Shinhan Financial Group Co Ltd (SHG) 2014 Q1 法說會逐字稿

Good afternoon everyone. I am Yu Sung Hun and I am in charge of IR. I would like to thank all of you for participating in the 2014 Q1 earnings conference of Shinhan Financial Group.

We will now begin the 2014 Q1 business results presentation. Today, we have here with us Vice President, Kim Hyung-Jin, who is in charge of Strategy; our CFO, Min Jung-Kee; as well as [Chang Dong-ki] who is in charge of Finance. We will first open with the business results presentation from our CFO, Min Jung-Kee, and after the presentation, we will be taking questions and engage in a Q&A session together.

I'll now handover the microphone to CFO, Min Jung-Kee.

Good afternoon. I am Min Jung-Kee, the CFO of Shinhan Financial Group. First of all, I would like to extend my gratitude to the investors, analysts and journalists in and out of Korea for listening into the 2014 Q1 Shinhan Financial Group business presentation.

Let me now walk you through the highlights of Shinhan Financial Group's 2014 Q1 earnings release.

Let me first elaborate on the Group's income on page 6. Shinhan Financial Group's 2014 Q1 net income recorded KRW558.4 billion, a 16.1% increase YoY. The major highlights of this quarter's earnings are as follows. First, interest income base was recovered through appropriate asset growth and margin stabilization. Second, SG&A was efficiently managed through Group's overall cost cutting efforts. Third, Group's asset quality stabilized and credit costs declined.

Regarding the P&L items, with the Group NIM stabilized and appropriate loan growth continued, the Group's interest income grew 3.2% year-on-year. On the other hand, it dropped 2.3% QoQ because the bank's one-off items, which took place in Q4 of last year including overdue interest revenue which did not take place this quarter occurred and it was also because of the seasonal slight fall in Shinhan Cards' interest income.

Non-interest income also fell 34.5% to YoY. Main reasons were a drop in bank fees and commissions income, increase of available for sale securities impairment losses and fall in card securities for sale disposition gains. Compared with the previous quarter, bank's available for sale securities disposition gains increased, impairment losses dropped and the non-banking subsidiary income including financial investment and insurance recovered leading to a non-interest income growing 57.8%.

SG&A, thanks to the Group's overall cost cutting efforts, rose only 2.1% year-on-year. There was a drop in the other SG&A expenses, which increased temporarily in the previous quarter and SG&A went down 5.3%.

Looking at credit cost, the Group's 2014 Q1 credit cost went down 56.7% year-on-year and 49.3% QoQ. The reason credit cost fell quickly was because Shinhan Bank did not have major one-off provisioning such as corporate restructuring or long-term delinquencies. Shinhan Bank also had some provisioning write back with recovery of written-off assets and also the Savings Bank had a big drop in credit costs.

Next page 7, Group subsidiaries income. In Q1 2014, taking into consideration the contribution of the bank and non-bank, net income recorded KRW425 billion and KRW207.8 billion respectively. Bank income recovered slightly faster than the non-bank and the non-bank income contribution recorded 33%, a slight fall compared to the last year.

Next page 8, Group subsidiary income. Shinhan Bank income due to the interest income stabilization and falling credit cost went up 24.6% year-on-year and 48.4% QoQ respectively. On the other hand, non-bank income went down 16.3% YoY. This was because in the case of Shinhan Card and Shinhan Investment, the one-off items having a positive impact on income did not take place during the same period this year as last year. Also the recurring income level of Shinhan Life declined because it is going through difficulties including deterioration of business environment and regulatory changes. QoQ, the non-bank side subsidiaries [had] overall income recovery and non-banking income grew 43.3%.

Next page 9, Shinhan Bank performance. Bank's 2014 Q1 net income recorded KRW425.1 billion. With the interest income stabilization and credit cost greatly declining, Bank net income rose 25.8% year-on-year and 50.1% QoQ respectively. Shinhan Bank's Q1 NIM recorded 1.77%, a one bp fall year-on-year from 1.78% in the same quarter the previous year. However, with the interest bearing assets including loans in won consistently increasing, interest income grew 1.4% year-on-year. And as aforementioned, taking into consideration the one-off interest revenue in the previous quarter, interest income level similar to the previous level on a recurring level was recorded, showing a gradual stabilization of the Bank's interest income.

Non-interest income went down 31.1% year-on-year with the fee income drop and increase in available for sale securities impairment losses. Compared to the previous quarter, with the increase of disposition gains from available for sale securities and decrease in impairment losses, non-interest income went up 50.7%. SG&A with the consistent efforts to have cost efficiently rose only 1.1% year-on-year. Credit cost with the decrease of one-off credit cost items and provisioning write back went down 76.8% year-on-year and 75% QoQ respectively.

Next page 10, Shinhan Bank's non-interest income and SG&A. 2014 Q1 Shinhan Bank's non-interest income recorded KRW172.3 billion, a 31.1% drop YoY, but a 50.7% rise QoQ. The reason why the non-interest income fell YoY was because of fees and commissions revenue profits dropped 5.8% with the decrease in Fund and Bancassurance sales and also because the available for sale securities impairment losses went up KRW61.5 billion YoY leading to a 65.7% drop in securities-related gains. Compared to the previous quarter, despite a decrease in commissions from sale of funds and drop in IT commissions income, with the increase in dividend profits, disposition gains from available for sale securities and drop in impairment losses, non-interest income grew QoQ.

You can see Shinhan Bank's SG&A on page 10. Shinhan Bank's SG&A stopped at a slight 1.1% increase YoY with consistent efforts to cut costs and to improve efficiency. There was a change in some SG&A accounting methods from this year. Regarding some expenses including employee welfare fund, the leave compensation and another expenses which were recognized at the expenses for the quarter in question, the system has been changed from a cash basis to accrual basis recognizing the same amount each quarter. Accordingly, we expect the SG&A volatility to be improved in the following quarters.

Now let's go to page 11, Shinhan Cards income. Shinhan Cards' 2014 Q1 net income recorded KRW141.2 billion. It was a 12.1% drop YoY, but taking into account the VISA card securities disposition gains, which occurred in the previous quarter amounting to KRW40.1 billion, recurring profits rose slightly. Despite the slight increase in credit cost caused by the KRW8 billion YoY, decrease of recovery from written-off assets, the overall quality of income improved with lower operating expenses caused by efforts to reduce marketing costs and also by the drop in funding interest rates, leading to the 11.5% drop in interest paid.

In the previous quarter, there was a temporary rise in credit card sales due to seasonal factors. The card sales dropped to the recurring level in Q1 and with the market shrinking, use of cash advances went down, leading to a drop in income commissions and interest income. SG&A, which went up temporarily during the previous quarter, dropped and fees and other operating expenses dropped and net income went up 14.5% QoQ. In the case of written-off loans, 2014 Q1-end balance recorded KRW5.4 trillion and the average recovery rate has been maintained at a 4% level.

Group's assets on page 13. As of March end, Shinhan Financial Group's total asset rose 2.9% QoQ to KRW382 trillion. Q1 saw even growth in both banking and non-banking side assets. The bank side assets grew 1.9% on the back of steady loan growth. Shinhan Investment Corp. witnessed significant growth in tradable financial products and trust asset and Shinhan Life grew on the back of loans and financial assets held to maturity, posting a 12.6% and 3.2% asset growth respectively.

Page 14, Shinhan Bank's loans and deposits. As of March end this year, Shinhan Bank's loans in Korean won recorded KRW149.6 trillion, posting a 1.7% growth QoQ. Retail loans grew 0.7% QoQ as non-mortgage loans such as credit and key money loans increased by 1.9%. And when taking into account KHFC's mortgage loan securitization, actual retail loan growth for the quarter was 0.9%. The overall corporate loan grew 2.7% as SME loans steadily increased and also the large corporations that had paid back their loans at the end of the year to temporarily clean up their books were given loans once again. So and especially the SME loans are showing a steady growth of 1.6% QoQ as there is even growth in the existing core growth market of SOHO loans and loans to companies not subject to external audits.

And for your reference, as of March end, balance of loans to companies not subject to external audits stood at KRW14.9 trillion, up KRW400 billion QoQ. Going forward, we will continue to monitor the changes in the market's loan demand in line with economic recovery and seek appropriate loan growth.

As of March end, Shinhan Bank's deposits in Korean won grew 0.8% QoQ to KRW151.7 trillion. Savings deposits were down 0.7%, but low cost deposits were up 3.6% QoQ as the number of accounts grew for salary transfer and merchant payments and also deposits of institutional clients such as universities increased. And as of March end, LDR stood at 98%.

On page 15 are details on Shinhan Card's transaction and funding activity. Operating assets of Shinhan Card dropped 1.3% QoQ to KRW19.4 trillion. The nature of the credit card business is that credit purchase decreases in Q1 every year. As such, credit purchase decreased 3.4% QoQ and cash advances reflecting continued market decline also dropped 1.5%. On the other hand, card loan assets were up 2% and installment finance assets increased 4.5% used for purchasing new cars. Despite the decrease in credit purchase amounts, debit card transactions continue to increase. Out of the total credit sales, debit card transactions accounted for [16.7% in Q1, up from 14.0%] in 2013.

Asset quality on page 17. The Group's NPL ratio was 1.26%, the same as the previous quarter. There was continued prudent management of NPLs and write-offs and disposition of KRW300 billion worth of NPLs during the quarter. Thus the Group's asset quality is maintained in a stable manner. The Group's NPL coverage ratio was 161%.

Page 18, Shinhan Bank's NPL ratio and NPL coverage ratio for the quarter were at similar levels from the previous quarter at 1.15% and 147% respectively. If you look at the delinquency rate chart on the lower left hand corner, the Bank's delinquency rate was 0.44%. It's a 5 bps increase QoQ, but still managed at a stable level.

Page 19, Shinhan Card's asset quality. During the first quarter, number of business days decreased and recovery rate slightly went down. Long-term delinquent assets increased, but total loans decreased and NPL ratio grew 0.23% QoQ to 1.76%. NPL coverage ratio for the Card dropped 28 percentage point QoQ to 295%. The delinquency rate was 2.06%, up 0.26 percentage point QoQ. But two months delinquency roll rate was the same as previous quarter at 0.44%.

Page 20, credit cards and NPL write-offs. As shown on the graph, the credit cost ratio of the Group for the quarter fell 26 bps QoQ from 0.59% to 0.33%. And Shinhan Card credit cost went up slightly due to lower gains from recovered bad debt and Shinhan Bank one-time credit cost decreased and large scale written off assets were recovered and so the Group's credit cost ratio was [increased] by a wide margin. Going forward, Bank's credit cost is likely to go up higher than the current level due to corporate credit review and restructuring, but the downward trend compared to previous year is expected to continue. On the other hand, Shinhan Card's credit cost is expected to rise slightly due to lower gains from recovered bad debt. The quarterly write-off and disposition of bad debt for Shinhan Bank and Shinhan Card was KRW197.7 billion and KRW104.1 billion respectively.

Page 22, capital adequacy. Since the end of 2013, capital adequacy of the Group and the Bank has been calculated based on Basel III criteria. BIS ratios of the Group and the Bank as of March end are estimated at 13.2% and 16.2% respectively. Basel III common equity Tier 1 ratios are expected to be 10.3% and 12.8% and Tier 1 ratios are expected to be 11.3% and 14.1% respectively and they are looking fairly good. The reason behind the slight decline in BIS ratio over the previous quarter is because the subordinated debts and hybrid bonds issued prior to December 2013 were subject to grandfathering, thereby reducing the amount that can be recognized as equity. Shinhan Card adjusted equity capital ratio is 28.5% maintaining a sound capital adequacy level.

Page 23 and onward explains additional earnings related information, major business indicators of Shinhan Bank's SME and retail loans. So please refer to them.

This concludes the earnings conference of Shinhan Financial Group for Q1 2014. Thank you very much.

(Operator Instructions) And for your reference, today's earnings report and the presentation material can be downloaded through the IR app on either your tablet PCs or smartphones. For Android users, please enter Shinhan Financial IR or SFG IR and you can download the IR app on Android, and if you are using Apple iOS, please enter m.shinhangroup.kr and then you can download your IR app to read the material. This is for your convenience, so please make full use of this.

(inaudible).

It's great to be here. I am (inaudible). Regarding the delinquency rate on page 18, it says for SMEs and SOHOs and households, it's bigger than late last year. So it seems that the overall delinquency hasn't been increased greatly. So it seems that was it caused by large corporations or other factors? And there is the precautionary NPL trend, it seems different. And I know that, it's only the [5 basis point] difference and you see delinquency going up, but for the precautionary it hasn't. So can you tell us about the difference if it exits?

Regarding the first question, I would like to answer. Regarding the overall delinquency ratio, it is going up. It is actually being improved slightly, but for provisioning, you can see that there is a slightly different picture. It's because of the write off, because in Q4 write off or the Q3 write off amount of last year, when you see those amounts and when you see Q1 of this year, you can see the written off amount has shrunk slightly.

Also for the SMEs, you can see their asset quality is not showing signs of deterioration yet that we could feel and for the SMEs, you can see for the SOHO loans, we are trying to curb the growth and we plan to have a strategy in place from Q1. So I don't think there is a great difference in the delinquency and even if we had slight changes in delinquency, we don't believe that it will have a big impact on asset quality.

Regarding the NPL ratio and the delinquency ratio, that seems a little bit different. When you see the delinquency ratio, you can see it is coming from some places and for the sub-standard and below, we had some reclassifications and it happened in Q1 of this year and Q4 of last year. You can see for the sub-standard and below, it is falling greater than others and in Q4, we had aggressive write-offs and sell-offs and that strategy was implemented. However, in Q1 we did not have that strategy, but it is 1.26% and it's being maintained at that Group level, which seems that the asset quality is being maintained at a sound level.

Thank you. You can see precautionary, it should have gone up, but it is stable. So can you see that the delinquency trend and the precautionary trend seems to be different, so were there -- so you said that there were some delinquencies that were reclassified in precautionary or are you telling me that something else happened?

Regarding the precautionary, some of it was reclassified as normal, but let me give you more details later on.

Kim Jinsang, SC Securities.

Good afternoon. Thank you for the wonderful results. In credit card, the industry itself is going through bad times in Q1. So the industry was weak. This year, how do you view the card business growth rate and Shinhan Card market share is expected to be in what range? What is your target for your market share? Credit cost ratio is 33 bps and that's pretty low and there was a big write back. So excluding those one-offs, what do you think is the actual credit cost ratio? And low cost deposit is growing steadily and do you think that trend will be sustained? Thank you.

As for the card related questions, I'll answer those first. In Shinhan Card, the market situation is not favorable for high growth. There are regulations and the card market itself is very mature and saturated. So taking that into account, there is not much room for explosive growth in the card business itself. And in Q1, looking at the revenues -- in Q4, the card revenue was KRW34.8 trillion and it slightly went down this quarter. Of course, there is a seasonal factor. And there is a certain limit to increase our card business in this environment. But recently when we look at the market trends in terms of debit cards, we see that the volume is growing. That is the recent trend. In terms of debit card in Q4, the revenue was KRW4.1 trillion and it grew to KRW4.3 trillion in this quarter. So the debit card growth is there. And the debit card out of the new issued cards is 15.7%. So we have expectations on debit card. As for the market share target for new sales of cards, we are targeting 22.7% for the credit sales. So, it's a slight increase from 22.5% to 22.7%. So this is not by a lot.

And as for the provisioning, looking at the credit cost ratio, it's fell by a lot QoQ. The credit cost was -- the provisioning was KRW167 billion. So the credit cost ratio fell to [0.33] and this was because of the unexpected write-backs. In terms of property development, they have been written off debt of [KRW53.4 billion] and because of these one-offs in Q1, the recurring credit cost ratio would be 50 bps. And as for bank, we had credit cost of KRW57.2 billion and so the credit cost ratio fell and if we just take out the one-offs, it's in the range of 35 bps to 34 bps of credit cost ratio. So as far the credit cost at the recurring level, there is room for improvement and this is valid. And this is going to materialize sooner than we thought in the first quarter.

And as for the low-cost deposits, as you're well aware, in 2013 Shinhan Bank had KRW6 trillion of low cost deposits and the reason behind the surge is the market rate moved and the institutions as well as individuals made -- used the low-cost deposits, and as to whether this could sustain into 2014, it was unclear. But as for the sales strategies of the bank and the low market rate is continuing, so the low cost deposits increased by KRW2 trillion this year. There was a lot of increase in low cost deposits and as tapering off was delayed and low interest rate is maintained in the market and Shinhan Bank has the strategy to cut cost, so in that sense, we believe that there will be a steady growth in the low cost deposits and this is probably going to affect NIM in a positive manner.

(inaudible).

It's great to be here. I have two short questions. Regarding the credit cost, it's quite impressive and you've talked about the recurring level and you also have the reversal or write back. So even though they are one-off items, do you believe that these one-off items can occur again in 2014, are the one-off items just for Q1 of this year or for other quarters as well? Second, the margin trend compared to the cumulative level of last year, it seems to be showing signs of improvement. So I am curious about your outlook for the margin trend for the following quarters, Q2, Q3 and Q4. So your margin outlook for this year?

Well, thank you for the questions and I'll give answers. Regarding the credit cost, it's very difficult to give you an outlook and predict. When we had internal predictions, we have the past experienced rate and other one-off factors combined, but statistically, the experienced rate does not take into consideration the changes that might occur. Accordingly, we expect it to be similar to the past levels. And regarding one-off items, we do not see them pronounced at this moment but when we see a provision in policies, well, regarding the problematic loans, we had a very conservative provisioning policy, and when we went to do the due diligence, we would also reflect some changes after our site visits. And we expect there to be some write-backs going forward, but the amount will be quite low.

Your second question referred to the margin outlook. When you look at our material, you see 1.77% for Q1. And excluding the one-off factors, it's 1.75%. Last year in Q4 at the recurring level, it was 1.73%. So from Q4 of last year, Shinhan Group's NIM seems to be showing a turnaround. There could be many factors contributing to this. For example, the policy to expand low cost deposits and I think it was our continuous effort to go ahead with that policy last year. We had stabilization of asset growth and our funding structure was quite restructured and in Q4, we had high interest rate deposits that were deposit -- that were matured and we also had a drop in the retirement factors as well.

But for this year's NIM outlook, regarding -- if there are no changes in the BOK interest rate, we expect this year's NIM level to be similar to the Q1 NIM level of 2014. There are many reasons behind it and it can be both positive and negative. Regarding the negative factors, it's because of the mortgage market and you are seeing the market competition heat up and you can see the installment type repayment loans without grace period, regulations by the government must be met. So they are negative aspects.

On the other hand, regarding Shinhan's funding structure, I told you that low cost deposits are growing and the retail loans out of household loans are increasing and we're going to have portfolio management and safeguard the NIM and we believe that the margin will be maintained at the Q1 level for this year. Thank you.

(Operator Instructions). We do not seem to have additional questions. With this, we would like to conclude the earnings release of Shinhan Financial Group for the quarter. I'd like to thank you for participating despite your busy schedules. Thank you.

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.