Shinhan Financial Group Co Ltd (SHG) 2009 Q4 法說會逐字稿

(Interpreted). Good afternoon, ladies and gentlemen. (Technical difficulty) -- CEO Shin for some remarks of greetings before we go into our presentation by Mr. Cho about 2009 results. We will also take your questions before we end the conference call. First of all we will hear from our CEO, Sang Hoon Shin.

(Interpreted). Good afternoon dear investors. My name is Sang Hoon Shin. I am the CEO of Shinhan Financial Group. First of all I would like to sincerely thank all of you, the investors, customers, analysts and the domestic, international media for the deep trust and unchanging support you have shown us in 2009. Thanks to your encouragement and support the Shinhan Financial Group was able to increase its capital and make its foundations stronger, despite the global financial crisis.

On the Banking side, we focused on recovery of core profit source, through asset quality management, conservative provisioning policies and NIM defense. On the Non-Banking side, our Non-Bank subsidiaries have also contributed to the entire Group's profit stability through sound growth in profits. This has resulted in further differentiating the Shinhan Financial Group as the comprehensive total financial group. I, of course, ask for your continued support and encouragement in 2010.

And now I would like to briefly highlight the 2009 financial results and some of the Group's strategy for 2010. Shinhan Financial Group's 2009 net income was KRW1,305.3b, including fourth-quarter net income of KRW256.2b. Shinhan Financial Group's interest income decreased by 7.1% year on year, mainly due to the drastic shrinkage of NIM during the first half of last year. Corporate restructuring did increase our credit cost and provisioning increased by 67%. And the Group's net income decreased by 35.3% year on year.

The Shinhan Financial Group's fourth quarter NIM did recover to 3.3% after the rapid fall during the first half of last year. The Banking side's fourth-quarter NIM was 2.01%, finally recovering the 2% range.

The Group's SG&A also stopped at 2.1% increase year on year due to our active cost cutting efforts.

The Group's assets -- on the Group asset side, the Bank was focused on deleveraging and the Bank assets decreased by 6.7 -- 6.3% and the Non-Banking side assets also slightly decreased by 0.4%. The entire Group's assets decreased by 5.4% year-to-date recording KRW304 trillion.

Lastly, the Group's capital has stabilized to a Tier I ratio of 7.9% and a BIS ratio of 12.6% thanks to the capital increase during the first quarter and continued risk weighted asset management and income generation.

Dear investors, in 2010 we will put the priority on winning back the trust of the market and the Korean and international investors by achieving healthy and visible earnings recovery. To this end we will first expand core profit basis by ensuring a stable asset growth and continued margin improvement in the Group's core businesses such as the Banking and Credit Card business.

Second, through the continued asset quality improvement and reduction of credit cost at all the Group companies we will increase the Group's ROA and we will at the same time endeavor to increase the capital through enhanced profits. Lastly, through continuous enhancement of competitiveness in the Securities, Insurance and Asset Management businesses, we will further differentiate ourselves as a comprehensive, total financial group, just as you have seen last year.

Ladies and gentlemen, in order to enhance long-term shareholder value and to show our appreciation for your continued trust and support, everyone in the Shinhan Financial Group will do their very best to achieve its 2010 strategic goals so that Shinhan's differentiated premium will be even more emphasized and your trust in us will be even more deepened. I would like to ask that you continue to give us your support and advices. Thank you.

(Interpreted). Next Mr. Cho will be giving us a presentation about the 2009 results.

(Interpreted). Good afternoon, ladies and gentlemen. I am [Hu Yeong Cho] of Shinhan Financial Group. We have just heard from our CEO the full year as well fourth-quarter financial results highlights so I will go into the details of the results of 2009 and the fourth quarter. This is page six in your pack which is the Group's performance.

Shinhan Financial Group's 2009 fourth-quarter net income was KRW256.2b, a full-year net income of KRW1,305.3b. The Group's interest income increased by 15.1% quarter-on-quarter as fourth quarter NIM reached 3.3%. As you can see, the interest income has continued to improve throughout the third and fourth quarters. On the other hand non-interest income decreased by 38.2% quarter on quarter because of currency evaluation gains on securities no longer being effective in the fourth quarter and brokerage fee decreases.

Loan loss provisions during the -- increased by 138.3% quarter on quarter due to additional provisioning against Kumho. SG&A also increased by 19.1% quarter on quarter due to one-time factors such as early retirement packages. So the Group's recurring profits decreased quarter on quarter.

In summary, the interest income has increased during the fourth quarter due to increase in NIM, but one-off factors such as Kumho, our early retirement package, accounting changes related with labor cost add up to KRW453.5b and the Group's profits decreased by 47.9% quarter on quarter.

We will look at the results by each of the subsidiaries. As you can see on the Bank's side, the Bank's revenues have maintained an improving trend in the second half but the restructuring related provisioning, ERP and other one-time factors have resulted in a higher net income contribution by non-bank subsidiaries versus bank subsidiaries. As you can see on the left hand side, during the fourth quarter, the Bank's contribution recovered to 40%, but Shinhan Card and Shinhan Life's contribution was 45.2% and 9.2%, helping to maintain the Non-Bank's contributions at a stable level.

Next is the fourth-quarter performance by each of the subsidiaries. Our fourth-quarter Bank income increased with improved NIM, but one-time provisioning, SG&A increases resulted in a net income decrease of 36.8% (sic - see presentation) quarter on quarter. Also there was SG&A increase and provisioning increases in Non-Banks and a net income decreased by 38.7% quarter-on-quarter. The Shinhan Card, which recovered normal levels the quickest, so a net income decrease of 2.1% quarter on quarter. Shinhan Investment and Shinhan Capital also decreased quarter-on-quarter net income due to Kumho related provisioning. Shinhan Life and BNP Paribas net income also decreased by 39.1% and 63.8% quarter-on-quarter due to reserve increases and marketing expense increases.

We'll go into a bit more detail about Shinhan Bank's performance. Due to the funding cost decrease during 2009 and loan margin increases during 2009, the NIM continued to increase by 27bp during the fourth quarter, continuing from a 28bp increase during the third quarter and the interest income increased by 21.2% quarter on quarter. However, one-time provisioning against Kumho was taken in the fourth quarter and loan loss provisions increased by 68.7% in the fourth quarter and fourth-quarter net income was KRW184.1b.

As you can see on the left-hand side graph, the Bank's NIM, this is -- you can see that the NIM including card was 3.34% in the fourth quarter, close to the 2008 level. This is because of major NIM improvements during the fourth quarter. Shinhan Bank's NIM in fourth quarter was 2.01% and the cumulative NIM was 1.72%, a 10bp improvement. As you can see on the right hand side the net interest spread was 1.91%, a quarter on quarter 14bp increase, and the deposit rate was 3.52%, which is continuing to decrease from the second quarter. We expect the NIM to further improve during the first quarter mainly by refinancing the loan assets.

Shinhan Bank's non-interest income decreased 3.3% quarter on quarter with increase in bancassurance related fee income but decreases in fund sales commissions. Shinhan Bank's SG&A increased 34.7% quarter on quarter, mainly due to ERP and accounting changes to labor-related costs. When these are excluded, the recurring SG&A has decreased quarter on quarter. As you can see on the left-hand side, the Group's cost/income ratio did slightly increase due to seasonal and special factors, but the Group's actual cost/income ratio that excludes goodwill amortization was being maintained at 46%.

Next is Shinhan Card's performance. Shinhan Card's fourth-quarter net income was KRW242.2b, which is a KRW5.3b quarter-on-quarter decrease but maintaining a stable trend. The operating revenue increased due to receivable increases but the interest payments also increased by 5% due to increased borrowing. SG&A also increased by 2% quarter on quarter due to one-time factors. The written-off assets total was KRW2.6 trillion as of end of 2009 and recovery from written-off assets was KRW381.3b, maintaining a KRW90b plus recovery per quarter during last year.

Next is the Group's assets. As of end of 2009, Group's total assets was about KRW304 trillion, which was a 5.4% year-to-date decrease due to continued deleveraging and asset efficiency management efforts. There was a quarter-on-quarter 2.4% decrease which is a result of major asset reductions during the fourth quarter. If you look at the subsidiaries, during the fourth quarter Shinhan Bank's assets decreased by 2.4% due to NPL sales and write-offs. In the Shinhan Paribas Asset Management there was a decrease of 8.5% due to retail fund redemptions. Shinhan Card assets increased by 7.4% due to receivable and card loan growth and Shinhan Life assets also increased by 5.1% quarter-on-quarter due to increase in first premium payments.

Now we'll look at the funding and lending side of Shinhan Bank. Shinhan Bank's won denominated loans was KRW121.6 trillion which is 0.2% quarter-on-quarter growth. As you can see there was a conservative loan growth continued in the fourth quarter. Household loans grew by 1.5%. Corporate loans decreased by 1% during the fourth quarter. In the household sector while general retail loans have decreased somewhat, mortgage loans have increased by 2.5% mainly around actual residential demand.

Won deposits at the end of 2009 was KRW123.3 trillion, which was a quarter-on-quarter 2.6% decrease due to CD decreases, but you can see that time and installment based deposits have increased by 4%. The loan-to-deposit ratio stabilized to 99% in the fourth quarter from the 114% at the end of 2008. If you look at the loan-to-deposit ratio based on monthly average balance excluding CDs it is 103% and we are continuing to maintain a stable deposit ratio.

Page 15 is about Shinhan Card's funding and lending situation. As you can see on the left-hand side, Shinhan Card's fourth-quarter transaction volume was KRW28.9 trillion. It increased by 5.8% quarter-on-quarter mainly around receivables and card loans. Credit card assets increased by 6%. This is because there was selective marketing done especially around high quality merchants and customers, in order to increase receivables.

Now we will move on to our asset soundness. As at end of 2009 substandard and below NPL ratio stands at 1.29%, which is a 32 basis points decline from the end of September. Precautionary NPL ratio also dropped by 36 basis points to stand at 2.87% quarter-on-quarter. Group's NPL coverage ratio went up by 8 percent points to reach 180 -- excuse me, 158% showing that the Group is well prepared for future potential losses.

Next is Shinhan Bank's asset quality. Shinhan Bank's substandard and below NPL ratio is at 0.99%. Precautionary NPL ratio is 2.43% and NPL coverage ratio is 166%. All the asset quality indicators show significant improvement quarter-on-quarter. In particular in Q4, Shinhan Bank's substandard and below NPL amount declined by 30.8% quarter-on-quarter resulting in less than 1% of substandard NPL ratio. However, loan-loss reserve only decreased by 14% and so NPL coverage ratio increased to 166%.

And as can be seen on the lower left hand, Shinhan Bank's delinquency ratio improved dramatically. Household delinquency ratio stands at 0.23% as at end of 2009, showing a substantial improvement compared to last year. Delinquency ratio by SOHO also was to 0.49%. Overall delinquency ratio is maintained at a very stable level of 0.41%. The reason for the large drop in delinquency ratio in Q4 are write-offs and sale of NPL assets and some one-off items. Another big reason is that there has been no new large loan-loss (inaudible) asset quality management since Q1.

Next about quality asset -- asset quality of the Shinhan Card. Shinhan Card's substandard and below NPL size increased 3.3% compared to Q3 but the ratio of substandard and below NPL decreased by 7 basis points to 2.58% thanks to asset growth of 6%. Due to a small increase in substandard NPL, NPL coverage ratio recorded 187%, which is a 4.8 percent point decline. However we can tell you that we have still maintained a sufficient loan-loss reserve for the future economic downturn.

Delinquency ratio as of end of 2009 is 2.67%, an improvement of 9 basis points compared to Q3. The ratio has been kept on a continuous decline curve since Q1 of 2009. And Shinhan Card's asset quality will continue to be maintained at a stable and healthy level.

On page 20, about loan-loss provisions/write-offs, as has been explained, credit cost ratio for the Group as can be seen on upper left graph increased to 0.9% at the end of '09 from 0.5% at the end of 2008. Credit cost ratio which was 1.6% in Q1 and 1.2% in Q2 dropped down to 0.4% in Q3 and 0.8% in Q4. As can be seen on the upper right table, LLP of Shinhan Bank is mostly from the corporate sector. LLP increased much in the first half due to corporate restructuring. However, it has greatly stabilized since Q3. We have written off KRW445.9b in Q4, which is a much larger number than the other quarters, in order to maintain NPL ratio of 1%.

Lastly I'd just like to talk about our capital adequacy. As of end of 2009 Group's BIS ratio and Tier I ratio are expected to be 4.6% and 7.9%, which are 0.7 percent points and 0.3 percent points decline compared to previous quarters due to the increase of risk weighted assets of Q4. It is expected that the Bank's BIS ratio will stand at 15.1% and the Tier I ratio at 11.6% as at the end of 2009. Shinhan Card's capital adequacy ratio is expected to be 26.7%. We expect stable growth in the Group's assets and the core profit basis to continue to improve. Therefore we forecast that the Group's capital ratio will continue to improve as well.

Page 23 and onward are additional earnings data for the subsidiaries, major management indicators and Shinhan Bank's loans to SMEs for your reference.

With this I would like to conclude the presentation of earnings results of Shinhan Financial Group in Q4 of 2009. Thank you.

(Interpreted). Now we will receive questions.

(Operator Instructions). Those who would like questions in English, their questions will be consecutively translated into Korean, so we would like to ask those asking questions in English to wait while their questions are being translated into Korean consecutively. We will wait for a minute until we get the questions collected. We have a question. The first question will be from Dongbu Securities. Mr. [Cambon Lee], would you like to ask your question? Sir please go ahead.

(Interpreted). My name is [Cambon Lee] from Dongbu Securities. Can you hear me?

(Interpreted). Yes. Please go ahead sir.

(Interpreted). Thank you very much for the good performance last year and there could be one question. I think it's a question that could actually be answered in many ways. You did increase a lot of time deposits and loan-to-deposit is at 103%, which means all guidance provided by the government. If you look at 2010 there was about KRW2 trillion of net increase of time deposits during January.

My first question is, of the time deposits, I'm assuming that a lot of that is revolving time deposits, which means that there is a very low early termination fee. For LDR what impact will this have? Concerning LDR, I'm sure you've done some simulations with LDR. Compared to other time deposits, Shinhan's time deposits would be -- would have a disadvantage when you calculate LDRs. So I would like to hear your views about it.

And there are these revolving time deposits that are being increased. I'm assuming that the minus duration gap would have become narrowed before it was more than three months. I'm wondering what is the current duration gap. How much have you been able to shrink your duration gap?

And for loan-to-deposit, I actually feel that you've lowered it a bit too fast. Of course the government talked about this because of liquidity ratios. They gave you a four-year period and that is not the top priority right now by the government, but maybe you sort of overdid your loan to deposit ratio. Couldn't you use CDs and other ways to actually improve your margins? I think there's an opportunity cost that you're taking by improving your loan to deposit ratio so much.

(Interpreted). Related with the time deposits, we did increase a lot of the revolving time deposits. This year in 2010, if you look at the mostly maturing revolving time deposits, during the first quarter about 88% of the entire will be coming to maturity in the first quarter, which is about KRW22 trillion of revolving time deposits coming to maturity during the first quarter this year.

But if you look at the entire share, about KRW70.6 trillion of deposits are to come to maturity during this year, and of that revolving time deposits account for about KRW24.9 trillion. Time deposits are about KRW35.8 trillion. So considering the share of these revolving deposits, I don't think it will have a major impact in terms of our liquidity. I don't think they pose any extra burden on the Bank's liquidity.

About the impact, whether we've done simulation studies about that, I don't think we have actually gone through a very precise study yet. But I do say that we will elaborate on the impact once we have completed our internal studies.

We'll take the second question which is from Templeton Asset Management. [Mr. Chong] would you like to go ahead, sir?

(Interpreted). I have three questions. Question number one is related to, first question is related to NIM. And the Bank of Korea is announcing the loan to deposit spread of three months. And so that is the first question.

And the second question is related to strategy at Shinhan on cards. And the other credit card companies are growing very quickly and so I wonder if you have any plans for any mergers? And I wonder what the strategy that Shinhan Card is planning to employ under the current circumstances. I wonder if you plan on increasing the size or increasing the profitability.

And my third question, and this is the last question, this is related to regulations and strategies at Shinhan Financial Group.

(Interpreted). Mr. Chong, I'm very sorry but the quality of sound is very bad. We have not been able to hear you. It's okay now.

(Interpreted). So do you want me to repeat the questions?

(Interpreted). I think you need to put some distance with the mouthpiece of the handset. That way we think we'll be able to hear you better.

(Interpreted). Now? Can you hear me now?

(Interpreted). I think it is a bit better than before.

(Interpreted). Why don't I call you in five minutes time?

(Interpreted). We'll take your questions when you connect to us again. We haven't been able to hear your question because of the low quality of the sound. Thank you.

(Interpreted). We'll take the next question. (Inaudible) of Credit Suisse. Please go ahead.

Yes, hi. I just had a very quick question. I have not heard anything about your Core Tier 1 ratios, which is there in your report. I've only been able to see the capital adequacy ratios such as the BIS and the Tier 1, but I wanted to know the positions of your preferred equity and hybrid positions for Shinhan Bank. Could you hear me?

(Interpreted). The hybrid balance at Shinhan Bank is KRW2.4 trillion. I'm assuming that your intention is to take out the hybrid. I think you're asking about the Core Tier 1 or the common stock based capital ratio is probably what you're asking for. So the Core Tier 1 as of end of December 2009 was 6.54%. On common stock based Tier 1 is 6.2%.

I had a quick question regarding these numbers that you've just given me. According to international regulatory standards, I'm sure you know that I think Korea would be possibly wanting to increase your Core Tier 1 ratios to approximately 8%. So does Shinhan have any plans in order to do that within 2010 within the first half?

Also do you have any plans with regards to mergers and acquisitions part of Shinhan's strategy in 2010?

(Interpreted). Globally there is a lot of talk about increasing the capital ratios of banks. One interesting phenomenon is that whether you look at European or American banks their capital adequacy ratios are higher than that of Korea, but they are more concerned about increasing capital ratios. Korean banks appear to not be so concerned about increases in capital ratios.

I think the reason why Korean banks are less concerned, if I talk about Shinhan Bank, as you know last year we did not increase much of our assets. We did realize a large gain or income and therefore this has a natural increase in our capital ratio. And in the early part of the year we were able to increase our capital by KRW1b. And so we will continue to increase our capital ratios through generating income.

So I do know that globally, even if there is a strengthening of capital requirement, Shinhan is already at a high level and we are very confident that we'll be maintaining our capital soundness and quality. We are not much concerned about increasing capital requirement. We are preparing, but I don't think these requirements will increase to a level that will be burdening Shinhan.

And to give you some numbers, according to [BPPS] they have -- they will be setting numbers, targets by end of this year and we will be able -- we will have to follow this by 2012. And so we've projected the figures as of 2011 end. We will be meeting probably the target. Even after for example we are paying the preferred stock, our Core Tier 1 would be 8.48% and Tier 1 8.15%, according to our simulations as of end of 2011.

I think there was a question about the margins and about our strategical directions about credit cards, and there is an increase of our margin. That margin decreased at one time to a very small amount, but it is on the increase. Not just the average of loan-to-deposit ratio, but also the latest, recent loan-to-deposit ratio is higher by -- it's about 30 basis points. So I believe that the current increase of loan-to-deposit ratio margin increase will continue. We do not know how long this is going to continue. However we do believe that the loan-to-deposit ratio will continue to expand.

And in terms of credit cards, as you know our credit card company has the largest market share here in Korea. Last year, due to global economic recession there were many concerns that there could be another credit [fall] here in Korea. So we took many proactive and pre-emptive actions. And delinquency ratio or other indicators related to credit cards are very stable.

And in the future in the management of credit cards, Shinhan credit card company we will not decrease the margin by active marketing activities. We will focus on capturing good and high credit quality of customers, and increase the loyalty of the customers and therefore increase the profitability. This has been our strategy and this will continue to be our strategy.

(Interpreted). We'll take the next question from (inaudible) Securities, Mr. [Yung Su Saw]. Please go ahead, sir.

(Interpreted). Yes, good afternoon. I have two questions. The first question is about especially mortgage or loan rates, the base rate. Some products will be using COFIX as their base. Do you think that if this happened, what Shinhan's strategy would be in such COFIX based loans? Compared to CD rates COFIX rate loans do you think would be priced higher or lower, or would be priced at a similar level to CD based loans? And are you planning to introduce active COFIX based products that could substitute your existing loans?

My second question is about December and January. Your loans have grown quite a lot. What is the reason for such -- excuse me, deposit growth. With such deposit growth in December and January, what is the reason for increasing deposits? What are you planning to do with these deposits?

(Interpreted). I'll take the question about the COFIX loans. For those who are -- probably not, but to briefly introduce COFIX, COFIX is cost of funding index. So from the fifteenth of each month the Korea Federation of Banks will announce a COFIX index. And so the first announcement will be made on February 16 because 15 is a holiday. If you look at demand deposits and other subsets, these are excluded. If you look at the costs, each of the banks report this information to the Federation of Banks and they place a weighted average on this to come up with an index, COFIX index.

The Bank, Shinhan Bank plans to announce a product based on COFIX on February 17. And during a period until end of August we will not charge an early termination fee on existing CD based loans if they convert to a COFIX based loan. We're expecting that the COFIX will be around 6%, which means -- I don't think the CD rates will move because of this, but the CD rate is at 2.88%.

So COFIX will be more favorable at a CD plus 300bp priced loan. So those who are in that range will probably want to change to a COFIX based loan. And we have about KRW2.5 trillion of loan balance in that price range, which means that if current rates are fixed, if they don't change, there will be a decrease on interest income by KRW11.3b. There could be a decrease of interest income by KRW27b if the interest rates go up by 100bp.

(Interpreted). If I add to that, COFIX rates are the average funding cost, it could be the most accurate way of reflecting the average capital funding costs of banks. The CD rates have changed, fluctuated. And that has caused the NIM of banks to also unnecessarily fluctuate. I think COFIX is an index that reflects the funding costs of banks. And by using this as a way of pricing loans it could stabilize the bank's income structure. But I don't think it will have changes in our loan strategy. We are still looking towards maintaining a strong and long-term relationship with our good customers.

About increase of deposits during December and January, I think deposits will increase, not because the banks took an initiative, but I think overall there is a preference of risk free assets in the market. And this is the main reason driving increases in bank deposits.

There was a promotion of deposits in January, from January 4 to January 7, of deposits of KRW7 trillion. It wasn't really to attract more deposits. It was more a customer relationship management. We wanted to retain our customers because other banks had started promotions. The rate was 4.9% and we closed it earlier than scheduled at KRW1 trillion of deposits.

(Interpreted). We will now take our next question. From UBS, Mr. Scott Lee is going to ask the question. Please go ahead, sir.

(Interpreted). About Core Tier 1 and the common stock by 2012, you have given us the forecast number, a (inaudible) around 8%. Could you give us more assumptions for those numbers? By 2012 what your earnings expectations are and how you are going to anticipate, how you anticipate the loan growth to be and asset growth to be. And I don't think there will be any finance -- refinancing with the capital, but I hope that you will give us the explanation about these assumptions.

(Interpreted). By 2012, our Core Tier will be 8.4% and the common stock Tier 1 about 8.25%. And the assumptions is the net income is about KRW2.3 trillion and it would be about KRW3.4 trillion by the end of 2012.

Well, internally, we have calculated some numbers. However, under conservative assumptions, the profit growth rate and -- we want to be conservative on these number forecasts. We will not be increasing our capital. That was one of the assumptions that we take, and believe we will be able to achieve at least 8%. And as we were talking about the future, because of the fair disclosure requirement and other requirement I will not be able to give you further explanations. Thank you.

(Interpreted). The numbers that you have given me about, 8.45% and 8.26%, is that for the Bank or is that for the Shinhan Financial Group? Do you have different numbers?

(Interpreted). As I've said -- the numbers that I have given you are for the Shinhan Financial Group.

(Interpreted). Thank you.

(Interpreted). We'll take the next question from Templeton Asset Management. Mr. Chong will retake his question.

(Interpreted). Can you hear me well this time?

(Interpreted). Yes. It's very clear this time.

(Interpreted). I have three questions. I think the first two has been answered. My third question is a bit abstract, but I think it's an important question. It's about the public function of finance has been strengthened and not only of banks but some financial service companies. Don't you think the attractiveness from the investors' perspective would decrease because of stronger regulations and greater demand of financial service companies to serve a greater public interest? What message do you think Shinhan Financial Group could give to investors?

The reason I'm asking this question is because I think it could decrease investment merit in financial service companies. Do you think actually seeing stronger regulations or public functions could have a plus, have investment merit for us in the long term?

(Interpreted). I understand your point very well. The fact that the capital ratios are going to increase means that our leverage will go down. And, if all conditions are the same, it means that our capital returns will decrease. And I think that is what you're referring to as decreasing investor merit. But not only in Korea but globally, the bank values have changed quite a lot.

In the past there was a few number of banks that have expanded successfully -- aggressively. The other banks were forced to follow. There was a competition over market share. This eventually led to a decrease in bank's share prices and to a financial crisis. Every time this cycle happens there has been a strengthening of regulation. If the regulations are done well and actually promote the stability of the financial sector and banking sector, such unreasonable competition will be prevented. And so in that sense I think it will decrease the fluctuation of bank share prices and help better.

Of course Shinhan has many differentiations in terms of competitiveness. You can see that some regulations are mainly being introduced additionally in the banking sector. Shinhan Financial Group is much more diversified than any other financial group in Korea. So if there is increase in regulations against bank businesses, relatively speaking Shinhan Financial Group will be the least affected because we are a very well diversified financial group.

(Interpreted). We will take the next question. It's from Mr. Jinsang Kim of Citi Securities. Mr. Kim, please.

(Interpreted). Good afternoon. Equity Tier 1 and Core Tier 1 you have done an internal simulation. At the Group level, Tier 1 capital is low because you are utilizing Basel I. I think that could be one of the reasons. And the valuation gains, I think you have about KRW2 trillion worth of that. I don't think that is counted. And you said that Tier 1 ratio is going to be 8.4%. And as we move from Basel I to Basel III, I think that 1.5 percent point would increase. And about the valuation of the securities, I wonder if that has been considered, that 1.5 percent point increase has also been considered, or did you only think about the assets or the end profitability as you calculated those numbers?

And second question is this, in the financial industry there is a lot of privatization movement. KDB would like to sell, would like to do some sales related to Lone Star and I think there could be some M&A movement. KEB is to be sold. And I think there would be many changes. And I wonder what Shinhan Financial Group is doing in order to prepare for these changes in the M&A market. I wonder what sort of possibilities you see.

Within Shinhan Financial Group do you think -- what do you think are the feasibilities and the possibilities of you responding or taking part in this M&A movement? And other banks, because of the capital ratio, other banks will have the difficulty to take part in the M&A activities. I wonder do you have any other growth strategy besides the organic growth.

(Interpreted). Those who are responsible for the finances must be prepared to return the deposits that the Bank has got from the customers. That is the first task and the first responsibility. Because of that -- that we're testing such as stress testing. The capital ratio of around 8% and other regulations are being discussed to be strengthened. And for that end we are also running various simulation scenarios. So in conclusion, as we move to Basel II, BIS ratio will increase, as you know. We did not consider that. We tried to be very conservative. I can tell you that we have, we can affirm you that we will be able to satisfy the international standards.

(Interpreted). Mr. Kim, good to hear from you. You've asked questions related to M&A. You have asked whether there's a possibility or feasibility. Personally I don't think we should do something that is not feasible because if we go against the market principles then that would cause difficulties. We would like to move with the tide.

For the Shinhan Financial Group, we would like to focus -- we believe if we concentrate on the internal side -- as I became the CEO of Shinhan Bank -- Shinhan Financial Group last March, I have talked about the ABC principle, ABC principles. And we think now with our internal capability I think that we'll have good opportunities.

It's not just the Bank that can do M&A activities. We would like to strengthen our internal capabilities and abilities. And I think that if we continue to watch the market closely, I think we'll have some opportunities. I'm cannot go into the specifics as of now, but I hope that I will have another opportunity in the future to talk to you about this matter. Thank you.

(Interpreted). There is no further questions waiting in the queue and so I would like to announce the end of our 2009 earnings results conference. Once again thank you for coming.

Portions of this transcript that are noted "interpreted" were interpreted on the conference call by an Interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.