Shinhan Financial Group Co Ltd (SHG) 2013 Q3 法說會逐字稿

Good afternoon, everyone. I'm Ryu Seung Heon and I'm in charge of IR. I would like to thank all of you for participating in the Q3 earnings conference call.

We will now begin the Q3 earnings report. Today we have here with us Vice President [Kim Yeong Gi] who is in charge of Strategy, and our CFO, Min Jung Kee, and [Mr. Chang Dong Ki] who is in charge of Finance.

We will first open up the conference call with the presentation from our CFO, Min Jung Kee. And after the presentation, we will be taking questions.

I'll hand the microphone over to CFO, Min.

Good afternoon, ladies and gentlemen. My name is Jung Kee Min and I'm the CFO of Shinhan Financial Group. First of all, I would like to thank all of you for attending our third quarter earnings conference call. All of the investors, analysts and press, both domestic and foreign, thank you very much for your interest.

Now I would like to take you through our presentation that summarizes the key points of our third quarter results. Please turn to page 6 which covers the Group's income.

During the third quarter, the net income of Shinhan Financial Group was at KRW523.2b. Year to date it was KRW1,559.5b, which is a 5.8% decrease quarter on quarter and a 22.5% decrease year on year.

Compared to the previous year, our credit costs have stabled and SG&A has been maintained at an appropriate level. However, our interest income decreased due to lower NIM as well as the fee income decreasing both on the bank and card side. This has resulted in decrease on the earnings side.

Quarter on quarter, we have successfully maintained our credit costs and SG&A on a quarter-on-quarter basis. But there was interest income one-off factors that did not continue on the third quarter, and this resulted in a slight decrease of the net income.

By sector, as you can see, the interest income for the Group decreased by 7.2%. Year on year, there was a decrease of 19 bp on our NIM, resulting from a lower base rate. On a quarter-on-quarter basis won loans increased by 0.8% and the Group NIM overall increased by 4 bp quarter on quarter. And this overall contributed to a slight increase in our interest income.

On the non-interest side, there was a decrease year on year of 8.6% year on year on the non-interest side due to fee income continuously decreasing due to decrease in bank fund sales commissions and Bancassurance commissions.

On a quarter-on-quarter, our second quarter, there was a net interest income decrease of 11.2% due to the sales profit of the second quarter to the National Happiness Fund which was KRW66.4b, and the impairment loss on AFS of KRW43.1b during the third quarter.

Our SG&A was maintained at an appropriate level at 4.3%. And also during the second quarter there was the KRW35b paid into our welfare fund, the Employee Welfare Fund, in the second quarter. And if we take -- if we reflect this, there was a decrease of our SG&A by 2.1% during the second quarter.

In terms of our credit cost decrease, there was a decrease of 14.7% and 13.4% year on year and quarter on quarter respectively, thanks to decrease in overall credit costs from the decrease in large restructuring corporate, as well as high-risk sectors.

So if you look at overall Group, there was a decrease in the squeeze on the NIM and we have seen a stable interest income. On the non-interest side, the fee income has decreased and some of the one-off incomes in the second quarter have been removed, this resulting in a decrease on a quarter-on-quarter basis. But the overall costs such as SG&A and credit costs have been well-maintained, and we believe that profitability on a recurring basis is on a strong trend.

Next I would like to look at each of the Group companies. Until the third quarter, both the banking and non-banking net income year to date on a contribution basis was KRW1.1 trillion for the banking and KRW716.9b for the non-banking respectively. And the non-bank's profit contribution increased slightly year to date to 39.4%.

Next I would like to look at each of the affiliated companies. Compared to the third quarter of last year, banking profit decreased by 24.4% year on year on a cumulative basis due to decrease in interest income. This is larger than the 16.7% drop of the non-bank side.

The non-bank side profit decrease is mainly due to lower merchant fees on the credit card side, as well as lower profits on the life insurance due to changes in systems as well as decrease on interest margin gains. On the other side, Shinhan Investment Corp. and Capital has improved in profitability, resulting in year-on-year increases.

Quarter-on-quarter basis, the banking profits increased by 8.5%, thanks to slowdown in the interest -- in the NIM squeeze. And also on the non-banking side, the profit decreased 18.9% on a quarter-on-quarter basis due to the gains on the asset sales to the Happiness Fund during the second quarter being removed, as well as seasonal factors, resulting in fee income decreases. Also on the life insurance side, there was a premium received decrease.

Next is page nine which is the details of the Shinhan Bank's performance. The bank's third quarter net income increased by 8.3%, thanks to slowdown in the interest income decrease and stable management of costs including SG&A and credit costs.

On the interest income side, the interest income decreased only slightly as NIM was held at 1.73%, which is only a 1 bp drop from the second quarter.

The non-interest income of the bank increased by 34.3% quarter on quarter, despite an AFS impairment loss of KRW43.1b during the third quarter, thanks to gains on sales of loan assets and foreign exchange and derivative-related gains from the exchange rate changes.

SG&A of Shinhan Bank decreased by 6.2% quarter on quarter, mainly due to the contribution made during the second quarter to the Employee Welfare Fund. The credit cost of the bank has been stable since the second quarter, and in the third quarter, despite the addition of provisioning expense from the downgrade of STX, overall credit cost has been stabilized. And the credit cost has decreased by 6.1% quarter on quarter, thanks to the overall stabilizing in credit cost.

Also we have reflected the results of the Shinhan Bank's tax audit and have reflected KRW38b additionally to the results of the third quarter in terms of tax expenses.

Next is the Shinhan Card's third quarter performance. The third quarter net income was -- the Shinhan Card's third quarter net income was KRW106.4b (sic - see presentation slide 11 'KRW 160.4b'), which is a 25% decrease quarter on quarter due to the impact of the KRW55b gain to the Happiness Fund and the 1.7% in operating profit, explained by seasonal factors.

Shinhan Bank's SG&A non-interest income fee decreased by 5.4% quarter on quarter due to fund sales commission decreases, and AFS impairment loss contributed to securities related gains decreased by 32.8%. And so overall, the Shinhan Bank's overall cost/income ratio was at 51.5%, thanks to increase in gross income in third quarter.

Next is Shinhan Card's third quarter performance. Shinhan Card's third quarter net income was at KRW160.4b, which was a 25% decrease quarter on quarter due to the impact of KRW55b gain to the Happiness -- the sales to the Happiness Fund and the 1.7% in operating profit explained by seasonal factors. Despite decrease in operating profit, the interest paid decreased by 24%, thanks to improved funding costs. And the credit costs also improved due to delinquency roll rate and asset quality improvements.

The write-off asset balance was KRW5.3 trillion at the end of third quarter and the annual recovery rate was 4.8%, which shows signs of maintaining a sound level.

Please turn to page 13 for assets and liabilities. Total assets as of the end of Q3 grew by 3.5% to KRW380 trillion, showing a healthy growth trend. Key contributors are Shinhan Bank's 3.2% annual asset growth and continued increase in the Shinhan Investment financial product assets and Shinhan Life Insurance operating assets.

If you look at page 14, you may see that Shinhan Bank's Korean won loans stood at KRW147.5 trillion as of the end of Q3, an increase of 2.3% compared to year-end. Loans recorded a steady growth of 0.8%. Retail loans increased by 1.6% QOQ owing to growth in Jeonse loans and credit loans. And SOHO loans led to growth in Korean won loans by posting a 2.5% growth.

On the other hand, mortgage loans declined 4.2% annually due to securitization of confirming loans by Korea Housing Finance Corporation. However, long-term mortgages are showing a sound growth.

Taking securitization into account, Korean won loans grew by 3.9% and retail loans by 4.4%. We plan to push for continuous growth in sound assets such as household credit loans and SOHO loans.

The Korean won deposits in Q3 2013 also continued on a stable growth path, growing at 2.2% to reach KRW150.5 trillion. On a quarterly basis, savings in particular, time deposits recorded a slight decrease while low-cost deposits increased by 1.2%, maintaining a similar level compared to the previous year. LDR also grew to 97.9% as of the end of Q3. We'll try to maintain a stable LDR through continued management of low-margin loans and high-cost deposits.

Turning to page 15, let me go over Shinhan Card's transaction and funding activities on page 15. During Q3, Shinhan Card's credit card transaction volume declined slightly to KRW34 trillion QOQ.

Operating assets also fell 0.9%, mostly due to credit sales and cash advance. This is largely due to less business days compared to Q2 and credit card seasonality as well as a temporary decline in transaction volume and credit sales.

Now let me move on to page 17 for asset quality. Shinhan Financial Group's NPL ratio at the end of Q3 2013 dropped 0.06 percentage points to 1.53% QOQ. This is owing to the constant management of bad debt and KRW396.4b in write-off in sales during Q3, resulting in smaller NPL growth compared to the rate of asset growth.

The Group's NPL coverage ratio posted 144%, an increase of 5 percentage points QOQ, stable enough to counter potential deterioration of assets.

Moving on to page 18, the NPL ratio for Q3 stands at 1.39%, down by 0.4 percentage points QOQ. NPL coverage ratio increased 5 percentage points to 132%, continuing the trend of asset quality improvement.

Delinquency ratio, as you can see on the bottom-left of the chart, remained steady at the 0.6% level, keeping the asset quality at a stable level.

On page 19, Shinhan Card saw a slight decrease of 0.6% in NPL QOQ owing to continued sales and write-offs of NPL, posting 1.80%. NPL coverage ratio increased by 7 percentage points to 293% QOQ, allowing the bank to hold sufficient provisions for a potential deterioration of asset quality.

Delinquency as of the end of Q3 dropped 7 basis points to 2.05%, maintaining our healthy level.

Page 20 looks at provisions for credit losses and write-off. As shown in the upper-left graph, provision for credit loss decreased from 0.67% to 0.57% year on year, showing a stabilizing trend. This is due to the decline in provision for credit loss in Q3 from additional provisions required for corporate restructuring and improvement in card delinquency roll rates. We will continue to make efforts in quality management of potentially problematic companies to maintain the stable level of provision for credit loss.

Increase in provision for credit loss for Shinhan Bank is not expected to take place as the number of companies that will undergo restructuring is expected to decrease. In addition, loan growth has been increasing steadily during the past three years.

In terms of credit costs for Shinhan Card, the recovery of written-off debt decreased by KRW6.2b from previous year's KRW65.9b to KRW59.7b. However, due to decrease in write-off, improvement in delinquency roll rate and recovery rate, credit costs of KRW81.6b was incurred to result in a decrease of KRW20.5b QOQ.

Write-off in sales for Shinhan Bank during Q3 stood at KRW95.1b and KRW142.2b respectively, posting a decrease compared to KRW412.4b of Q2.

Please turn to page 22 for capital adequacy. The Group BIS ratio for the Q3 is expected to see an increase of 0.4 percentage points to post 13.1% due to growth in income and slight decrease in risk-weighted assets. Tier 1 ratio is also expected to increase slightly by 0.3 percentage points to 10.2%.

Shinhan Bank's BIS ratio for Q3 is likely to drop due to an increase of Tier 1 assets, thanks to a stable net profit increase and a decrease of KRW1 trillion in risk-weighted assets from the application of AMA. As a result, the Tier 1 ratio is expected to increase to 13.1% and the BIS ratio is expected to increase to 16.1%. Adjusted capital ratio for Shinhan Card stands at a healthy 29.4%.

As the Group asset growth is expected to be led by steady asset growth and its profit-generating capabilities are expected to continue on a solid path, the capital ratio for the Group will see continued improvement.

Please refer to the remainder of the presentation for additional details on the subsidiaries' business results, major management indicators and loans to SMEs.

This rounds up the 2013 Q3 Shinhan Financial Group earnings report. Thank you.

Now we will take your questions. (Conference Instructions).

Also the presentation material for today's conference call can be also accessed through the mobile app portion on Financial Group IR that we have developed. Those on the Android platform can search for SFG IR to find the app. For those on the Apple iOS platform, please enter m.shinhangroup.co.kr to find the app which you can download. Not only today's presentation material but also past material, our Annual Report and e-brochure, is accessible through this mobile app. I hope you will find this mobile app very helpful.

We will take the first question. The first question comes from Mr. Jinsang Kim of [SG Security]. Please go ahead, sir.

Thank you very much for the good performance. I have a question on Shinhan Card. You've said that the roll rate for delinquencies has improved and that the new delinquencies are also stabilizing in the case of build-up. When I look at other major credit cards, their new delinquencies are decreasing. But their recovery of existing delinquencies are dropping is what I hear from other major credit card companies.

Do you see a different trend on your credit card operation? And if you do, how can you explain this difference in trend? Because I think some people read a moral hazard effect on the credit card side. Also the check card or the debit card, some people are saying it's cannibalizing the credit card side. Do you see any impact of the so-called check cards on your credit card operation?

Well, regarding the Shinhan Card business, if I may answer that question, our two-month roll rate currently is 0.45% and is maintaining a stable level around that range. For two months plus delinquency roll rate, actually the delinquency roll rate has decreased slightly quarter on quarter.

Our two-month roll rate currently is 0.45% and is maintaining a stable level around that range. For two month plus delinquency roll rate, actually the delinquency roll rate has slightly decreased slightly quarter on quarter. So overall, our recovery rates have not decreased largely. I think we can explain that in twofold.

One is that in Shinhan Card, the cash advance which is relatively higher risk, the cash advance has been decreased based on our strategy. So the cash advance in our total operating asset is around 12%. It's about KRW2.4 trillion.

Since 2008, we have been decreasing the share of cash advances in our assets, because in 2008 it was up to 24%, twofold of the share current. So relatively, I think one way of explaining it is that our relatively high risk asset share has been decreased.

The second way of explaining our situation is the fact that our current credit card growth strategy is not an aggressive strategy for growth. Still Shinhan Card focuses more on the fact that our market share is 22.4% -- 22.3% and maintaining that level. And we have not engaged in aggressive marketing. So I think relatively speaking, we have a less increase on the lower credit rating customers and I think that once again explains the fact that our recovery rates have not dropped as much.

About the impact of check cards, check cards, yes, has been increasing. In terms of our overall volume turnover, it accounts for about 11%. A bit above 10% of our business is check cards. Whether it will be profitable and if so how much and whether it will help our overall business was the question. There are various factors we have to consider because check cards has no credit risk. And so in terms of our soundness or in terms of our credit cost, there is a contributing factor there.

Also if you look at the Financial Group level, one of the reasons why our margins have been stable is because we have been able to attract the merchant settlement accounts and also the credit card holder's personal accounts. And that has been a source of our low-cost deposits which helps keep our NIM healthy. And so in that sense there is a plus factor.

Maybe it will not help much on a credit card bottom-line, but we believe that check cards may be helpful from the overall Group's perspective. Also the check cards, when we look at the pace of growth of check cards, it's not yet a very rapid pace of growth. So overall their impact on our bottom line I think would also be gradual.

Thank you very much.

[Watanabe, Prudential Investments].

Can you hear me well? Thank you very much for the good earnings report. Regarding the net NIM, net interest margin, Q2 you mentioned was [73% and -- 7.3%]. Well, what you have mentioned, is this the bottom? Do you think this will go back up?

Well, regarding NIM, 1.73%, is this the bottom? Yes. The -- whether or not this is the bottom, we cannot be confident. However, we feel that we are very close to hitting the bottom.

And our basic approach for the growth strategy is the annualized growth rate even if it is 3%, if the margin is about 6 bps growth it will not have an impact. So the NIM has been declining quite quickly or quite rapidly, since 2012. However, it is showing a stabilizing trend. And this is because -- and this is largely dependent on what kind of price strategy or stance other banks have. We try to defend our margin and at the same time push for our growth strategy. I think this is the bottom or close to the bottom of NIM margin. And in order for the NIM to increase, the yield curve itself becoming steep is itself is not important. There has to be a parallel increase along with there needs to be a shift upward.

Thank you very much.

(inaudible), Macquarie Securities.

Good afternoon, how are you? Can you hear me well?

Yes.

Well, I have another question about the NIM. You said that the -- actually the -- including merchant fee NIM decreased by 7 bp quarter on quarter. Why is there this huge decrease quarter on quarter on the merchant fee included NIM? I don't see any special factors there.

Well, when we prepare the presentation, the merchant fee included NIM is at 3% ranges. But then there will be the change in accounting and we'll have to take up the merchant fee, look at the net bank and Shinhan Card which is around a 2.3 percent range.

As you know the merchant fee were lowered for the smaller merchants. But the merchant fee for the larger merchants where slightly increased and that does have a decreasing effect on our NIM. This old NIM, which includes merchant fees of course, will decrease. What we need to look at more is the RF -- RS based NIM, which excludes the merchant fee and only looks at the interest income, which will be around 2.31, which actually we have defended quarter on quarter, which we would like to emphasize more.

And additionally, the one-off event in Q3 was that the card fee was reduced by about KRW50b. So with the merchant fee increase, there has been a decline. However, if you look at the fee that does not include merchant fees and just for the margins for bank and card you can see that there is a slight improvement.

(inaudible), Securities.

Good afternoon, I am (inaudible) from (inaudible) Securities. I have a question regarding provision for write-offs and also provision if you look at the refunds in write-offs. I would like to know the size.

And my second question is, well, you did mention the one-off event. In terms of the write-off and the exchange rate, I would like to know the figures. I think in terms of provision, (inaudible) will be included in the figures. So I would like to ask you for details.

And when you were talking about check cards, you talked about the increase of deposits. There has been a very significant increase. I would like to know if this had an impact on check cards usage and I would like to know if you expect any more increase in the usage of check cards.

Well, you have asked four questions. Regarding asset quality, you have talked about the provision which has declined compared to the previous quarter. There has been 13.4% decrease. Last quarter was KRW251b. Now this year it's KRW217b. So we did experience a decline. So in terms -- there has been a reversal which came from the loans to construction companies. KRW32.3b have been reversed in our provision. So this resulted in a decrease in provision.

And secondly, regarding the second question, regarding the write-off, STX write-off. KRW35.4b has been added to our provision for loss. And regarding the construction companies there have been KRW32.3b of reversal. And in terms of non-income there have been two sales of securities, which amounted to KRW80.8b. The first was SK Hynix shares and secondly, we sold Visa Card, which resulted in KRW37.3b. So these were the two biggest elements.

And regarding the bank business there we also sold the workout funds -- workout sales of KRW41.3b. And regarding shipping companies KRW24.6b of profits was realized from CBA. And regarding non-income, we have experienced KRW43.1b of loss from our POSCO shares impairment. So that was the second answer.

And regarding the provision for Q4, during the first three quarters, the current provision size stands at -- the recurring basis it is on the decrease. And as our CFO has already mentioned, the overall credit cost has dropped to the 57 basis point level. However, the basis on -- based on the recurring basis, it is -- it remains at the 26 -- KRW260b to KRW270b level.

In Q4 we are going to set the provision on -- based on the recurring basis. And in the case of some weak industries such as construction and some of the credits that are still considered problematic still remains. So there is a possibility that we may have to increase the provision for Q4.

And as to the on-demand deposits, it can have a positive effect on the margin. As to the on-demand deposit, there is a -- there can be three reasons why there is an increase. First is, the merchant accounts, the number of merchant accounts are increasing and also the payroll accounts are increasing as well. As we are providing credit loans, it is bundled with the payroll account. So the on-demand deposits are increasing along with them.

So for instance we have a deal with [National Court]. So these are the reasons why the overall procurement cost -- the financing cost is increasing and is also having a positive impact on the NIM.

And let me add to the answer regarding the provision. The financial authority always requires the banks to have a preemptive provisioning. After the application of IFRS, it was quite normal for banks to increase provision [4Q]. So there are some potential delinquencies such as personal workouts and etc. So individual provisioning can be done on the partner of the bank and it has always happened on Q4 each year.

So we are currently standing at 57 bp right now. But looking at the past trend, it will be quite inevitable for us to increase the provisioning for Q4. As to the actual amount we will have to look at how many companies that we need to consider and what the size of the workout loans will be.

[Jung Moo Il], Franklin Templeton.

Good afternoon. My name is Jung from Templeton. I have a question about Shinhan Life. If you turn to slide 26 we have the profits and you can see that the premium income has decreased compared to last year. I'm looking at other insurance companies and they don't show such a deterioration in their premium income [net]. Is there a special reason behind this decrease?

The second question is on page 27 on the new premiums. There is a huge drop between the first quarter and the second quarter. Can you explain that drop in new premium income?

I will take the question about Shinhan Life. The Shinhan Life performance, it has been on a decreasing trend. I think I need to take this question from a more comprehensive approach.

There is three reasons behind the decline in performance. One is changes in various systems which is decreasing the operational profit. Also there is a decrease in terms of the interest gain due to the decrease in the overall interest rates. Also there is a decrease in terms of asset sales.

So if we go into the details one by one, the third quarter accumulated net income is KRW76.3b in which is a 25.7% decrease quarter on quarter; 59.4% year-on-year decrease. There are various decreases in the operating profit which is KRW69.2b. Also there is a decrease of KRW52.5b in terms of interest gains and also in terms of trading gains there is a decrease of KRW31.5b. These all add up, pre-tax wise of a decrease of KRW153b; post-tax wise KRW160b.

These decreases due to changes in the system probably will last us another three to four years. The market rate being so low and that impact on the interest gain -- interest margin gain probably that will not be improving unless the market rates go up. However, the contribution of Life within the overall Group is only 3.9%. So the impact on overall Shinhan Financial Group will be still limited.

Fortunately though, compared to -- other subsidiaries such as Shinhan Capital have been improving year on year in terms of their results. in terms of Shinhan Capital, there is an increase of KRW15.7b and Shinhan Securities has been increasing about KRW700m. So overall that is offsetting the decrease in the Shinhan Life decrease in performance. So in a sense it is a reflection of the diversification as a financial group and also reflects a team play approach.

We plan to increase the share of guarantee or protection type products and also increase the gains from asset management and also improve the retention rates and focus more on getting the high-end customers so that the Shinhan Life can get access to a stronger base for long stable growth.

It looks like there are no other questions at the queue. So with this we would like to wrap up the Q3 earnings report for Shinhan Financial Group. Once again, I would like to thank all the participants for taking time out of their busy schedule to join us. Thank you very much.

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.