Shinhan Financial Group Co Ltd (SHG) 2011 Q1 法說會逐字稿

Good afternoon. I am Ryu Seung-Hun, the leader of the IR team at Shinhan Financial Group. Thank you very much for taking part in today's earnings release despite your busy schedules. And now I would like to start the 2011 Shinhan Financial Group first quarter earnings release for 2011.

We have with us the CEO and Chairman Han Dong-Woo of Shinhan Financial Group as well as Deputy President [Choi Beom-Su] and our CFO, Min Jeong-Gi as well as Mr. Chung Dong-Gi, the Head of the Financial Department. Today's agenda will consist of greetings by our CEO and Chairman Dong-Woo Han and then we're going to hear from our CFO, the earnings release of the first quarter of 2011. Lastly, we will have a Q&A session.

Now I would like to invite Shinhan Financial Group's CEO to the podium.

Distinguished guests and investors, I am Dong-Woo Han, the CEO and Chairman of Shinhan Financial Group. I would first like to express my sincere gratitude to investors, analysts and journalists in and out of Korea who are listening in to the Shinhan Financial Group first quarter earnings release of 2011.

I am also quite delighted to greet you for the first time since I have been appointed the CEO of Shinhan Financial Group on March 23, with this earnings release presentation. Most of all, I would like to express my sincere gratitude to all the investors who have been showing us your support and encouragement despite the market's concerns about Shinhan Financial Group's governance in last September.

Shinhan Financial Group promises you that we will establish a more transparent governance structure and revitalize the fair performance culture where you're recognized for your capability and performance so that Shinhan's competitiveness can be more emphasized in this market.

Shinhan will also re-solidify once more our differentiating point as the most balanced, comprehensive financial group in the Korean financial market. Shinhan Financial Group has already grown to an organization operating not through individuals but through organic teamwork by the system and employees. I truly hope that the concerns by some who believe that Shinhan will be troubled for a considerable amount of time because of the series of incidents last fall will be dissipated with today's first quarter earnings release of 2011.

I would now like to briefly explain about Shinhan Financial Group's 2011 first quarter earnings release.

Shinhan Financial Group's first quarter net income recorded KRW924.3b showing improvement in the NIM. We also had decreasing provisioning with sound asset quality management so we were able to have high earnings growth of 0.7% year on year, which was 57.9% QoQ. Bank net income recorded KRW653.7b, a 196.2% growth QoQ which confirmed once again that the bank was the main driver of Shinhan Group's earnings generation.

The non-banking side also realized KRW360.7b of sound and strong net income and showed us that the Group's profit generation structure mutually complemented the banking and non-banking sides respectively, according to the economic cycle.

Shinhan Financial Group's total assets stands at KRW329 trillion, which is a KRW10 trillion or 3.3% increase compared to the end of last year. Loan in Korean won only grew slightly which is only by 1%. However, mortgage increased by 2% and loans to SOHO rose by 2.7%, maintaining an overall asset upward growth trend.

As for the non-banking businesses, Shinhan Life Insurance and Shinhan Investment Corp saw asset growth of 5.2% and 12.5% respectively year to date, posting healthy asset growth rate thanks to economic recovery.

The Group's NPL ratio is 1.59%, marking 1.43% or 16 bps increased QoQ due to increased bad assets related to construction companies and real estate PF.

Lastly, as for the Group's capital adequacy, thanks to continued profitability improvement of the subsidiaries, tier one ratio stands at 8.6% and BIS ratio at 12.6% posting an increase of 0.3% and 0.2% respectively.

Dear international and Korean investors, in order to repay shareholders' unwavering trust and support and to enhance long-term shareholders value, the management and employees of Shinhan Financial Group would do their utmost to ensure achievement of the Group's strategic goals and by doing so, distinguish Shinhan's differentiation even further.

As we have done in the past and are doing so currently, through sustainable asset growth, stable NIM and constant credit risk management, we will ensure that consistent profitability increase trend is firmly put in place.

We will also endeavor to improve the Group's capital efficiency by implementing flexible capital policies while proactively responding to newly emerging capital related regulatory measures.

To ensure that these goals are met in Q2 and the second half of 2011, the Group will concentrate its capacities on continued stable generation of profit in such companies as the bank and Life Insurance Company. At the same time, focused efforts will be made to grow high ROA businesses so that the Group can solidify its position as a well-balanced total financial group and through which corporate value can be realized.

We have now embarked on a journey to become a more competitive and attractive investment destination. As we make this journey, I'd like to ask for your continued support and advices. Thank you very much.

Now I would like to invite our CFO Mr. Jeong-Gi Min to give our earnings release presentation for 2011 first quarter.

Good afternoon. I am Jeong-Gi Min, the CFO of Shinhan Financial Group. Before we begin the earnings release presentation, I would like to tell you beforehand that our 2011 first quarter results are based on IFRS accounting standards and that 2010 business performance results have been based on IFRS once again. Then let me elaborate on the main highlights of 2011 first quarter business results. Please go to page six, Shinhan Financial Group income.

Shinhan Financial Group's first quarter net income posted KRW924.3b. The Group's interest income with a consistent NIM improvement and appropriate loan growth went up 7.5% year on year, 4.5% QoQ. Interest income continues to improve.

Non-interest income, along with the slight increase in fee income as well as the gains from sales of SK Network securities, resulted in KRW624.6b. However, it went down 15.6% QoQ compared to last year when there were gains from sales of Hynix securities. For your information, from the first quarter results, credit card income including card merchant fees which was classified as interest income have come under fee income due to IFRS.

SG&A went up 2% year on year and went down 23.2% QoQ, with no one-off factors such as the ERP and salary hike in 2011 first quarter, which previously took place in 2010 fourth quarter.

Credit cards, despite the one-off provisioning following some mid-sized construction companies filing for court receivership in the first quarter, went down 4.2% and 8% respectively year on year and QoQ, due to the provisioning reversal or write-back of several shipbuilding companies and credit card.

To summarize the first quarter business performance, with the continuous NIM improvement and proper level of asset growth, interest income which is the core profit base of the bank is constantly growing and with reasonable cost containment and credit cost stabilization, NIM has gone up QoQ and YoY.

Next page seven, Group subsidiaries' income.

In Q1 net income, taking into consideration the ownership of banking and non-banking, recorded KRW651.6b won and KRW357.2b respectively. As you can see on the top left graph, it seems like in the first quarter the bank's net income contribution recorded 65%, a great increase compared to last year and non-banking net income contribution went down to 35%. But this is because of the seasonal factor of the bank's first quarter net income looking higher compared to the non-banking side in the first quarter. On a yearly cumulative basis, non-banking net income contribution is growing.

Shinhan Card and Shinhan Life Insurance's net income contribution recorded 25% and 6% respectively and their net income is growing year on year, which shows that the non-banking net income contribution is being maintained steadily.

Next let's go to page eight, 2011 first quarter subsidiaries' income.

First quarter bank interest income went up due to the 6 bp NIM improvement year on year, but non-interest income went down 1.4% due to no one-off factors appearing such as Hynix in non-interest income compared to 2010 first quarter. Non-banking side went up 11.5% and 11.4% respectively for Shinhan Card and Shinhan Life Insurance year on year, but went down 3.7% year on year due to the fixed income security losses stemming from the interest rate hike in prop trading.

In the case of Shinhan Card, the first quarter net income went down 32.7% QoQ due to the corporate tax write-back which occurred in the fourth quarter of last year.

In the case of Shinhan Capital, operating income is being maintained without many fluctuations QoQ and year-on-year. But with the one-off corporate tax cost, increased cost by the consolidated corporate tax effect, net income appears to have gone down 30.7% year on year.

Next page. Next on Shinhan Bank's income.

2011 first quarter Shinhan Bank net income recorded KRW647.1b. Interest income rose year on year whereas non-interest income went down with no one-off factors in the first quarter. Provision for credit losses went up which led to a 1.4% drop in net income.

Interest income went up QoQ and non-interest income improved and credit costs dropped QoQ leading to a 192.5% increase QoQ. The reason why interest income kept on going up in the first quarter of 2011 compared to the first quarter in 2010 was because, as you can see on the graph on the bottom right hand corner, there were continuous efforts to reduce funding costs and to secure the proper loan margin which is leading to a continuous increase in the net interest spread. NIM also rose from 6 bp to 8 bp year on year.

As you can see on the graph on the bottom left hand side, bank NIM including card has risen to 3.64% in the first quarter and is showing an upward trend compared to the previous year. If you classify merchant fee as non-interest income, bank NIM, including card, has gone up 2.73% in the first quarter and is on an upward trend.

Non-interest income shows high volatility each quarter due to one-off factors and it has gone down 10.3% year on year due to Hynix securities sales gains in the first quarter of 2010. However, it has risen 286.4% QoQ due to the low sales losses and some impairment loss effects which have not taken place in this quarter compared to the previous quarter.

Let's go to the next page.

Shinhan Bank's non-interest income went down 29.5% year on year despite the slight increase in fund and fee income in 2011 first quarter because of the decrease in one-off factors related to securities and showed a 10.3% drop year on year.

Shinhan Bank's G&A has gone up 3.8% year on year, which is an appropriate upward trend. And although it has went down 23.7% QoQ, this was because of the ERP and salary hike and other one-off factors in the last quarter and the recurring G&A expenses went up slightly QoQ.

Cost/income ratio that you can see on the bottom left side of the Group and bank is the G&A expenses -- is the CIR of the Group excluding goodwill amortization cost. And with no one-off G&A expenses in the first quarter, the CIR went down slightly QoQ and is showing 38.7% and 37.7% respectively.

Let's go to page 11. Shinhan Cards 2011 first quarter net income recorded KRW249.4b which is 11.5% increase YoY showing stable profit generation.

Real operating revenue went up with the increasing credit sales in the first quarter.

Interest expenses went up slightly at 2.5% with the stabilization of funding costs and G&A went down 1.2% year on year with efforts to contain labor costs and marketing.

As you can see on the graph on the bottom in the case of credit cards, it had KRW6.3 trillion of total written-off assets in the first quarter 2011 and KRW86b of written-off asset recovery took place in the first quarter and is maintaining stable recovery performance.

Next is about our funding. Let's move on to page 13 please.

In Q1 of 2011, Group's total asset grew by 3.3% year to date to stand at KRW329 trillion. Lower asset growth and AUM increase fuelled by deposits increase in the bank are the reasons for the overall asset growth. And overall Group assets grew by 2.7% year on year, maintaining the continued asset growth trend.

As for major subsidiaries, Shinhan Bank's assets including loans and marketable securities increased by 3.8%. Shinhan Life Insurance Company saw its assets grow by 5.2% thanks to increased monthly premium payment. However, Shinhan Card, credit cards posted a 1.5% drop due to seasonal reasons. Our asset management company also saw 1.6% decline due to equity fund redemption.

And on the next page, Shinhan Bank's loans in Korean won rose by 1% YTD and reached KRW128.9 trillion. Loan growth rate which continued in Q1 -- excuse me, the loan growth rate which restarted in the second half of last year continued in Q1. Household loans and corporate loans went up by 0.5% and 1.4% respectively. Shinhan's loans decreased slightly, however, mortgage loans increased by 2%. And the households with the real potential to [leverage] their house purchases saw increase in loans.

For corporate sector, the loans to SOHO surged to 2.7%. And as you can see, there's a balance in terms of loans to household and the corporate. So we do have a healthy balance in terms of loans to house and corporate.

As for end of Q1 our deposits in Korean won marked KRW131.8 trillion and this is 4.1% increase year to date, thanks to continued growth in time deposits, installment deposits and low cost deposits. Loans to deposit ratio was kept at a comparable level as at the end of last year which was 97%. Deposits on an ending balance basis went up significantly. However, LDR on a monthly average basis remained at a comparable level as end of last year. Stable funding structure focusing on deposits will continue to be implemented.

And on page 15, let me elaborate on credit cards funding. As can be seen on the left upper hand corner, our cards transaction volume in Q1 was KRW32.3 trillion, a drop of 2% year to date. Card assets also came down by 1.8%. This is due to fewer business days and seasonal factors of Q4. However, transaction volumes and earning assets are once again showing increase beginning of March this year. And we plan to grow the assets at an adequate level through selective marketing targeted at high net worth merchants and customers.

Next let me elaborate on asset quality. This is page 17.

At the end of Q1, NPL ratio stands at 1.59%, an increase of 16 bp year to date. Precautionary and below loans are as of Q1 2.96%, an increase of 9 bp year to date. The main reasons for this is some construction companies that applied for court receivership in Q1 were included in the precautionary and sub-standard and below loan category.

The Group's NPL coverage ratio is 130%, a decline of 11% QoQ. But we are sufficiently preparing for future potential bad assets.

Next page please.

For Shinhan Bank, NPL ratio is 1.53% and NPL coverage ratio is 120%. Due to increased number of companies seeking court receivership and all the asset quality indicators saw a slight drop compared to the previous quarter.

Delinquency ratio, as can be seen in the chart on the lower left hand corner, SME delinquency ratio significantly increased due to real estate PF and construction companies involved in the legal proceedings. However, delinquency ratio for household loans and SOHO loans are maintained at a very stable level.

The bank has been continuously managing asset quality with focused effort since 2009. Except for a few companies that began legal proceedings in 2011, new bad loans due to increased delinquency has not grown by much.

Next page please.

Shinhan Cards substandard and below loans are slightly declined as of Q1. NPL ratio stands at 1.62%, same as end of last year. NPL coverage ratio dropped 4% to mark 230%, but we have sufficiently provisioned to counter any potential economic downturn. As of end of Q1, delinquency ratio increased 4 bp to reach 1.84%. This is because earning assets declined slightly in Q1. But the overall delinquency level is at a healthy level.

We believe that such healthy level delinquency ratio is possible thanks to stable asset management strategies and strengthened risk management that were instituted in the second half of 2008. We will continue to ensure that Shinhan Card asset quality is kept at a healthy level.

On page 20 let me walk you through provisioning for credit losses and write-offs. As can be seen on the upper left graph, the Group's credit card ratio declined from 0.43% to 0.39%. This is because normally Q1 the ratio is lower than other quarter. We expect the number to reach a normal level after Q2.

As you can see on the upper right table, in Q1 the bank's provisioning of credit losses are mainly related to corporate loss. Shinhan Card saw a reversal of provisioning of about KRW6b thanks to increase of earning assets, reduction of unused credit limits, better customer payment and collection.

Write-offs and sell-offs in Q1 for Shinhan Bank posted KRW90b and KRW44b, respectively, and these are relatively small numbers compared to other quarters.

And next is our capital adequacy. As at the end of Q1, Group's BIS ratio and tier one ratio are expected to be 12.6% and 8.6%, respectively, each increasing by 0.2% and 0.3% year to date thanks to income growth in Q1.

For Shinhan Bank, as of end of Q1, BIS ratio and Tier 1 ratio are expected to be 15.2% and 12.3%, respectively. Shinhan Card's capital adequacy ratio is 24.3%, maintaining our sustained capital increase trend.

In 2011, the Group's assets are expected to post gradual growth and a core profit base is also expected to continuously improve. Therefore, the Group's capital ratio is expected to continuously improve.

For your reference, on page 23 and following pages are additional business results and management indicators for the subsidiaries and Shinhan Bank's loans to SMEs. Also included are net income and capital [adequacy] services from K-GAAP to KIFRS applications. I hope that you will refer to this material later on.

With this, we would like to conclude this presentation on the business results of Shinhan Financial Group Q1 2011.

Thank you.

From now on we will be receiving questions. (Operator Instructions). We will receive the questions in the order of questions asked. (Operator Instructions). For those who are asking questions in English, we have consecutive interpretation provided. Those who would like to ask questions in English, please wait until interpretation is being provided. Now, there is a slight lag until we receive the question.

Yes, now we'll take the first question. The first question will be provided by Mr. [Han Chin Kim] of Pacific Securities. Mr. Kim, please.

Congratulations on the good performance and the business results. I have two questions.

Question number one; for Credit Cards this margin and in terms of income or profit, these seem to be pretty good. However, market share -- I'm sure you're also controlling the expenses quite well. I'm curious about your market share and, as you know, competition is becoming scarcer. In Q1 the expense -- I wonder if you would be able to maintain the good control of the expenses as you did in Q1. Of course this will differ dependent on your strategies.

And two, if you have plans to protect or to increase your market share, what sort of strength, or what sort of advantages of Shinhan Financial Group will be utilized in doing so?

In Q1, Pumyang Construction and Sambu Construction (inaudible) suffered difficulties and had a negative impact on Shinhan Financial Group and credit. I understand you had a bit of exposure. However, you maintained good quality. They were deemed to be a good quality asset although there were large exposures. And the possibilities of this large -- or mid-sized to large-sized construction companies becoming in difficult situation. Do you think that -- there will be more of these companies -- construction companies that will be suffering and if you think so -- those things have been made in preparation?

As for question number one, the question was related to the strategy of Shinhan Credit Card. As Gi has said, the margin declined in Q1. However, in terms of cost ratio, or our overall funding cost, they have seen improvement. And for market share in terms of credit sales it's up at 20% -- around 24%.

And as you've asked, with the competition becoming scarcer, well will we increase our market share or we'll be focused on improving on profitability. Well we will focus on our improving profitability and then increasing on market share; that is the strategy that we are considering.

And the costs, including our marketing costs we will be emphasizing efficiency so that the overall profitability is maintained. So that is the strategy of our credit card.

And beginning in Q2, as you know, the regulations will become more stringent and with strengthened regulations I believe that there would be some buffer for this fiercer competition. But actually beginning in May the merchant fee range were changed and the fees for the check cards, this reduction will take place beginning in April. And I believe that these changes will serve as a buffer to the fiercer competition.

As for your question related to our construction companies, well the loan to the construction companies is less than 3%. Even including the PF it is less than 6% of our total loans. And, of course, there could be unexpected cases as the LIG case but compared to -- but they will not have a significant impact on the income of Shinhan Financial Group. And I think you'd be more interested in the assets, with the health of the assets.

With the construction industry suffering and medium-sized construction companies asking for the court receivership, the real estate PF is in a very uncertain situation. However, there's only limited impact from the real estate PF on the Shinhan Financial Group. And the reasons are that we do not have much exposure to such PF. And, in 2008, the real estate PF side, which was for KRW9.7 trillion and that has decreased to KRW5.3 trillion as of Q1 of 2011, so the overall size is smaller and the real estate PF is on a continuous decline. In Q1, there was a reduction of KRW870b PF reduction and also the PF that will be maturing in Q2 there were some of that. So therefore, there will be continued decline on the PF side.

And also KRW560b of the PF having recategorized as the NPLs but there will not be any additional NPLs. And protocol of construction companies doing [single] PF and there we have invested about KRW1.2 trillion. This is about 22% of our total PF and so even if -- even considering that it will be limited, a negative impact of PF on our Company.

Second question. The second question is from Franklin Templeton, Mr. [Cheong] please.

I am from Franklin Templeton. My name is Cheong (inaudible). Can you hear me?

Yes, very clearly.

I have actually three questions. The first question is about Shinhan Financial Group's strategy. Secondly, it's about growth and the future growth strategy of Shinhan Financial Group, going forward. And I'm curious about your [depreciation] in your growth strategy compared to your peers in Korea.

And second question is about shareholder value maximization. What kind of strategies do you have to maximize your shareholders' value?

And last question can be a difficult question for you to answer and it's about the establishment of bad banks that has been talked about by the government and what kind of losses do you think will have to be burdened by the banks? Can you give us some ballpark figures of how much of this NPL burden needs to be on the shoulders of the commercial banks? I know that it will be very difficult for you to answer the third question but I would just like to know your concerns or opinions.

My name is [Choi Beom-Su]; I'm in charge of Strategy and the Deputy President. And regarding the growth strategy, Shinhan from last year has started to grow. It's not the fastest growth but when other peers were at a standstill we still were growing. We are going to consistently grow and -- but I would like to tell you that we do not think double-digit growth is most optimal. The reasons we started to grow from last year is because if we grow too much then it will be very difficult for us to deal with it in several circumstances so what we are pursuing is good growth; an appropriate amount of growth that slightly exceeds the economic growth rate based on our strong customers. That is our growth strategy.

Second is to maximize shareholder value. As you're probably well aware, in early last year, next year we have KRW3.4 trillion of redeemable preferred stock and other stock that we can redeem so we will be able to have more capital at that time. And we have been maintaining 15% dividend payout ratio until now but there will be review of this payout ratio in the future. And, as we have mentioned before, we are going to take on predictable measures that can be predicted by our shareholders. And most important issue in shareholder value maximization is asset soundness and management efficiency, so we wish to stick to the fundamentals so we can meet the expectations of investors in the financial market.

Regarding your question about bad banks, I think that establishing a bad bank, itself, is a good idea. If you transfer uncertain bonds or fixed income to the bad banks it can cut down on the future uncertainties of several companies and the current management can focus on normal activities at those companies. And regarding the bad assets, I believe that those who have ample experience in bad assets should concentrate on those issues. And there should be more focus -- there can be more focused management of those bad assets at those bad banks so it is good in those factors.

However, regarding the pricing, some people are voicing some concerns about the bad banks because it will burden the commercial banks, so I think that was the gist of your question. Well from the Asian financial crisis, we were thinking of making a bad bank and Campo was quite successful. And there is [Yuamco], which is a bad bank that has been jointly established by several commercial banks. This is established by the banks and run by the banks and it has been quite successful. And in transferring the assets to bad banks, I believe that it will be transferred at the market price and then when you look at the past experiences, when you look at the size of our provisioning, we believe that establishment of the bad banks, or transfer of assets to that, they will not affect our bottom line at all.

Thank you.

Yes, we'll take the next question. And the next question will be asked by Mr. [Tokyo Wong] of [Tuborg] Securities.

Good afternoon. I have two questions. Question number one for credit cards. For credit cards, [present] credit cards at AE, the cost of less payment days they had large number in provisioning but when I look at the numbers for the Shinhan Credit Card, of course I'm sure in February there was no large impact -- was there any large impact on provisioning in Q1?

And second question. We were thinking about the results based on K-GAAP but aren't yet KIFRS, you had very good results, so do you have numbers based on K-GAAP instead of KIFRS, so could you tell us those numbers?

And in -- also, you haven't given us the breakdown in the materials and if you could compare that to 2011, I would appreciate that.

I think your first question was related to Shinhan Credit Card. Shinhan Credit Cards, well actually in Q1 provisioning -- there was a provision reversal of KRW6b. And at a recurring level, on a quarterly basis, the provisioning is expected to be KRW36b to KRW40b. In Q1, there was a collection of written-up assets which were -- and that was considered in those numbers. So in Q1, for Shinhan Credit Card, provisioning is -- there was a reversal of provisioning of about KRW42b. And Shinhan Credit Card was able to have such a reversal or write-back because the delinquency ratio is maintained at a healthier level. It's about 1.8% and for the NPL ratio it's about 2.62%, which is also quite healthy.

And next is on credit cards. Because of the seasonal factors, in Q1 the assets dropped and the assets dropped by about KRW360b compared to the last quarter. And for Shinhan Credit Card the unused credit limit reduced and, as a result, there was a reversal of provisioning. And because of these reasons, the Q1 provisioning was smaller compared to other quarters.

And your question related to K-GAAP and KIFRS, you wanted to know the numbers based on K-GAAP. Last year's numbers have been converted based on KIFRS so very quickly I will go over these numbers.

We have profit and loss for Q1 based on the IFRS of this quarter. And for the net income was about KRW924.3b compared to the same period last year. And this is an increase of 0.7%. And QoQ this is an increase of [57.9%]. Compared to the same period last year there were special circumstances and, excluding those special circumstances, there are some reasons for increase and decrease.

About the increase, the reason for the increase, the NIM increased of 12 bp on year and that's an increase about KRW119.5b. And in quarter three -- excuse me Q1 the NIM was 3.52%.

And there was other reasons and that is the healthy asset quality so the credit cost decreased by KRW7.6b. Of course there were reasons for reductions and in Q1 up to 2010 there was a sell-off of Hynix shares worth about KRW150b. And so non-interest income, compared to the same period, there was a decrease of KRW115.6b and for the G&A, there was only an increase of about KRW18b. So at a recurring level, compared to the same period last year and compared to last year, we were able to post a very good result.

Well we are waiting for a question to come in.

It seems that there are no other questions coming in and with this we would like to conclude 2011 first quarter earnings release. We will upload this presentation on our website so please revisit it whenever in the future. And please contact the IR team for other questions and we would be more than happy to answer your questions. Thank you very much for your participation and I would like to conclude the 2011 first q Shinhan Financial Group earnings release.

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