Shinhan Financial Group Co Ltd (SHG) 2010 Q1 法說會逐字稿

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Good afternoon. This is Sang Hoon Shin, the CEO of Shinhan Financial Group. I would first like to sincerely thank you, thank the international and domestic investors, analysts and members of press for joining Shinhan Financial Group's Q1 earnings conference call despite your busy schedules.

As I have promised you, during the conference call, which took place soon after I became the CEO, we have been focusing on enhancing capabilities of the Group in times of internal and external crisis. As a result one of our Bank's key performance indicators, the net interest margin [posted] continued improvement. Income is (inaudible) thanks to stringent asset quality management and cost control. Non-banking subsidiaries such as (inaudible), Securities, Life Insurance, Capital and Asset Management, continue to make stable contribution to the Group's income, therefore enabling the Shinhan Financial Group to solidify its differentiated status as a real balanced and integrated financial group.

I would like to extend my deepest appreciation to all of you for your support and trust in times of difficulty, and 15,000 of us here at Shinhan Financial Group will exert our utmost effort to ensure that your trust in us is well deserved.

Now I would like to briefly explain our financial results of Q1 as well as future strategic direction.

Shinhan Financial Group in Q1 of 2010 pushed its net income up KRW779 billion, and this is 559.5% increase compared to the same period last year's number of KRW180.1 billion, and 204.1% increase when compared to previous quarters KRW266.2 billion.

The Bank's net income is KRW593 billion, 700% increase year on year and 220.6% climb quarter on quarter leading the Group's fast recovery of its income.

In the non-banking sector, stable and sound income up -- KRW396.4 billion is posted, which is 90.1% increase year on year and 83.6% increase q on q.

Thanks to quick income recovery by the Bank, the Bank's net income contribution climbed to higher level of 60%. The Group's total asset size is KRW311.7 trillion, 2.6% or KRW7.7 trillion increase compared to end of last year. The Bank's (inaudible) grew by 0.6% over all asset [class], and therefore was quite stable.

On the non-banking side, we also saw stable upward trend such as 1.6% increase of Shinhan's operating assets. The Group's [NPL] ratio increased 19 BP from last quarter's 1.3% to stand at 1.49% due to increase of construction and ship building related NPLs and decrease of total loan balance.

Lastly, capital adequacy of the Group, thanks to income improvement of the subsidiaries, saw T1 capital increase to 8.3% and [EIS] ratio to 12.9%.

Ladies and gentlemen, learning from the lessons of the recent financial crisis, Shinhan Financial Group will put priority on enhancing its key asset matrix, BRROA, by limiting volatility in asset quality through investing in adequate asset groups, including (inaudible) of risk adjusted loan pricing, maintenance of stable net interest margin and stable management of net interest margin.

As for ROE, which may become unnecessarily low due to stronger resolutions such as the new EIS regulation, we will proactively prepare measures to improve the Group's capital efficiency by reviewing of flexible capital policies in advance.

Shinhan Financial Group is currently preparing a mid to long term strategy which would cover until the year 2015, and the tasks mentioned above would be sufficiently incorporated in it. In Q2 and the second half of the year, the Group will focus its efforts on issuing stable growth in banking, credit card, securities and [insurance] of businesses, fully taking advantage of [economic] recovery and domestic market growth. By doing so, we will work to reduce provisioning through asset quality (inaudible) and to increase the Group's income through asset growth.

Dear investors and ladies and gentlemen, thank you for your unwavering trust and support. And to increase long term shareholder value for the remainder of 2010, everyone at Shinhan Financial Group will try to achieve the Group's strategic goals so that Shinhan's differentiation may become even more prominent, and its premium position be continually expanded.

I ask for your continued interest in the Bank and I would like to thank you once again.

Now we will hear from our CFO on the first quarter results of 2010.

Good afternoon. I am the CFO of Shinhan Financial Group, Buhmsoo Choi. As the CEO, Sang Hoon Shin, has described the first quarter business results, I will jump right into the details for each area.

So please go to page six for the Group's income. In the first quarter of 2010 Shinhan Financial Group's net income recorded KRW779 billion. It has gone up dramatically year on year and quarter on quarter and income is rapidly becoming normalised.

There are some main reasons behind the income improvement. First is the Bank's NIM increase, and regarding this I will describe in more detail later. Secondly, I would like to specially emphasise that in the non-interest income there has been a drastic increase. This is mostly because of one-off factors, some extraordinary factors, including the [Hynix] securities [disposition] gains, which is more than KRW120 billion, and we also have KRW70 billion in investment securities and debentures trading as well as KRW41.2 billion for (inaudible) rates going down.

On the other hand as [GNA], due to a decrease of one off factors including ERP in the last quarter, has disappeared for this quarter so that's why it has gone down. In the second quarter, as GNA will reach a similar level to last year and we will continue on our downward trend of cost cutting. On the other hand we also have a great decrease in (inaudible) provisioning.

Another point to note is that from this year we have consolidated payment, tax payment scheme, and regarding this the holdings group income is mostly from dividends from our subsidiaries and this is not included as our income. Accordingly, the holdings group's interest, expenses or other SNGA go into expenses so that's why the holdings group was showing a loss. Despite this we did not have consolidation with our subsidiaries so we could not cut down on the corporate tax, however, with the changes in the tax scheme we will be able to compound the income of our subsidiaries and our holdings group so we will be able to cut down on our taxes.

Due to this we expect a 10 billion quarter tax decrease for each quarter.

Let's go to the next page. The Group's first quarter net income total is shown and the total is, as you can see on the bottom of the page, KRW992.8 billion. Shinhan Financial Group has mostly 100% ownership of subsidiaries including the Bank but ownership of BNP Paribas is only [55%], so the total net income considering the ownership of the subsidiaries is different which is KRW989.5 billion. If we include the net income asset consolidated adjustment including goodwill amortisation and other (inaudible) adjustments, it is KRW779 billion, and you can see the notes and that will describe the goodwill amortisation.

So first is the goodwill amortisation, and in the past there was [Chohung] Bank and (inaudible). When we acquired these companies we paid a sum, and it was much higher than the total value, asset value, so that's included in the goodwill. In Korean (inaudible), the Korean accounting standards, this goodwill is divided and amortised in a 10 year period, so that's what we are doing. Due to this there is KRW45 billion for Shinhan and we have Shinhan Investments, KRW45.5 billion, as you can see on the note, so those were amortised.

To note, in the case of Shinhan Investments, KRW45.5 billion has been amortised, and to this year we will follow the pay gap. But from next year we will have changes and we have to follow the international accounting standards and when this happens this goodwill will not be amortised evenly but the goodwill value will be evaluated year after year and if there is value remaining then it will be amortised. But if there is no value then there will be no application.

Shinhan Financial Group has been amortising and we don't have much value left, and in the fourth quarter of last year Shinhan Investments saw losses because of real estate, so it saw a loss. Accordingly, Shinhan Investments continues its evaluation of the goodwill will be done and we thought that there would be some fluctuation in net income. That's why we amortised all the remaining goodwill to exclude these fluctuating factors. That's why KRW42.5 billion has been amortised.

So that is different, and this is a one off factor. And Shinhan Financial Group's income is affected, but the others will act as interest costs for our subsidiaries. And on this page you can see Shinhan Bank's income has recovered. And you can see in the Bank, Shinhan Bank's income recovered, leading to KRW593 billion of income for the Bank. You can see that the proportion was 60 to 40 and non-Bank income contribution went up to 60% at the end of 2009, but as soon as the Bank income started to recover in the first quarter the contribution proportion was normalised.

Let's go to the next page. For each Group, the subsidiaries, as I mentioned, the Bank's income rapidly increased and Shinhan Bank and Jeju Bank's income recorded KRW593 billion in total and it went up more than threefold from that here.

On the other for the non-banking income you can see KRW396.4 billion of income which was realised which was the 83.6% quarter on quarter increase. For Shinhan Card, the net income recorded KRW262.6 billion, an 8.4% quarter on quarter increase. And for Shinhan Investments the first quarter, and as the market transaction volume went up and with these rosy results, it recorded KRW54.4 billion of profit. For Shinhan Life Insurance, with the increase in premiums you can see that the result was KRW39.3billion of net income and KRW28.1 billion increase q on q, and other (inaudible) all showed good results.

Likewise, as you can see, there are different reasons behind these improvements, and first is the NIM recovery. You can see on the graph the NIM trend. In the first quarter, the Bank NIM went up 17 BP to 2.18%, recovering to the margin of 2008 before the financial crisis. This also contributed to the Group NIM of 3.48%.

On the other hand for non-interest income it also went up drastically. For SG&A, as I mentioned before, you can see that compared to last quarter the one off factors disappeared, so it also showed some changes. But to note for (inaudible) provisioning with stabilisation of asset costs, (inaudible) provisioning went down from KRW259.3 billion last year but it went down by KRW48.7 billion and resulted in KRW210.6 billion.

Now let's go to page 10. It's Shinhan Bank's non-interest income and the SG&A for Shinhan Bank. For non-interest income we heard a detailed explanation so I won't go over this and for SG&A you can see it went down quarter on quarter. As a result the CIR ratio has gone down to 43.1% for the Group and you can see for the Bank the CIR ratio is 35.1% and we will continue on this trend to cut down on our expenses.

Let's go to page 11. It's Shinhan Card's income picture. For Shinhan Card's net income in the first quarter recorded KRW262.6 billion, an 8.4% increase quarter on quarter. It is because the operating revenue went up by KRW21.8 billion. SG&A also went down and the (inaudible) provisioning also went down slightly q on q.

Now I would like to describe the funding and lending. Let's go to page 13. It is the total assets for the Group. So when you look at the total assets, including the MPPAM and [trusts], compared to KRW304 trillion late last year it increased 2.6% and is currently KRW311 trillion. If we exclude the AUM, and if there only a purely consolidated asset for the Group, it's KRW264 trillion.

On the whole, Shinhan Bank's first quarter assets went up by 2.2%; and for Shinhan Card it went up 8.5% to increasing in KRW1.5 trillion; and Shinhan Investments and Shinhan Life Insurance also saw improvements and it went up by 11% and 3.8% respectively during the first quarter. For Shinhan BNP Paribas Asset Management, because of the increased fund redemptions AUM went down by KRW0.3 trillion.

Next is bank loans. In the first quarter of 2010, you can see that the loans in won have reached KRW122 trillion, a KRW0.7 trillion increase. For household loans, you can see it went up by KRW400 billion, and for corporate loans it also went up, and for large corporations it went up by KRW700 billion. So you can see that there are no big changes but for low risk mortgage loans and blue chip large corporation loans you can see those loans have grown.

Next is Shinhan Bank's funding and you can see 2010 first quarter bank deposits increased to KRW6.7 trillion. You can see that there were increases in the term deposits and compared to that BD or bank debentures went down. Accordingly, the loan to deposit ratio, the LTD, is 96% so it is much lower than 100%, the FSS requirement. Accordingly, the Bank will be able to have flexible strategies in keeping time with the demand.

Next is page 15, Shinhan Card. For Shinhan Card the first quarter transaction volume went up KRW29.2 trillion, a 1% increase year on year, quarter on quarter, and because we have economy of scale and sales capability, Shinhan Card's managed earnings asset and revenues are continuing to be increasing. Because of the increase of Card assets our funding side also has slightly increased compared to the last quarter.

To note, Shinhan Card, among all the funding, has mid to long term funding source of ABS proportion which is 86% and maintains a stable asset funding basis.

Let's go on to asset quality. Let's go to page 17. First quarter Group NPL ratio recorded 1.49%. This is a 0.19% increase quarter on quarter. Regarding this, the Shinhan Bank and Shinhan Card, and I will go into more detail behind these reasons and next page you can see Shinhan Bank's asset quality.

In the case of Shinhan Bank you can see the NPL ratio quarter on quarter is 0.28% increase and recorded 1.28% Shinhan Bank NPL ratio. So it was a big increase but there were the workout companies in the first quarter and their credit rating was downgraded, so that was one of the reasons for that. You can see that KRW394 billion of NPL increase year on year. To elaborate on this, in the first quarter Shinhan Bank's write offs was KRW25.2 billion. Last year the total write offs of Shinhan Bank was KRW1 trillion, and when there is an average of each quarter it's KRW250 billion. There were a lot of write offs in the fourth quarter of last year.

Likewise, if we make the assumption that the write off volume was KRW250 billion, then NPL increase would be only 13 BP. And on the left hand side on the bottom, you can see the delinquency ratio for SMEs and SOHOs and household loans for all areas in the fourth quarter of last year, and you can see in this year it has gone up a bit. It is because in the fourth quarter of last year there was a great decrease, so there was some reflective effect from that, and because of our write offs. We expect that this level is manageable; however, we are planning to cut down on this.

At the end of Q1 the delinquency ratio increased by 20 BP and I do not think this is high. However, we would like to lower this number.

Next page, which is the asset quality of Shinhan Credit Cards. NPL ratio of Shinhan Credit Card is about 2.09% which is a 49 BP increase compared to the end of last year. So our credit cards since last year has been rebuilding its asset portfolio and we are beginning to see the impact of that. NPL coverage ratio is also on the increase. At the end of Q1 a more than one month late ratio for the credit cards is 2.31% which is 36 BP drop from last year and 2.67%. On time payment ratio is also quite high at 99.6%.

On page 20, you're looking at [provisioning]. In Q1, at Group level, the credit cost was about 50 BP, which is a decrease of 34 BP compared to 84 BP of previous quarter. This is because one off items such as KRW141 billion provisioning related to (inaudible) has disappeared and that is why we were able to see this number.

For Shinhan Credit Card in Q1, the credit card was about KRW85 billion but we have recovered the written off assets of KRW91.5 billion. So actually we have a recovered the credit cards of KRW6.5 billion. So the credit cards in Q1 at the Group level decreased dramatically compared to the previous quarter to stand at KRW175 billion.

On page 22, looking at the capital adequacy, at the end of March 2010 the T1 ratio is at 12.9%, which is up 0.3%. The T1 ratio was an increase of 0.4% to stand at 8.3%. That is because net income of the Group in Q1 increased. And at the same time if you look at the Bank as at end of March, the (inaudible) ratio of the Bank increased 0.9% points and is expected to stand at 15%. The T1 ratio is estimated to be at 12.4% which is an increase of 0.8% point.

Beginning this year our Bank will be implementing a Basel II, and that would have brought about increase of the IS ratio but we haven't done that at our [one-time] level and that is why there was an increase of 0.3% point.

As for Shinhan Credit Cards, the adjusted equity of ratio actually decreased 3% compared to the end of last year to stand at 23.7%. And this is - also, Shinhan Credit Card realised the net income of KRW252.6 billion in Q1 and has paid a dividend of KRW600 billion to the holding company. The Shinhan Credit Card are continuing to make a profit and we believe that this number will continue to increase and we'll be able to maintain high, more than 20% of T1 ratio.

After 23 pages, we have earnings details, business performance indicators of our subsidiaries as well as other details for your convenience.

With that we would like, I would like to complete my presentation on the financial results of Shinhan Financial Group in Q1 of 2010.

We'll now take questions from you. (Operator Instructions) If you ask your question and basically we're going to be providing consecutive interpretation, so those who are asking questions in English please wait until the translation has been provided into Korean.

Let's take the first question. Our first question is from Mr [Tong] of [Temprapum] Asset Management. Good afternoon.

Good afternoon. Can you all hear me? Thank you for wonderful results. I have a question to Mr Sang related to M&A. The Bank's becoming bigger, or the need to become bigger, has been dealt with in the press and from Shinhan Financial Group's point of view that increase the size of the Company mainly focus on the increase upside to the Bank. What do you think about this sort of strategy? I wonder what Shinhan Financial Group's road map or the responses are to other financial organisations increase of their sizes. Thank you.

Thank you for that question. The issue of financial institutions becoming bigger, and (inaudible) is about to be privatised, and indeed [KDB] is to be sold off. And so the competition landscape in the financial institution is expected to change. For our case, we do not as of now think about increasing the Bank's size through M&A activities. However, we will watch very closely the changes that are taking place in the market and we would, of course, like to post organic growth.

However, we have the experience of acquiring LG Credit Card and Jeju Bank, and the response from the market was very positive. So we, with the M&A opportunity, that can be accepted positively in the market, then we will look positively to that, however, as of now I don't think there's a positive outlook in the market.

As for other, there is somewhat concern about other banks becoming bigger. When banks merge, if you look at our cases, we have to deal with the attrition of the customers and the overlapping of branches as well as the customers. Given our experience, we don't think this is really a critical or important issue as of now.

We are putting priority on the non-banking sector, banking, non-banking and [unclear] of businesses. We, internally, are making preparation for future potential and we will look closely to what's happening in the market.

I wonder if this answers your question. If this does not satisfy your question then you could ask your questions later on.

Yes, thank you, but that was enough.

Next we'll receive the second question. And from [Donga] Securities we have team leader (inaudible) Lee, Mr Lee.

Hello, I'm (inaudible) from Donga Securities. I have two questions. The first question is about the NIM improvement. It has truly improved and I think that there are some advantages or merits in your funding, and you did a very good job in funding as for the Bank. Can you break it up and tell us about the reasons behind the NIM improvement?

Well it's not only Shinhan but also other banks have revolving term deposits or other short term funding and I think there was an increase in these short term fundings so regarding the duration spread I think that any improvement was based on the short term funding and there was probably some effect coming from the employment insurance.

Also, there was probably some effect from the term deposit. Can you describe these different factors and how they contributed to your NIM and can you describe your forecast for the second quarter NIM? The second question is from my investors and with IFRS implemented next year, for goodwill amortisation it will actually lessen the burden in your income. However, on the other hand, in the case of (inaudible) for recovery I think that it will be classified as capital. I may be wrong but some say that it will not go into assets but into liabilities so that your interest costs would go up.

Regarding the implementation of IRFS can you tell us about how it will affect the goodwill amortisation and can you tell us about the other effects on your books?

Regarding the NIM, in the Bank our margin was 2.01 and went up 17 BP to 2.18. When we separate funding and lending in the 17 BP we saw margin increase of 10 BP in our funding and in our lending 7 BP.

In the case of our funding the margin was greatly increased, improved and the biggest reason behind that was the increase of term deposits. We have revolving term deposits and compared to the last quarter 1.9% was increased which is not a substantial number. As of end of March in the first quarter the majority of revolving term deposits is KRW17.2 trillion, and in the case of normal bank deposits that are not revolving, the amount stands at KRW46.3 trillion, so 21.5% increase which is KRW8.2; and the average interest rate in the term deposits, January it was 4.54% but it went down and in March it was down to 3.56%.

You can see that 98 BP has gone down and that was one of the reasons, and that was actually the greatest contributor to the NIM recovery for revolving term deposits. Compared to January we don't have a substantial difference in the amount. In January it was 3.34 and it was 3.2% in February so it was only 14 BP drop.

Regarding the margins of the future, we believe that non-revolving term deposits will withstand (inaudible) will determine our future NIM.

In the second quarter the funding cost to ratio, if it doesn't go up dramatically then we believe that our margin will remain at a stable rise level. There is a possibility of that taking place.

Regarding the NIM, on page nine on the left hand bottom side of the graph, you can see that until now there's a yellow part which is the marginal NIM, that interest margin. It's the blue and accumulative average margin it was higher than the bottom. So recently higher margins were included so it contributed to the margin going up. However, in the first quarter, you can see that those two numbers are the same at 3.48.

What this means is that in the future we will not have many fluctuations in the margin, and I believe that there will be only slight changes to the current margin level. So I think that can be seen differently from our numbers.

Regarding IFRS goodwill amortisation and other effects including whether it will be as capital or not we will have to have more detailed research, and I think that we will provide you future information about the effect of IRFS not only on our Bank but on all our subsidiaries.

Regarding goodwill amortisation for the Bank the net income side will go up. However, the cash generating capability or other realistic factors there will not be many changes. There will only be some changes in the GAP, the general accounting principles, and it will affect slightly the capital. But regarding the preferred (inaudible) for recovery, it will be classified at a similar level to now. So our BIS ratio will not see many changes. There will be slight changes but I don't think that we will see grave changes.

Whether it's KGAP or IFRS regarding the classification or the capital there is value for the meaning of the capital which is providing some buffer for future contingency [unclear] that meaning will still hold and regarding IFRS implementation it has not been finalised so before it is fully implemented next year we will provide you with some material on how IFRS will affect the Shinhan Group.

We will take the next question. The next question comes from Mr [Buk Yu Par] of [Global Securities]

Good afternoon. I have four questions. Question number one. You have NIM increase and asset increase as well, but in Q2 the investment, the interest decreased. I wonder what the reasons are. On page 11 in credit cards, the [STNA], the categories are so confusing. Q1 number and Q3 number, I think they are mixed. I think STNA in this quarter - did that decrease? I want to clarify the correct number. And to follow-up (inaudible), I wonder what that is like at the bank level.

Question number four in the Q, the subsidiaries did quite well, the Bank did well, the credit card did well and related to a high mix besides one off items is there any other one off items besides high mix? Thank you.

As for your first question about compared to Q4 in Q1 our interest income did not increase and that is because of the operation days, lower business days. In February there were two less working days and that is why the interest income of KRW20 billion did not occur. So compared to Q4, so there has been a slight decrease and that is the reason.

About disposition or the selloff, let me answer your question number three first. For the Bank there was no disposition. We only had write off. We had write off of KRW25 billion so we had no selloff.

As for one off items, this is answer to your question number four, there was about KRW121.3 billion of one off items after the Hynix, and this saw the disposition of the securities, market of the securities, and the gains from that and the life insurance was about KRW15.7 billion from the Bank, and there was about KRW41.2 billion gain for the Bank. Those are the one off items with the extraordinary gains in Q1.

The latest provisioning, there was - we accumulated additional provisioning by [FLC] criteria for the construction ship building, the shipping, there was about KRW65 billion or KRW60 billion of additional provisioning. I guess it's between 60 to 65 provisioning, so that could be the one off item, or [the fact that it is provisioning].

As related to your question related to STNA, yes, the decrease compared to the previous quarter because there was ERP expenses in the previous quarter. So the STNA number that you're looking at is the correct number.

Thank you.

2010 first quarter Shinhan Financial Group business results presentation. Thank you for taking time to be here despite your busy schedules. Thank you.

It's the end of the conference record.

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.