Shinhan Financial Group Co Ltd (SHG) 2015 Q4 法說會逐字稿

Greetings. I am Sung-Hun Yu. Head of IR of Shinhan Financial Group. Thank you for coming to our earnings conference today despite your busy schedules. We will begin our earnings release for the full year 2015.

With us today are our CSO [Hyeong-Jin Kim]; CFO, Bo-Hyuk Yim; and Head of Finance, [Young-Kyo Jeon]. We will begin with the CFO's presentation of 2015 earnings, which will be followed by a Q&A session with the participants.

Without further ado, our CFO will begin the presentation.

Greetings. I am Bo-Hyuk Yim. I am the CFO of Shinhan Financial Group. Before I begin, let me express my appreciation to investors, analysts and journalists in and out of Korea for their unwavering support and trust throughout last year. I sincerely thank you for your strong support.

I will now walk you through the key highlights of Shinhan Financial Group 2015 full year business performance. Let me begin with the Group's income on page 6.

SFG's annual net income for 2015 was up 14% from 2014 to KRW2.3722 trillion, with our Q4 net income standing at KRW409.1b. Even amidst the continued challenges in this environment, posed by low growth and low interest rates, we were able to deliver good results due to the four main factors.

First a stable foundation for interest income generation, with steady loan growth throughout the year, as well as NIM stabilization in the second half. Second, mutually complementary income contributions by banking and non-banking that highlights the Group's diversified business portfolio. Third, the effective SG&A expense control through consistent cost saving [levers] at the Group level. Lastly, credit cost stabilization based on pre-emptive and consistent risk management.

Let me elaborate on each factor in more detail. First, despite the NIM's (inaudible) caused by the continued interest rate trend, SFG was able to maintain a solid foundation for interest income, by posting steady loan growth throughout 2015. While the Group's NIM fell 27bp at Y on Y, its total loans increased 8.5%, with its interest income just edging down by 1.4%. In particular during Q4, on the back of margin stabilization and asset expansion, interest income moved up 3.1% Q on Q.

Second, 2015 was the year that particularly well played the strength of Shinhan's trade balance, business portfolio between banking and non-banking. With the improved sales of credit card and securities business, as well as the recovery of Shinhan Life, non-banking subs posted meaningful income growth, while the Group's fee income also rose 10.3% Y on Y.

Third, our endeavors over the past three years to enhance efficiency of channel and HR structure, capped the Group's SG&A growth at a mere 0.3% last year. With continued endeavors towards effective cost control, we are determined to maintain stable efficiency management for the Group.

Lastly, the Group sustained a similar credit cost ratio from last year at 0.43%, as its pre-emptive and consistent risk-management efforts matched the stabilizing trend of credit costs for two consecutive years, (inaudible) the Group's non-interest income.

To facilitate your understanding, beginning this year we added new pages on the details of the Group's non-interest income and SG&A. In 2015 the Group's NII rose 40.3% from 2014. Thanks to strong investment product sales by banking affiliates, increased sale of credit card receivables and increased brokerage fee income at SHIC, the Group's overall fee income moved up 10.3% Y on Y. Furthermore, increased AFS [securitized] disposition gains and dividend income pushed up securities-related income substantially, contributing to non-income growth.

The fourth-quarter NII came down 39.7% mainly owing to the fall in AFS securitization gains, as well as reduced [securitized disposition] income resulting from expanded market volatility. We added the details on the Group's fee income on the bottom right-hand corner, for your reference.

Moving on to the Group's SG&A on page 8. in 2015 the Group's SG&A moved up 0.3% Y on Y and by 12.2% Q on Q. Strong earnings posted by credit card and securitized businesses resulted in the increased performance pay. However, as Shinhan Bank saw a decrease in management performance pay and early retirement expense, coupled with effective control of non-labor costs, the Group's SG&A remained little changed from 2014.

In 2015 the Group's KRW105b in early retirement cost in the fourth quarter. Shinhan Bank recognized JRW59.5b, Shinhan Card at KRW37.2b and Shinhan Investment KRW5.2b. An increase in the Group's SG&A in Q4 is largely attributable to the execution of early retirement, as I just explained.

The bottom right-hand side shows a Y-on-Y decrease of 4.5% in Shinhan Bank's SG&A. This has to do with the fall in early retirement cost and management performance pay, as well as continued cost reduction endeavors.

In 2015, CI ratios of the Group and the Bank stood at 52.7% and 54.5%, down 2.6 percentage point and 1.9% each from 2014.

On page [8] is income by subsidiaries. In 2015 banking and non-banking business net income after reflecting ownership stood at KRW1.503 trillion and KRW1.0925 trillion each. Income contribution by non-banking rose 3% from 2014 to 42%, on the back of the non-banking subsidiaries income recovery.

Moving on to page 10 concerning 2015 subsidiaries income. Banking business income increased by 2.6 percentage points, maintaining a favorable income trend. In non-banking business income, Shinhan Card, Investment and Life all posted income growth, with an overall Y-on-Y income growth at 18.3%, making substantial contribution to the Group's consolidated net income growth. The reduced interest income of the banking business, arising from a margin contraction, was successfully complemented by the improved earnings by non-banking businesses, once again capitalizing on the Group's diversified business portfolio to deliver strong results in 2015.

Next, regarding Shinhan Bank's earnings. Shinhan Bank's 2015 net income reached KRW1.4897 trillion, up by 2.4% Y on Y. And 24bps Y-on-Y drop in NIM led to a decrease in interest income. And the effort of provision write-back that existed in 2014 was removed, pushing up the credit cost. However, supported by higher NII and lower SG&A, net income moved up on a Y-on-Y basis. For your reference, the Bank's ratio of credit cost came in at a fair level of 29bps for the full year 2015.

In Q4, a fall in the AFS disposition gains, coupled with seasonal factors, pushed down net income by 48.8% Q on Q. The Bank's Q4 NIM fell 2bps Q on Q to 1.46%, while its net interest income grew 4.7% Q on Q on strong loan growth.

Page 12, regarding Shinhan Bank non-interest income. Shinhan Bank's NII for 2015 climbed up 17.6% Y on Y, thanks to increase in fees and securities-related income. Fee income grew 6.3% from 2014 on the back of [IBC] and trust fee growth. With the increased dividend income and decreased impairment loss on AFS securities, income related to securities and foreign currency derivatives has also gone up by 18.5%. Non-interest income fell 32.7% Q on Q, mainly owing to the drop in AFS securities disposition gains.

On page 13 is Shinhan Card's income. Shinhan Card's net income for the year increased 9.4% Y on Y to KRW694.8b. The reasons behind the increase are threefold. One, merchant fee income increased due to higher debit card usage volume; two, lower deposit rate brought down interest payment by 9.4%; three, credit card fell by 20.6% due to fast recovery in asset quality.

SG&A in 2015 increased 7.7% Y on Y. But if we take out the ERP factor, the growth rate is moderate at 2.4%.

Compared to the previous quarter, operating income before provisioning decreased because gain on sale of AFS securities decreased and ERP expense was recognized.

However, Shinhan Card's net income for the quarter increased slightly due to the total credit cost coming down by 65.5%. Approximately KRW40b of credit cost was recognized during the Thanksgiving holidays in the previous quarter due to insufficient number of payment days. But that amount was written back this quarter. Excluding the one-off provisioning factor, the credit cost for Q3 and Q4 stood at KRW83b respectively, showing a very steady flow.

FYI, gain on stake sale of Visa in Q4 recorded KRW39.1b, most of which covered the ERP expense. Written-off asset balance posted KRW3.4 trillion as of year end. And the annual recovery rate is 5.9%.

Group's assets on page 15 as of year end. The Group's total assets on a consolidated basis rose 9.6% Y on Y to KRW337 trillion. Bank assets grew by 13.9%, as Shinhan Bank's loans grew steadily. Non-banking side posted a 3.5% growth as well due to an increase in Shinhan Card's long-term loans and Shinhan Life's operating assets.

As of year end, Shinhan Bank's loans in won increased by 10.5% Y on Y to KRW177 trillion on the back of even growth in both retail and corporate loans. In the retail loans category, secured loan grew 9.5% Y on Y as the housing market picked up and there were more frequent transactions among actual residents. General purpose loans also increased 16.1% Y on Y due to an increase in credit loan as well as key money loans. Large corp loans were on a decline throughout the year, whereas SME loans grew steadily, including mainly the SOHO loans, by 12.4%.

Q4 usually has a tendency to show slower loan growth. But in Q4 2015, the growth rate of secured loan was high. And the quarterly growth rate of loans in won was 4%.

Deposits in won for 2015 were up 10.7% YoY to KRW181 trillion. Core deposits increased 19.9% Y on Y, as the Bank succeeded in attracting more settlement accounts from credit card merchants and new money from the institutional clients. Savings deposits also grew rapidly in Q4, showing a 5.1% growth rate Y on Y. The LDR was 98.8%.

Let us look at the numbers in Shinhan Card. Shinhan Card's earnings assets increased 3.8% Y on Y, to KRW21.3 trillion.

The top-left graph shows that the total transaction volume increased 5.1% Y on Y, to KRW148.4 trillion. Debit card transactions grew 19.8%, accounting for 15.7% of the total sales amount. Regular credit card transactions steadily grew at 3.7%. And long-term card loan grew 13% Y on Y due to marketing activities.

Moving on to asset quality on page 19, the Group's NPL ratio fell 0.28 percentage points Y on Y to 0.87%, showing steady improvement throughout the year. The reason behind the fall is an 8.5% increase in the total credit, whereas substandard and below decreased by 18% due to risk management efforts.

As of year end, the Group's NPL coverage ratio rose by 23 percentage point Y on Y to 191%.

The Bank's NPL ratio was down by 0.23 percentage points Y on Y to 0.8% at year end. It is close to the record low of 0.78% reached at the end of June in 2008.

Delinquency ratio for one-month overdue is 0.33%, which is similar to the level the year before.

Page 21, Shinhan Card's NPL ratio was down by 0.43 percentage point Y on Y to 1.24%. NPL coverage ratio is 359%. And over one-month overdue delinquency ratio was 1.44%. It's the first time the delinquency ratio fell below 1.5% level since LG Card acquisition in 2007.

Credit cards and NPL write-off on page 22. As the second graph from the left shows, the Group's credit card ratio for the year was constant at 43bp. Since the 2009 financial crisis, Shinhan Financial Group has implemented proactive risk management against sectors showing signs of ill performance, and loan growth strategies focusing on prime borrowers. And we will stick to this principle.

The Group's write-off and bad debt sales amounted to KRW1.85 trillion, which is a KRW280b increase Y on Y.

Page 24, capital adequacy. Year-end estimated BIS ratio for the Group and the Bank are 13.4% and 14.7% respectively, marking a 0.1-percentage-point and 0.3-percentage-point fall Q on Q. It is because the Group's risk-weighted assets increased, whereas the capital growth momentum was dampened by higher dividend payout.

The year-end estimated CET 1 ratios for the Group and Bank are 10.8% and 11.9% respectively, posting a stable level.

Shinhan Card's adjusted BIS ratio is 28.9%. And for your reference, for FY 2015 it was resolved at the BoD meeting that the dividend per Group common shares would be KRW1,200. And if the resolution is passed as at the annual shareholder meeting, the dividend payout ratio for common stocks is expected to be 24%.

We will continue to listen to the voice of the shareholders, implement consistent and flexible capital management policies within the range of satisfying capital requirements so as to maximize shareholder value.

Please refer to the remaining slides for further details on subsidiary performance, business indices and Shinhan Bank's SME loans.

This concludes the earnings report for SFG 2015 full year. I sincerely ask for your full-hearted support every step of the way in 2016. Thank you very much.

Thank you very much. We will be now taking questions. If you have a question, please press star one on your phone. And according to the order that you press these keys, you will be given a chance to ask your questions.

And for those of you who will be asking in English, we are prepared to give you interpretation services. So if you ask your question in English, please wait until your question is translated into Korean.

And as for our IR materials, you can access them through your tablet, PCs or phones through the IR app. And you can download the app from the Android and Apple phones, so I'd like to ask that you make full use of them.

We will take the first question. It is from HMC, Kim Jinsang.

Thank you for great results. I have two questions. First, when it comes to your earnings, I believe that you are being very exemplary for others. But when it comes to dividend payout ratio, maybe it could be regarded as a satisfactory level, but it's not at a surprising level. And (inaudible), after buying back, I believe that they are going more aggressive. And I believe that 10.8% is quite sufficient in terms of BIS ratio. And I wonder whether you have a plan to become more aggressive in dividend payment? Then what would be the possible reservations that are keeping you from paying out more to your shareholders? If there are any such factors, please share them with us.

Of course, your subsidiaries are performing well. Globally I believe that you are focusing a lot on global business, according to your plan. What would be more concrete plans for your global business down the road? Thank you.

Good afternoon. Thank you for your questions. First, regarding our dividend payout ratio and concerning our capital policy, let me address your questions in that regard.

If there's a decision by the shareholders' meeting, the payout ratio would be 24%. And last year it was 16% and previously it was about 10% level. We -- I don't believe that we are pursuing a drastic increase in payout ratio. We want to be more steady and consistent in raising our payout ratio to shareholders.

But it's not the very good deal that is keeping us from paying more to our shareholders in the immediate future. But although there are some discussions regarding the introduction of Basel IV and concerning capital management-related policies by the regulatory authorities, there could be some unknown factors that could lead to more strict requirements on our part.

Given all of those factors, we have made a decision regarding the dividend this time, for this year. I know that there are expectations from the market for a higher payout ratio. If we can continue to deliver the great results as we did for the past year, we will pursue a flexible policy regarding payout ratio. Thank you.

My name is Hyeong-Jin Kim. I am responsible for global business strategy. Thank you for your question on this front. The current environment is based on lower growth and low interest rates. That is forcing us to turn our eyes towards the global market.

In 2015 I would consider the developments of a mid to long-term strategy. 2016 and 2018 is the period that's covered by a mid-term strategy. And to talk about the direction, the strategic focus will be placed on maintaining our position as a leading player in the domestic market. Secondly, when it comes to global business, we would like to build a strong foundation for growth in the Asia market. Those constitute our major strategic directions over midterm.

Regarding the direction of global business, first we want to become consistent in pursuing the global business. And when it comes to the specific goals and objectives of global business, we would like to place a focus on the ASEAN market and build a local infrastructure in those markets. And in order to pursue a meaningful growth, instead of just focusing on organic growth, we could diversify our advancement, such as M&A and so forth.

In addition to the banking subsidiary, other non-banking subsidiaries could go together with the bank in -- towards those global markets. Why a focus on the Asian market? In December, according to a UN report, there was a prediction regarding the population curve growth all the way towards [2016]. A 21% growth is expected in Asia and 25% for Indonesia, and a double-digit growth for the Philippines and India.

Concerning these markets, we want to pursue a systematic and mid- to long-term growth strategy. To that end, first, we need to focus our priority on some Asian markets with high growth potential, specific countries being the countries that I have just talked about. Secondly, we want to boost our profitability. In order to gain fee income we would like to pursue and develop new business opportunities and pursue some online business opportunities as well.

At the same time, in developing profitable business opportunities, we will be willing to make expanded investment. At the same time, we will also endeavor to generate synergies among Group companies in those foreign markets by building up a system and necessary infrastructure.

Lastly, the countries that we are advancing into will have local affiliates there. In the case of the markets that we do not have such a presence as of now, we will establish local affiliates there so that we can localize our image towards the local people in order to complete our global business strategy execution.

As of the end of 2015, we have presence in 19 countries. We have 151 outlets. And net income is [about] $14m that's coming from global business.

And for the Bank, just about 10% of its income comes from global business. And within three years from now, just based on organic growth, we would like to push up the share to more than 15%.

Last year, in 2015, we have made various attempts for more diversified entries. For instance, in the case of Vietnam, currently not just the bank but also other affiliates are trying to enter, because in Vietnam a bank cannot own a credit card that is licensed. Last year I understand that they have issued [65,000] credit card accounts. If you think of Shinhan Investment in the year of 2015, they've made an effort to enter there and they have a plan to start their operations in 2016. In 2017, their legal nature will be transitioned to a local affiliate.

And in the case of Indonesia, we have acquired two local banks. And we are currently in the process of integration. We expect to be able to launch full-fledged operations in 2016.

In the case of Shinhan Card, in India we have established an entity with a large conglomerate in India, local one.

At the same time, again in Indonesia, around September this year, Shinhan Investment, its channel will be established in the local market of Indonesia.

Mexico, Australia, Dubai and the Philippines, these are the countries that we are considering to enter or the markets that we have already entered.

Going forward, Shinhan is determined to post meaningful growth in these foreign markets so that we can have a firm foundation for delivering growth in the Asian market. Thank you.

Thank you. We will take the next question. (Inaudible) please go ahead. It seems that we lost the connection. We will take the next question from Hwang Seok-Kyu from Kyobo Securities. Please go ahead.

Good afternoon. I have a couple of questions. First, as for the margin in 2016, what is your outlook?

And second, looking at the situation now, as you mentioned, it's low-growth, low interest-rate market and the Bank's growth is limited. So you're looking for opportunities in non-banking and overseas. You talked about overseas market. So as for the non-banking, this year, compared to the bank, do you think that we can have expectations in net income for the non-banking? Do you think this trend will continue? And how will you strengthen the non-banking side; what is your business strategy for the non-banking?

Yes, I am Young-Kyo Jeon, Head of Finance. Let me talk about margin first. As you could see from the presentation material, the Group's margin in Q4 dropped by only 1bp. And in the Bank there was a 2bp drop. Of course, it is on the decline, but the declining speed is cushioned. And we didn't expect it to fall in Q4, but we -- there was a need to manage liquidity. And so unexpectedly the margin did fall in Q4.

As for the outlook in 2016, in the bigger picture, BOK base rate, if it is not cut, then at a minimum it will not fall and we will continue to manage our margin. And we could expect slower growth, but we do expect the NIM to improve slightly. Thank you.

Yes, let me talk about the strategies for the non-banking side. Looking at the economic outlook in the Bank side, it's low growth, low interest rate. And there will be -- we are not thinking of price competition. But as for non-banking, we will -- we have different degrees of competition by business type. For card example, there will be competition for securities. There will be large companies and the concentrated competition will be in that area.

And product development will make a difference in some businesses; in insurance and diversified Internet channels for selling the insurance products. I think that will also change. And as for asset management, ISA will help. And retail consumers' needs will diversify and we will key in on that to grow our business.

And as for making the preparations, we will decide on the path for adequate growth. We will select the prime clients. And we already have our hybrid channels, and that is our strength. We have [PW and CI]. And so we will try to reinforce our channel.

We have, as for example, a client can receive all financial services like a one-stop service. And we will develop products like that. And disruptive -- we have disruptive (inaudible). And we will provide many different products and services through new channels. And big data is being used in marketing. And that will be a Group-wide marketing effort.

And as for insurance, we have launched hybrid branches, selling insurance products. And we have only opened three so far, but we will try to diversify the channels.

And we will try to differentiate the returns on the AUMs that the customers have with us.

And we are looking into various strategies. Since establishment, SFG has gone through many M&A activities. And in reviewing the M&A candidates, it will be to the direction of enhancing ROA and ROE.

As for Bank and Card, we do not have any specific M&A candidates. So we will first look out for the market conditions. We will be on the lookout. But we will concentrate on our core strengths and look for ways to diversify our business opportunities overseas and see if that contributes to beefing up Shinhan's portfolio. Thank you.

We are ready to take the next question, coming from Jung Moo-Il, Franklin Templeton.

Good afternoon. My name is Jung from Templeton. I have one question. One of the key variables of Shinhan Financial Group's corporate value is the interest rates and asset quality. And when it comes to asset quality, there must be a perspective from investors and there is a perspective that's portrayed in your IR book. There is a significant gap because, regarding the future of Shinhan Bank and Shinhan Financial Group, investors seem to be quite conservative.

But from the perspective of Shinhan Financial Group, do you regard them as concerns on the part of the investors? What is the actual level of asset quality that you feel inside the Company? And what is the future trajectory of the asset quality for the future? How do you address those differences in perceptions?

Thank you. Our internal thoughts and the thoughts on the part of external investors, you are saying that there is a gap between those perceptions. Let me address your question this way. In the past, if you look at the history of our credit costs, it's not that we've done a good job just in one year or two. For a considerable period of time we were able to maintain a fair level of credit cost. And we have been able to maintain the lowest level in the domestic financial industry.

Even during the financial crisis that we have gone through in the past, so we have been able to post a stable credit cost in the past. Nobody can expect the challenges that will come our way in the future. But no matter what comes our way, we are ready to tackle those challenges.

In 2014 and 2015, the credit cost ratio recorded the lowest level of 30bps. Given that -- 48bps, excuse me. This is not something that you can do or deliver in one day. This was made possible through pre-emptive management efforts. And we're very cautious in growing our loan assets. And there were many other types of endeavors that we made that led to such strong asset quality. When it comes to asset quality, I can ask you to please trust us in terms of our capability and competencies.

Of course, there could be some concerns regarding the macroeconomic conditions that will unfold in the future. However, I don't believe that the shocks that we will feel out of those macroeconomic circumstances, will not be as severe as other people would feel.

We do not see any questions on queue. I would like to thank you for participating in our earnings call despite your busy schedules. This concludes the IR presentation for SFG 2015. 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.