Shinhan Financial Group Co Ltd (SHG) 2007 Q3 法說會逐字稿

(Interpreted). Good afternoon ladies and gentlemen. My name is Yu Sung-Hun of the IR team of Shinhan Financial Group. We will start the third quarter 2007 earnings conference of Shinhan Financial Group. Today we have present our CEO, In Ho, as well as our CFO, Byung-Jae Cho, and our Vice President, Kin Leong Chong, in charge of Finance. First of all our CEO will deliver a short opening statement followed by a presentation of our third quarter performance by Vice President Kin Leong Chong. After the presentation, we will take your questions. First our CEO In Ho will make some opening statements.

(Interpreted). Good afternoon. My name is Lee In Ho, the CEO of Shinhan Financial Group. Despite your busy schedules, I thank you for attending our earnings conference through the webcast. I would like to thank our shareholders and analysts in Korea and abroad for attending our conference. Before we go into the third quarter performance presentation, I would like to take this opportunity to sincerely thank all of your support from Korea and abroad during the whole process of bringing LG Card into a subsidiary, end at March 23, and also integrating LG Card with Shinhan Card into an integrated card company as of October 1.

The new integrated Shinhan Card will further strengthen its position as the number one card company in Korea and will focus on associated sales and cross selling to create greater synergy among the Group's affiliated companies. This will be the focus of the Group's energy and resources.

Now I would like to give you a highlight of our third quarter performance of 2007. During the third quarter of 2007 Shinhan Financial Group recorded a net income of KRW524.2b. Accumulative as of end of September the Group's net income was KRW2.176 trillion which is actually 38.8% increase year-on-year. Last year, third year accumulative net income was KRW1.5638 trillion.

If we look at the bank alone, the banks' accumulated net income was KRW1.861 trillion, which is a year-on-year 31% increase. The non-bank businesses recorded an accumulative net income of KRW855.8b, which is a year-on-year 105% growth and brought up the contribution of non-bank businesses to the entire Group's profit to 31.5%. Also, Shinhan Bank's loan assets grew by 21.7% year to date, especially in the SME segment our loan assets have grown by 26.9% leading the growth in our loan assets.

If we exclude the credit card and just look at the net interest margin of our banking business, it did decrease by 6 bps during the third quarter to 2.21% which reflects, not only the higher competition in loan business, but also in the increase of funding expenses. But we believe that we're able to minimize the pressure on our margins.

If you look at the net interest margin of the Group, even though there was a decrease of the banks' net interest margin, and even though there was a decrease of cash advances of LG Card and even though there was some corporate bond issuing expenses and decreases of business days, the net interest margin decreased by 10 bp during the third quarter, but still maintains a high level of 3.93% in net interest margin.

Considering all of our businesses until the third quarter, we believe that on the full year basis our net income as well as growth targets will be fully achieved.

Dear shareholders, in the year 2007 Shinhan Financial Group has been able to make several achievements despite the changing financial environment. We were, first of all, successfully able to launch our integrated card company, Shinhan Card. This diversified our profit source and also expanded our customer base to create greater synergy. Also we were able to strengthen our non-bank businesses which will enable us to further differentiate ourselves as a leading universal financial group.

There are some concerns that the integrated credit card company may lose some market share after the integration and its profitability may decrease. However we are committed to continue to leverage our expertise and economies of scale as the number one credit card company in, for example, new product development, marketing, customer management and risk management. We will also leverage the relationship we have within the Financial Group to increase cross-selling and increase the share of wallet of our customer base.

In the year 2008, with the participation of all the Group's affiliates, we will continue to establish a business strategy that could satisfy all of our customers and shareholders. In the year 2008 the strategic direction of the financial group would be differentiated growth and leadership in value innovation. Currently, we are establishing detailed implementation tasks under this strategic direction.

On the banking side, we will continue to keep in check immediate or short-term growth in size and rather try to minimize the outflow of our customer deposits and look into ways of diversifying our funding methods, for example, by leveraging the possibility of securitizing our home equity loans to defend the decrease in the net interest margins. We will also use the integrated sales channels to develop next-generation growth businesses such as investment banking and private banking and also gradually increase the contributions from our overseas businesses by building a global business base.

In order to strengthen our differentiation as Korea's leading financial group, we are aware of a need to have a balanced growth by both the bank and non-banking businesses. The asset management segment has been rapidly growing. We will actively respond to this market change. And also we will look into other investment banking businesses, as well as other business models of our subsidiaries, to make up for the limited improvement of our deposit and loan -- lending businesses. Also, in addition to the increase of our business capabilities, we will further enhance our cost efficiency to strengthen our leadership in the market.

Once again I sincerely thank our shareholders both domestic and abroad for their unchanging trust and support to Shinhan Financial Group. All of the employees of Shinhan Financial Group is once again committed to strengthen our position as the leading financial institution in Korea which will enable the continuous enhancement of shareholder value in the long term. Once again, I ask for your future support and advice. Thank you very much.

I will now invite the third quarter earnings presentation by our Vice President, Leong Chong Kin.

(Interpreted). Good afternoon. I'm in charge of the Group's financial activities. Let me now share with you some highlights of the earnings results of Q3 of '07. The beginning portion, with regards to the major highlights were already covered by our CEO, so let me move right on to page seven.

First of all let me share with you the P&L of the Group. The accumulated net income was KRW2.1716 trillion which was a 38.8% increase, increased by KRW606.9b increase. The interest income was KRW4.771 trillion and non-interest about KRW1.6 trillion which was around 43%, 44% year-on-year growth. And G&A was KRW2.7974 trillion. And operating income KRW3.5823 trillion (sic - see presentation). And pre-provisioning expense income was about KRW3.6 trillion and also KRW106.6b loan loss provision. And overall the consolidated net income was calculated upon reflecting all these factors. During Q3, the net income was KRW524.2b which was a reduction by KRW162.4b quarter-on-quarter. It was because of the one-off factors on Q2 and also because of the seasonal factors of Q3.

Moving on to page eight, this is the income by subsidiary. If you look at the central column, please refer to the total net income after reflecting ownership of the bank was KRW1.86 trillion, non-bank was KRW855.8b. If you look at the non-bank contribution to the overall Group's profit was 31.5%. On the right hand side you will see the graph and you can notice that this contribution was an increase by 8% compared to last year. If you exclude the non-ordinary income, it's actually about 43% contribution actually. LG Card gains will be fully reflected starting from 2008. And we expect the contribution coming from the non-bank subsidiaries to easily exceed 40%.

Moving on to next page, this is the increase and decrease of the income by subsidiaries. On the second from the last line, up to the third quarter the accumulated net income of the subsidiaries was KRW2.71 trillion which was an increase by KRW878.5b increase year-on-year. On the very bottom is about -- the bank was KRW1.86 trillion and non-bank was KRW855.8b as was previously mentioned. And again it was an increase by about KRW440b increase. LG Card recorded KRW421.5b, Shinhan Card KRW164.8b, Goodmorning Shinhan Securities KRW124.6b and the Life and Capital businesses each recorded KRW96b and KRW33b respectively.

Let me now move on to the core subsidiaries which are the banks and also the card business. On page 11 -- excuse me, page 10, first of all Shinhan Bank's net income was KRW1.8539 trillion which was a KRW475.7b increase year-on-year by about 34.5%. If you look at different items, interest income was about 7.9%, increased by about KRW198.7b. And non-interest income increased by 62% or KRW702.6b. Under G&A there was an increase by 7.2% year-on-year. And also non operating income saw a reduction by KRW132.4b. I will further elaborate on this issue on later pages, but as the LG Card shares was disposed, there was some loss recognized earlier which was reversed this time around. So, on a net-net basis, it is actually no change. Pre-provisioning income compared to year-on-year basis is about the same amount. And currently the pre-provisioning income was KRW2.79 trillion.

Moving on to the next page, let me begin with the interest revenue. At the very bottom of the first table, net income, net interest income, it was KRW2.717 trillion. On a year-on-year basis it was about 7.9% increase or KRW198.7b increase. Interest revenue increased 22% while interest expense increased 33.2%. Compared to the year-on-year basis, the assets increased by about 15.9% but NIM decrease has led to about only 7.9% increase on the interest income.

On the bottom of the page you will find a NIM table. As of September the accumulated Shinhan Bank's accumulated NIM was 2.25, which was 2 bps reduction. Quarterly it was 2.21 or about 6 bps reduction. On a Group-wide NIM, it was 3.93%.

Please move on to the next page, page 12. If you look at the non-interest revenue, up to the third quarter it was KRW1.836 trillion which was KRW702.6b increase or 62% increase year-on-year. If you look at the fee income, we have the fund fee which has increased by about 83%, or is KRW98.2b recording KRW216.1b. Bancass slightly edged down. Regarding the security related commissions, there was an increase by KRW639.8b. This was because of the accounting regulation change this year. And LG Card [disposition] gain amount of about KRW460b and also about KRW270b regarding the treasury shares, [disposition] gain was reflected in this item. Under others, fixed income commission -- FX commission and others, we saw a reduction by about KRW33.7b year-on-year. FX and derivatives, we did record over KRW200b, but when it comes to the credit guarantee contribution and deposit guarantee contribution, we also had to incur about KRW200b expenses there.

Let me move on to the G&A. Under G&A we recorded a total of KRW1.65 trillion, which was KRW111b increase year-on-year and it was an increase by 7.2%. Labor cost was an increase by KRW137.55b, but administration costs came down actually by KRW128b. So on a net-net basis it only increased by 7.2%. But if you look at D&A we saw an increase of KRW56.5b. This was because of the new IT system integration activity that was going through during the merger and it was amortized. And also taxes and dues, we saw an increase by KRW45.7b. This was an additional KRW20b contribution to the welfare fund. And also we had additional education tax burden that was reflected here as well.

On the bottom of the page we have the cost/income ratio chart. During third quarter the cost/income ratio was 36.3%. Quarter-on-quarter this was a slight increase. However it was because of the bonus factors and the seasonal factors. But if you take out those seasonal factors, it is maintained at about the same level.

Following we have the LG Card related P&L information. Please refer to page 14. On a Group-wide equity gain was at about KRW421.5b but let me share with you, for easy comparison, accumulated basis figures. Up to the third quarter, net income was KRW1.3949 trillion. On a year-on-year basis it was an increase by KRW445.7b.

If we look at the operating revenue, year-on-year we saw a reduction by KRW180b. This was because of the cash advance services and the re-aged loans reducing. So that was a big factor for the drop. And under G&A expenses we had some marketing expenses through the integration. And also the performance pay expenditures, compared to the previous year we saw an increase by about KRW89b. So the operating income saw a reduction of KRW223.7b recording KRW765.5b.

And also the loan loss provisioning, because of the reducing credit cards and because of our credit rating, that was a minus of KRW197b for loan loss provisioning. And also deferred tax was reflected, so we had a reversal of income tax by about KRW461b.

If you look at the quarterly information, during Q3 we recorded about KRW194b which was a reduction by KRW141b compared to the previous quarter. Again this was because of the SG&A factor, was KRW92b factor was reflected. And last year as we integrated with the former Shinhan Card, there was a reversal about KRW41b. So if you reflect that, all in all, it was a reduction by KRW141b reduction on a quarter-on-quarter basis.

Let me now move on to the P&L of the Shinhan Card business. Up to the third quarter accumulated net income was KRW164.8b. On a year-on-year basis it seems to be a minus of KRW22b. However back in 2001, the former Chohung Card deferred tax portion was reflected by about KRW82b. So apple-to-apple comparison is difficult. During quarterly figures, it was KRW53.6b, which was a slight reduction from the second quarter figures.

Let me now move on to the size of the Group asset, please refer to page 17. If you look at the total asset for the Group, there was KRW266 trillion which includes trust and AUM and all those figures are reflected here. Compared to year-to-date it was an increase by about KRW50 trillion, which was 23% increase year-to-date. The bank asset was KRW205 trillion which was KRW26 trillion increase year-to-date. And non-bank side the asset size was KRW56 trillion which was an increase by KRW20 trillion year-to-date. Of course this includes the LG Card increased portion of KRW12 trillion. But on top of the LG Card factor, from the Securities, Life and Capital businesses evenly have seen an increase of organic growth in terms of the asset size.

Next we have the Shinhan Bank's loan related information. As of the end of September the outstanding balance for loans was KRW108 trillion which was 12.7% increase, or KRW12 trillion increase year-to-date. Retail grew by 5.4%. Corporate grew mainly because of the SME expansion, so all in all corporate increased 23% year-to-date. SME portion has increased by about KRW9.3 trillion. On a quarterly basis, during the first quarter it was KRW3.3 trillion. During Q2 it was KRW4.2 trillion. And in Q3 it was KRW1.8 trillion. So the growth angle, or the speed, is plateauing actually.

Now let me go on to the procurement side. Total deposits in won was KRW91 trillion which was 6.6% increase year-to-date. But on the bottom you will see that financial debenture in won was KRW24.8 trillion which was an increase by 14.5% year-to-date. If you look at the low cost deposits on the bottom, compared to the end of last year, it was a reduction by about 1.8%. Especially because of the savings and the free deposits, a lot of these funds were moved to the fund products. So compared to the end of last year, it was reduced by about KRW951b. On the other hand the savings, other savings, the time deposit was increased by KRW3.9 trillion. It was because of the special sales promotion that was held in the first half.

Next we will look at the balance sheet of LG Card. If we look at the managed assets of LG Card, in September it had KRW12.3 trillion. Year-to-date, that's a 3.3% growth. And for the receivables there was a 10.5% year-to-date growth. On the other hand, cash advances and card loans have decreased, especially the re-aged loans, have decreased by about 30%, cash advances by about 8.4%. The number of customers in total is 10.9m which is 520,000 increase year-to-date.

The following pages about Shinhan Card managed assets is KRW4 trillion. Year-to-date, that's a 4.1% growth. And receivables -- excuse me, purchase card assets decreased by 16.1% and re-aged loans have decreased by 53% but the cash advances of Shinhan Card has grown slightly. Number of customers active is 5.4m which is 678,000 increase year-to-date.

So if we integrate the two credit card companies, total assets year-to-date have grown by 1.1% ending the September with KRW16.4 trillion. If we divide the assets by portion, as you can see credit purchases have continued to increase. Cash advances and credit card portions have been decreasing. Installments or leases are actually gradually increasing as well.

Now we would like to go into the asset quality which is on page 24. As of end of September 2007, our substandard and below ratio is 1.06% which is 21 bps increase year-to-date. The increase in the NPL ratio, substandard and below ratio, is because of the LG Card integration bringing in a relatively higher asset into the Group. But on the quarterly basis you can see that it has been continuing to go down. Quarter-on-quarter it's a decrease by 2 basis points. And the coverage ratio for NPLs is 178% which is similar to the end of last year.

The asset quality of Shinhan Bank, the substandard and below ratio is at 0.78% for Shinhan Bank which is 3 bp increase compared to end of last year. The coverage ratio for NPLs is at for Shinhan Bank 170%. Our total delinquency ratio is at 0.8% for entire loans, which is 16 bp increase compared to the end of the year. Retail delinquency ratios have gone down. But on the corporate side there was 30 bp increase compared to end of last year.

Now the asset quality of LG Card. LG Card NPL ratio is at 3.59%. You can see that LG Card's NPL ratio has continued to decrease and it's actually decreased by 1.3% compared to end of last year. LG Card's coverage ratio is 190%. And delinquency ratio for one month or over is, at the end of September, 3.3% which is 1.2 percentage point decrease compared to the end of last year.

The asset quality of Shinhan Card, the NPL ratio for Shinhan Card is 1.88% which is 1.3 percentage point decrease year-to-date. The coverage ratio is at 269%. The one month and over delinquency ratio for Shinhan Card is 2.2% which is 0.2 percentage point decrease year-to-date.

If you look at the asset quality of the integrated credit card company, the yellow line will be the integrated basis. It's at 3.2% NPL ratio as of end of September 2007. Coverage ratio is at 202%. Delinquency of one month and over for the integrated basis is 3.1% and has been trending downwards continuously.

Now we see loan/loss provisioning and write offs on page 29. If you look at the major subsidiaries, the loan/loss provisioning, for Shinhan Bank in third quarter there was an increase -- there was a provisioning of KRW36.4b. LG Card minus KRW19b and Shinhan Card KRW9.8b and total there was KRW27.1b. And so total this -- so that was during the third quarter.

If you consider the one-off factors, the normalized provisioning size would have been KRW490b which means that our loss rate would be about 43 bp. And on the bottom of the slide the graph shows our loan/loss for credit cards which has continued to decrease. At the end of 2006 we're down to about 50 bp. We think that our credit cards would be even lower than 50 bp at the end of 2007.

And the capital adequacy ratio on page 31. For the Group, expected BIS ratio is 11% for the Group which is, compared to the previous quarter, 0.7% increase we're expecting. If you look at Shinhan Card separated, the BIS ratio is expected to be 12.6%, Tier One 8.1% and Tier Two 4.5%. The BIS ratio year-to-date is 0.6 percentage point increase according to our expectations.

And lastly our key financial ratios are summarized. For the entire financial Group, as of third quarter ROA is 1.4, ROE 18.43 (sic - see presentation) and BPS is 49,000 (sic - see presentation) and EPS is KRW6,000. And cost income ratio is 43.8%. If we exclude the goodwill amortization it will be 39.6%. Shinhan Bank ROA is 1.45%, ROE 23.18% and loan to deposit LTD is 111%, which is relatively high. Cost income was for Shinhan Bank was 36.3% and NPL ratio was 0.78%.

We also have attached as an appendix our investment securities list as well as our SME loan situation which you may refer at your leisure. Thank you.

And this completes the third quarter 2007 performance presentation. Thank you.

(Interpreted). We will now take questions.

(Interpreted). (OPERATOR INSTRUCTIONS). For those of you asking questions in English, we are providing consecutive interpretation here. So for those of you asking English questions, please bear with us while your question is consecutively translated after here and then receive answers. Thank you very much.

We have a question from Mr. Jin Sang Kim from Nomura Securities. Please go ahead, sir.

(Interpreted). Thank you very much for your presentation. The CEO is here as well, so I have a couple of questions for the CEO. First of all the net income has exceeded KRW2.1 trillion. And after your investment I believe that your retained cash holding is quite a bit I'm sure. So what are you planning for the dividend payout strategy, especially for the rest of this year? Can you share with us the dividend policy?

Secondly, now that you are completing the integration with LG Card, is there any other mid to long term project that you are targeting?

And thirdly, as with other commercial banks in Korea I think that the NIM compression during Q3 is accelerating. On the loan side, I think that from the funding side pressure will continue. So going forward, in order to protect the margin while ensuring growth how do you plan to balance the two goals?

And looking ahead into next one and two years, how do you anticipate the margin trend of Shinhan Financial Group and especially the Shinhan Bank?

(Interpreted). First of all let me address the question regarding your dividend policy question. As you are well aware at Shinhan Financial Group since we launched the financial holding company structure in 2001, we have maintained a very consistent dividend payout ratio. And more recently the financial industry is stabilizing and financial institutions' profit is improving in general. So I do understand that there is high interest from the shareholders regarding the payout policy.

But especially for this year, we have recorded the biggest ever net income exceeding KRW2.1 trillion. But once again as the shareholders and investors are aware at 2008, regarding the acquisition of Chohung Bank and also LG Card, the preferred convertible bonds will exceed about KRW810b range. Therefore, there is such an overhanging burden so we have a limitation as to the payout increase this year.

Now next year we will have to of course close the books to find out. But we believe that at least dividend payout of at least last year's payout ratio should be maintained. And once we go past next year, looking ahead into 2008, I think that convertible preferred shares issue related matter would be almost closed. So starting from 2009, the payout policies and dividend policies can be run more flexibly, I believe. I hope that answered your first question.

And your second question was regarding our mid to long term plans. As you are well aware the Korean financial market right now is rapidly going through a process nearing a very matured market situation. So starting from the traditional banking activities, we are moving on to the iBank type of activities. So from the low risk traditional activities, the centre is moving towards more high risk, high revenue generating businesses. And also the global business competencies are being called for to keep abreast with such changes in the market.

In order to reflect such market changes within our Group, we will continue to do our utmost to grow as a leading global player in the Korean market. To do that we will need to start coming up with more differentiated mid to long term strategy going forward. So recently we have -- we are actually in the process of upgrading our strategy. Since the financial holding company structure since 2001, during the past six years, we have focused on the diversification of the business lines and we also worked on increasing the size of the banking business. So we acquired Chohung Bank and we also acquired LG Card so that we could provide the right stepping stone to emerge as a major global player out of Korea.

So the next five years will be a different phase. I believe that regarding card business and the banks business, we hope to gain a dominant leadership position. We believe that we have already secured that position. But there is relatively weaker business lines such as securities and insurance and asset management. Those portions going forward will be also grown so that we could again become leading players in those respective financial areas as well.

In order to maximize shareholder value, TSR based value creation would be sought. So about 20% range of [TRS] return is our ultimate target to be at par with other global peers.

And also there was a brief mention about non-bank to bank contribution to the Group. I believe that from the non-bank 37% contribution can be expected by the year end this year. And after LG Card profit is fully reflected starting from 2008, it would exceed 40%. But ultimately non-bank -- bank to non-bank we believe that 55 to 45 ratio will be the goal, so that we could grow the more balanced Group business. And we will also strengthen the overseas business as well.

To do that, not only should we go through organic growth but if necessary both domestically and globally we would actively have to seek out M&A possibilities as well. Therefore, for now as of the total assets as of the end of 2006, we are Asia 25th and global 75th. But by year 2012 global 50th and Asia 12th would be the position we are aiming for. So that's the consensus strategic view internally.

And lastly, you had a question about the NIM reduction. As you are well aware from the traditional [LCD] products to a more integrated savings products assets is moving. So NIM reduction is unavoidable to a certain extent. Therefore within our Group within next year the growth of asset size will be at the nominal growth rate of the economy. We will minimize the NIM reduction and we will refrain from overheated competition in the market. And instead from the non-bank businesses we want to increase the contribution coming from the non-bank to the general group.

After the inclusion of LG Card business, we will now have access to bigger customer base and bigger business lines, so we will actively leverage such larger customer information so that we could realize true synergy. So that a NIM reduction can be offset by the non-bank related subsidiaries. So that is our plan.

And lastly, in order to maximize cost efficiency at the Group level we will do our utmost to cut cost going forward as well.

Thank you.

(Interpreted). Next we'll take a second question. The second question will be from Goldman Sachs, Philippa Rogers. Please go ahead, ma'am.

Yes, good afternoon. I have three questions for you. The first is can you comment on your effective tax rate and why it was higher than the national tax rate? It seems to have gone up significantly.

The second question is on operating expenses. In the quarter, operating expenses growth considerably exceeded revenue growth. Can you comment on the higher than expected expense growth for the quarter?

And the third question is the SME growth year to date is significantly above nominal GDP, which is where you said you are targeting asset growth. Can you comment on the outlook for SME growth and how you plan to moderate that downwards, if at all? Thank you.

(Interpreted). First of all regarding the tax rate, during the report of our performance the tax effect I said was quite significant. During 2007 related with LG Card and its merger there was some tax related issues. Because of the integration of LG Card, there were some special taxes. These are for example deferred tax debits being included and that was reflected as a loss on our P&L. So on a normal basis there was not a change in our tax rate -- on a normalized basis. But in this quarter there were some special tax factors related with the integration of LG Card.

And regarding your third question about the SME assets and loans growth rate, during our presentation, during the first half of this year, SME loans have increased considerably. And within the SME segment SOHOs did play a large role in the loan growth. Now first of all there was the demand from the market that supported this loan growth. As you know since the end of last year, home equity loans have become difficult. With corporate investments increasing and the economy improving there was a larger demand, quite a large demand from the SME segment for loans. Despite such strong demand from the market, from the third quarter and onward, our SME loan growth has decreased considerably. On an annual base compared to the GDP growth rate our SME loan growth would outgrow. But we don't think that the difference between our SME asset growth and the nominal GDP growth rate will be large.

And regarding the second question, which is about your expense question. During the third quarter our cost/income ratio has increased but that's not because our costs have increased during the third quarter. But there were some special factors. For example, in the first and second quarter in terms of income and expense that did not occur in the third quarter. And so that is why compared to the first and second quarters our expense appears to have gone up. But if you look at the full year, our cost/income ratio is still lower compared to our cost/income ratio of 2006 or 2005.

(Interpreted). Now we will take the third question which will come from Citi's [Bun Yeong Choi]. Please go ahead.

(Interpreted). I have the following three questions. First of all regarding the SME loans growth rate, there was a previous question so this is a follow up question. On a quarter on quarter the delinquency rate seems to be going up slightly. I believe that the same situation occurred in other commercial banks as well. But despite that credit cards from the corporate side has shown a very low figure. So what other positive factors did you have to record such a low figure?

And next year -- from this year's high growth of SME loans, you said that you plan to curb the growth rate next year. So while you do that how do you also plan to manage the delinquency ratio? And any other concerns about the asset quality of these loans?

And the second question is the following. Compared to other banks the overall capital adequacy ratio, especially Tier I ratio is not that high. Basel II will be implemented starting from next year, partially. So in light of such Basel II introduction what type of impact would you be expecting? And do you think that going forward your current capital base would be sufficient?

And thirdly, as mentioned by the CEO from the non-bank side of the subsidiaries you expect higher contribution. Of course you have become number one in credit card business. But you will also try to be number one in insurance, capital and other types of asset management business. And I believe that Shinhan Bank is doing very well in the banking and the credit card business already, in which those those industries tend to be conservative. But in the case of securities and asset management, you need to have more innovative culture. So how do you expect to overcome such cultural differences as you diversify into other non-bank businesses?

(Interpreted). Let me first comment on your question regarding the corporate side delinquency ratio. Actually the corporate delinquency has edged up slightly and from the management we are paying close attention to this trend. According to our assessment the corporate loans delinquency ratio has grown for the following reasons. First of all during Q3, the asset growth rate compared to the previous quarter has come down slightly. Therefore, that has had a certain impact. So the nominal delinquency ratio seems to have risen partially because of that. And secondly, in the second half of 2006, we have increased SME loans quite a bit. And that portion is maturing. Its due date is right now. And we are going through [BH] loan process during which time we are seeing a slight increase of delinquency ratio as well.

So if you reflect all these different components, we will further review such trends on a monthly basis going forward. By the year end we will try to recover more of these delinquency amounts so that we can further reduce the delinquency ratio. Overall SMEs delinquency ratio is not actually a big portion of the overall delinquency ratio. But on a trend basis, yes, we are paying close attention to that same phenomenon as well.

Regarding your second question about Tier I ratio, you said that it is relatively smaller compared to other banks. Well, first of all once Basel II gets to be implemented, the way we understand it the operational risks and other such risks will ask for about 0.9% to 1% reduction is quite likely. So in order to prepare for such changes we are trying to enhance our sales capabilities and we are calculating the right level of capital base. Currently it's about 12.6% of BIS capital ratio right now and about 8% Tier I ratio. So for now I believe that that capital base is quite appropriate.

And lastly you had a question about the non-bank side contribution and how in those areas where we have not been too strong, for instance securities and investment trust business, in trying to grow such businesses how we plan to overcome the cultural differences was your question, so that we could promote a more innovative culture in those respective business areas.

I have actually received the same question from other people as well. As you are well aware, within the Group as we went through the integration of the banking businesses and the credit card businesses, we are now just turning around from that integration activities now. And the next stage is for us to prepare fully to directly changing the financial business environment. And that is our biggest challenge going forward. And another axis that you should remember is that asset management business, how we're going to settle with the asset management business. So that's another homework that we have to tend to.

So from the strategic division, we are referring to various benchmarks of other global peers in similar situations so that we could come up with the best solutions. But in any case I believe that in order to make sure that our Company becomes number one in global -- number one leading player in the domestic market, we will further revisit the business plans for these respective non-bank businesses from a clean sheet of paper.

I believe that people is the most biggest asset in trying to achieve such goals. Therefore, internally and externally we will do our best to secure and retain such top talent. And once we have more concrete business plans to that end, I'm sure that we will communicate those informations with you as soon as possible.

And regarding the capital adequacy let me also share with you. Capital adequacy ratio of Shinhan Financial Group you said is slightly lower than other commercial banks. And that is actually true. But you should really review this issue. Whether those other players are setting up too high such ratio or whether we are relatively low is a better perspective.

But the reason for such lower Tier II ratio was because we had to go through the two major integrations and we wanted to minimize [the addition] as much as possible in the process. So you could understand this trend to be a very temporary situation as well.

And regarding the management related cultural issues, I believe that those concerns are being raised because the banking business is the mother company practically. If the non-bank subsidiaries become a part of the -- under the banking business, then that might be an issue. But the whole reason why we have created a holding company structure was to exactly avoid such a situation. So within this holding company structure, whereas in the past most of the banking related business executives played a major role in the Financial Group structure. But if you look at the current make up of the top executives of the Financial Group structure, you see more representations of the non-bank subsidiaries as well. So in terms of such reshuffling as well, we are continuing with our best efforts to make sure that innovative culture does get embedded.

(Interpreted). Currently there are no further questions in waiting. And so we will complete and close the third quarter earnings conference for Shinhan Financial Group. I sincerely thank those who have attended. Thank you.

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.