Shinhan Financial Group Co Ltd (SHG) 2016 Q3 法說會逐字稿

Greetings. I am Sung Hun Yu in charge of IR. I would like to thank all of you for participating in the 2016 Q3 Shinhan Financial Group earnings release. We will now begin the business results presentation.

I would like to introduce to you Vice President Kim Hyung-Jin in charge of Strategy, Vice President and CFO Bo-Hyuk Yim as well as Managing Director and Financial Head [Jeon Young Kyo].

We will first open the conference call with a presentation from our VP, Bo-Hyuk Yim, our CFO. And after the presentation we will be taking questions

Now I would like to give the floor to our CFO Bo-Hyuk Yim for the business results presentation of Q3, 2016.

Greetings, I am CFO Bo-Hyuk Yim. I extend my gratitude to the investors, analysts and journalists in and out of Korea for taking part in Shinhan Financial Group's earnings release. I will now elaborate on the major highlights of Shinhan Financial Group's 2016, Q3 business results.

Let me begin with the Group's income on page 6. Shinhan Financial Group's cumulative net income in Q3 recorded KRW2.1627 trillion. Q3 net income recorded KRW707.9 billion, a 10.2% increase YoY and 3.6% QoQ increase respectively.

Major characteristics of this quarter's performance are as follows. First, interest income increased due to loan growth and net interest margin stabilization. Second, SG&A expenses decreased thanks to the realization of the Group's cost management efforts. Third, asset quality improved, leading to the stabilization of credit cost to a recurring level.

Looking at the income breakdown, with the bank's continuous loan growth, margin stabilization and of course long-term loan growth contributed to the Group's interest income. And it went up 7% YoY and 3% QoQ.

Non-interest income declined 18.1% YoY with the drop in the Group's available-for-sale securities disposition gains and the decrease obtained from loan sales because of the drop in loan sale volume. QoQ non-interest income went down 22.5% with a drop in the Group's available-for-sale securities disposition gains.

The Group's SG&A expenses dropped 0.4% YoY with the Group's strategic cost-cutting efforts. Overall, SG&A expenses also dropped 1.9% QoQ with the decline in other expenses, including advertising and service costs.

Group's credit costs, which rose temporarily in the first half with the impact from continued restructuring stabilized to a normal level in Q3. Accordingly, credit costs up at 1.8% growth YoY and 28.1% drop QoQ.

The Group credit cost ratio also improved to 0.47%, a 2 bp drop compared to 0.49% of the previous quarter.

The Group's non-interest income in 2016, Q3 declined 18.1% YoY. The biggest reason behind the non-interest income drop was the decline in the available-for-sale securities disposition gains and the drop in gains from loan sales. Each went down 23.7% and 67.8% respectively.

Fee income decreased 4.2% YoY because although the bank's fee income increased, the fee income of card, investment securities, life insurance and other non-banking Group subsidiaries went down.

AFS securities impairment losses went down 55.2%, partly offsetting non-interest income.

Non-interest income went down 22.5% QoQ because in Q2 there was a sizeable amount of AFS disposition gains, including the disposition gains from the sale of Shinhan financial securities, but not a large sale disposition in this quarter. I have attached the Group's fee income details on the bottom right-hand side of the slide, so please refer to it if needed.

Let's now go to page 8, Group's SG&A. Group SG&A in 2016 Q3 decreased 0.4% YoY.

Salary and employee costs rose only 0.2%, a slight increase thanks to the Group's cost-cutting efforts.

D&A and other expenses declined 5.3% and 0.5% respectively.

Group SG&A went down 1.9% QoQ because other expenses, including taxes and public utilities, advertisement, rental and service costs went down 5%.

Shinhan Bank's SG&A expenses, on the bottom right-hand side, recorded a sound level, with 0.7% YoY increase.

Salary and employee expenses increased 2.1%, which is similar to this year's wage growth ratio.

D&A and other expenses decreased 3.4% and 0.9% respectively.

Bank's SG&A expenses in Q3 decreased 1.8% QoQ. This is because of the sizeable tax and public utility costs we had recognized temporarily in the previous quarter, including property taxes and real estate taxes, which did not take place in Q3. Also, non-banking expenses, including rental, advertising and service costs, decreased.

2016 Q3 Group and the bank's cumulative cost income ratio recorded 49.1% and 48.7% respectively.

Next let's go to page 9. Taking into account the bank and non-bank's contribution until Q3, net income recorded KRW1.5234 trillion and KRW803.3 billion respectively.

Non-banking Group subsidiaries profit contribution was 35%. But excluding bank's deferred tax effect, non-bank's contribution was 37%.

Next page 10, the performance of each Group subsidiary. 2016, Q3 bank income, thanks to the growth of Shinhan Bank's interest income and stabilization of credit cost increased, 20.6% YoY and 6.7% QoQ.

Non-banking income went down 8.1% YoY.

Shinhan Investment Securities income dropped substantially YoY with the overall performance downturn of the securities industry. However, card and life insurance income rose 2.1% and 44.4% respectively, contributing to the Group's non-interest income.

Next page 11, Shinhan Bank's performance. Bank's Q3 cumulative net income posted KRW1.5117 trillion, a 20.7% increase YoY. Quarterly income reported KRW485 billion, a 7.3% increase QoQ.

Interest income grew 7% YoY, with margin stabilization and continued loan growth. And non-interest income also grew 3.6% (sic - see presentation slide 11 "3.5%"), with the decline in securities impairment losses.

In expenses, SG&A expenses rose 0.7%, a slight increase and provisioning went up 14.6% YoY but is showing stabilization trend from Q3.

Let me elaborate on the income breakdown in Q3. Bank's quarterly NIM stopped at a 3.6 bp, but actually bank's quarterly NIM stopped at a 1 bp contraction compared to the previous quarter and those continued to increase leading to a 3.6% QoQ net interest income growth.

In addition, with the cost-cutting efforts, SG&A expenses dropped 1.8% QoQ and asset quality improved, leading to a 57.8% credit cost drop, contributing to the quarterly net income growth.

Next page 12, Shinhan Bank's non-interest income. Shinhan Bank's cumulative non-interest income until Q3 2016 posted KRW865.8 billion, a 3.5% increase YoY.

Fees from funds and bancassurance sales decreased, but FX fee income and trust income grew, leading to a 0.5% increase in fee income.

Securities impairment losses declined approximately KRW90 billion, contributing to a non-interest income improvement. On the other hand, non-interest income in Q3 went down 32.7% QoQ. A main factor was the fade out of the sizeable AFS disposition gains occurring in the previous quarter.

Now page 13, Shinhan Card income. Shinhan Card's Q3 net income recorded KRW532.6 billion, a 2.1% increase YoY.

Merchant fee income and interest income came along with the increase in transaction volume. Although operating expenses and SG&A also increased, there was a decrease in interest expenses and provisions for credit losses of 12.5% and 12.9% respectively, leading to an income improvement.

QoQ operational profit decreased 14% with the absence of the securities disposition gains compared to the previous quarter. However, the recurring profit is showing a stable trend.

Group's assets on page 15. As of Q3, Group's total assets on a consolidated basis rose 7.7% YTD and 2.2% QoQ to KRW399 trillion. Bank assets grew 8.3% YTD on the back of loan growth. And non-banking side posted a 10.7% growth YTD due to even asset growth coming from card, securities, life and asset management.

Shinhan Card's total assets grew 5.2% YTD due to an increase in operating assets, including card loans.

Asset rose 18% in the Shinhan Investment Corp due to an increase in financial assets and trust assets.

Shinhan Life also recorded an 8.5% increase in assets due to financial asset growth.

BNP Paribas asset management AUM steadily rose, posting a 4.3% increase year to date.

Page 16, bank's loans and deposits. As of Q3 this year, Shinhan Bank's loans in won increased by 6% YTD and 3.1% QoQ to KRW187 trillion.

Retail loans grew 7.9% YTD as the others category under retail loans shot up 14.5%, including the Jeonse loans and unsecured personal loans.

Mortgage loans posted a growth rate of 3.4% as of Q3. When the securitized loans are included, the growth rate is much higher at 8.3%, showing a steady loan growth in line with the rising market demand.

Corporate loans recorded a 4.1% YTD. SME loans grew 6.7% at the back of loan growth extended to smaller companies exempt from external audit, whereas the large corp loans was down by 4%, which is a shrinking market. The Bank's SME loan portfolio includes 22% firms subject to external audit, 28% not subject to external audit, and remaining 50% SOHO companies.

As of Q3, deposits in won increased 5.8% YTD and 3.2% QoQ to KRW191 trillion, showing a similar trend as the loan growth.

Low-cost deposits were up 6.9% year to date thanks to an increase in debit card transaction volume, acquisition of settlement accounts by the credit card merchants and acquisition of new funds from institutional clients, including schools.

Third quarter's loan to deposit ratio was 97.3%.

Page 17, Shinhan Card's transaction and funding activities. Shinhan Card's Q3 transaction volume was KRW124 trillion. And the recent three months' volume was KRW42.7 trillion. Card transaction volume posted a 13.6% growth YoY and a 2.5% growth QoQ on the back of steady increase in credit purchase and card loans.

Shinhan Card's earning assets increased 2.9% YTD and 1.8% QoQ.

Asset quality on page 19. The Group's NPL ratio was 0.86%, showing a slight improvement over 2015 year end. This was thanks to the total loan increase of 4.2% YTD with the balance of NPL growing at only 3.4%. The Group's NPL coverage ratio is 195%, up 4 percentage points YTD.

Page 20, Shinhan Bank's NPL ratio was improved to 0.79%.

The delinquency ratio chart on the bottom left shows the bank's delinquency ratio of 0.36%, which is a slight increase both YTD and QoQ. However, considering the decrease in the amount of NPLs sold or written off in Q3, the actual delinquency ratio is being maintained at a stable level.

Shinhan Card's asset quality on page 20 (sic). Card's NPL ratio fell 7 bps YTD to 1.17%. And the NPL coverage ratio was 381%. The delinquency ratio as of Q3 is 1.48%.

Credit cards and NPL write-off on page 22. As shown on the graph, credit cards ratio of the Group for the year was 0.47%, a 2 bps drop YoY from 0.49%. This was possible due to a fall in the Shinhan Bank's credit cards in Q3 this year. Going forward, continuous efforts will be made to manage asset quality to stabilize the credit card.

During the quarter, the Group rolled off or disposed of bad debts amounting to KRW306.9 billion, which fell significantly from previous quarter's KRW611.9 billion. Nonetheless, the Group managed to maintain a stable NPL ratio and delinquency ratio, indicating the asset quality is consistently improving.

Page 24, capital adequacy. The Group's BIS ratio and Common Equity Tier 1 ratio are expected to be 13.8% and 11.2% respectively, each having gone up 0.4 percentage points YTD.

The Bank's BIS ratio and CET1 ratio are expected to be 15.1% and 12.1%, each up by 0.3 percentage points and 0.1 percentage point YTD.

Both the Group and the bank are showing steady improvement in the capital ratios as the net profit derived capital is increasing at a higher rate than the risk-weighted assets.

Shinhan Card's adjusted equity capital ratio is expected to be 25.4%. Please refer to page 25 and onward for additional earnings related information and the major business indicators of the subsidiaries and also for the bank's SME loans.

This concludes the earnings call of Shinhan Financial Group for Q3, 2016. Thank you very much.

Thank you very much. And now we will take questions from the investors. (Conference Instructions). And for your reference, not only today's IR presentation material, but the past materials can be downloaded and reviewed through our app and our annual report, previous IR materials, CSR reports can be downloaded through this app. And so you could use them at your convenience.

We will take the first question. It's from HMC, Mr. Kim Min-Jung. Please go ahead.

Thank you very much and congratulations on your earnings. For the credit card, against people's concerns, it seems that volume wise and also for your credit cost, it has helped your total earnings. Do you think this trend can continue in the credit card business?

My second question is about the Internet bank that will soon be launched and be operated. Regarding the Internet customized bank or Internet only bank, I'm curious about Shinhan's trend going forward.

Thank you very much for your question, Mr. Kim. And regarding the credit card, let me give you our forecast. Well, I'm quite prudent in giving you the forecast for credit card because compared to the first half of this year, it seems that the second half is showing stabilization. And looking at the current forecast, we are not finding any surprising factors in Q4.

However, for DSME, Daewoo Shipbuilding and Marine, well some uncertainty remains. However, even if we have something unexpected happen at DSME, we don't have a lot of exposure for DSME at Shinhan so I don't think our shareholders or the market will be surprised. Thank you.

You also asked a question about our forecast on credit card business. As you mentioned, for credit card, well, actually the earnings was quite high, higher than people's expectations. And I think there are two reasons behind that. First is because our growth was quite high, higher than expected.

And there are two aspects to our robust growth. First is when you look at the credit sales or credit purchase amount, it has risen greatly, 14%. So you can see the volume in Q3 has grown substantially. And secondly, in order to be proactive against future competition, we have been growing our credit card loans very continuously so we had good growth in both aspects.

The second reason is, because of the credit cost, because last year, in the quarter we had about KRW100 billion of provisionings, but we have about KRW85 billion to KRW86 billion of provisioning. So provisioning went down. So we have less of a burden on the credit cost.

Secondly, for the credit card business, as you know, there's long-term financing that is the cost structure of credit card. And because we have economy of scale at Shinhan Group, we have had a substantial benefit. So that is why our credit card subsidiary has seen good results.

For the next year, well, regarding the transaction amount volume, well we believe that the earnings will be quite stable. But, as you said, because of the emergence of the Internet bank that you mentioned in your second question, we believe that we might have a difficult year in terms of income. But we will need to take things and look at things very prudently.

So regarding the Internet-only bank, let me elaborate. IBM super computer performance was very high in 1996. But Galaxy 7, with iPhone 6, they say those phones, smartphone performance is higher than that of the IBM super computers. Likewise, we are carrying around these devices which are more powerful than the IBM super computers of the past.

So we are going to be in this kind of world where finance will also need to take advantage of this change and we will need to -- from the end of this year to next year, January, there will be two Internet-only banks that will be launched. So it will be easy to transfer money and it will be actually very easy to settle money as well. So they can also give mid rate loans, so we are expecting them to be launched in the near future.

We are going to be proactive and respond to these changes because we're going to provide comprehensive financial services centering on the customers' needs. We have done finance for a number of years, so we have credit card, we have life insurance, we have securities. So we will provide mobile services so that our customers will have easy access to all the areas in finance.

We have three projects especially. So we have a shared platform, we have bank club and robo-advisor and others. So we have three special projects that we are currently embarking on.

We also believe digital finance is very disruptive because it can provide very innovative services and products that will be very fun and interesting for the customers. We recognize this fully at Shinhan Group and we believe that, for instance AI or [block] change, we need to be well prepared. So we will take advantage of these digital technologies beforehand. And we are currently developing these digital technologies.

Going forward we will attract not only our current customers, but we will have the capacity to attract our non-existing customers of now. They will become our customers of tomorrow. We also -- we are joining hands with fin tech companies that are very innovative. And we will have JVs or alliances with very advanced companies so they will have very advanced ideas.

So for the fin tech companies we have a second round and third round. And we have now 23 companies that are part of our future in that. So we will cooperate with them so that we can provide comprehensive services. Fin tech companies and also Shinhan will live in the same ecosystem and help each other and both create synergy.

We also have 18 companies that have cooperated with us, but we will have JVs or strategic alliances so that we can have more companies in the bank club and we will have true cooperation with other companies. We believe that this is the only way for Shinhan to be more competitive in the future. And from 2016, this year, we have embarked on digital transformation which is actually one of the most important slogans for our business. We believe that from the end of this year we will see results that are finalized and are visualized. Thank you very much.

We will stand by until we get the next question on queue. (Conference Instructions). Yes. We will take the next question. It's from Franklin Templeton, Mr. Jung Moo Il. Please go ahead.

Good afternoon. I am Jung Moo Il from Franklin Templeton. I have two questions. One is about the strategy and the second is from the investors' point of view.

First, as for the strategy, well I know it's too early to talk about it, but 2015 and 2016 you had a very good growth. And in non-banking and banking you had good growth, but looking forward in 2017, looking at it from the income perspective, what will be the focus and where will you be getting your earnings in 2017?

And from the investors point of view, including the financial group of Shinhan, many of the financial institutions, despite their good performances, but there are uncertainties that the investors feel. And I -- you do meet a lot of investors. So what are their biggest concerns? What is their biggest uncertainty factor? And what are you doing, from the Group's perspective, to relieve some of these uncertainties? Thank you.

Thank you very much for your questions and thank you for your support and your attention on our Group. I know you always ask the difficult questions. In looking forward, the earnings growth for next year, you did talk about the trend in 2015 and 2016. We don't think that the environment is going to change substantially. But in setting up the plan for next year, what we are focusing on is non-interest income.

So for the time being, in the loan business, it was very stable. But there is only so much growth that we can get from the loan. To get the ROE and ROA numbers better, it shouldn't be really the loans, but there could be some answers from the capital market. And we should be after the non-interest income. So, to be exact, fee and commissions income, so that's what I have been thinking of. And these will be reflected in next year's business plan.

And luckily enough, at Shinhan Financial Group, we have the cooperation between the investment corp and the bank and -- so we have the infrastructure and the initiatives. And there is the awareness already. So I think we are in a position in which we can take these initiatives. And we think that we can garner visible results. So that's what we are going to focus our efforts on. And so what you will be looking out for is growth in non-interest income, since we have the WN and CID platform.

And you talked about the uncertainties. Despite the good performances, investors are a bit wary and what are we doing to relieve some of these uncertainties. Well the investors may feel some type of anxiety. Well I need to be aware of what their uncertainties are to be able to respond to them.

When I go on IR shows and the gut feeling that I have in meeting the investors is it's the rise, or the possible increase, in credit cost because of corporate restructuring.

In the emerging markets, in Asian markets, there was a lot of talk about the credit cost; also in Germany. And is Korea an exception? I think the investors are worried on that front.

Well, up until 3Q this year the credit cost was not really an issue. And going into the fourth quarter I don't think it will be a significant issue. So I think the investors could put their minds at ease about that type of uncertainty, as for the credit cost.

And as for any chances of income growth, we have to look at the macroeconomic factors or the interest rate level and it's a bit difficult. People are thinking that there is only so much room for the income growth to go up. Korea is an ageing society now so it's now going to see an increase in the capital market products, not only in deposits and loans. And where the NIM is fat and where there is a lot of growth, we are venturing into those markets. I know it will take some time, but with the right risk management, I think we will be able deliver to you very good news. I don't think there are only pessimistic views on the Korean financial front. Thank you.

Next question is from KB Investment Securities, Director Yoo. Director Yoo, yes.

I have a question about non-interest income. And I think we had actually some very general questions, so I would like to ask you some micro questions in detail. Some banks have already given their earnings release and I'm curious about your differentiator, I guess, for loans.

Compared to other banks, in Q3 you have quite substantial loan growth. And you can see it's for the ordinary loans, other loans. And I think you have seen some growth in large corporate loans compared to your competitors. So these loans, compared to the credit loans, other types of loans, can you give us your breakdown on what types of loans were grown in Q3? And you had good loan growth in Q3 so I'm curious about Shinhan Bank. Regarding your loan plans for the future, are you going to be aggressive in loans going forward?

My second question is about a focal point which is about D'Live provisioning. So your exposure to the broadcasting industry, can you give us any one-off or any factor we should take into consideration like the Visa security disposition, or others?

I am Jeon Young Kyo, Head of Finance. Regarding the growth for Shinhan, in Q3 it is true that we had substantial results. But on a yearly basis I don't think there is a big difference among the banks.

Regarding loan growth, well, to give you a sector breakdown, well to tell you about what is different at Shinhan, for the household loans we can see until the first half of this year there was not very active growth.

But in Q3 we had a substantial growth and then we had a lot of mortgage loans that went up in Q3. For these types of credit loans, you can see we had very good unsecured personal loan growth and that was at a very normal level, recurring level. And mortgage loans went up 7.9% until September and 3.3% for the mortgage loans -- 3.4%. So from household loans we had a lot of good growth in the others, apart from mortgage loans.

Going forward, in our future strategy, you can see for household loans it is impacted with other factors like regulations. And we believe that we will not see many changes, but we will see some securitization going forward. And because of the market impact, we will not see a lot of growth in this area.

And for SOHO loans, during the past three years, in 2016 we have a somewhat downturn in the growth of SOHO loans. Of course, we have seen substantial growth until 2016, but we wanted to have more profitability. And we have stricter regulations so that might be why we haven't seen substantial growth.

And for the SME loans, we have 6.7% growth YoY -- YTD. And it is real economic growth rate of 4.5%, but we had a lot of -- a little bit of over-growth. But it's quite seasonal because we're going to see probably a decline in December. So I think that on a quarterly basis it will probably be the level of Q3.

And now let me elaborate on D'Live. For D'Live our exposure is about KRW170 billion. Well to give you the detail, our D'Live loan exposure -- has Korea broadcasting, which is about KRW190 billion. And then for D'Live broadcasting, so KRW140 billion. But we are now classifying as normal because D'Live itself has good business potential and their asset quality has grown because of some changes they've made. So that's why we don't think an immediate provision is needed. But we are going to keep an eye on D'Live. Thank you very much.

And to add to that, as for D'Live, in the industry, there were talks of evaluation or impairment losses and we have provisioned against possible losses. And as Mr. Jeon Young Kyo said, as for now, the financial conditions have normalized. And there is no issue on interest payments and there are marketing efforts being made. So as for D'Live, in the mid to long term, we don't think it's going to cause a serious problem.

Thank you. We'll take the next question. It is from Morgan Stanley. Mr. Seok Joon please go ahead.

Good afternoon. Thank you for all the good results. Well, somebody asked my question. And I'd like to talk about the cost. As for the performance incentives or performance based pay, what can you do from the cost perspective? And in the mid to long term, what will be your CI ratio?

Thank you. Well, another tough question for me and for the Korean financial institutions how to control the cost. They feel there is not much room for controlling costs and they don't have many means to cut cost.

What we are doing at Shinhan Financial Group is we are trying to manage the CI ratio to keep it from increasing. And it's not rather an active control of the cost but it's to increase the income so that we can manage the CI ratio.

And in Q4 or in 2017 I think we will be moving along that line. It's just that in the recent market there are some changes in the labor market and there is this introduction of performance based salary. And that could help with our cost cutting efforts. But it's too early to tell because we do not really have the facts and figures as evidence.

But in the mid to long term we believe that, looking at last year's and this year's strategic cost-cutting efforts, we have come up with six strategic projects and initiatives and programs to cut cost. And we have the task force set up and we're getting the results from them and we're applying them to the field. And we believe that next year will be a year in which these results will become more visible.

And so every year I think there will be an improvement. And five or six years down the line I'm sure we will have significantly cut cost. And I'm sorry I cannot give you a clear-cut answer. That's the best I can do. Thank you.

Thank you.

It seems that there are no other questions on the queue. Just a second. Actually we have from (inaudible) Securities Director Kim [Yong]. Are you there Director Kim? Actually I think the question was cancelled.

With this we would like to end our Q3 earnings release presentation. Thank you very much for taking part in our earnings release for Q3, 2016. 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.