Shinhan Financial Group Co Ltd (SHG) 2016 Q1 法說會逐字稿

(interpreted) Good afternoon. My name is Sung-hun Yu. I'm the Head of IR at Shinhan Financial Group. First of all, I'd like to thank you for taking the time out to take part in the first quarter 2016 earnings release. We are joined today by our Chief Strategy Officer, [Hyeong-Jin Kim], the CFO, Bo-Hyuk Yim, as well as [Head] of Finance, [Young-Kyo Jeon].

We will begin with a short presentation on the first-quarter earnings release to be made by our CFO, Bo-Hyuk Yim, and this will be followed by your Q&A session. Now let me invite Mr Yim for a briefing on the first-quarter results of 2016.

(interpreted) Good afternoon. I am Bo-Hyuk Yim, I'm the CFO of Shinhan Financial Group. First, I would like to thank investors, analysts and journalists in and out of Korea for joining today's earnings conference.

I will now walk you through the key highlights of Shinhan Financial Group's Q1 2016 earnings. Let me begin with the Group's income on page 6.

In Q1 2016 SFG's net income rose 30.3% YoY and 90.9% QoQ to KRW771.4 billion. Noteworthy effects are as follows. First, NIM recovered its upward trend and assets continued to grow, expanding the Group's core profit, which is interest income.

Second, on non-interest income front, one-off incomes such as gain on securities disposal has declined. But fee income in foundation of recurring profit has been maintained and is now level.

Third, despite additional provisioning caused by sluggish shipbuilding and shipping sector performance, the Group's total credit cost was kept little changed from 2015. Lastly, in connection with the Group's unused loss carried forward in Q1, as we recognize the future tax deduction effect as deferred tax assets, some KRW210 billion in corporate tax gain was incurred. This means that barring one-off factors in corporate tax effect, the Group's recurring profit edged up with a stabilizing trend.

Now let me give you the details by item. The Group's interest income increased 5% YoY. NIM had been on a decline since late 2013. But in about two years since then, it turned around and is rising. Interest-bearing assets also grew steadily, contributing to interest income expansion. Meanwhile, non-interest income fell 31.4% YoY as the Group did not have a large gain on disposition of securities this time, unlike in the first quarter of last year. Recurring non-interest income items, such as fee income, posted stable performance.

SG&A rose a mere 2.8% YoY which had to do with our strategic cost-cutting endeavors, that kept cost growth to the minimum. During Q1, the Group's provisioning amount remained a little changed from one year ago. While the Group's exposure to shipbuilding and shipping factors incurred some credit cost, the overall provisioning amount remained similar YoY, while the amount of recurring credit cost edged down during the same period. As you see, it's committed to similar credit cost continuously through consistent risk management.

Let me now turn to page 7 on the Group's non-interest income. In Q1 2016 the Group's non-interest income came down 31.4% YoY. Fee income grew 1% YoY. While card merchant fee reduction pushed down credit card fee income, bank fees income rose 3.7%, contributing to the overall fee income growth.

The largest contributor to the reduction of non-interest income this quarter was a fall in the gain on AFS securities disposal. In Q1 last year a large amount of this gain was recognized by the gain on the sale of bonds were sizeable, this year we had no such gain on securities disposal, and this led to a 76.7% drop in the gain on AFS sale.

On an QoQ basis, non-interest income grew 35%, mainly due to a drop in income and loss and AFS securities. On the bottom right, the Group's fee income details are added for your reference.

Moving on to page 8, on the Group's SG&A. In Q1 2016 the Group's SG&A went up 2.8% YoY. Group-wide cost reduction initiatives kept the employee related expenses rise at a mere 1.5%, and effectively controlled other costs. However, with more vigorous credit card marketing, card business AMP costs moved up YoY.

SG&A decreased 13.1% QoQ this quarter, no early retirement expenses were incurred and other SG&A items that had temporarily increased at 2015 end came back to normal recurring levels. As can be seen in the bottom right, Shinhan Bank's SG&A just edged up 1.4%, remaining at a sound level. In the first quarter 2016, SFG and the Bank each posted 52.5% and 50.9% (inaudible) ratio.

Page nine, indicates net income by affiliate. In Q1 this year, banking and nonbanking business net income after reflecting ownership, each came in at KRW579 billion and KRW242.6 billion. Nonbanking business income contribution ratio was 30%, seemingly a big drop from the past. However, excluding the corporate tax aspect I mentioned, it stands at 36%.

Page 10 is on earnings by subsidiary. Banking (inaudible) income rose 47.3% YoY with the regulation of corporate tax income among others, nonbanking (inaudible) income declined 5.9% YoY, mainly owing to the shrunk earnings of Shinhan Investments at base aggregated business environment, as well as provisioning by Shinhan Capital.

Page 11 is on the details of Shinhan Bank's performance. This quarter, Shinhan Bank's net income came in at KRW574.9 billion, up 47.4% YoY. Pre-tax income fell 11.3% YoY, while margin improvement ongoing growth pushed up interest income. A drop in the gain on securities disposal pushed down non-interest income by 25.5%. This was the main culprit for the fall in pre-tax income.

Because of the provisioning for its exposure to shipbuilding and shipping, the Bank's credit cost came in at a similar level from the time when there was [corporate] restructuring last year. To share the main credit cost items this quarter, it was KRW42.7 billion for Chang Myung Shipping and others.

On a QoQ basis net income rose by 142.7% and pre-tax income by 45%. To explain why, seasonal SG&A items, such as the expense incurred in Q4 last year, no longer existed at this quarter, coupled with a drop in impairment loss and securities, non-interest income moved up. The Bank's Q1 NIM stood at 1.48%, up 2 bps QoQ.

Page 12 is on Shinhan Bank's non-interest income. Shinhan Bank's Q1 non-interest income stood at KRW237.1 billion, down 25.5% QoQ. This drop was largely attributable to a fall in one-off income. Gains from AFS securities sales decreased 56.3% and gain on the sale of loans also dropped by some KRW30 billion. In regard to fee income on the back of the rises in trust effects and IBC, it increased by 3.7% YoY.

Page 13 is on Shinhan Card's income. Shinhan Card's Q1 2015 net income recorded KRW148.8 billion, up 3.7% YoY, and 14.1% QoQ decrease respectively. Despite the lower commission rate for merchants this year, card earnings rose slightly YoY due to an increase in credit card purchase volume and interest income on card loans. On the cost aspect, low interest rate trends affected the interest payment downwards by 12.7%, and SG&A increased by 6.3% YoY as AMP one-off boosted by the normalization in credit card marketing activities.

Credit cards went down 3% YoY due to asset quality improvements, contributing to a stable income. Pre-provisioning income was at a similar level QoQ as it was offset between cost and income. However, provisioning debt temporarily followed in the previous quarter regained its average level, bringing down the total net income.

Credit card related income was down by 5.2% QoQ as it took the direct hit from the lower merchant commission fees, but due to cost-cutting efforts, part of the sales cost also went down. With the previous quarter's ERP [set] gone, SG&A decreased by 20.2% QoQ. For your reference, securities disposition gains from Visa has recurred in Q4 last year, equivalent to KRW39.1 billion. But there was no Visa securities disposal this quarter as were written off assets. The Q1 balance posted KRW3.4 trillion and the quarterly recovery rate 5.8%.

Page 15, Group's assets. In Q1, Group's total assets on a consolidated basis rose 2.2% QoQ to KRW378.5 billion. Bank assets grew 1.5% QoQ on the back of loan growth. Nonbanking side posted a 4.4% growth to increase in Shinhan Investment Corporation's trust assets and short-term trading financial assets.

Bank's loans and deposits on page 16. As of March end this year, Shinhan Bank's loans in won increased by 0.9% QoQ to KRW178.4 trillion. At the last earnings release, we made a statement that we would moderate the pace of loan growth in order to reflect the changes in the market demand and to reinforce risk management. In accordance with the plan, we implemented adequate loan growth this quarter, and as a result, retail loans and corporate loans rose 0.9% each, [VGROs] grew slightly by 0.3% on the back of a 1.4% growth in mortgage loans and key money loans steadily grew.

And as for corporate, SME loans grew by 1.3%, whereas large corporate loans shrank by 0.6%. We will continue with adequate loan growth that is in line with the market environment.

In Q1 deposits in woe decreased 0.2% QoQ to KRW180.5 trillion. This is because as loans were moderated, we also adjusted the pace of deposit growth. Low-cost core deposits were up 0.7% QoQ to reflect an increase in the number of accounts for salary transfer in merchant payments as well as in the amount of the institutional client deposits. As of March end, LDR posted 97.9%.

Page 17. Shinhan Card's transaction and funding activities. Shinhan Card's operating assets increased 0.6% QoQ to KRW21.5 billion. Usually in Q1 the number of business days contracts, and due to other seasonal factors, the credit card purchase decreases QoQ. However, as [corporate] efforts were made to expand sales, credit purchase, mostly lump-sum payments, increased significantly this quarter. As seen on the upper right, Q1 credit sales increased 13.3% YoY and 2.5% QoQ to KRW39.9 trillion compared to (inaudible) in the fee income base.

Asset quality, on page 19. Group NPL ratio was 0.93%, up 6 bps QoQ, but was improved by 17 bps YoY. The Group's NPL coverage ratio is 185%, down by 6 percentage points QoQ, but still maintaining a fairly high level.

Page 20, Shinhan Bank's NPL ratio was 0.86%, up 6 bps QoQ, but down by 12 bps YoY. Even though there was a considerable drop in the amount of NPL sale and write-off, NPL ratio has maintained a stable level continuing from last year. The Bank's NPL coverage ratio was down 6 percentage points QoQ to 167%.

The delinquency ratio chart on the bottom left shows the Bank's delinquency ratio of 0.33%, the same as the previous quarter.

Page 21, Shinhan card asset quality. Card's NPL ratio and NPL coverage ratio were 1.26% and 358% respectively, similar to the previous quarters. The delinquency ratio rose slightly to 1.49%, but the two months' delinquency roll rate was maintained at 0.33%.

Credit cards and NPL write-offs are on page 22. As shown on the graph, credit cost ratio of the Group was 0.53%. It rose by 10 bps compared to the annual credit cards ratio last year, but fell by 4 bps compared to Q1 2015. The Bank's credit card had temporarily gone up due to additional provisioning. However, delinquency and asset quality indicators point to a healthy trend.

Shinhan Card's credit cost was reduced slightly YoY, despite lower gains from recovered bad debts, because asset quality was improved. Shinhan Bank and Card each wrote off and/or disposed of bad debts amounting to KRW182.1 billion and KRW109 billion respectively, a huge drop over YoY and QoQ.

Capital adequacy on page 24. BIS ratios of the Group and the Bank are estimated at 13.5% and 15% respectively. Common equity Tier 1 ratios are expected to be 10.9% and 12% respectively. Sound flow of net income in Q1 pulled the overall BIS ratios slightly upward compared to the previous quarter. Shinhan Card's adjusted equity capital ratio was 25.6%, maintaining a sound capital adequacy level.

Please refer to page 25 in our more traditional earnings information and major business indicators of the affiliates and also for the Bank's SME loans.

This concludes SFG Q1 2015 earnings release. Thank you very much.

Thank you. We will now be taking questions. (Operators instructions)

And the earnings materials can be viewed conveniently through your IR dedicated app, not only today's earnings materials but past materials can be conveniently downloaded and viewed through your app. I would like to ask that you make full use of this.

Mr Kim Jinsang, HMC Securities.

(interpreted) Good afternoon. Thank you for your sound results. I have two questions. First, during Q1, maybe it's the same with other banks, there were some one-off factors or extraordinary factors. In the case of Shinhan Financial Group, according to your documents, what were the main one-off factors? Focusing on sizeable one-off factors, can you share those one-off factors or the extraordinary factors that happened in Q1?

Secondly, in the case of poor deposits, across the banks they are on the rise. In the case of Shinhan there is a particularly high growth in poor deposits. Do you believe that this trend will continue on as you move forward?

Also regarding margins, what be your forecast? What is your projection as to the margin trend going forward?

(interpreted) Concerning the first question, I shall give you the answer to the first. You've asked us to talk about the non-recurring factors that happened in Q1. Let me try to address them myself. There were three such factors. First, non-interest income. Second, provisioning. Third, concerning corporate tax aspects.

Regarding the non-interest income and provisioning that related to our operations during Q1 this year, there was again on the sale of a bond KRW30.9 billion, and also there was a KRW44.3 billion on the sale of Ssangyong Cement. And at the same time, so in the case of the non-interest income, on a pre-tax basis there was the effect of about KRW56 billion.

Also regarding the provisioning, there was some factor that increased the provisioning concerning the mid-sized shipping companies, and large shipbuilding companies. About KRW125 billion of provisioning took place in Q1, and due to this provisioning, there was a rise in our provisioning level. There was a write-back of about KRW24 billion. So all in all, there was an additional KRW100 billion in provisioning this quarter.

And regarding the corporate tax effect, obviously our CFO has already given you the explanation -- overall across the Group there was the deferred tax asset effect of KRW210 billion.

Concerning the core deposits, for the past three years there has been significant growth in core deposits. One of the main reasons for such growth is because of this low interest rate environment. Money doesn't really move fluidly in this market. From the perspective of asset managers, and the banks are offering a [91%] level interest rate on its deposit projects, and so people are exploring other options.

And as a result of that there has been a big rise in core deposits. And this phenomenon can be observed both with the retail and institutional customers, and this trend is likely to continue on. However, the pace of growth will slow down.

Let me address the margin forecast. Regarding the core deposits, I don't believe that the margin will be so bad in the future. Other than that, if there is no additional key interest rate cut, as you could see during the first quarter, the effect of interest rate cuts was reflected in the funding. And this trend, I believe, is expected to continue on. But a key variable is the BoK's decision as to the key rate.

Thank you.

Mr Kim Jae-woo, Samsung Securities.

Good afternoon, I am Kim Jae-woo with Samsung Securities. I have a question about provisioning. In our thinking, looking at the economic cycle and economic situation, it doesn't look that good. But looking at your numbers, not only SFT but KB and (inaudible), the credit cards, except for the one-offs, was down by 0.2% or 0.3%.

And what is the drop in the credit cost? Why did this happen? And will this trend continue? Or will it get even better? Or the credit cost being so low is not normal. What can we expect? Is it unusual?

(interpreted) Thank you for the question. This is how we see things. In 2008 we had GSC, and starting in 2009 the banks and the financial institutions in industries like shipping and shipbuilding in the problem areas, we had built up provisions, wrote off debts and tried to reduce exposure. And that has continued for seven years now. And from the perspective of the financial industry, we have been taking or reducing the positions in dangerous industries.

So we do not expect that there will be huge threats anymore; that is how we think. In shipbuilding, not only us, SFG, but the remaining exposure is limited and top shipbuilders, and as for the SME builders, we have taken care of our exposure. And as for the shipping industry, the government is initiating some restructuring processes. We did discuss the exposure or the additional provisioning of KRW125 billion for shipping and shipbuilding companies.

We do not think that there will be any unexpected threats this year. And as for SFG, in looking at the corporate exposure, it's a very small amount in small companies, and it's evenly distributed. So as long as there is no big event, we do not have anything to fear. And there are talks about household liabilities. I don't have any special comments to add, but we are taking measures, and we are being very pre-emptive with our risk management policies. And we do not expect any huge event this year.

Thank you.

Mr Byung-Gun Lee, Dongbu Securities.

(interpreted) Good afternoon. I am Byung-Gun Lee from Dongbu. Thank you for your strong results. Regarding capital, I have a question, and especially concerning the credit card operations. I understand that you're doing a good job at managing your overall operations. Recently, if you look at the capital adequacy regulations and the adequate level of ROE, the common equity share one ratio and common equity ratio, what are your target rate that you want to maintain going forward? And is there a possibility for you to issue new hybrid securities within this year?

Secondly, concerning credit card business, this year you seem to have done a great job at defending your business. During Q1 I believe that there has been an extraordinary factor regarding the auto loans. Excluding that aspect and maybe starting from Q2, I believe that there will be the emergency reduction impact to be filled. So what is your view on this?

(interpreted) Concerning capital adequacy, let me address your question myself. Recently there was a measure taken by the financial authorities, countercyclical capital ratio will be capped at 0% as they reduced the burden of part of the financial institutions. If you apply all the advantages related to this capital, then the common equity capital ratio should be at around 10.5% and CET1 ratio should be capped at around 11% or 12% level.

Currently, the Group's capital adequacy ratio in the case of common equity capital ratio, even after accumulating all of the countercyclical capital buffer, we are at a sufficient level. So we can cover that sufficiently. And over mid-term, long-term basis, I believe that our target is to maintain an adequate level of common equity Tier 1 ratio.

In the case of hybrid securities that you mentioned, as I stated, already we have over-achieved our common equity capital ratio targets. So there's no particular demand for issuing new securities. And recently, there are not many potential buyers of the securities. So it looks unlikely.

Concerning credit card operations, let me give you the answer myself. In the case of Shinhan Card, if you look at their Q1 results, as you mentioned, the rate itself has been cut in February. But there was an increase in the transaction volume, especially the credit purchase growth was pronounced, and the number of credit card users has increased. So there was quantitative growth that made up for a cut in the fee rate.

Secondly, regarding the cost, the Company has made great endeavors to reduce costs, and these two factors were combined in producing sound results for Q1. If you look into -- look at the domestic demand, I believe that the current trend will continue on into the second quarter and the third quarter. As I stated in Q1, there was no sale of these shares, for the sake of risk management. However, to make a split deal of the shares throughout this year.

Regarding the income prospect of Shinhan Card, I believe that there is no reason for concerns. Thank you.

[Pak Shu Han] from CIMB.

(interpreted) Good afternoon. Thank you for the good results. I have a question about capital. [Common here] but in the presentation the Group's capital ratio is taking into account the issue of the type of equity and annually. How will that reduce or shrink the dividend?

(interpreted) As for RPS, it does not meet the capital requirement, and so that's why it's not included. And as for repayment of RPS, it does not affect our capital ratio. And the rate was 5.5%, KRW65 billion of dividends will shrink.

We're still waiting for questions, and it appears that there is no further questions. With this, let us conclude the first quarter 2016 earnings release. Once again, I would like to thank everybody for joining us today. 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.