Shinhan Financial Group Co Ltd (SHG) 2009 Q1 法說會逐字稿

(interpreted) Good afternoon and good morning. My name is Sung Hun Yu. I'm the head of the IR team. First of all, I'd like to thank you all for coming to our earnings release. From now on, we would like to begin our Q1 '09 earnings release call. Today with us is the CEO of the Group Mr. Sang Hun Shin and our CFO Mr. Beom Su Choi and Executive VP Mr. Yeong Choi.

First, we'll begin with a greeting remark from the CEO Mr. Sang Hun Shin. And Mr. Choi will give you a presentation of our earnings release for Q1 '09. After the presentation, we'll have a Q&A session. First, let's invite Mr. Sang Hun Shin, our CEO.

Good afternoon. This is Sang Hun Shin, the CEO of Shinhan Financial Group. It is a pleasure to extend my greeting to you through the Q1 earnings conference call for 2009. I would like to also express my appreciation to all the investors, analysts, and members of press both here and abroad for attending today's webcasted earnings call.

In particular, I would like to take this opportunity to thank the shareholders who have shown their trust in us and enabled us to prepare for the future by participating in the rights offering despite the difficult market situation.

I have returned as the CEO of the holding company on the 17th of March this year after serving six years as the President of Shinhan Bank. I am acutely aware of the tremendous responsibility of leading the Company in these difficult times. With these 21,000 employees and the management pulling together, I am confident that the current turmoil will be an opportunity to consolidate our position as the leading integrated financial company in Korea. I ask for your continued support and interest.

And now I would like to briefly talk about the business results for Q1 of 2009. Shinhan Financial Group's net income for Q1 recorded KRW118.1 billion, a decrease of 81% year on year from KRW620.4 billion and a reduction of 58.4% quarter on quarter from KRW283.7 billion due to interest income decline cost and in contraction and increase in loan loss provisions as a result of deteriorating asset quality. Net income for the bank business is KRW74.1 billion, decrease of 80.7% year on year and decline of 79.6% quarter on quarter.

For non-bank business, KRW208.8 billion is realized, a decrease of 53.1% year on year and 10.9% drop quarter on quarter. As a result, net income contribution of non-bank businesses, such as credit card, securities, insurance, and capital, increased to 73.8% in Q1 of this year compared to 34% in '07 and a 47.8% in '08.

Asset growth rate has visibly slowed with the proper asset price of the Group reaching KRW325 trillion, which is an increase of 1.2% from KRW321 trillion at the end of '08 and loans in Korean won only increasing 0.3% year to date. Bank's NIN are excluding the credit cards recorded 1.66%, a decline of 48 bps from last quarter due to rapid drop in market rates. The group overall NIN decrease of 53 bps from last quarter to reach 2.89%. Mr. Yeong Choi is going to be providing you with more details on Q1 business results shortly.

Investors with a recent upturn in the stock market stabilizing exchange rates current account surface and improved financing condition for companies, it appears that the financial market is starting to regain stability. However, given the current unemployment, private consumption, and investment indicators, and in consideration of the asset quality trends of banks and credit card companies, it's too early to say the economy is currently on the track to full recovery.

As we expect a gradual recovery in the Korean economy, we will continue to focus on overcoming the current crisis while also trying to concentrate on building up internal capacities to capture new opportunities that will arise once the crisis is over. To this end, at the end of last year, each company in the Group developed their own management agenda aimed at tiding over the current crisis. And they're now working to enhance the Group's survival capability by quickly implementing them.

In addition, to build a firm foundation for the Group to sustainable growth, we classified our potential strategies into, A, accelerates, B, back to basics, C, create, and D, decelerate businesses to reinforce our future competitiveness.

This is where we will be focusing our efforts on this year. First, a strategy to accelerate is further building on Shinhan's biggest strength, which is a balance between banking and non-banking. To reinforce this, we plan to concentrate our energy on increasing competitiveness of the securities, life insurance, and asset management positions. At the same time, we will also upgrade our risk management capabilities to strengthen our early warning system on major magnifying indicators.

Next is the strategy of going back to the basics by means of increasing efficiency within the Group. And a flexible capital policy will build a customer value oriented system to increase our ROE and shareholders' value and deliver the best value to the customers.

Thirdly, areas where we need to apply our creativity -- we are committed to developing new growth engines and consistently enhancing our expertise and capability for asset management, global business, and other businesses with long-term growth potential so that we can proactively take advantage of changes in the industry paradigm.

Furthermore, in the case of areas not aligned with the Group's mid to long-term vision, we'll definitely decelerate our efforts so that we can move away from attempts at shortsighted gains and superficial top line growth.

Distinguished investors at home and abroad, current market environments require financial institutions of constant transformation. As always, Shinhan will continue to preemptively respond to rapidly changing market environments and make constant transformations to further solidify its standing as a leading financial group and differentiate itself from others. We will spare no efforts to boost our shareholders' value dramatically once again. I look forward to having your continued interest and support in the future as well. Thank you. Next, Mr. Yeong Choi is going to make a presentation on the business results of Q1.

Good afternoon, ladies and gentlemen. My name's Yeong Choi. I'm responsible for the financial team at Shinhan Financial Group. I am going to make my presentation based on the materials made available on the website. The highlights have been covered by our CEO. And so I'll be skipping the first part. And I will be looking at the income of the Group as far as the subsidiaries as well as the bank's profit and loss.

So let's begin with page six. As a financial group, we reached -- has reached KRW118 billion, which is a decrease of 58% compared quarter-quarter. And the reason for the reduction in the income is because of the NIN reduction and increase in loss provisions.

And as for the non-income -- non-interest income, we see some reduction indices. But we have been able to deal with the one-time loss causes. So consistent with last quarter, we have been able to recovery -- record recovery.

And in terms of SG&A, we have been able to make minimal improvements in terms of SG&A. With the economic slowdown and the risk factoring, we see that the -- we have been about KRW518 billion of provisioning. We have seen increasing provisioning for the shipbuilding and production for about KRW219 billion by addition of bank. And we have also about KRW46.9 billion of provisioning for the realized [BPF].

An increase position on bank is related to a restructuring -- excluding restructuring on (inaudible). We believe that we have about -- we have some losses, loss provisioning. And we have seen some loss because of the increase in the NIN contraction. We believe that this is going to continue until the first quarter. But this is going to recover in the second half of the year. And I'm going to go into the details in the next pages.

And this is income per subsidiary. And in the first quarter of 2009, we have KRW282 billion of net income. And the contribution of the non-bank has increased as much as [73%]. And we have contribution of the bank [about 76%]. And we believe that if the bank's profit increases in the second half, I believe this balance between bank and non-bank will take place.

And as for the -- we have about KRW285 billion. And we have the financial cost and other. We have about KRW118 billion of consolidated net income. And in terms -- because we have about KRW420 billion that's been written off as the cost and with new international accounting standards, we are not going to be able to write off about KRW400 billion. Therefore, on the accounting books, we'll be able to see recovery in terms of income.

And on page eight, this is the income and loss of banks and non-banks compared to the last quarter. As I mentioned before, because of the interest income decrease and because increase in the loss provision, the income has decreased. And if the non-banks for additional card and additional securities have seen decrease in the income due to loss provisioning.

And for the Shinhan cards in the first quarter of last year, because we have the dividend and we have the -- as well as the performance payout was paid out in the first quarter, that has come -- resulted increase in the [four to one, three of one] of SG&A. And that is why there has been a result decrease has -- increase has taken place. And [Nomura] securities has seen income decrease because of the loss provisioning.

And however, Shinhan Life Insurance, despite the difficult times, it has been able to see increase of 26% and 34.3% year on year and quarter on quarter. And the bank insurance has been do quite well. So Shinhan's life has been able to maintain a stable growth quarter on quarter.

And next is the NIM and income option on bank. And the net income of the Shinhan Bank has increased -- has decreased by about 81%. And because of the market rate, NIM has decreased -- the advertised of the interest income has decreased by 12%. And the loss provisioning has increased dramatically because of the restructuring that is going on.

However, SG&A because of the seller cut and the performance pay decrease and the cost reduction, we've been able to see much reduction in SG&A cost. And we have seen the decrease of the NIN quarter to quarter about 79% and interest income decrease. And the benefits paid have caused a decrease.

As for the non-interest income and because of the NPO and the foreign exchange related loss, an exchange rate loss, and CD of cost, we have seen about a KRW37 billion increase. And the loss provisioning has been -- we haven't set the loss provision as the last quarter of last year. And the total loss provisioning amount is KRW425 billion. And this is a result of restructuring and also because of the delinquency rate.

And if we look at NIM, Shinhan bank NIM is 1.66%. And the market CD rate has decreased by about more than 1%. And that has been a dramatic decrease of 48 bps. If the market rate is maintained stable and as time passes and then the funding cost will reflect that. And so we believe that the NIM will recover slowly in the second half of the year.

And Shinhan Financial Group would like to increase the low cost of funding. And we would take many efforts in order to enhance the NIM in the future. And at the same time, credit cards of NIM is about 1.89%.

The next is the non-interest income and the SG&A of Shinhan Bank. And in Q1, non-interest income was about 4.5%, which is about KRW11 billion decrease. Fund and [bancassurance] sales decreased, commissions decreased about KRW2 billion. And so the brand of payment -- so the [institution] paid a decrease about 37%. And however, there's the decrease or there's a disappearance of the one-time off losses. We have been able to minimize the loss.

But compared to the quarter, the non-interest income increased by 57%. And this is (inaudible) last quarter. And in the first quarter of this year, non-interest income was about KRW233.4 billion.

And if you look at the bottom, the SG&A of Shinhan Bank has decreased by 10.9%. And this is year on year. But that's the income -- the labor cost has decreased and has result -- that has helped to decrease the SG&A.

And compared to last quarter and because of the benefits paid and others have caused increase in the labor cost. And we have been able to decrease administrative costs. And that has helped us to decrease the cost by KRW132 billion. And compared 2008, we are going to continue to decrease the annual SG&A cost. And the cost information has increased. And it's because of a decrease of the income. And that is not as a result of the increased cost.

And on page 11, this is the income for the Shinhan credit card. And there's a 55% decrease year on year but 12.5% increase quarter on quarter. And the operating income has decreased 6.8%. And SG&A has increased 11%. And because of delinquent rate increase and the increased loss provisioning has led to the loss. Compared to last quarter, the operating income has decreased by about 2%. And the provisioning has increased by up to KRW12 billion. But as SG&A cost has decreased by 4% and therefore the operating income quarter on quarter by 12%.

As you can see, the operating income ratio is around 20%, 21% and therefore the possibility of Shinhan credit cards maintaining at a manageable level. And because we changed the payout period for the benefits, and that has resulted increase in this SG&A. And but in the second quarter, I believe that we'll be able to recover the situation. And despite the economic decline, the recovery of the bad debt has maintained quite well. And we have been able to recover about KRW90 billion. And we believe that we'll be able to recover around KRW360 billion.

Moving onto page 13, SFG asset growth, as of March 2009, total assets stood at KRW325 trillion, which is an increase of 1.2% YTD. By subsidiary, Shinhan Bank showed a decrease of KRW1.9 trillion. And in the case of Shinhan BNP Paribas Asset Management, there was an increase of about KRW4.5 trillion.

The reason that there was an asset decrease in Shinhan Bank was because of a significant reduction in contract accounts. And in the case of Shinhan cards (inaudible) of last year, they have been continuously decreasing their risk-related assets. Therefore, asset was reduced by 1.2% YTD. And the integrated asset management company has shown a YTD percentage growth of 16.7%. And KRW4.5 trillion of assets have gone to Shinhan BNPP Asset Management out of the money that's floating in the market.

Moving onto Shinhan Bank loan and deposit growth on the next page, as of March end 2009, loans in Korean won was KRW120 trillion, which was an increase of 0.3% YTD and 9.1% YoY.

Recently, due to the sluggish economy, the pace of the loan growth is slow, especially in the case of corporate loans. For large corporates, there was a reduction of 7.1% YTD. And also, multi-loans increased by [2%] YTD basis. In the case of credit loans, there was a decrease of about 3.7%.

In the case of the corporate loans, due to the government policy of encouraging SME loans, there was an increase of about 2.3% YTD. However, there was a decrease of about 1.1% in SOHO. So overall for corporate side, there was an increase of 0.7%.

And looking to total deposits in Korean won, there was a 6.6% YTD. And in the case of loans in foreign currency, there was a YTD increase of 1.3%.

Moving onto the deposit side, as of the end of March 2009, total deposits in Korean won was KRW112 trillion, which increased by KRW7 trillion from the end of the year. And it was a 17.1% YoY growth. This is due to the market preference for safe products. So the money that went to the stock market came back to the bank.

And also in the case of the low-cost deposits, there was an increase of 11.7% YTD to KRW40.2 trillion.

Our time deposits, there was an increase of about 7.5% YTD. And especially in the case of last year, there was exclusive growth in one product. However, now there is a significant growth in the accumulative and et cetera deposit products in the bank.

Also, [in regards] to the increasing liquidity from the government, there was a significant reduction in the issuing of bonds. And in the case of the loan-to-deposit ratio, it changed from 114% last year to 107%. So there was an improvement.

Moving onto the next page, Shinhan card asset growth, due to the slow economy and due to the policy of the Company to manage their assets conservatively, their assets were about KRW15.9 trillion.

To respond to the current sluggish economy, the Shinhan card refrained from aggressive marketing and instead continued their efforts on managing of their quality customers.

Their transaction (inaudible) was reduced by KRW1.7 trillion to KRW24.3 trillion. In the case of the receivables, there was a decrease of about 2.5% YTD. And there was a decrease of 6.9% and 7% in cash advances and card loans.

The number of active customers was 13.6 million as of March end. It was an increase of 0.2% YTD. And in the case of the merchants, there was an increase of about 1.1% YTD to 2.2 million.

To think about the funding, there was a decrease of 3.6% YTD in terms of the total funding. And in the case of CPs, there was a reduction of 13.9%. So the credit card company is now maintaining a much more stable funding structure.

Moving onto the asset quality of Shinhan Financial Group, NPL ratio of the Group was 1.7% at the end of March, improve -- up from 1.14% at the end of last year. And precautionary and below ratio was 3.17%.

In the case of the total loans of the Group, it was KRW177 trillion, which is a decrease of about KRW2.5 trillion from the previous quarter.

Due to an increase in the NPLs on the part of the Shinhan Bank, the Group's NPL coverage ratio was reduced to 131%. But this is still a sound level.

Moving onto the Shinhan Bank asset quality on the next page, page 18, at the end of Q1, NPL ratio of the bank was 1.51%, up by 0.51%. And precautionary and below ratio was 2.79% at the end of Q1.

And substandard and below loan amount for the bank was KRW2.29 trillion, which is up by 49% from the previous quarter. This is mainly due to the restructuring that's going on in the construction and shipbuilding industry. There was only a limited growth in the NPLs in the retail loans.

In the case of the retail loan delinquency ratio, it's 0.36%, up from 0.33% in Q4. And in the case of the large corporates, there's not much change. However, in the case of the SME loan delinquency ratio, it's up by 38 bps from the previous year to 1.63%. And the real delinquency ratio moved up by 0.7%. This is because of the restructuring that's currently going on in current sectors.

Actually, in the case of the SOHO loans, which accounts for 33.5% of the retail loans of Shinhan Bank, the delinquency ratio only edged up by 10 bps to 1.01%, which is quite sound compared to the SME and large corporate loan delinquency ratios. So mostly, our delinquency ratios are kept under 1% level. Therefore, we do not expect any major provisioning requirements in the future.

Actually, SOHO's more sensitive to the economic cycle. So given this fact, I believe that the fact that there was only a slight increase in the SOHO delinquency ratio proves the sound asset quality of Shinhan Bank.

So in all, we are maintaining sound asset quality for retail and large corporates. And in the case of SME delinquencies, actually one-third of the SME loans are accounted for by SOHO loans. And SOHO loan delinquency ratios are quite sound. So this has all been under our control.

Page 19 on Shinhan card asset quality -- NPL ratio of Shinhan cards was up to 3.11% from 2.44% at the end of last year. And precautionary and below ratio is up by 0.47% to 5.6%. The total increase in the NPL loans, NPL coverage ratio, is a 185%. So it's down by 21%. However, this is still quite a sound level for the card company. And the real provisioning balance is about KRW147 trillion. And coverage ratio is quite high.

At Q1 end, delinquency ratio was at 3.57%. It's up by 43 bps from 3.14%. However, starting from March and April, our delinquency ratio is stabilizing.

Moving onto loan loss provisions and write offs on the next page, SFG loan loss provision in Q1 was KRW581 billion. This is down by -- excuse me -- mostly Shinhan Bank had to provision additionally for shipbuilding and construction companies. However, in the case of the retail sector, it still maintains at KRW31 billion in won level, which is quite sound. And in the case of the total provisionary requirements, it's KRW502 trillion. In the case of the credit cards, it's up from 0.5% to 1.3% in Q1 '09.

During Q1 2009, Shinhan Bank's write off is about KRW131 billion, which is increased from the previous quarter. In the case of Shinhan cards provisioning in Q1 was KRW106 billion. This is the write off -- excuse me. So all and all, the total write off of Shinhan Bank and Shinhan card was KRW237 billion at the end of March 2009.

Moving onto the next page related to capital adequacy status of the Group, at the end of Q1, our group BIS ratio increased by 1.4% from 10.2% to 11.6%. Well, we did a rights offering of about KRW1.3 trillion in March. Therefore, there was an improvement in the BIS ratio. So our capital base increased by about KRW2.9 trillion as a result of the rights offering.

We also are very actively managing our asset quality. So we are [rising price on the] for BIS and other asset quality ratios.

In the case of Shinhan Bank BIS ratio, it's up by 1.1% from the end of previous year to 14.5%. There was about KRW800 billion rights offering that was completed at the end of last year. So Shinhan Bank is maintaining a quite sound level for BIS and other capital adequacy ratios. Especially starting from 2009, they are going to apply Basel II approach. So they are going to apply a relaxed rule, which would reduce the amount of risk-weighted assets. So Shinhan Bank's BIS ratio will be maintained at a sound level in the future as well. Shinhan cards have the adequacy ratio or stood at 21.5% at the end of Q1 '09.

Last but not least, I would like to explain about the results of our capital raising that was completed in March this year. Shinhan Bank in order to preemptively react to the changes in the financial market environment, we completed -- we announced to a rights offering this year. Our biggest shareholder and strategic partner BNP Paribas Group took part in the rights offering. And other major investors, National Pension Services and others, have also fully participated in the rights issuance. Therefore, we were able to raise KRW1.3 trillion. Therefore, the Group BIS ratio could improve by 1.5 percentage points and Tier I ratio by 0.8 percentage points. So I'd like to take this opportunity to thank our investors once again for taking part.

Regarding the other major management indicators, I would like to ask you to please refer to the materials later on. This concludes my presentation on Q1 '09 earnings. Thank you.

Thank you. We will now entertain questions. (Operator Instructions) Now we'll take the first question. The first question will be posed by Ms. Park from HSBC please.

Good afternoon. My name is Kathy Park of HSBC. I have two questions. The first question is related to refinancing risk. Recently, Shinhan Financial Group, the bank or the bond, I think will mature this year and next year will be [term]. And I think that is going to be about KRW1 trillion this year and a little more than KRW1 trillion next year. So I wonder what your view is about the debt capital market and how you plan to do your refinancing.

And my second question is this -- Shinhan card, its income is decreasing. And provisioning is increasing. And what is your target for the net income for this year? And I was interested about -- I wonder if you have a target from a group point of view.

My name's Beom Su Choi, the CFO. As you know, since we've become listed in the United States, we do not disclose our internal targets. But as of now, Shinhan credit cards relatively is doing quite well. And we're compared to our target. We are not -- we have not reached the progress that we would like. The credit economy's in a difficult situation. And I believe that impact on the households has not been reflected fully. And so preemptively, we are strengthening our risk management. And that is why the cash advance services, which was very profitable in the past, we are decreasing the exposure. And that is why the margin has decreased slightly. However, on credit cards, we have taken many preemptive measures. We are not concerned about cards.

And as for the refinancing, I think at the end of last year, the capital market was in difficult situation. And however, this year, I do not believe that we need to be worried. As you know, we have been able to increase our rights by KRW1.3 trillion. So we have the capital from that offering. And we are doing small refining. And they are being done without a hitch. So we have no concern related to refinancing in the future.

And related to borrowing, about the corporate end of Shinhan Financial Group, that is about KRW2.7 trillion. And if the holding company has issued the debenture in order to support the credit card. And I mentioned before the credit card company has seen a CD decrease as well as ADS.

And I guess we have been able to secure funding through the financial debentures. So given that in the current market situation, I don't think we need to be worried about the refinancing. And we do have a liquidity over KRW1 trillion. So we do not need to worry about refinancing. Thank you.

Yes, we have a second question. The second question will come from Mr. Byung-Gun Lee from Shinhan Securities. Mr. Lee, please go ahead, sir.

Yes, good afternoon. My name is Byung-Gun Lee from Shinhan Securities. Regarding the asset quality, I have two questions. First, as was mentioned before during presentation, Shinhan Bank had to additionally do the provisioning. Can you talk about many of the other assets?

And in regards to the superior asset quality that you and the company's at, how is it [EBITDA] to do provision for them? And during the previous quarter earnings call, you said that you've sufficiently accumulated provisioning. So I wonder what is the additional provisioning that you have to do. Can you please elaborate on this part?

And secondly, with regards to the SME loans, I have a question as well. SME loans I think have increased by KRW1.2 trillion on a net basis. But comparatively speaking, if I hear from other banks, well, the new loan amount that's [percentage] to SME seemed to have been a lot for Shinhan Bank, especially if that went through fast track. So how troubled these are -- there must've been some conversion from (inaudible) into loans. And there must've been some new loans that you originated. Therefore, I think that these two account for quite a significant portion of your loan growth -- it's SMEs. And I guess that this must've affected your asset quality ratios. So can you explain about this, please? Thank you.

Yes, in regards to the shipbuilding industry question, I would like to address that myself. Currently, the entire group has about KRW3 trillion exposure to shipbuilding and Shinhan Bank KRW1.8 trillion and Shinhan capital the remainder. Currently, we have provisions in KRW97.1 billion for this industry.

And with regards to 38 shipbuilding companies that were identified as a result of the first range credit assessment, we have about -- certain exposure. Well, our current anticipation is that the additional provisioning will be between KRW100 billion and KRW200 billion. So this is not going to be a material addition to our current provisioning level.

One more thing that we can add is the follows -- the bank's loans to shipbuilding companies is mostly to the major players in the industry. And especially in the case of Shinhan capital, most of the loans are in the form of ship financing. And this is in the form of leases owned by Shinhan capital. So there is not much to worry about this.

And [LTZ] is just about 35% level because most of the loans are based on the payments of both interest and principle amount repayment. And starting from 1998, we discontinued handling ship financing in the case of Shinhan capital. This is the reason that Shinhan capital does not really have a large exposure to shipbuilding industry because most of the loans have been repaid for both interest and principle amount. Mr. Choi will follow on.

Looking for the SME loans, it's true that there was KRW1.2 trillion increase from the end of last year. And you talked about fast track programs. And through these fast track programs, we provided about KRW2.1 trillion in liquidity through fast track programs to SMEs.

About KRW580 billion of liquidity support, about half being supported by the credit guarantee and other parts of guarantees, out of KRW1.2 trillion, KRW580 billion is covered by guarantees. And about KRW720 billion are loans with guarantees. And the remainder is credit loans. That's about KRW500 billion. Thank you.

Next, for the additional provisioning, as was mentioned, with regards to the first round of restructuring during Q4, we've provisioned KRW183.9 billion. And at the time, there was a question with regards to the level of provisioning, whether it was sufficient enough. During Q1, with regards to the first round credit assessment, we've done additional provisioning. That is true. And the major portion is related to shipbuilders. And the total additional provisioning is KRW136.6 billion.

But Q4 last year, we were implementing walkout programs. So at the time, we felt that there was no need to -- for additional provisioning. However, (inaudible) those companies required additional provisioning from us during Q1. So regarding these companies, we've accumulated KRW136.6 billion more in provisions.

So with regards to this restructuring drive, it is true that we've additionally provisioned in Q4, which is the reason that there's not going to be any additional provision requirement in Q2 with regards to the first round credit assessment.

And one more thing to add in the case of Shinhan Bank's SME loans, it seems that there is a notion that there is a dramatic increase in SME loans in Shinhan Bank. But SME loans account for about 17% of the overall Shinhan Bank loans. And SMEs (inaudible) loans are the ones that we have been identifying as sound for SMEs for a long time. So this is an optimal level that we are maintaining. Thank you.

Let us move onto next question from Morgan Stanley. [Mr. Wan] is going to ask the question, please.

Good afternoon. My name is Chan Young Hwang of Morgan Stanley. In these difficult times, I think that you may have some difficulties related to results. But I have two questions for you. One is that market rate -- related to market rate. According to other banks, it seems that -- I wonder -- you didn't have any (inaudible) related to hybrid. But your NIM has decreased further than other banks. So in the future, you said that the recovery is going to take this from Q3. So how much recovery to you expect related to NIM? That's my first question.

And another question about the market preprovisioning of margin -- if this is decreasing, in the future, does the preprovisioning income -- how much increase do you expect? And I believe this is very important in enhancing the attractiveness of Shinhan Financial Group. Could you please answer these two questions?

Shinhan Bank compared to other banks, the NIM decrease is more than other banks because we had a decrease of 48 bps. And because we have a deposit that's related to market rate that's up 87%, other things have (inaudible) and [76%] we have higher ratio. And we have very high CD-related deposits as well compared to other banks. And that is why we are impacted in this time of market rate decrease.

But I mentioned before in Q2 we believe that the -- our selling cost will reflect the market rate. And so in the second half of the year, I believe the NIM will recover. So we anticipate -- I can't give you the exact numbers. But in Q2, we expect about 20 bp decrease in NIM. And then I believe there will be no further reduction in NIM.

And about the preprovisioning income, this is because of NIM reduction and because of the fee income reduction. And related to fees and commission, the biggest decrease was in the fund sales commission. As you know, Shinhan had two asset management companies. But they were merged into one. So in the asset management area, we are trying to stake out a new position based on our mistakes of the past. We would now want to provide products that the customer wants right now. But we are looking for products or funds that we can grow along with the customer so that we can have a long-term growth. And I believe these efforts bear fruit.

And second, we do have the loans that is related, linked to market rate. And when the market situation changes, I think, as I said, we will need to recover the NIM more quickly. We are going through difficult times, as I mentioned before. But I believe that this is the time for us to do the things that we need to do but weren't able to do, for instance, cutting costs and expenses.

And low-interest deposits, we are taking various efforts. So when Korean economy and the world economy are normalized, I believe that Shinhan will be the first bank to recover its profitability.

Yes, we have another question from Templeton, [Mr. Chung]. Please go ahead, sir.

Yes, good afternoon. My name is Mr. Chung from Templeton. I have one question related to strategy. And I also have another question. With regards to strategy, while the net income for Shinhan Financial Group for Q1 is KRW118 billion, while in the case of preferred stocks and dividends and except for the cash out was under (inaudible) investors in common stocks. Well, it seems that this income is not something that's going to be returned to general shareholders, except for in the case of Shinhan toward investors investing in common stocks with the Company. What kind of strategy are you thinking of to differentiate yourselves from others to provide greater benefit to your general shareholders, holders of common stock?

And secondly, with regards to provisioning, while technically speaking, I would like to ask your question. While in the case of bank, it was KRW433 billion in Q4 and KRW425 billion in Q1. So if it excludes some aspects (inaudible) KRW180 billion is purely because of the delinquencies. So this is translated into 50 to 55 bps increase in credit cost. Well, this is a level that's quite normal in terms of provisioning. So intuitively speaking, I believe that most of the loans of the bank are quite similar. And in case of other banks, they had to provisioning additionally for more than 100 bps. But in the case of Shinhan, it was only about 50 to 55 bps. And I would like to know why. Maybe it's because of a (inaudible) something you have. Or maybe it's because of provisioning that you didn't really fully need accumulated for that.

And related to NPL coverage ratio strategy, in the case of Shinhan Bank, the peak was about 180%. And currently, it's about 120% level. So it's quite a dip. Other bank figures are down to 100% level. So what is your future strategy regarding NPL coverage ratio? What is your target or level that you think you will be tolerating in the future in terms of NPL coverage ratio? Thank you.

In the case of common stock, for those investors who hold common stock for a long time, we truly respect them. And we truly believe them as our strategic investors, that they're trusting us. So from this perspective, we are respecting this in the performance evaluation criteria. ROE equity, the ROE ratio, return on equity ratio is being reflected in one of the management evaluation criteria at the Group. And also for those shareholders, return is another important indicator that we utilize internally.

We set a certain period. And during this period, we calculate the stock price growth rate, another indicator so that we can calculate total shareholders' return. Last year, it was an (inaudible) figure. However, compared to other large financial holding companies, our figure was much better. And there was a less fall for us. And our stock price performance was quite strong last year compared to other financial groups. This is something that we are going to maintain in the future. And that we will try our best efforts for. Thank you.

Regarding the provisioning and asset quality, you've asked certain questions. And I'd like to address them myself. In the case of credit cards, as you previously pointed out, it's about 50 bps for us. So comparatively speaking, the amount of provisioning is smaller than other area banks for two primary reasons. First, our loan assets -- half of our loan assets are household retail loans. And if you look at the delinquency ratio in retail loans, it's 0.36% at the end of Q1. This means that the provisioning level for retail loans is not so large compared to the previous quarter. And also, even when comparing to the entire '09 -- '08, excuse me. So half of our loan assets are quite stable. And they do not require a lot of provisioning, which is a reason that there's not a dramatic increase in the recurrent basis provisioning.

And secondly, from the perspective of corporate loans, except for the companies that are currently undergoing restructuring, about KRW18 trillion, 15% of the loans are SOHO loans. And delinquency ratio is quite stable there.

And in the case of SME loans, delinquency ratio for one month overdue, there was an increase of about 1.6%. But however, in the case of SOHO, there was -- it's about 1.01%, which is quite stable, even from the end of last year.

And in the case of asset growth rate, in Q1 this year, especially in SOHO, there was little grow. There was actually negative growth. Still, we were able to maintain sound asset quality in SOHO loans. So in retail loans and SOHO loans, we are maintaining sound asset quality levels, which is another reason that there was not much increase in the provisional requirements on a recurrent basis.

Also, in the case of NPL coverage ratio strategies that you asked about, while Shinhan cards coverage ratio is still at a high level, but at the Group level, the coverage ratio is 130% level. And Shinhan Bank is down to 120%. By the end of this year, we expect it to be about 110%. This is a level that we can defend by the end of this year.

So we do not anticipate any major event that would push down our coverage ratio dramatically. And in the case of the provisioning amount, whether it is optimal level for us, this is something that we always think very critically about for ourselves. So I do not anticipate any major deterioration in terms of provisioning amount that we have to do in the future. Thank you.

We'll now take the last question from Deutsche Securities. Mr. Scott Lee is going to be asking the question. Mr. Lee, please.

Good afternoon. My name is Scott Lee of Deutsche Securities. I wonder if you can hear me clearly. My question is -- most of my questions have been answered. But I have one more question. What I want to know is that -- it's not a quantitative number. But I would like to hear from the people who are working in the field of SMEs in particularly if the cash flow is bad. Then how much time does it take from working capital to a delinquency ratio? So I would like to know that time gap.

First, compared to in the past, that gap has shortened or that gap has widened. And compared to economic situation of the future, we would like to able to estimate the future direction of NPL. That is why I'm asking this question.

(inaudible) related to that question, we have not really reviewed that information. But given the overall market situation (inaudible) the situation is truly difficult. In June of '97, I think that unemployed increased by 850,000 employees. Unemployment took place. When the economy was bad and the company delinquency took place and then the SMEs went bankrupt. And then we had a credit crisis. But this was related to retail, to households.

And too, because of that, it's very difficult to make the comparison because one is related to company; one is related to retail. But last year, compared to ten years, because we haven't able to (inaudible) from ten years. And the financial structure of the life companies have become quite solid. And the companies that are working with these solid large companies are able to receive the necessary funding and are (inaudible) reporting terms of their revenues and sales. But compared to the past, the SMEs have better resilience and are better able to respond to difficulties. That is my belief.

However, I think we need to check what's happening in the field at the branches. And I will provide that answer to you, Mr. Lee, after we check this information.

Well, there's questions for us. So this concludes our Q1 '09 earnings release. I would like to once again thank you all for coming. Thank you.

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.