Shinhan Financial Group Co Ltd (SHG) 2008 Q4 法說會逐字稿

Good afternoon. My name is [Sung Hun Yu], the Head of IR team. We will now begin Shinhan Financial Group's earnings conference for fiscal year 2008. At today's earnings conference we have with us our CEO, In Ho Lee, our CFO, Beom Su Choi, and Managing Director [Hu Yeong Cho] from Finance and IR. Today's earning conference will consist of the opening remarks by our CEO, In Ho Lee followed by the earnings presentation by Managing Director, Hu Yeong Cho, and also he will make comments about the recapitalization plan. We will first hear from our CEO, In Ho Lee.

Good afternoon. My name is In Ho Lee, the CEO of Shinhan Financial Group. First of all I would like to extend my deepest appreciation to all the shareholders and analysts at home and abroad as well as the members of the press for your unwavering support and trust you have shown us throughout 2008.

Looking back, 2008 was a year of unprecedented volatility and uncertainty. The financial crisis stemming from the US sub-prime crisis impacted not only the Korean financial market, but also weakened the Korean real economy. As a result the financial institutions experienced liquidity crunch and side effects from rapid growth.

Despite the challenging business environment in 2008, and although it was faced by all the financial players, Shinhan Financial Group has recorded KRW2 trillion in net income thanks to the support from all the shareholders and customers. In addition, the business portfolio balanced further between bank and non-bank subsidiaries. The successful integration of our asset management business to help lead the Korean investment trust market was another valuable feat we were able to achieve in 2008. As we usher in the year 2009, we ask for your continued support.

Let me now give you a brief overview of SFG's financial results for 2008 as well as the Group's strategic direction.

SFG's consolidated net income showed at KRW283.7b for Q4 2008, making the total net income for the year KRW2.0186 trillion. The net income for the Bank was KRW1.4605 trillion, which was a 29.1% decrease compared to 2007. However the combined earnings of the non-bank subsidiaries jumped by 25.5% year-on-year to KRW1.335b. The net income contribution from non-bank subsidiaries such as Securities, Card, Insurance and ITC significantly increased from '07's 34% to 48% in 2008, further striking the balance the in the business portfolio as a total financial solutions group.

The Group total assets grew 19.6% for the Bank and 7.8% for the non-bank subsidiaries. The year-to-date growth in the Group asset was 16%, reaching KRW321 trillion. The Group NIM reached 3.52%, which is the highest among our peers. We successfully limited our margin drop by 14 basis points, the lowest in the industry.

Dear shareholders, we anticipate 2009 to be a year of crisis and unprecedented uncertainties both globally and domestically. Sluggish export and weaker domestic consumption are expected to lengthen the economic slowdown. As the restructuring of the unsound companies proceeds, the asset quality of financial institutions is likely to deteriorate.

To overcome such crisis and to secure growth platform for the future SFG is proactively selecting and implementing action plans for overcoming crisis and preparations for the future. We will proactively secure liquidity early on, while maintaining the asset quality and capital adequacy.

The Group will set stable asset growth targets and focus on sound management. Also we will eliminate inefficiency and high cost factors, while pursuing lean management and active change management. In addition we will do our utmost to strengthen customer relationships to alleviate distrust, to recover customer trust and to stabilize the customer base. Lastly we will conduct a full scale reshuffling of the risk management system which exposed limitations during this crisis. We will prepare a detailed process to enable immediate reflection of the changing external factors.

Dear shareholders and investors, through the BOD meeting today SFG has decided to implement a recapitalization exceeding KRW1 trillion. Through this capital injection, SFG will be able to preemptively prepare for future uncertainties, satisfy the investors' demand for high level capital and enhance our readiness to capture post-crisis opportunities. Shinhan Financial Group will successfully complete this round of recapitalization so that we could further enhance the level of capital adequacy for the Bank and the Card business and the entire Group to the level of the global standard. With the active participation in this recapitalization by all the shareholders, our Group will be able to further Shinhan's competitive edge yet again. We promise to make all your trust and support worthwhile.

Dear shareholders and investors from home and abroad, in order to give back to your consistent trust and encouragement and to further increase the shareholder value, all the members of Shinhan Financial Group will do our best in the year ahead. I ask for your continuous interest, encouragement and advice to that end. Thank you.

Next I would like to invite Mr. Hu Yeong Cho to explain our earnings results for 2008 and also regarding the recapitalization plan that we have.

Good afternoon. My name is Hu Yeong Cho. I'm in charge of Finance and IR. First let me tell you about our earnings results. Actually the highlights have already been talked about by the CEO, so let me start from page six, regarding the Shinhan Financial Group income.

Our Group's consolidated net income was KRW2.01 trillion which showed a drop of 15.8% YOY and 12.2% QOQ drop. Our net interest income actually increased 8.5% YOY and also due to the wage freeze for 2009, and despite the payment of KRW85b in retirement money at the Shinhan Card, SG&A dropped in 2008. Non-interest income dropped by 57.1% YOY to KRW919b in 2008. Our construction and shipbuilding industries were additionally provisioned for at about KRW180b, which was one of the main reasons that there was a decrease in the net income and also an increase in the loan-loss provision.

Interest income -- actually NIM edged up by 4 bps. And also during the Q3 there was Lehman Brothers related loss, but it was eliminated in Q4. However, due to the early retirement program at Shinhan Card, SG&A expense increased and also because of the addition of provisioning for shipbuilding and construction industry restructuring, there was a loan-loss provision increase.

Next, regarding the net income by subsidiary, the Bank net income contribution was 52.2% and non-bank subsidiaries rate was 47.8%. On a mid to long-term basis, we want to be able to maintain net income contribution of non-bank subsidiaries at around 40% level.

Moving on, first of all, in terms of the Bank, due to deterioration in the asset quality and an increase in provisions, our income dropped 29% YOY. However in the case of the non-bank subsidiaries, because they showed strong performance, the overall consolidated net income drop was decreased. During the Q3 last year, there was Lehman Brothers related loss which was the reason that Goodmorning Shinhan Securities posted an 11.6% drop in income YOY. Bank's income increased by 67.9% QOQ in Q4 and non-bank's income showed a 11.9% drop QOQ in terms of income.

Moving on to next page, Shinhan Bank income and NIM, shinhan Bank's net income in FY'08 was KRW1.446 trillion which showed a drop of 29.5% drop YOY, and also its Q4 income was KRW356.7b which showed a drop of 66.4% QOQ. There was an increase in the SG&A and increase in the bad loan-loss provisioning cost, but during the Q4, thanks to asset growth and NIM increase and a fall in SG&A, our operating income increased by 33% QOQ. In terms of the loan-loss provision, it increased from Q3 to -- in Q4, which showed an increase of 48.4%.

So overall the asset quality of the Bank was quite sound. I'd like to give you a separate briefing on asset quality of the Bank. And in terms of the interest income, it increased by 17.6% QOQ and NIM increased to 3.52%. And NIS shows -- stood at 2.54%. Moving on to next page, non-interest income, SG&A.

But before we do so let's take a look at NIM. Shinhan Bank plus Shinhan Card's NIM was 3.52% which is strong compared to industry average. The Bank's NIM increased by 2 bp. However Shinhan Card's NIM dropped by 5 bps. Shinhan Card's NIM fall was related to the increased funding costs and worsened profitability due to an increase in SG&A.

Moving on to next page, Shinhan Bank non-interest income and SG&A, the Bank's non-interest income dropped by 60.1% YOY to KRW886.4b. Due to the sluggish stock market, fund fees decreased substantially and also the fee income dropped by 6.5% YOY.

Securities related was recorded at KRW292.1b and there was about KRW1.7 trillion of one-off securities related income and reversal to the bad debt restructuring fund was also a factor. So YOY there was a strong drop of about KRW990b. In addition a foreign exchange translation loss was a factor in terms of the cost/income ratio, which explains a fall of about KRW300b YOY. Our fund fees and bancassurance fees decreased, however, (inaudible) agent fees also increased. So overall fees and commissions income for the Bank increased by 5.4 -- 4.5% QOQ.

In terms of the fund, we are taking measures to prevent redemptions of the existing fund. And in the case of the bancassurance, due to the recent market situation, we are continuing to see a fall in the new sales. So our target is KRW90b for this year. Due to the dividend income from the bad debt restructuring fund, we are seeing a QOQ increase of 129.6% in securities related income.

In the case of SG&A expenses, due to the wage freeze for 2009 and cost reduction efforts and other extraordinary factors such as the valuation loss, there was a significant impact in terms of the labor cost reduction. Administration expenses increased by KRW44.6b. Actually every year there was labor cost increase factors that were associated. However in the case of 2008 we were able to push down the labor cost by a substantial degree so I believe that we will be able to over-achieve the target.

If you look at the left bottom section, cost/income ratio for Shinhan Bank was 43.7% in Q4. But Shinhan Financial Group's figure was 49.3% which is related to the early retirement payment for employees at Shinhan Card. So if you take into account the goodwill amortization costs, these cost/income ratios are being maintained at a sound level.

Moving on to Shinhan Card income, 2008 net income was KRW940.6b ,which is a stable level of income for a credit card issuer. Actually our earnings before income tax increased by 2.6% YOY. However the net income shows a decrease of 43.1% YOY largely because of an increase in the loan-loss provision. The Q4 figure for net income of Shinhan Card was KRW126.8b.

Our receivables increased by 2% YOY and on a quarterly basis receivables dropped in Q4 by 2% from Q3. Installment finance increased by 17% YOY to KRW164.1b, but QOQ basis there was a drop of 4.1%. Others, thanks to derivatives related income and that Bank related gain of KRW29.6b, it showed an increase of KRW91.6b -- 91.6% of YOY increase.

And due to an increase in the interest expense, SG&A increased vis-a-vis last year. There was a marketing cost of about [KRW84b] and there was a fall of about KRW39b in solicitation cost, which explains an increase of 20.8% YOY in SG&A expenses and others.

On loan-loss provision, due to the strength in the provisioning criteria from the regulatory authority made the Company an additional provision for bad loans.

Next, moving on to the balance sheet of Shinhan Financial Group and Shinhan Bank, please refer to page 13. As of the end of 2008 the Group total asset compared to the previous year increased by 16%. It amounted to KRW321 trillion. On a quarter-on-quarter it was KRW6 trillion increase.

If you look at the Bank, because of the loans and also the marketable securities, it amounted to KRW242 trillion (sic -- see presentation). And for Shinhan Card it increased by 1.2%. And Shinhan Card amounted to KRW17 trillion and Shinhan Goodmorning Securities KRW7.3 trillion, etc. And if you look at Bank, their contribution to the overall asset contribution was 79% Bank, and others insurance 8% etc.

Let me move on to Shinhan Bank's loan and deposit growth. If you look at the end of last year's loan, it amounted to about KRW120 trillion, which was KRW14 trillion or 13% increase year-on-year and it was 1.8% increase quarter-on-quarter.

If you look at retail, centering around mortgage, we steadily grew our asset, but if you -- this was just a residual loans that we were able to subscribe back in 2006 and 2007. So actual net increase only amounted to KRW1.7 trillion. So if you exclude KRW670 trillion collective loans, it was only an increase by 0.6% increase year-on-year. In other words, because of the sluggish economy, the collective mortgage loan is not increasing as fast as before.

If you look at the unsecured loans up to Q3 we have maintained a very conservative, prudent loans. So we've promoted a lot of our campaign products only so by -- up to Q3 we grew the unsecured loans, but during Q4 it dropped quite a bit. So the end balance was quite similar to the end of Q3 as of Q4.

And when it comes to corporate, we are making preemptive risk management. After Q3, also in Q4, we were quite prudent. So quarterly we grew by 0.9% (sic -- see presentation) only. If you look at real estate, renting and construction and wholesale, in such sectors, on a quarter-on-basis, our outstanding loans dropped. If you look at corporate loans, the three major conglomerates received additional facility loans etc., but in the second half it was mainly working capital related loan increase in the corporate sector.

If you look at loans in foreign currency, we have seen some decrease. But because we added SME currency swap related additional loans we saw a slight edging up.

On the bottom part, total deposits in won amounted to KRW105 trillion which was an increase by KRW12b -- KRW12 trillion compared to the previous year. And because of the Bank's policy to increase deposit base, our savings increased by 41% so we were trying to secure the deposit related asset.

In 2008, unlike our concerns about CD, in Q4 we saw a drop by 14.7% quarterly. On a year-on-year basis it was a drop by 13%. Despite the fact that we don't have too much need to secure capital base, but the deposit increase is taking place as 3.6% quarter-on-quarter. So in Q3 the loan to deposit rate was 116% but it came down to 114% which is an improvement.

Going on to Shinhan Card asset growth, if you look at Shinhan Card asset, compared to the end of last year it was a decrease by 2.7% amounting to KRW16.8 trillion. To Shinhan Capital we transferred the corporate lease information and also the re-aged loans decreased as well. So if you exclude such transferred loans and the re-aged loans, there was an increase by KRW188b on a year-on-year basis.

If you look at the details, receivables increased 2.9%, but card loans saw a minus 20.8% growth. We were trying to reduce the extension of the credit on the card loans in order to make prudent risk management. That was the reason. In the case of card loans, it grew by 3.9%, but generally it came down in terms of lease by 12.8% year-on-year. Active number of customers increased to 13.6m.

But if you look at the details of the total funding, debentures took about 62%, CP 8%, ABS 18% and Others 12%. In 2008 because of the market situation, ABS and CP issuance was reduced whereas debentures and corporate bonds increased. And a lot of the borrowing from the holding company level has increased quite a bit.

Moving on to asset quality, on page 17 you will find the details. First of all the NPL ratio for the Group as at the end of last year was 1.14% which was a 14 bps increase. On a quarter on quarter basis it was an 8 bps increase.

Compared to the previous quarter, the Group's precautionary and below ratio and NPL ratio stood increased respectively, as can be seen and it was mainly because of the asset quality deterioration of the Bank. And that detail will be included on the following page. If you exclude Shinhan Bank, the asset quality of the rest of the subsidiaries has actually improved slightly on a yearly basis, but because of the sluggish real economy we are becoming even more prudent. And I will go into the details about the Shinhan Card asset quality later on.

The Group NPL coverage ratio as of the end of last year was 172%, which was a minus 20% compared to the previous year 2007, but it was an increase slightly, on a quarter-on-quarter basis. Because of the restructuring of the construction and shipbuilding industry we had to add additional 20% provisioning. That is why the provisioning requirement increased on the assets reclassified as precautionary and below. Through such proactive asset quality management, we will make sure that the Group-wide asset quality remains quite sound.

Currently the loan-loss provision we believe is quite sufficient as we speak. However, in order to prepare for the future, by the end of 2009 we might have to increase even more provisioning, which might slightly reduce the asset quality.

Moving on to Shinhan Bank asset quality, if you look at the NPL ratio, it actually has increased by 56.1% (sic - see presentation) year-on-year and it reached about KRW1.5 trillion. And NPL ratio was 1%. There was an increase year-on-year, 0.27%.

Now NPL, ABS [KRW30b] and some of those one-off factors were included. But if you exclude the one-off factors, it was an increase by KRW440b. If you exclude the write off, the NPL ratio for Q3 was 1.3%.

Precautionary and below ratio has increased a little bit, but it was because we had conservatively reclassified our assets into precautionary and below keeping in mind that construction and shipbuilding industry would call for more restructuring. So we're being extremely conservative here. It's not actually bad loans yet.

As you can see, we are maintaining a quite sufficient level of 164% as we speak. The delinquency ratio, as you can see, is increasing very slightly. But if you consider the real economy and surrounding situations, it's not at an alarming level at all.

Let me go on to Shinhan Card Asset quality. In the case of Shinhan Card, NPL ratio has come down by 0.6% on a year-on-year basis and minus 0.1% on a quarterly basis and also loan-loss reserve is coming down and also NPL coverage ratio has increased. But for Q4, 3.9% delinquency ratio for one month or longer delinquency has increased to the early 4% range (sic -- see presentation). Therefore we will do an even better job going forward in order to manage these delinquencies.

Moving on, we have loan-loss provisioning and write-off. For 2008 annual loan-loss provisioning was KRW986b of which Shinhan Bank took up KRW865b. So that was an increase by about KRW200b. And for Shinhan Card it was about KRW169b reduction compared to the previous year. We have the detailed numbers on the top and bottom on the right hand side.

If you look at the Group we maintained the similar write-off ratio as the previous year, but because of the KRW390b for extra provisioning for Shinhan Bank for 2008, actually our credit cost ratio has actually gone up. For quarterly basis, Shinhan Bank took up KRW420b for write-off and for Shinhan Card about KRW353b. In the case of Shinhan Card, we had some preemptive KRW139b additional conservative provisioning, just in case we encountered additional delinquency going forward. So these are all very conservative actions. Combined write-off for both the Bank and the Card amounted to KRW945b, which was an increase by KRW236b compared to 2007 on a year-on-year basis.

Moving on we have capital adequacy. For 2008 the Group BIS ratio was 10.2% and Tier I of 5.3%. On a quarterly basis we have edged down slightly and we had the preferred share dividend and also AFS loss, KRW120b. And altogether we had experienced a drop of KRW300b or so for Tier I. So going forward we will work even harder to manage risk weighted assets and as I will be explaining later, we will be going through the recapitalization increasing our BIS ratio by 120 bps.

Shinhan Bank's BIS ratio as of the end of last year was 13.4%, which is expected to go up by 1.5% quarterly basis. We had KRW800b rights issue and in November of '08, we had additional capital injection through various means, which added to the capital adequacy. In the meantime, compared to the previous year's KRW136 trillion worth of risk weighted assets it has actually come down to KRW133 trillion for Shinhan Bank BIS ratio.

So as we proceed with very prudent loan policies, we believe that we could manage our asset size quite effectively. We will limit the growth rate for risk weighted assets to less than 2% so we hope to maintain a high level of BIS ratio going forward. During Q4 of last quarter we have received Basel II approval for our risk management system from FSS and we have applied for AIIB to the FSS. So we hope that we could more stringently manage our BIS ratio with all these necessary actions.

We have some reference documents in the appendix and please refer to those documents at your leisure. So this completes the official presentation on the earnings highlights for the year.

So let me now move on to the Shinhan Financial Group's rights issue related presentation. The type of offer is rights issue to the existing shareholders. It would be 17% rights issue compared to the outstanding shares and offering size will be 78m shares, discount rate 25%. And on February 13 we will have our first reference price, but between the first and the second reference prices we will select the lower price.

The number of shares entitled to subscription amounts to about 396m common shares and about 33m preference -- preferred shares. And regarding rights ratio, actually we have ESOP, ESOA eligible to subscribe to 20% of the new rights issue. So depending on how ESOA is exercising this right, it will be slightly changing the rights ratio.

Going forward, assuming that we raise KRW1.5 trillion of new capital, we will increase the BIS ratio to 10.2%. Tier I ratio will be seeing an increase by 100 bps from the current 5.3%. And Tier I, core Tier I will be 5.5% compared to 4.6% now. And use of proceeds will be to enhance the Tier I and core Tier I of the Group and we will also utilize these proceeds to support our business operations for general purposes.

So let me now talk about the reason and the background to which we are pursuing rights issue. Because of the global economic crisis, the global real economy is quite sluggish so we are experiencing quite a bit of uncertainties for the future, so we want to be quite preemptive. And a lot of the domestic shareholders are asking for higher BIS ratio. And also we have domestic consumption reduction. So we want to go through this rights issue so that we could beef up our capital base, so that we could differentiate ourselves further.

Amidst such changing business environment we would like to maintain our stance as a franchise in a flight to quality environment and also we would be offering our shareholders an opportunity to invest in our Bank at an attractive valuation. Therefore I ask for your strong support and participation.

Thank you very much for listening to the earnings presentation.

Now we would like to begin our Q&A presentation. (Operator Instructions).

Now I would like to begin our Q&A session. I would like to take the first question coming from Nomura Securities, Mr. Jin San Kim. Please go ahead, sir. Hello, yes. Please go ahead.

Thank you for your presentation. My question is related to rights issuance. First of all I understand that you explained the rationale. However, Tier I capital of a financial holding company can be -- is quite low. Therefore I am not too sure whether the current offering price will be sufficient to beef up your Tier I ratio.

Also although I fully understand the rationale of doing this rights issue, is there any other method available for you to use to increase or improve your capital ratios other than this rights issue?

And there are financial holding companies with relatively low equity capital ratios and I wonder whether the government has any influence on you for making this decision to this rights issue. Those are my questions. Thank you.

Yes, as was just explained by Managing Director Cho, who explained about the rationale and the background of this rights issue, as you must be well aware, Tier I ratio of the holding company due to two rounds of M&A was lower compared to those of competitors. So that was one factor that we took into account. At the same time we are facing very uncertain market situations so we wanted to make preparations preemptively, which was another reason that we decided to do this rights issuance.

And there was no government recommendation, but we just wanted to use our own credit to -- for financing and receive a fair evaluation from the market directly.

First of all in the case of the Bank at the end of last year, they increased their capital by KRW800b through Shinhan Financial Group's funds. So their ratio is over 9%. It stands at 9.3% and their BIS ratio is around the 13% level. So for the time being as far as the bank is concerned I don't believe that they will see any additional need for capital increase.

However, when it comes to the holding company, Tier I ratio is relatively weak. Therefore we wanted to beef it up so that we can proactively counter uncertainties in the current environment. At the same time we wanted to make preparations for the future as well, by having a stronger capital base. So it was our own decision to do this.

Thank you.

To give you more explanation on that if you look at the materials that we gave to you, core Tier I ratio is 4.6%. Just for your reference, other financial holding companies such KB, Hanna as of September last year, core Tier I ratio is around 6% level. Hanna's ratio is about 7%.

But if we increase our capital through this rights issue, we will be able to improve our core Tier I by 90 bps and BIS ratio by 170 bps and Tier I ratio by 100 bps, meaning that the subordinated capital and hybrid capital can be now utilized. Actually the Shinhan Bank has already utilizing those hybrid or subordinated capital but the holding company is not. This again means that at the Group level, common stocks will be increased.

And other than that method there is no other way available for the holding company to raise capital.

Furthermore, our BIS ratio is satisfying the regulatory minimum ratio. However, global banks are proactively managing their Tier I ratios. They want them to be at double digit figures to prepare for the future. So comparatively speaking our holding company's Tier I capital ratio looks rather lower than the figures of the global leading banks which is the reason that we are making this preemptive decision to do rights issue.

In the case of Shinhan Bank, about 10 years ago they issued DRs in the US market, which marked the first time around for any Korean bank to issue drawing rights. And during the issue period our stock price went up by more than 20%, which indicates that through this rights issuance, we believe that they'll be able to take another look at us and give us due recognition about our strength. Thank you.

We will now take the second question. The second question comes from Templeton, Mr. (inaudible) [Chang]. Please go ahead, sir.

Good afternoon. I'm from Templeton ITMC. My name is [Chang]. I believe my question is in line with the previous question. Could you be a little bit more specific about the reasons why you're going towards this rights issue route?

So far FSS has been only regulating about the Bank's BIS ratio, but the government did not have any regulation on capital adequacy on the holding company level. Of course you said that you want to be preemptive, but from the FSS related issue I'm sure it would be sensitive for you to speak about that. But I'm wondering is there any pressure coming from the government about the holding company's level BIS ratio.

And in the previous comment the CEO said you're preparing for the future. So perhaps I'm a little ahead of myself but I'm wondering whether you are keeping in mind any possible future M&As or opportunities going forward.

If there was no pressure on capital adequacy from the Financial Supervisory Service, I'm wondering whether you could possible use these proceeds for a possible M&A future.

And with regards to the proceeds of KRW1.5 trillion, I'm wondering where you would be using the proceeds. Do you have any specific ideas as to how you will be spending this money?

And lastly regarding Shinhan Bank's asset quality, how do you project the rest of 2009, with regards to asset quality? Thank you.

First of all, your first question was whether FSS had any concerns about Shinhan Financial Holding Group's capital adequacy. Now so far regarding the holding company there has been no comment whatsoever, coming from the regulator regarding the capital adequacy.

However, what I could tell you is that globally we are fully aware that no financial institution is completely safe. Therefore we wanted to validate the situation. We wanted to have some buffer along the way. That is why we are proceeding with this. So I could reassure you that there has been no concern or guidance coming from FSS.

You talked about a possible M&A. At this particular juncture, we have no option that we have in mind regarding an M&A. Even if there is such an opportunity that arises, I don't think that this fund will be sufficient for such an M&A.

In the case of Shinhan I am sure that you are well aware of the fact that we are prudent managers of funds and we are quite efficient in the management of our assets. So when you pursue an M&A there has to be a dire reason, an imperative to do so, but so far we don't have that reason.

So then it boils down to the rest of the questions. Where are we going to be -- use these proceeds? Actually for now we are trying to keep this fund as a buffer for our capital base. We will be watching the market movement quite carefully. As you are well aware, our core -- compared to core, we have -- compared to Tier I we have more Tier II capital. So whenever this Tier II capital reaches some maturity in some form or framework then we might have to use this fund.

And also your question was regarding asset quality. I believe it's too early to tell how our asset quality will move in the rest of the year. But if you look at the economic growth rate for this year expected for the entire world, and according to some of the major think-tanks around the world, in the beginning of the year, they kept forecasting about 4% range for Korea. But recently they kept coming down to the point where some institutions are predicting that Korea will grow in minus percentile. That tells you how uncertain the world market is and how the economy is deteriorating globally.

And as you are well aware, Shinhan Financial Group is a financial entity representing Korea and we are quite sizeable an entity. Therefore we cannot fully guarantee you that our asset quality will only improve. I believe that we will go through various challenges going forward.

And if you have looked at the history of the banking industry you will know this already, but in the case of Shinhan Group, starting from the very branch on the field up to all the managers at the headquarters, we have maintained a very prudent and conservative management practice up to date. Therefore Shinhan's asset quality I believe is bound to experience slight deterioration of asset quality just as with other global players, but I don't think it will be at an alarming level. Thank you.

We are ready to take the third question now. The third question will come from Shinyoung Securities, Mr. Byung Gun Lee. Please go ahead, sir.

Yes, thank you. I would like to ask you two questions. First question is along the lines of the previous questions. As you have said, the holding company's Tier I ratio and subsidiaries' Tier I ratios are showing a significant gap. And even if you increase your Tier I ratio by 100 bps, compared to other companies Tier I ratios, the holding company Tier I ratio will still be lower.

Given this fact of course you could be issuing hybrid capital additionally which would give you additional room. However, given the offering size, I believe that it's not going to be that sufficient. So either you are in a really -- you're projecting that you will be in a really bad situation. So given the current offering size, I think that it doesn't quite explain too many things to us clearly.

And at the end of last year, non-banking subsidiaries capital was brought by the holding company to be injected into the Bank. The Bank's Tier I ratio is quite high now but there is a certain significant gap in the Tier I ratios between the holding company and Shinhan Bank which brings the question whether there was -- it was necessarily -- absolutely necessary for you to inject capital into the bank at the end of last year. So again back to this gap, are you really preparing yourselves against a possible deterioration in the economic situation? So I'd ask you to on this.

And the second question is regarding the deposits. Time savings has increased substantially, but recently CD interest rates has fallen substantially which is putting a pressure and burden on you. But overall during the Q4 last year, time savings have shown an increase and the interest rate gap structure seems to have worsened vis-a-vis in September last year. And in the case of Shinhan Bank as well, [BOKRP building] fund has increased and the NIM is worsening right now. So to which extent do you believe you can respond to best handle the situation? Thank you.

Let me address the first question first. As you must be well aware, the Group's Tier I ratio compared to other banks will still be lower than those of other banks. Probably you must have surprise by this sudden news, but high figures do not necessarily mean that they are absolutely good because according to the guidance of the regulatory authorities we should be able to maintain proper levels of equity capital ratios. But globally it seems quite fashionable that financial institutions are going after double digit equity capital ratios, which is the reason that we are trying to increase our ratios.

However, as a matter of fact, we're not -- we were originally skeptical about whether we need to be -- we need to incur such a cost to raise this ratio. And we have done a lot of stress tests previously and we thought that the current offering size was sufficient to beef up our capital base for now.

And of course we received dividend from Shinhan Card and injected the capital into the bank last year. Actually one of the main functions of a financial holding company is making decision on efficient capital allocation among subsidiaries so margin and capital should be high in the areas where we inject capital into. So we made such a decision last year for the sake of the efficiency of the capital allocation. At this time point however, BIS ratio of the Card company is over 20% so we thought that the margin efficiency of capital there at the Card company was lower than that with the Bank.

And NIM is falling. But it's true, however, CD rates will no longer fall as drastically as it has been until now and we are also trying to identify various measures to counter this current situation. And we internally believe that there is not much possibility that the CD rates will see such a drastic drop as we saw in the recent months.

And currently one of the efforts that are being made by the banks is as follows. Actually CD rates shouldn't necessarily be the only base rate for bank rate -- interest rates because CD rates is not really fully reflecting the financing cost of the banks because it's showing such a great fluctuation. So we are trying to develop another base rate other than the CD rates.

And at the same time in the market the borrowers' risks spectrum has widened substantially, which is the reason that we believe that we need to be able to widen the spread for pricing. Again this means that we will make various efforts to expand our low cost deposit base. Of course this will take time.

However, once again, I don't believe that we will see the repetition of a drastically falling CD over a short term period, meaning that we are expecting our NIM to improve in the future as well. Thank you.

We'll take the next question.

We currently have no participant waiting for a question. (Operator Instructions). We'll wait just a little bit to see if there is additional questions.

If there are no more questions in this line, we would now like to wrap up the earnings conference for 2008 for Shinhan Financial Group as well as the announcement about the rights issue. Thank you very much.

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