Shinhan Financial Group Co Ltd (SHG) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is [Sung Hun Yu] from IR team. We will now begin the first quarter 2008 earnings conference. We have with us our CEO In-Ho Lee, our CFO Byung Jae Cho and also Managing Director from the Financial Department Mr. [Yeong Choi Kim]. We will first hear the opening remarks by our CEO In-Ho Lee, followed by the more detailed presentation on the earnings for the first quarter by our Managing Director Kim. After the presentation is completed, we will hold a Q&A session. Let me now invite our CEO In-Ho Lee for his opening remarks.

Good afternoon. My name is Lee In-Ho, the CEO of Shinhan Financial Group. Let me extend my deepest appreciation to all the participants for taking part in SFG's webcasted earnings conference for the first quarter 2008. I thank you all for your interest and participation.

If you look at Shinhan Financial Group's performance for Q1, despite the increased uncertainties and volatility, the Bank business maintained a stable revenue base, while the non-bank businesses continuously expanded their contribution to the overall revenue. As a result, the Group's business lines are taking on a more balanced structure. [I ask] for a continuous support from all the investors going forward.

Now, let me begin the presentation of the earnings of the first quarter. Let me give you some highlights. The net income of SFG for Q1 was KRW620.4b. Compared to the same quarter of the previous year, when there was a one-off extraordinary income from the acquisition of the card business, the net income came down by 35.4% year on year from KRW959.8b. However, on a quarter-on-quarter basis, it was a 174.8% increase.

The net income from the Bank stood at KRW383.8b, which was a 53.9% reduction year on year, but it was a 92.6% jump quarter on quarter. The non-Bank side net income went up 123.6% year on year and 114.3% quarter on quarter to reach KRW444.8b, continuing the robust income growth trend.

Accordingly, the share in the Group net income by the non-Bank subsidiaries like securities, credit card, insurance and investment trust was 24% and 34% in '06 and '07 respectively and this figure increased to 53.7% in Q1 this year. Even when excluding Shinhan Card's extraordinary income of KRW99.8b, the contribution from the non-Bank businesses increased up to 47.3%.

The Group's asset size stood at KRW304 trillion, which was a 10.7% growth from KRW275 trillion at the end of '07. The Bank's loans in won grew 3.8% year to date, realizing a stable asset growth. The Bank's NIM for Q1, excluding credit card, was 2.18%, which edged down 12 bps quarter on quarter due to the rapid increase in the funding cost. The Group NIM was 3.69%, which came down by 10 bps quarter on quarter.

Dear investors, we at Shinhan Financial Group will do our utmost to preemptively respond to the changes in the capital market. Especially in the IB and asset management businesses, we will further strengthen the overall capabilities in HR and infrastructure with a high priority. We plan to identify the right business model for the Group and gradually find ways to implement them.

Also, as was reported at the last general shareholders' meeting, we plan to further enhance the competitive edge as a comprehensive financial service group during the second half. By leveraging the expanded customer and network bases, we plan to increase the credit card settlement account conversion to those from Shinhan Bank. Through such similar efforts, we will create more Group-wide synergy creation capabilities. Furthermore, we will continue to pursue investment in HR competency enhancement and fostering talent to further solidify our differentiated position as a leading financial group.

In terms of business operation for the Bank, we will refrain from short-term results-oriented competition for size while minimizing the narrowing of the NIM. We will also manage asset quality to secure a profitability base. In the non-Bank businesses, such as credit card securities, insurance and capital, we will pursue robust growth to continuously diversify the Group's growth and profitability platforms.

Dear investors from home and abroad, Shinhan Financial Group will do its best to achieve the annual guidance and to address strategic challenges during the rest of the year to meet the expectations from all of you and the market. Thank you very much. Let me now invite our Managing Director Yeong Choi Kim for a more detailed presentation on the earnings results.

Good afternoon. My name's Yeong Choi Kim from the financial department. Let me begin with a more detailed presentation on the earnings of the first quarter 2008. I believe that the first part of the presentation material, which is the highlights for the earnings results, was already covered by our CEO, so I will begin from page five, which talks about the Group's income.

We have recorded A consolidated net income of KRW620.4b, which was a 35.4% reduction year on year, but it was an increase on quarter on quarter by 174.8%. To give you some details, on a year-on-year basis, last year first quarter we had some extraordinary factors which added quite a bit to the net income. So this is quite a normalized increased trend or is a trend of NIM.

To give you more details, our interest income recorded KRW1,708.5b. So on a year-on-year basis, it was 7.8% increase. Om a quarter-on-quarter basis, it was 1.6% increase. From the non-interest income portion, it was KRW290.5b. Now, despite the fact that we had some extraordinary one-off factors in the same quarter previous year, we still fared quite well. But nevertheless, on a quarter-on-quarter and a year-on-year basis, we saw some reduction and I'll give you the detailed breakdowns in the later pages.

If you look at SG&A, it was KRW1,040.2b, which was a 9.2% increase year on year, but it was a minus 11.6% quarter on quarter. If you look at non-operating income, it was KRW46.5b and it includes the disposition gain on LG Card shares from the previous year portion. So the pre-provisioning income was KRW1,005.3b. So if you reduce from that amount the loan loss provision and earnings, income tax, you come up with a consolidated net income of KRW620.4b.

Please move on to the next page, subsidiary income. If you look at the net income after consolidation, the Bank recorded KRW352.3b and non-bank KRW353.1b. And we came up with a consolidated net income figure and it includes the goodwill amortization portion as stated in the footnote. So if you look at the central column, which is net income reflecting ownership, the banks recorded KRW383.8b in terms of net income, consolidated basis. Non-banks recorded KRW444.8b. Credit card recorded KRW334.6b. And also securities, Good Morning Shinhan Securities, KRW56.3b. Shinhan Capital, KRW16.5b, etc. So as you can see, the share coming from the non-bank subsidiaries increased quite a bit.

So if you look at the contribution to the Group's net income, the banks contributed 46.3%, non-banks 53.7%. So as you can see, overall, including the insurance and securities and capital businesses, we recorded quite a bit. So even if you reflect or decrease the credit card based gain coming from the card business, it still recorded quite a bit of contribution coming from the non-bank subsidiaries. So this year, by the end of this year, we believe that the overall contribution coming from the non-bank subsidiaries will reach at least 43%.

Let me now move on to the specific details about the banks' income and other subsidiaries' net income situation. As I told you before, the net income of the banking business recorded KRW381.8b, which was a minus 53.9% year on year, but on a quarter-on-quarter basis it was an increase by 93.4%. On the very top, please refer to the interest income. The total interest income was KRW1,011.5b. Although NIM continued to decrease, the asset size grew quite a bit. So thanks to that, it was an increase by 15% year on year and, on a quarter-on-quarter basis, it was 1% increase.

Let me now briefly talk about the NIM. If you look at the bottom chart on the bottom left-hand side, Q1 NIM recorded 2.18%, which was a 12 bps quarter-on-quarter decrease and, compared to the entire 2007 figure, it was 8 bps reduction.

During January, we had some special deposit product launching, so, in the months of January and February, we had very high funding cost. But fortunately, our funding cost declined somewhat during March, so we are beginning to see the stabilization. And also, we are applying more aggressive risk pricing on the loan side. So going forward, we do not anticipate too much narrowing of the NIM going forward. I think that it will quite stabilize.

For your information, credit card and capital and the total NIM for the Group was 3.69%. Again, because of the NIM narrowing from the banking business, the Group NIM reduced by 10 bps. But nevertheless, I believe that this is the highest level in the banking industry in Korea.

Let me move on to the non-interest income of Shinhan Bank and also SG&A. Let me first talk about the fees and commissions. In Q1, it recorded about KRW244.4b, which was a reduction somewhat on a year-on-year basis and on a quarter-on-quarter basis, as you can see. If you look at fees and commissions, it recorded KRW254.2b, which was an increase by 18.4% year on year. It includes KRW68.8b from the fund and bancassurance KRW29.7b.

Now, as you recall, because of the bearish stock market, the fund revenue decreased quite a bit, but we are still receiving the management fees from existing fund products already sold. So on a quarter-on-quarter basis, we are still doing quite well, or on a year-on-year basis, that is. And if you look at the bancassurance figures on the left-hand side graph, as you can see, we are seeing a steady growth.

Please refer to the securities-related non-interest income, which states KRW51.9b in the revenue and it was a 92.7% decrease year on year and minus 26.4% quarter on quarter. As I told you before, in Q1 2007, LG Card recorded gain was there and (inaudible)-related reversal took place in Q1 of 2007. So those were some of the one-off factors which do not exist in this quarter. And as I told you before, during 2008, derivatives-related profitability is already reflected here as well.

Derivatives investment is something that I would like to discuss right now from the Shinhan Group's perspective or Shinhan Bank's perspective. Regarding sub-prime, the CDO investment was about $15m. In 2007, we recorded impairment loss of about $1.6m, but still the CDO prices are still decreasing in value. So in total, we have recorded about 87% impairment losses.

And it's not a sub-prime mortgage per se, but we had additional $5m-worth of CDO on the commercial properties, on which we have recorded an impairment loss of $1.5m earlier. And in total, on those commercial properties, about 77% of impairment loss was recorded. As you can see recently, the global financial market is quite unstable, so credit spread is expanding and the structured products prices have come down quite a bit. So during this quarter, on the investment side, we had to reflect additional losses because of that.

Regarding synthetic CDOs amounting to about $120m, from that amount, we have recorded impairment loss of $54m. And also, regarding $5m-worth of investment trust, that was liquidated in March and we recorded loss of about $3m. And regarding CDS, we have recorded valuation loss amounting to about $190m. So in total, Shinhan Bank's investment in CDOs and CDSs and such credit structure products, we recorded about $310m in total, of which $105m we were able to protect the principal. And regarding CLM, with the underlying asset of Korea treasury bond, that portion we did not incur any losses.

So remaining $200m during Q1 of 2008, we have either conducted impairment loss or valuations loss recording by about $82m. So if you add that to the already recorded loss of about $10m, in total, we are recording about $92m worth of losses from the impairment side and the valuation loss. So I believe that such loss recognition is quite sufficient with regards to the recent market trend. And recently, the market has turned the corner, so I think that we still have a little bit of cushion by about 10%. So I believe that the overall tolerance level is quite in a reasonable range.

So regarding the credit derivative products, as you can see on this slide, that portion -- CDS-related impairment losses already reflected on the securities side. And so overall, about $8.16m-worth of losses is reflected in this quarter. So aside from the CDS valuation loss, on top of that, we have deposit insurance premium that we had to pay to the insurance agency and other types of dues payable to such guarantee agencies are included here as well.

Let me move on to the SG&A on the bottom. The total for Q1 was KRW518.9b (sic - see presentation), which was an increase by 13.5% (sic - see presentation) year on year. And the labor cost is similar to that of previous period and also about 220 -- we have recorded KRW208.4b for Q1. And regarding D&A cost, it was KRW53.8b. Taxes and dues, KRW39.4b. So regarding SG&A, that includes additional performance pay and also, if you consider the welfare for employees which was added, it was an increase by a moderate pace. So I believe that it was a reasonable increase in terms of the labor cost and SG&A.

On the left-hand side, please find the cost income ratio on the graph. During Q1, the cost income ratio was 52.2%, which increased quite a bit, it seems. However, generally speaking, in every first quarter, we have some seasonality and we have some one-off factors such as provisioning for severance pay and incentive payments, monthly leave payments and annual leave payments, etc., so that's the reason. And 2007, for the entire year, was about 40.2%. However, in Q1, we also recorded 50 some -- point something related cost income ratio in '07 as well. So on an annual basis, I believe that we can maintain cost income ratio at about 47%.

The Group's cost income ratio also seems to have risen quite a bit to 52%. However, again, it includes the amortization of goodwill. So if you reflect that, the cost income ratio for the Group for Q1 '08 was 46.7%, which is quite similar to the previous year same quarter. So I think that we are reasonably managing these figures.

Let me now move on to credit card business. On the right-hand side, please go down to the very bottom, which states the net income, which was KRW317.5b. On a year-on-year basis, it was a reduction by about KRW600b. So we have income tax and also the loan loss provision as well, so that has to be reflected as well. So if you look at it from the pre-provisioning income basis, it was KRW442b, which was a big jump by 32.4% year on year. On the very top, we have credit card and also installment finance. These two line items are showing steady growth. And we have seen a big increase from the others column, which recorded KRW189.7b. On a year-on-year basis, it increased by 225.6%.

As you are well aware, there was the Visa IPO-related gain, which amounted to KRW88.6b. And underneath that, we have the non-operating income, which was KRW50.7b. It also reflects the second portion from the IPO gain from the Visa card. So during this particular quarter, extraordinary gain was about KRW137.9b pre-tax basis. Last year, we had reflected a Visa-related gain of about KRW120b, so we also reflected this portion. So that has added to the net income line for credit card business.

On the left-hand side, please find the operating yield related graph. If you exclude one-off factors, for Q1, it was 21.6% for Q1 '08. And we reduced the merchant commission last year and also cash advance service reduced a little bit. Because of those factors, we have seen a 0.4% reduction from the operating yield side.

But if you look at the middle portion, which states SG&A, 9.9%. Now, because of the integration activities, we had some SG&A reduction that was enabled. And if you expect a lot of the savings that is anticipated, I believe that the portion -- the blue column, pre-provisioning operating profit, is expected to maintain about 8% range going forward as well. Recovery from written-off assets for Q1 was KRW112b, which is an average from the first quarter basis.

Next, I'd like to speak about the balance sheet. If we move on to page 11, we will find the Group asset growth. Total assets including the AUM and investments trust stands at KRW304 trillion, which is a 10.7% increase year to date. And in terms of (inaudible), it's about 20% increase. Shinhan Bank stands at about KRW232,344b and this also includes the receivables and also some KRW10 trillion increase in some assets. Actual loan assets increase is about KRW4 trillion.

If we look at Shinhan Card, it's about KRW16,755b and that is about a slight reduction compared to previous year. And also, Shinhan Life Insurance, it's KRW7.7 trillion. In the case of Shinhan Capital, the corporate lease transfer and also because of the improved sales environment compared to the end of last year, it stands at KRW3.5 trillion. And also, if we include the investment trust as well, that's also an increase. So in terms of the asset contribution, the bank accounts for 77.3%.

Next, moving on to the Shinhan Bank loan deposit growth. If you look at the loans in Korean won as of March 2008, it stands at KRW110,060. That's a 3.8% increase year to date and that's a 1.8% increase year to date in terms of the retail sector. And also, if we look at the corporate sector, that's an increase of 5.9% year to date. And if you look at the corporate sector, it looks like there's a big increase, but that's about a KRW1 trillion increase and mainly that's due to M&A acquisition, so that's a one-off factor increase.

And then, if you look at the deposits in won, it's KRW95 trillion. That's a 3.1% increase year to date. The low cost deposits reduced about 6%. But on the other hand, if you look further down, the time deposits and also the debentures in Korean won are increasing continuously. Of the low cost deposits, the demand deposits reduced about 1%. Relatively, that's a slower reduction. The -- also, converting -- due to the conversion of the credit card payment accounts, we were able to defend ourselves somewhat and we believe that will continue in the future. And also -- so the 115% loan to deposit ratio is about the same level as last year.

Next, moving on to the Shinhan Card asset growth. If you look on the right, the managed assets as of March stands at KRW17,109b. That's a 0.9% decrease year to date. If you look on the left, if you look at the transaction volume, at the end of the first quarter, it's about KRW25.46 trillion. So compared to the previous quarter, that's a slight decrease, and this is mainly due to seasonal factors. So the assets seasonally reduce in the first quarter and then they start to pick up.

Compared to the previous year, year to year, our sales increased 15.6% and assets increased 9.9%. The number of active members stands at 13.503m and the number of merchants increased 1.3% year to date and stands at 2.182m. And if we look at the funding, the ABS funding, 12.7% reduction you see here.

Next, moving on to asset quality. If we look at the asset quality of the Group, you see on the NPL ratio it's at 1.06%. Compared to the end of the previous year, that's a 0.06% increase. The Bank increased nine bp, nine basis points, and the card fell seven basis points. So as a whole, that's an increase of six basis points. So overall, we are at a very stable level.

If you look at the precautionary and below ratio compared to the total NPL ratio, it was 1.12% (sic - see presentation) at the end -- at the beginning of '07, but then we showed an improvement to 1.99%. So we believe that it won't worsen. So the NPL coverage ratio compared to the previous quarter [proved] -- it's at 178%.

Moving on to the Bank's asset quality, the Bank's NPL ratio as of the end of March is at 0.82% compared to the previous quarter. It increased nine basis points. Sub-standard and below ratio, NPL ratio, increased KRW174b, but, during the first quarter, we didn't have any loans to sell. So the actual real NPL ratio doesn't show much of a difference compared to the previous year, so it's about 0.84% (sic - see presentation).

Now, if you look at the precautionary and below ratio on the left, this can also be seen as a predecessor of the precautionary loans in the future. It's quite relatively healthy. But if you look at the delinquency ratio on the bottom, if we apply the new standard of the FSS, it's 0.74% in the first quarter. Compared to the end of the previous year, it's an increase of 10 basis points. With regards to this, the construction, real estate and the leasing industry, the SME delinquency ratio is increasing. SME and SOHO, their delinquency ratio is increasing at 1.19% and we will continue to monitor this asset quality.

Moving on to the asset quality of Shinhan Card, if you look at the NPL ratio here, it's at 2.97%. As compared to the end of the previous year, it's a reduction of seven basis points. So this shows our asset quality is improving continuously. If you look at the delinquency ratio, it's very similar to the end of the last year. It's at 3.39%, which is quite stable. Our coverage ratio is at 197%, which is quite high. If you look at the provisions, that increases to one point -- KRW1 trillion. Then, our coverage ratio would be [better then] 290%, if we were to include that as well.

Next, we will move on to loan loss provision and the write-off. In the first quarter, Shinhan Bank and Shinhan Card, if we were to include both of them, it's at KRW56b. Shinhan Bank, it's -- in the first -- there was a reversal of [KRW27b] so actual -- it's about KRW53b. And also, if you look at the Card, in the first quarter, there is an ordinary provision of 80b. But as I mentioned earlier, there was a reversal of KRW112b. So -- and there was an additional provision of KRW34.3b. So if we were to include all of that, the actual provision is about KRW3b.

If we look at also the write-off, the Bank, it's 30 bps. Card is about [119] basis points. So the credit cost is about 146 basis points as a whole for the Group. But because of the special factors in the first quarter, there was a credit cost of 13 basis points. The write-off, the Bank -- the total is about KRW150b, which is a reduction compared to the end of last year.

Moving on to the capital adequacy. As of the end of March 2008, the BIS ratio for the Group -- taking into -- because of the net income and also the hybrid products, it increased 0.5% to 10.4%. Our Tier 1, 5.5%. Tier 2, 4.9%. If we look at the Group's BIS ratio in the future, because of our management of our risk-weighted assets and because of the issuance of [new --] the products, we will prepare for this Tier 2 ratio and also the Tier 2 in the future will increase, we expect. So from 2010, our capital ratio will be at 12%. Tier 1 will be more than 7%.

The Shinhan Bank's BIS ratio in 2008 will now be applied the Basel II standard. From April 18 of this year, from last week, the FSS -- we were -- we received the approval of the Basel II foundation method and we use the new Basel II standard calculation. So the first quarter, 11.6%, which is a 0.5% decrease compared to the previous quarter. But from the second quarter, where we apply the foundation IRB method, we believe that it will grow to about 13%.

If we look at the Shinhan Card capital adequacy ratio, it's at 21.9%. Compared to the end of last year, it's a 3.4% reduction, [we presume], but it is higher then the appropriate level.

The appendix I will -- you can look at at your leisure and this concludes the earnings presentation for the first quarter of '08 for the Shinhan Financial Group. Thank you very much.

Let us now move on to the Q&A session. (OPERATOR INSTRUCTIONS). The first question will be asked by Nomura Securities, Mr. Jin-Sang Kim. Please go ahead, sir. Please go ahead.

Thank you very much for the presentation and congratulations on the positive results. First of all, I would like to ask a question from the big picture perspective. After the launching of the new administration in the government, I believe that the biggest change we anticipate in the banking sector would be number one, deregulation, number two, privatization.

Under deregulation, Shinhan or other financial holding companies, I'm sure, are anticipating some deregulation from the new administration. Or if you have any wish list from the government regarding deregulation on the financial holding companies, what could be -- what could those be?

And regarding privatization, as you are well aware, after Shinhan Card acquired LG Card, we generally could sense that the likelihood of Shinhan Financial Group initiating another merger or acquisition is quite unlikely. But is that a correct understanding or would you have other plans for further acquisition in case competition gets more fierce?

Now, third question regarding NIM. The Group's NIM seems to be reducing quicker than that of the Bank. It seems quite unusual. Now, credit card and consumer financing -- should I understand that you have given up more margin? Why is it that the Group's NIM has narrowed, actually, less, excuse me, compared to that of the Bank's NIM? The Group's NIM has reduced less. What is the reason for that?

Let me first answer your question regarding deregulation, as far as I understand the subject at the moment. As you are well aware, there are many advantages of having a financial holding company structure.

First of all, you could diversify business lines under the umbrella of the holding company. By doing that, you could diversify the profit sources. And secondly, the holding company could act as a single company. Therefore, we could share customer information within the single umbrella of the Group, so we could create further synergy.

Thirdly, the Group's capital base or capital allocation can be conducted more efficiently. By doing so, we could enhance the return from the capital investment. And at the same time, the Group could more proactively deal with M&A opportunities as well. I believe that those are some of the benefits of having a financial holding company structure.

It's been about six years since Shinhan Financial Group was first launched. And after the launching of this structure up to this point, in terms of operations and in terms of product development, I believe that we have nevertheless experienced quite a bit of hurdles because of unseen or invisible type of regulations. So it is our hope that the new administration would be pushing for further deregulation. As far as I understand, I believe that the new administration is going from the existing positive system to a negative system. So we expect that type of big frame shift taking place by the new administration.

And also, there are various regulations in the financial sector which instills barriers between the financial services and I think that such barriers will likely come down. If that is possible, utilizing the bank channels we currently have, we then could pursue other types of diversified products and diversified business activities going forward. And also, in order to reduce costs, I believe that we could centralize the back office activities of all the subsidiaries within the Group.

As I told you before, if the barriers between financial services in the overall financial sector -- if those barriers are reduced, I think that we could further enhance our profitability from the entire Group's perspective. So from our perspective, we believe that the anticipated deregulation in the market will prove to be a boon for the Financial Group.

You asked about privatization. As you are well aware, after the launching of the new administration in Korea, financial companies which are public-owned are going for a privatization. I think that such restructuring of the industry will take place in a quicker pace. As you are all aware, our Group has the bank -- banking business and the credit card business and, in those business lines, I believe that we are quite competitive already. So on the banking business and the credit card business, we will pursue organic growth in the future.

But we have other subsidiaries which can still grow, such as securities and investment banks have room to grow. After the introduction of Capital Market Integration Act, I believe that all kinds of investment businesses and asset management businesses could flourish further. Of course, we will pursue various new business models and capabilities in order to continue organic growth. However, if necessary, after watching the market dynamics carefully, if needs arise, I think that we could always review future M&A opportunities also. So in the Group, we are fully preparing for any such opportunities arising in the market.

Now, the third question, I think, should be answered by Mr. Kim.

Yes, let me address your question regarding the margin. Shinhan Card margin in Q4 last year was 15.2%, but it rose by 1.6% in Q1 to 16.8%. So in Q3 last year, it was about 17.2%, but Q4, as you remember, came down quite a bit. That's why we saw a rebound this quarter around. But generally speaking, the credit card margin is expected to gradually narrow. But because of the extraordinary factors between the previous quarter and this quarter, we have seen a very drastic increase this quarter. And also from the capital side, on a quarter-on-quarter basis, we saw an increase of seven bps. So that's why the Group NIM margin has seen a better performance compared to the Bank's margin performance.

We'll take the next question. We will now take the next question.

There is nobody waiting to ask a question so, if you do have any queries, please feel free to ask them now. We will take the second question. The second question is Mr. Byung-Gun Lee, Shinyoung Securities. Yes, go ahead.

Yes, thank you very much for the good earnings performance. I will ask two questions. My first question is in -- regarding the SOHO. You talked about SOHOs and the new NPL formation. How is that in the SOHO sector?

And to what extent do you think -- in the future do you think that there will be increase in delinquencies? And in the case of Shinhan Financial Group, would that also have an impact on the performance of Shinhan Financial Group visibly? And if we exclude the reversal, if you look at the ordinary provisions, we cannot just be completely safe about Shinhan Financial Group. So I want to hear about how you feel about the future.

And second, in a one-on-one meeting, I believe the CEO mentioned this, but in the first quarter, the asset management and also BNP, you said there will be some type of conclusion. But I don't think there has been any progress thus far, so was there any trouble regarding that, any issues, problems? And what is the prospect on that issue?

As you know, within our Group, we have asset management companies - BNP Paribas ITMC and SHAM. So we want to specialize these two companies and we're thinking whether a dual track will help us our Group or integration will help our Group more effectively deal with the changes in the financial market. And in November of last year, we formed a TF team, a taskforce team, to look into that, and we also heeded the advice of third parties. And BNP -- we are engaged in very serious dialogue with BNP.

And so I believe that, in the early half of this year, in the first half of this year, we will be able to come up with a new conclusion about what we will do with these asset management companies. We feel that a new business model can -- the new business model should enable these asset management companies to play a very pivotal role in the financial market. And so, with BNP Paribas, we don't have any problems. We are engaged in very positive dialogue and we are engaged in serious dialogue.

With regards to the delinquency of the SOHOs and also the provisions, we will answer that question.

Regarding the delinquency ratio of SMEs during Q1, we have seen an increase of 25 bps to 1.19%. But if you look at SOHO, it was 1.19%, which was an increase by about 22 bps. In other words, delinquency -- asset quality deterioration from SMEs compared to SOHO was more pronounced.

And the second important factor to remember is the following. The current asset growth rate, we are trying to actually control the growth rate. So in Q1, asset quality has not deteriorated too much. And if you consider the amortization as well, the actual delinquency for SMEs in total has gone up by about 15 bps according to our assessment. So if you look at these figures, during Q2 and Q3, the asset soundness deterioration from SOHO will not be pronounced. And it is quite difficult to tell as of yet, but we do not see that to deteriorate.

And another thing is, including SOHOs in the overall SMEs, the asset quality deterioration trend is not something that applies to all SOHOs, but it is restricted to construction industry and real estate industry only. I believe that the recent real estate regulation is affecting these relevant markets. I believe that, going forward, we anticipate some deregulations in those respective industries and I believe that the market is expected to be vitalized as well. If that takes place, then the asset quality deterioration will be in a very moderate pace, despite such negative market climate so far.

Let me now take the third question. Well, there is no person with question waiting at the moment, so we will give you a little bit more time. The third question is from HSBC Securities, Mr. (Inaudible) Park. Please go ahead.

Thank you very much for the positive results. I have a question about the dividend policy. If you compared yourself with other competitors in the market, because of the acquisition, I believe that the dividend ratio is rather low. So going forward, what is your payout policy? You have converted your CPs recently, so would you be focusing more on paying down your debt or do you have any plan to conduct shareholder return in an increased form? So that's my first question.

The second question is the following. Recently, KB has announced a detailed plan to convert to a holding company structure. So regarding KB's plan, if KB establishes a holding company structure in the second half, how do you expect the dynamics in the competition in the industry will change in the future? At the same time, how do you plan to position yourself under the brand name Shinhan in such a changing environment?

First of all, let me answer your question about the payout or the dividend policy. Yes, our dividend volume in absolute number was rather low. But as you know, we acquired Chohung Card and also LG Card and there were some burdens because of the preferred shares that we had to buy back initially. So because of such burdens, we did not -- we were not able to offer you satisfactory dividend.

But at the time of Chohung Bank acquisition, our preferred shares purchase burden for us will be fully alleviated in the first half of this year. So starting from next year, I believe that our dividend policy will be maintained in a more flexible manner. I believe that that's what I stated earlier in previous conference calls as well.

But if you look at the actual value itself, I do not think that the shareholders suffered too much losses, in our opinion. And starting from next year, we will have enhanced capacity to make investment as well. So we will do our utmost to maximize the enterprise value and the shareholder value. I think that we would have more leeway to do so. So not only in terms of dividend ratio, but we will also do our best to increase our shareholder value in a very diversified manner. So we are reviewing various options to that end.

You talked about the conversion to a holding company structure from KB and you asked about the competitive landscape changing in the future. We have Shinhan Financial Group and Hana Financial Group and also we have a couple of other financial groups in Korea. But I don't think that the number of financial holding companies in the country is that important, but rather how we should diversify the business lines within the Group is more critical.

So by conducting such diversification, we should keep abreast with the changes in the future. And also, the contribution or the customer needs are moving from the banking side to the non-banking side. So accordingly, we have to diversify our business lines and we should diversify the profit sources as well. So I think that doing that well would be more meaningful.

So Shinhan Financial Group will do our best to provide more diversified products and services from various subsidiaries within the Group through the channels of Shinhan Bank. And also, we will ensure the top of the lines in service quality as well. So I think that coming out -- coming up with such higher capacity and capabilities will be the top priority.

So aside from the banking business and the credit card business, we have other subsidiaries which are relatively small, so we still have room to grow. Therefore, the key to success going forward for the Group will be to enhance the competitiveness of those other remaining subsidiaries, other than the bank and credit card business, will be critical.

It has taken us six years to come to where we are today and, during those six-year period, the contribution from the non-bank subsidiaries, we have targeted the share of the contribution at about 43%. And as I told you before, already we have reached the contribution level to 47%, even when excluding the extraordinary gain factors.

In the future, in the securities business and asset management and i-bank business, we will further enhance the competitive edge and, by doing so, we will provide more profitable platform. I think that that would be the best way to pay back to our shareholders and we will do our best.

Yes. We will take one last question, but no one has asked a question yet, so we will take one last question before we conclude the earnings conference for first quarter of '08. (OPERATOR INSTRUCTIONS). We will take the last question. (Inaudible) of (Inaudible) Securities. Mr. (Inaudible), please go ahead.

Yes, good afternoon. In the construction and real estate sector, you said that you expect some problems. So my first question, what is the real estate exposure as of the end of March? And also, as of the end of last year as well, the real estate [PF] exposure increased substantially last year, so what was the reason behind that? If you would explain that. You said that you foresee some problems in the real estate PF, so to what extent -- what's the worst scenario in this real estate PF sector?

Yes, I would like to answer that question. The Shinhan Group's total construction PF exposure is KRW9 trillion. Compared to the end of last year, it's a reduction of KRW180b. And of this KRW9 trillion, it's actual loans KRW7.2 trillion and ABS is about -- [ABR] is about KRW1.8 trillion. So the total loans of the Group is about KRW6.3 trillion, and so it only accounts for 4.1%. The real estate PF -- the project sales is about 62% and it's about 72%, so the actual risk is quite low.

But in the past, there were some unsold apartments that were constructed in the areas outside of the Seoul area. And also, because of the increase in the cost of raw materials, there was some financial problems of the construction companies and also some -- there were some financial problems of the construction companies in areas outside of Seoul. So with regard to asset management, we have a special taskforce that monitors these types of asset.

The delinquency regarding the PF is about 0.5%. It's only at 0.5%, Shinhan -- construction included. So as of now, we do not have any major concerns (inaudible) the future, looking at the business. If we look at the economy as a whole, this is an area that could have some problems.

Then, we would now like to conclude the earnings conference for Shinhan Financial Group for the first quarter 2008. Thank you very much for taking part.

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.