Shinhan Financial Group Co Ltd (SHG) 2012 Q1 法說會逐字稿

(Interpreted). Good afternoon. My name is Sung Hun Yu and I'm the Head of IR team at Shinhan Financial Group. I would like to thank you first of all, for taking the time out to attend to today's conference call. Let me begin our Q1 2012 earnings release call. Today here with us are our Chairman and CEO, Dong Woo Han, Beom Su Choi, our Executive President, our CFO Jung Kee Min, and [Jung Kee Jiang], our Head of Finance Management team. We'll first hear opening remarks from the Chairman and CEO Han and this will be followed by a presentation on our earnings results for Q1 2012 by the CFO, Jung Kee Min. Lastly we will have a Q&A session. First let me invite Chairman and CEO, Dong Woo Han.

(Interpreted). Good afternoon. I'm Dong Woo Han, the Chairman and CEO of Shinhan Financial Group. I would like to express my sincere thanks to all the investors, analysts and journalists from home and abroad for participating in the Q1 earnings call.

As I have promised at the first earnings call when I took office last March Shinhan Financial Group has achieved a sustainable level of growth during the past year, stabilized the credit cost and created a stable foundation for profit generation, successfully differentiating itself from peers as the leading financial group. As a result, despite the tight regulations, increased uncertainty and volatility in the financial environment, the Q1 earnings shows stability in ordinary profit. With that, let me brief you on the Q1 results and the strategic directions for Shinhan Financial Group going forward.

Shinhan Financial Group has realized a net profit of KRW826.3b. NIM stood at 2.57%, sliding only one bp QOQ. And despite the concerns from the market, credit cost was maintained at a stable level of KRW257.1b, similar to that of the last quarter. Net profit in the Bank business came in at KRW664b, showing an increase of 1.9%, and net profit in the non-Bank area recorded KRW284.1b, continuing a sound contribution to profit. Due to increased regulation, fierce competition in the credit card business and weaker soundness, concerns were raised that Shinhan Card might experience a sharp decline in profit. But net income came in at KRW186.5b in Q1. Excluding the one off gains of KRW67.3b from sales of BC Card, the profit is maintained at a similar level QOQ.

Distinguished investors and analysts, the immense uncertainty and volatility in the market this year calls for a nimble response to the new normal, which is defined by low growth, regulations and increased requirements for corporate social responsibility. In order to adapt to this fundamentally new business environment and generate stable profit at the same time, Shinhan Financial Group will realign its products and services from the customers' perspective and expand the ground for generation synergy through CIB and WM.

On the subsidiaries' front we plan to implement the following differentiated strategies. For the Bank we will focus on continuing stable growth and defending asset soundness, and NIM. For the Card business we will minimize profit decrease through adequate cost management. On the Securities side we will build a foundation from the mid- to long-term point of view to reinforce business competitiveness and increase contribution to the Group. Lastly, for the Life Insurance business we will continue the trend of stable growth and profit realization so that the business can become an additional cash cow for the group.

Investors from home and abroad, we will spare no efforts during the remainder of this year to meet the expectations of the investors and the market, and also to increase shareholder value in the long run by meeting all goals set forth. I would like to ask for your continued encouragement and support. Thank you.

(Interpreted). Next we will hear a presentation on the Q1 2012 results from our CFO, Jung Kee Min.

(Interpreted). Good afternoon. I am the CFO of Shinhan Financial Group and my name is Jung Kee Min. I will give you a presentation on our Q1 2012 earnings results.

First on the Group's income on page six, Shinhan Financial Group posted KRW826.3b in net income in Q1 2012. Despite NIM contraction the Group's interest income, which usually represents over 70% of the total income, increased by 2.9% YOY thanks to solid load growth. However, it decreased by 1.2% QOQ due to a seasonal fall in loan assets in Q1. While the Bank's non-interest income rose both on a QOQ and YOY basis on the back of gains from securities transactions, such as the gain from disposition of Hynix shares in Q1, the Group's non-interest income fell by 2.5% YOY due to non-Banking subs' poorer non-interest income performance.

SG&A increased by 8.1% on a YOY basis following the recognition of this year's anticipated salary hikes and also due to an increase in personnel-related costs, including stock option expenses upon the Company's strong stock price performance during Q1. On a QOQ basis SG&A fell by 26.7% as one-off expense items that had existed in the previous quarters, such as ERP and actuarial recognition of retirement allowances, no longer applied in Q1.

While the Bank tried to stabilize loan-loss provisioning in Q1, the Group's provision for credit losses rose by 44.9% and 1.9% on a YOY and QOQ basis respectively due to the ordinary level of increase in provisioning by Shinhan Card and increased credit cost at Shinhan Capital. In particular, while Shinhan Card saw its credit cost move up by 40.9% YOY as loan-loss provisions were written back in Q1 2011, the Group's credit cost ratio was maintained at a stable 54bps level.

All in all, in Q1 the Group's total income including interest and non-interest income steadily rose while SG&A growth was controlled appropriately and credit cost increase was kept at an ordinary level. Again, the Group's net income was KRW826.3b.

Next subsidiaries' income on page seven. In Q1 net income for Banking and non-Banking business of the Group stood at KRW664b and KRW284.1b respectively after applying an equity method. As you can see on the graph on the upper left, Banking business' stable income growth pushed up its income contribution to the Group from 62% in 2011 to 70% now. When considering seasonalities, non-Banking business' income contribution ratio is likely to move beyond the 30% level from Q2 and afterwards. Shinhan Card and Shinhan Life income shares are maintained at stable levels of 20% and 7% respectively.

Next on page eight our Q1 2012 earnings results by subsidiary. In Q1 the Group's Banking income was up by 1.9% YOY and by 184.9% QOQ as the previous quarter had reflected some one-off expenses. This indicates a stable income trend for Banking. On the other hand, non-Banking businesses saw their income come down by 20.5% and 13.9% on a YOY and QOQ basis respectively.

Shinhan Card experienced a normal credit cost increase in Q1 and thus saw its net income fall 25.2% from a year ago when loan-loss provisions had been written back. On a QOQ basis its income fell by 20.7% as the effect of earning KRW88.8b gain on BC Card shares' disposition disappeared.

In spite of the expenses associated with its continued channel expansion efforts, Shinhan Life's premium income steadily rose to post 0.9% and 14% growth on a YOY and QOQ basis respectively.

Securities and Asset Management subsidiaries saw their income fall by 7.6% and 14% respectively on a YOY basis due to the decrease in stock and futures brokerage commissions and fund redemptions. On a QOQ basis Shinhan BNP Asset Management's income grew by 2.3%, but Shinhan Investment's income fell 9.8% due to impairment loss and etc.

While Shinhan Capital posted operating income at a previous year's level, its income came down by 21.8% and 44.4% respectively on a YOY and QOQ basis following the provisioning for credit loss to cover some [shippers] during Q1.

Next page nine is regarding Shinhan Bank. In Q1 2012 Shinhan Bank posted a KRW658.7b in net income. Despite the YOY NIM contraction the Bank's interest income rose slightly thanks to loan asset growth. Non-interest income also rose as the Bank recognized one-off items such as gains on sale of Hynix shares. The Bank's credit cost grew slightly enabling it to put a 1.8% net income growth YOY despite increased SG&A.

On a QOQ basis the Bank's net income rose by 189.2% thanks to the increase in non-interest income from Hynix shares sale and the disappearance of the one-off expense items that have existed in the previous quarter. In Q1 interest income increased slightly from one year ago. While funding cost increased following rate hikes, lending rates fell slightly due to factors such as reduction of interest rates on delinquent loans and non-recognition of accrued income. As a result the Bank's NIM came down by 18bps from a year ago.

As can be seen on the bottom left graph, while the Bank's NIM including the Card fell by 15bps YOY to 2.57% in Q1, both Bank-only's and Bank-plus-Card's NIMs fell slightly by 1bp on a QOQ basis showing a stabilizing trend. We expect NIM to further stabilize as loan growth efforts will resume in Q2. The Bank's NIM is likely to stabilize at 2.1% without further drops.

As the Bank earned gains related to Hynix shares sales during Q1, its non-interest income grew by 14.1% YOY and by 163.2% QOQ. The Bank's provision for credit losses stood at KRW171.1b in Q1, indicating a stable credit cost ratio of 33bps. Next page please concerning Shinhan Bank's non-interest income. Its fee income including fund distribution fees and loan-related fees decreased in Q1 2012. However, its overall non-interest income increased by 14.1% YOY thanks to one-off gains related to securities such as those arising from Hynix's stake sales.

Concerning SG&A, the Bank's salary and employee benefits increased by 7.6% due to the recognition of wage increases and stock option costs. However, if you exclude these two factors, salary and employee benefit growth are deemed adequate. Overall SG&A fell by 33.9% from the previous quarter following the disappearance of one-off factors including recognition of ERP and additional retirement payment.

Cost/income ratios of the Group and Shinhan Bank on the bottom left graph represent real C/I ratios that exclude goodwill amortization, and they stood at adequate levels of 41.2% and 39% respectively.

Next on page 11. In Q1 2012 Shinhan Card's net income fell by 62.9% YOY to KRW186.5b. That is largely attributable to the normal level of [KRW58.5b] in credit cost incurred this quarter versus the KRW6b write-backs that had been reflected a year ago.

Q1 is seasonally weak in terms of credit purchase and fee reduction for small merchants that was enforced from this quarter has the effect of pushing down the card issuers' operating revenue by 1%. However, Shinhan Card is striving to maintain its profitability by reducing interest expenses through funding cost stabilization and also by saving SG&A and operating costs. As of Q1 2012 outstanding balance of written off debt stood at KRW6.4 trillion. The firm collected KRW71.7b from written off debt during Q1, demonstrating solid collection performance.

Please turn to page 13 for asset growth. In Q1 of this year total assets showed an increase of 1.8% to KRW33.8 trillion QOQ. The growth is attributable to an increase in Bank deposits, assets under management and earning assets in the non-Bank businesses such as investment in life insurance. Compared to the same period last year assets have increased by 2.6% showing a trend of steady growth.

Breakdown by subsidiary is as follows. Shinhan Bank posted a 1.3% increase in Q1 thanks to the growth in assets under management from additional inflow of deposits. Shinhan Investment Corp posted an increase of 16.6% owing to increased financial product assets. And Shinhan Life posted an increase of 5.1% on the back of increased assets under management, such as equity and fixed income. However, Shinhan Card posted a decrease of 5.1% due to seasonality.

Next page is loans in Korean won and, as you can see, loans in Korean won showed a 0.2% decrease at the end of Q1 to KRW138.7 trillion. Household loans dropped 0.8% while corporate loans climbed up 0.2%. The drop in household loans is attributable to the expiration of tax breaks for new home acquisition as of the end of last year. Loans in won declined 0.2% in Q1 as partial repayment from public sector loans came in, but the growth is expected to return to the adequate level from Q2 on the back of continued growth in SOHO and corporate loans.

Total deposits in Korean won in Q1 2012 stood at KRW144.2 trillion. Sustained growth in time deposits, accumulated deposits and low-cost deposits has shown a 2.3% growth QOQ and 9.4% growth YOY. Thanks to an increase in the savings space and stabilization in loan growth, LTD ratio dropped to 97% from last year's 99%. We plan to continue to maintain a stable funding structure centered on deposits.

On page 15, moving on to asset growth in Shinhan Card, as you can see at the top left hand side, the total transaction volume for Shinhan Card recorded KRW32.6 trillion, which is a 4.5% decrease QOQ but a 0.8% increase YOY.

Earning assets dropped 4.2% QOQ and this is because the number of days for credit card use is smaller in Q1 than in Q4 and also because of a seasonal decline in credit purchases. This is also a reflection of the Company's effort to limit underwriting of loans to high risk borrowers which began last year. Transaction volume and earning assets are back on the rise from March and we plan to manage the card loan portion at an adequate level while continuing specialized marketing activities for credit sales targeted at good merchants and card customers to pursue an adequate level of asset growth.

Next I would like to move on to asset quality of Shinhan Financial Group. Loans that belong to the substandard and below categories stood at 1.45%, showing a 20bp increase QOQ, and assets below precautionary increased by 48bp, recording a 2.94% at the end of Q1. This is due to the fact that the amount of total loans decreased in Q1 and only KRW137.8b were written off, which is smaller amount compared to other quarters. NPL coverage ratio dropped 15 percentage points QOQ to 151%. However, it still stands at a rather high level, providing enough provisioning for potential NPLs in the future.

Next page. Shinhan Bank's NPL ratio stands at 1.27% in Q1 due to the decrease in total loans and smaller scale debt write-offs. Loans in the substandard and below category increased slightly QOQ and NPL ratio stood at -- NPL coverage ratio stood at 150%, a 16bp decrease QOQ. As you can see on the delinquency ratio chart on the bottom left corner of the slide, delinquency in household loans increased 30bp due to a delinquency of KRW124.2b from a Group loan in the [Irsa and Chiksa] districts, but this is not an indication of increase in delinquency in overall household loans. Taking into account a small amount of write offs in the SME and SOHO loans, the real delinquency ratio is maintained at a stable level.

NPL ratio for Shinhan Card grew to 2.05%, which is a 33 BP increase QOQ.  Natural increase from growing delinquency and decrease in total loans are the reasons behind the increased NPL ratio. NPL coverage ratio dropped 23 percentage points to 211%. However, it can be said that a sufficient level of provisioning is in place for a possible economic downturn.

Delinquency ratio as of Q1 stands at 2.42% showing a 41bp increase. This is due to a slight decrease in earning assets in Q1 from seasonality and a temporary hike in delinquency ratio from applying tighter underwriting standards and reducing the credit line for multi-backed borrowers. From Q2 the outcome from the concentrated effort in managing delinquency will come into force and the delinquency ratio will remain at a stable level. We will work hard to maintain the asset quality of Shinhan Card at a sound level.

Please turn to page 20 for provision for credit losses and write-offs. As you can see from the graph on the top left hand corner, Shinhan Financial Group's annual provision for credit losses has increased from 0.47% in 2011 to 0.54%.

In the case of Shinhan Bank, decrease in the number of companies with NPLs and tighter credit management for troubled companies have led to a continuing trend of stabilization in credit costs. On the Shinhan Card side, increased provisioning due to deteriorated asset quality indicators and a decrease in profit from written-off debt resulted in an adjustment of credit costs from KRW6b last year to KRW58.5b. The credit costs for Shinhan Financial Group, reflecting such change, increased 55 bp and the credit cost for Shinhan Card this year is expected to maintain at the Q1 level.

In Q1 KRW39.8b have been written off at Shinhan Bank and KRW98b have been written off at Shinhan Card. In particular Shinhan Bank has executed a small-scale write-off resulting in a rise in NPL ratio.

Lastly, I would like to talk about the capital adequacy ratio. As of the end of Q1 the BIS capital adequacy ratio and Group Tier 1 ratio have increased 0.5 percentage points and 0.3 percentage points respectively to 11.9% and 9.2% owing to increased profit in Q1. As at the end of Q1 Shinhan Bank's BIS ratio is expected to come in at 15.4% and Tier 1 ratio of 12.4%. Shinhan Card's capital adequacy ratio stands at 26.1%, continuing an upward trend. In 2012 we expect to see a moderate growth in the Group assets and key profit bases will continue to be stronger, and the Group BIS ratio will achieve constant improvement.

In the Appendix we have prepared additional information on subsidiaries and details on key financial indices for the benefit of our investors so please refer to them as needed.

This concludes Shinhan Financial Group's 2012 Q1 earnings report. Thank you.

(Interpreted). Next we will take your questions. (Operator Instructions). And I'm sure that there could be investors who would like to ask questions in English and we will provide you with consecutive interpretation services. Those of you who ask questions in English, please hold on for a moment while the translation is provided consecutively. Now we are ready to take the first question. The first question comes from Citi Securities, Mr. Jinsang Kim. Go ahead please.

(Interpreted). Thank you for the strong results. I have two questions. First in the case of other banks margins have decreased because of the liquidity management, because they managed their liquidity too short term. And another factor was the reduction of fees for smaller merchants for credit card operations. And they also wanted to reduce LDR and they were subject to margin pressures as a result. That was the case with other banks but I believe that you managed to manage -- managed to protect your margins quite well.

Is it because you were less affected by the factors that I just mentioned or if there were other factors what were they and how do you expect your future margins going forward? Other banks have more of a positive outlook in terms of their margins going forward. So is that the case with Shinhan Financial Group as well?

And in addition, I know that the denominator has come down for your NPL ratio. I know that the scale of write-offs during this quarter was smaller. But excluding these two factors, I believe that you have a stable anticipation regarding your NPL ratio performance going forward. I do have concerns because the numbers show a growing trend. Thank you.

(Interpreted). First of all, regarding Shinhan Financial Group's NIM, you said that the NIM was better protected for us. There could be one factor behind this.

We fund about KRW10 trillion from the card debenture market and earlier that year the KTB rate was stabilizing. And in the corporate bond market the spread was also on a downward trend compared to our original expectations. Therefore I believe that we stood to benefit from this trend in the market. The issuing rate last year was 3.5% and in Q1 of this year the rate came down to 3.3% level for corporate bonds issue and this helped us in protecting our NIM. And in the case of our Bank the NIM was 2.09% for Q1. This means that our bottom is stabilizing, and we're hitting the bottom and moving upwards. And the downward trend that we saw until the end of last year I believe is being reversed.

Regarding the NPLs, as you mentioned, the scale of bad debt write-offs during Q1 was smaller than previous quarters. So that affected the numbers that we presented to you today. Furthermore, when it comes to credit cost ratio we normally reflect our aggressive target numbers in our business planning. And I believe that our actual credit cost ratio or the NPL ratio would be worse than the original target that we had reflected in our business plan. However, this is not a level that cannot be managed by us. Thank you.

(Interpreted). I will take the second question from Dongbu Securities, Mr. Lee Byung-Gun.

Good afternoon. My name is Lee Byung-Gun from Dongbu Securities. It could be a single question but it could be multiple questions all wrapped into one.

NIM is on the decline, but savings rate, interest is going up. So isn't this because the interest rate is not being transferred to the loan rate -- deposit rate is not being transferred to the loan rate? KDB is very aggressive and so I'm sure there is a bit of pressure on the deposit rate side. And also the Korea Housing Corp from this year have reduced their (inaudible) loan rate by 20bps. So I think it is very difficult to maintain the spread. But household loans side, many banks are being very aggressive by lowering their interest rates. So from the perspective of competition I want to know how you make of this market.

And not just Shinhan but also in other banks LDR is showing a drop. So was there any need for you to lower LDR under the circumstances you were in, in Q1?

And as to LTV, do you think there will be any more stricter regulation and how -- do you think there is any more room to contract the -- to manage the NIM more stringently?

(Interpreted). Let me try to answer that question. If you look at the NIM trend in Q1 as you may have already mentioned there was a drop of 1bp only so we have been successful in the protection of NIM. But the biggest element or the biggest issue was financing.

And in terms of management, if you've taken a look at our asset growth trend, in Q1 we have been rather careful about growth and the reason why we were approaching it in a very careful manner was we wanted to protect the margin. So if we look at the future direction of the margin, on the Bank side we are going to refrain from aggressive growth so we will be able to protect the margin. So in the Bank side, are we going to choose between growth or margin? If we were asked that question, we will put priority on protection of the margin. So Q2 and Q3 you will continue to see us protecting the margin.

And you have rightly pointed that LDR was 97.2%, slightly lower than 98%, 99%. This is not a result of our intentional effort to lower LDR. But from the L side there was very low growth and from financing the liquidity in the market and the liquidity to the bank, where flight to quality is continuing, so better terms of financing is possible for us. That is why LDR has dropped.

And as you have already asked are there any possibilities for tighter regulation on LDR, I would say the possibility is very slim because the current LDR level, not just for us but for our peers as well, it is stabilizing at a lower level. And tighter regulation on LDR can actually result in too much regulation and it could pressure areas where tighter regulation isn't even needed such as corporate loans. So we were not intentional in lowering the LDR.

(Interpreted). And let me build on the answer. Korean banks are focusing a lot on financing, not because of loan to deposit but LCR is going to be adopted from 2014. But the Korean financial authority is recommending that we adopt it from 2013. So in order to meet LCR we need to have some room in the loan to deposit ratio. So if you understand the circumstances I'm sure you'd be able to have a better understanding. We are not competing on LTD ratio.

(Interpreted). We are ready to take the third question. The third question is from (inaudible) from JP Morgan.

Yes, thank you for the call. My question is related to your thoughts on household credits given that you experience an up-tick in delinquency in the credit cards segment. So I'm interested in your thoughts in the household sector in general for the Bank. Thank you.

(Interpreted). Regarding the credit card asset quality, I would like to give you an answer myself first. In the case of Shinhan Card, if you look at the overall delinquency rate it is true that it is moving upwards, but there could be two different aspects to such an increase in delinquency rates.

First, our revenue earning assets compared to the end of last year has gone up -- has moved down by 4.8%. Therefore, this effect of a smaller denominator has -- is pushing down the -- is pushing up the delinquency ratio. And it is true that there has been some deterioration in asset quality. The delinquency ratio, whether that represents the real quality of the assets, I believe that is too early for us to tell as of now.

The reason that there was an increase in the delinquency ratio in Q1 for Shinhan Card was because of the pre-emptive efforts made by Shinhan Card that started from last year to tighten our control of the credit card loans and etc. As can be seen in Q1, there has been a 4% drop in asset base for Shinhan Card and such efforts already started last year. This has resulted in slight deterioration of asset quality for lower credit customers of Shinhan Cards and this is being captured in Q1 numbers. Again this has to do with our pre-emptive efforts to maintain stable asset quality overall going forward.

What is important is the second-month delinquency roll rate and it's about 4.5% to 5% level and internally we believe that this second-month delinquency roll rate will be maintained at a 5% level going forward as well. Therefore when it comes to credit card asset quality for the future we do not have any grave concerns regarding the possibility of sudden deterioration. I do admit that there has been a deteriorating trend but for credit card operations we have about 100bps credit cost ratio and this is well within our targets.

Concerning the Banking operation, if you look at the household sector delinquency rate, it is increasing as well. But in Q1 there have been some extraordinary factors especially for Shinhan Bank. Concerning the mortgage loan sector there has been a large amount of delinquency of Group loans in [Irsa and Chiksa] districts. And about KRW120b became delinquent. So that was one main factor.

As was mentioned by Mr. Jinsang Kim previously, including the household sector, we have written off some debts, but the scale of that write-off was smaller in Q1. Last year the quarterly write-off scale was about KRW370b. However, in Q1 this year the write-off was just about KRW38b. So this was also another factor.

As we move into Q2 of course our delinquency ratios or asset quality could further deteriorate. However, they will not deteriorate to the level that we had -- beyond the level that we had planned.

Concerning the overall household sector asset quality we do not regard this as a strong pressure on us concerning our future asset quality. Thank you.

(Interpreted). We're going to wait a couple of minutes until the next question comes in. It seems like there are no further questions. So with this I would like to close the 2012 Q1 earnings call. Once again, thank you very much for participating despite your busy schedule.

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.