the competitive situation, I think it will continue to fall slightly.

And you asked for our plans to address that situation. From our perspective, I believe that eventually, from the funding aspect, we are experiencing tight margins there. There has been some changes and also, with respect to the fund and capital market, a lot of funds are moving towards the capital market. And in order to prevent that, or trying to block that, we will have special sales promotions for the time deposits. And that has been our approach. Because of that, we have experienced reduction in margin, but we can't sustain this type of an approach. We have a financial Group system in place, which means that the financial Group has to have an overall view of the entire business.

From the Bank's business, margin hasn't been compromised to a certain extent. However, at the end of the day, we have to think about the fact that that capital or money is going to the asset management and other fund business. So, from a profitability perspective, it's actually more advantageous from the Bank's perspective if the -- that business margin is about only 100 basis points, than the Bank's margin is 20 or 30 basis points.

And, for the securities companies, the commissions and fees would be about 100 basis points. So that is moving towards a positive direction. We also need to have a close grip on the -- our consumer base, so we would need some special sales promotion. But other than that, we will operate our organization mirroring the changes in the market. And that, at the end of the day, will have a positive effect.

We cannot just think about our commercial banking on an independent basis. We can't just look at the margin level of the Bank itself. That is the environment that we are playing in. I think I should answer that question in that respect.

And, with respect to the LG Card's NIM number, on an annual basis it was 19.6%. But from the first quarter it slightly fell to 19.3%. The reason behind that slight reduction is from the operational income, or there has been a reduction in the lending aspect, lending rate. And also the funding rate we are also trying to -- we are saving on the funding side.

The reason is because LG Card previously, from the [creditor] banks had received emergency, which is high cost bond. And that bond has been repaid in its entirety. And, also, if you look at their share buyback it was about KRW3 trillion. The first quarter it was about KRW3.8 trillion.

So I believe that the portion of borrowing is going to fall and, therefore, from a NIM perspective operational aspect from managing the asset itself has also fell. But, however, we believe that the first Q number is 19.3% and I believe we will be able to keep and maintain that level.

So, with respect to the law and the capital integration, our CEO will answer to it but let me move onto the last question, the one-off elements. As you know, Shinhan used to own LG Card shares and there has been valuation gain of KRW470b on a pre-tax basis.

And also SK Global network -- or SK Networks, with respect to that we had about KRW35b. And also there is NPL sales of KRW5 trillion -- KRW5b, excuse me, KRW5b. And also, with respect to the -- there has been about KRW57b regarding the reversal of provisioning. So there has been about KRW620b on a pre-tax basis and also KRW430b on an after-tax basis. And the recurring net income basis, I believe the number is going to be about KRW513b.

With respect to your question on NIM, N-I-M number, our Group has reorganized ourselves into a financial group since about six years ago. And there are universal banking and expansion of the channels that have taken place, which is nearing its completion. And the capital market is undergoing certain changes, and also the so-called disintermediation phenomena we believe is also going to advance into the future.

So, from a non-bank perspective, we have tried to diversify our business line with the focus on the non-banking aspect. We had also, as you've seen, acquired LG Card. And, through all these efforts, we wanted to replace or cover that reduction in the NIM in the banking business with our activities in the non-bank aspect.

So things are going as scheduled and planned. And in terms of this year, in terms of retail loans, we will see some reduction and that's inevitable. And with the integration of Chohung Bank, the CHB, they're under a transition period, our sales capabilities had been slightly compromised. However, from the non-bank aspect, we will compensate for that. So we will expand our relationship with the -- we were expanding our relationship with the SMEs, prime SMEs that is, and any reduction in NIM arising from that can be that covered from the Group's perspective.

And also, with the LG Card acquisition, from the Group-wide perspective, thinking about getting -- establishing a relationship and having more prime customers from a non-bank aspect, it is going to be a positive element for the Bank -- for the Group as a whole.

With respect to the law on the capital market integration, it's not clear as to when it will be implemented or legislated. However, we will see more financial companies become bigger with the enactment of the law. And, in that case, the products and the service competition by the different financial providers is going to be much more heightened. That will be the situation in the future.

And the capital market has also been further promoted. And consumer needs are not only going to be satisfied by the banks, but the consumers will also flock to the capital market for their financial needs. That is the forecast or prediction that we are making. As you know, at our Group we have both the banking and the non-banking business line. We have a foundation in place, based on which, we could diversify ourselves.

So, from the financial market perspective, of course there are some disadvantageous aspects. But because we have securities and also asset management, and if we are to enhance our competitive edge in these business areas, actually, in the future the enactment of the law itself could be an opportunity to us. Therefore, we have a taskforce team in place within our organization, trying to find out ways that could enhance our competitive edge. So we are preparing for that time.

Thank you very much. We will take next question.

[Interpreted]. Next question is from Mr. Choi from [multiple speakers].

[Interpreted]. Thank you very much. Congratulations on the good earnings. I have a couple of questions. The first question is about the loan growth. Year to date, 8% loan growth for large corporations has taken place. Of course, you have given an annual guidance in the double digits as well, but on an annual basis what is the annual growth rate target that you think you will achieve?

And another question would be drastic increase in the volume growth means that [inaudible] experience NIM reduction, in Q1 you increased the volume to this extent. So, going forward, when you give directions to the branches, if you had to choose between the volume and the NIM, on which area would you put more focus?

Now, the second large question is the following. LG Card, KRW520b worth of deferred tax effect is reflected. Does it mean that in Q2 and Q3 and beyond, can you see the reversal of this trend? We were aware of the fact that LG Card wasn't paying corporate taxes, but now we see that there is a reversal effect here, so will this trend continue into the near future?

[Interpreted]. In the beginning of the year we have issued the annual guidance to the investors, at which time we targeted our corporate loan asset growth to be between 12% to 14%, in the two-digit numbers. So, in Q1, we have grown that asset by 8%. So if you look at the progress rate against the annual guidance, we do realize that this is faster than we anticipated. But because we have secured that 8% growth this much in Q1, we do not -- we are not considering the revision of the annual guidance. So we will stick with the original annual guidance for the corporate loan growth rate.

Secondly, if you look at the operating strategy for the Bank, in the first half we want to secure the necessary growth. And, starting from the second half, we will address the margin management. So that is the basic business strategy of Shinhan Bank, I believe.

I think that your question was with regard to whether we would focus on growth or profitability going forward. As mentioned by our CEO, we cannot choose one or the other completely. Therefore, initially we will focus on achieving the volume growth target that we set aside in the beginning of the year, during the first half. And, in the case of additional demand in the market, of course we could possibly consider additional growth.

The margin is a very critical area for us, so let me elaborate. From the Bank, we have the margin of about 230 bps. In the case of other banks, their margin figures include the credit card business figures as well, but in the case of Shinhan Bank we are simply looking at the deposit-to-loan margin. So the current 230 bps right now is not at all a low level.

If that is the case, you might be asking what is the appropriate level of NIM. It depends on your perspective. We have to figure out the details about the expense items as well. We have to consider the funding rates as well. And, additionally, what is the ultimate credit card going forward? In lending loans, what will be the SG&A to support such lending activities? Those factors will be critical deciding factors.

As you are well aware, if you look at the Shinhan Bank bad debt allowance or the loan loss provisioning, that is continuously improving. And also various types of SG&A line items are improving as well. The growth rate of SG&A is being tightly managed at a very low level. So the nominal NIM figure, even if it goes down by about 1 or 2 bps, but if you look at the overall end result of ROE, we will make sure that it does not hurt our business. If that is the approach we take, I believe that overall business will not be hurt.

You asked about the deferred tax item for LG Card. As of the end of February, we have capitalized KRW520b, reflected in the accounting line item. This is not something that can be reversed at a later time. Rather, starting from March, of course we have to start paying corporate tax normally.

From the holding company's perspective, the impact of the deferred tax impact coming from LG card was put forward in our Q1 figures. So it is shown not on the P&L but the balance sheet. In other words, LG Card's total equity increase will be shown at the end of the day. So, because the LG Card total equity will increase when the holding company receives a dividend from LG Card, at the end of the day then our income from LG Card will further be enhanced.

And also, let me elaborate about the deferred tax item on LG Card matter. The deferred tax losses, this is something that has to do with a tax item and about KRW1.6 trillion worth of item is still remaining. And I believe that that will expire by 2009, at the end of 2009.

So, according to the accounting regulations, of course we are bound to generate profit. So at the time of the acquisition we have to reflect LG Card-related matters as asset items, so we have put it forward in our accounting reflection. So as of February 28, such deferred tax item is reflected as asset item for the holding company. So ultimately it has an impact of reducing the goodwill amount. So by that amount, actually, the goodwill amount has been reduced. As mentioned by Mr. Lee from the IR team as well, this is an early realization of the income item which could have taken place at a later point.

But as I mentioned earlier, with the introduction of the international accounting regulations introduced in Korea, the goodwill amortization has to be done in an equal portion each time period. But even if we go through such straight methodology, because of the large size of the goodwill itself, the amortization amount will be quite high. By year 2011, IFRS regulations will be introduced in Korea. So therefore, if we start amortizing in sufficient amount within the next four or five years, I believe that most of the impairment costs will be reflected as well. So, beyond the year 2011, we do not anticipate any further amortization impact.

And another thing is that, regarding the deferred tax losses, we were not originally considering this in the beginning of the year. At that time we were estimating about KRW5 trillion in terms of goodwill. Of course that was just an estimation, without the due diligence on LG Card. But as I mentioned earlier, the goodwill amount has been reduced accordingly. So it's not even KRW4 trillion, it's about KRW3.99 trillion or so. But that is the amount for the value of goodwill. Thank you very much.

[Interpreted]. We will take the next question. Mr. Lee from Shinyoung Securities.

[Interpreted]. First of all, I have a follow-up question to the previous question, regarding the one-off element on ABS and PL write-off. With respect to that, I think there has been a charge back regarding the depreciation and amortization or written-off bonds regarding NPL fund. So if you could talk about that? Because I think only then can we really match the numbers.

And the second question is -- or, two more questions. On non-interest revenue, there has been a significant increase in the fund-related aspect, fund commission. In the 4Q it reduced, and this quarter it increased. As you mentioned, I think it looks like the offshore funds have had a big impact on this. So on a overseas fund I would like to know the amount of the magnitude of impact. And also I think the front-end commission is -- also front-loading commission seems to be a significant element here, so if you could explain that, that would be helpful.

Lastly, regarding SG&A, you talked about some of the elements under admin costs have been categorized under labor costs. Now, the fact that the cost-to-income ratio is falling from the previous standard, I believe from the Bank's perspective, at what level can you control the cost-to-income ratio? That's my question.

[Interpreted]. The answer to the question about the one-off factor, how are we going to account for this. One of the things that we mentioned was, regarding the ABS-related aspect, this -- well, some people argue that because this happens on an annual basis it's not really a one-off element. When I explained previously, with respect to charge back to the NPL fund, I think you're asking this question because of that. And the reason why is that we had about KRW454b, and SK Networks KRW34.5b, NPL reversal is about KRW59.3b.

With respect to the NPL reversal, according to our analysis we always debate whether we are going to reverse it back or not. We believe that taking it out is more adequate or -- because, when we manage this aspect, this [inaudible] NPL is always going to exist. You're not going to have no NPL. This is a recurring item. So that's why we thought the recurring aspect would have been the right aspect. And also there was a non-used portion reversal, about KRW25b, and the total reversal amount was KRW57b.

Regarding the cost/income ratio, under the previous rule basis -- or the previous company basis, old company basis, with the change in the accounting rules the number had been 30%. But if you are to calculate the first quarter cost/income basis on an old rule basis, it will be about 51%. End of last year, for Shinhan Bank the figure was around 50%. So, compared to that figure it will end up being 1% higher, based on the old rule basis.

Now, but is this trend going to persist into the future? I think that is an important aspect to follow. Mr. Cho mentioned, during the presentation, that starting this year the wage payment system for the Bank is going to be changed -- the compensation payment. So, for the quarter's SG&A from the labor costs, the 4Q usually showed the highest figure. But from this year, in the positive integration of the two banks, based on the adjusted compensation standard, the first quarter showed 16% higher number compared to the other quarters.

So if you were to calculate cost-to-income ratio on an old-rule basis, first quarter has this seasonal effect. So there will -- it explains about 1% to [point] increase, but after the first quarter we believe that the cost-to-income ratio calculation under the old rule is going to fall below 50%. So, we believe that there is going to be an improvement on that figure.

And for Shinhan Bank, of the SG&A increase factors, on a quarterly basis it increases by 19%. But as I said before, from a wage-payment approach, about KRW74b in the first quarter, that is the number. But if it was on a normal-quarter basis, of the first -- within the first quarter the SG&A increase rate will be about 4.6% for the first quarter.

And also, with respect to fees and commissions on the fund itself and the non-interest income aspect, for offshore funds, or overseas funds, on the front-loading, what is the portion of that? It is about eight -- 48%. And about 52% is the back-loading. And back-loadings are selling quite well, and this quarter the accumulative fund has sold quite well. And we think that explains the fees and commissions number for the fund.

[Interpreted]. We will move on to the next question, which is from Templeton ITC, Mr. [Chong]. Please go ahead, sir.

[Interpreted]. Good afternoon. I'm from Templeton ITC. I also have a question about your NIM. I would like to ask you about your rate into the lending-rate operations. If you look at the Shinhan Bank's way of business, according to your lending guidance, it has to do with the loan as well as the securities. The loans of the overall asset is about 70%. 15% is securities and the remaining is cash and other miscellaneous items. And the loans are quite affected by the market competition. That is why the lending profitability we do not anticipate would increase significantly. However, in the case of marketable securities, which has also taken up about 15%, the way you manage [the] securities might impact the return higher. If you look at the traditional Shinhan Bank management, you used to focus simply on the investment on the bond assets. Will that maintain going forward? Or, in order to improve your marketable securities-related returns, do you have any change of strategy?

Secondly, under assets, the marketable securities and bonds and loans, could you share with us the mix? What is the ratio? And what do you think is the most ideal case for the mix? And within the Bank, let's say the loans, the take-up of up to maybe 90% of the entire asset, would that be considered a dangerous level? So, could you share with us your ideal target portfolio mix?

[Interpreted]. You asked a question about the lending rates-related strategies. The margin during Q1, the way we look at it, the market rate -- the rate that we benchmark against is the following. About 80% of the lending is currently under variable rate and usually it is linked to the three-month CD rates. So, if that is the case, then three-month CD rates can be Shinhan Bank's benchmark in market rates. If that is the case, in Q1 the market rate has increased by 8 bps during the quarter. In our lending activities, we only improved our return by 2 bps. The funding rates increased by about 12 bps during the same period. That is why it is narrowing the NIM overall.

I believe that you raised a very challenging question for us. The 15% of our asset portfolio is marketable securities, and you asked about our strategy to improve the returns on this asset class. And you asked whether we have any plan to move away from the bond [during this] strategy, to diversify into equity or other types of asset class.

Let me answer it this way. We have launched a holding company structure and it is our role to look at the management in the long term. Therefore, we believe that asset management as a whole, within the whole Group, has to be integrated somehow. We have a separate asset management company, a separate securities arm within the Group as well, aside from Shinhan Bank. Therefore, I don't think that the bank business has to venture out too much in terms of actively managing the marketable securities and investing more on the equity class which has higher risk, rather than simply manage the liquidity activities. If you look at the bigger, overall, holding company structure, I believe that there is a limited role for the bank business.

[Interpreted]. We will take the next question. No one at this point has asked for additional questions, but we will take the last question. [OPERATOR INSTRUCTIONS]. We will take the last question from ABN Amro. Mr. Michael Chang.

Hi. I've got basically two questions. The first one relates to the Bank NIM. You said that out of the 8 basis points fall quarter on quarter, 2.36% down to 2.28%, I think about 5 of that was due to a one-off. Can you just explain what the one-off was?

Secondly, you said that the LG Card NIM, 19.3% in the first quarter, and you think that you can maintain it at that level. Now, I'm just trying to think about the semantics of that because, if your cash advances and your card loans don't seem to be showing much growth, that's really the high margin [put off]. And then, if it's just your receivables, the lump sum, which are actually growing, that's actually a bit lower margin. So wouldn't that imply that your margins would go down? And then, furthermore, it seems that competition's quite fierce in credit cards, so I'm just trying to figure out your strategy for maintaining your margins in LG Card.

And probably a related question to that, what's -- how has your Shinhan Card margins been tracking? Yes, that's about it. Thanks.

[Interpreted]. First of all, regarding the contraction on NIM, you asked a question about the one-off factor. The previous quarter, which is 4Q of 2006, on a yearly basis we -- there is a special loan, it's called [Merrywood], about KRW18.6b, and that impact is about 5 basis points. It is something that we collect and that is 5 basis points. So for the previous year, if we do deduct that then you may think that it's low, because the first quarter we don't have that one-off impact of minus 5 basis points. It happens on an annual basis, at the end of year. So, from a quarterly basis, this aspect should be considered. I think that will be an ample explanation for that question.

And secondly, with respect to the LG Card NIM number, as you have correctly pointed out, if you look at the credit card product, the so-called high profitability products like the cash advances and card loans are decreasing. So, from a credit card company's perspective, operating revenue is slightly falling as time goes by. But, as I mentioned previously, with respect to asset management profitability, it will be -- it is inevitable that it will fall. But one of the ways for us to overcome that is because -- is that, number one, fortunately on LG Card its funding rate is falling, which is a very fortunate aspect from our perspective. And also it may be ironical but the most highly risk assets, like cash advances and re-aged loans and card loans, the fact that that portion is reducing means that credit cost of LG Card is going to fall as time goes by.

So, at the end of the day, the operating revenue rate itself could -- will fall. But, at the end of the day, all the factors that will impact the ROA, return on assets, is going to be -- if they are quite solid, we believe that from the, once again, ROA perspective, we will be able to prevent it from falling.

And another aspect to note is the fact that only the lump sum credit sales have been increasing, and that is a correct observation. But you will see that 1 percentage point of reduction in the ROA for the LG Card did take place. But the way for us to compensate for that is that, as they joined our Group, what happens is that we have banks and also ITMCs and insurance companies, and they -- we will be able to develop an integrated product with these other business lines. As a result, we will -- we could increase the utilization of the credit card active customers, and also make these people use our card much more frequently.

Thank you very much. This marks the end of 2007 fourth quarter earnings conference. I would like to thank all of you for participating. 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.