Shinhan Financial Group Co Ltd (SHG) 2016 Q4 法說會逐字稿

(interpreted) Good afternoon, I am Yu Sung Hun, the head of the IR Team. I would like to thank everyone for taking part in today's earnings presentation. We will now begin the 2016 full year earnings presentation.

Together with us today is Vice President and Head of Strategy Kim Hyung Jin, CFO and Vice President, Yim Bo-Hyuk; and financing head and managing director, Jeon Young Kyo. For today's earnings presentation. Our CFO, Yim Bo-Hyuk would take you through the business results for the full year of 2016 and afterwards, we will hold the Q&A session together.

We will now invite Vice President and CFO, Yim Bo-Hyuk to deliver the 2016 full year earnings presentation.

(interpreted) Good afternoon, I am vice president and CFO, Yim Bo-Hyuk, I would like to thank investors, analysts and journalists from both home and abroad for taking part in today's Shinhan Financial Group's earnings presentation. From now on, let me walk you through the main highlights of the 2016 full year business results of Shinhan Financial Group.

First, on page six of the presentation material, the Group's income. In 2016, the Shinhan Financial Group full year net income is up 17.2% YOY to KRW2774.8 billion and the net income for Q4 is KRW612.1 billion. The key highlights of 2016 performance are as follows. First, we are stabilizing NIM and the steady rise of loans, the Group's interest income had increased.

The second, the efforts to improve inefficiencies at the Group level, the rise of SG&A was kept to a minimum. Third, the preemptive and proactive risk management and credit costs was stabilized.

Let me explain in more detail item by item. The Group's interest income grew sharply by 7.7% YOY, despite downward pressure due to the base rate cut last June through improvements in funding costs, the management of interest-bearing assets focusing on profitability, we were able to maintain the margin at a stable level and achieve appropriate asset growth resulting in increased interest income.

For your information, in 2016, the Group and the Bank's NIM posted 1.98%, and 1.49% respectively, following only 2 bp and 1 bp YOY. And the margin in Q4 is 1.97% and 1.49%, the same as the previous quarter.

The Group's non-interest income declined 12% YOY. One-off factors, namely disposal gains from AFS and loan debt declined when the fall in stock market trading amount and increasing volatility, the commission income of the Shinhan Investment Corp.

SG&A rose only 0.7% on the back of over four years of strategic cost saving efforts at the Group level and following the previous year in 2016 as well, growth in SG&A was kept to below 1%.

For your reference, in Q4, we carried out voluntary early -- we talked about progress for both Shinhan Bank and Shinhan Life Insurance and Shinhan Financial Group. We offer voluntary retirement programs every year, and this year, the number of employees leaving the bank and the Life Insurance through the ERP are 281 and 46 respectively, the costs recognized are KRW94.1 billion and KRW8.9 billion respectively. The Group's credit cost is up 12.3% YOY.

At Shinhan Bank, additional provisioning have been set aside for restructuring company, and due to the loan asset growth of Shinhan Card, the credit cost have increased. But the Group's NPL ratio is the lowest since our establishment, standing at 0.74% and the full year credit cost ratio is also at a stable level at 0.47%. Finally, let me touch upon the corporate tax gains.

In Q1 of 2016, with regards to the Group's unused loss carry forward, the tax deduction effect was recognized as deferred corporate tax assets and the corporate tax gains of approximately KRW210 billion occurred in Q4 as well. At Shinhan Bank, a similar deduction effect took place and corporate tax gains of KRW140 billion was additionally recognized, therefore, for the full year 2016, approximately KRW350 billion of corporate tax gains occurred, contributing to increase of net income.

Next on page 7, I will provide you with details of the Group's non-interest income.

The Group's non-interest income as I have explained previously, fell 12% YOY on the back of a decline in one-off gains and changes in the market situation.

The Group's fee income fell 3.4% YOY, owing to a decline in credit card income and stock brokerage commissions, but due to the growth in trust assets and healthy sales from overseas subsidiaries, the trust fee income and FX Fee income exceeded the growth trend.

For your reference, among the other non-interest income disposal gains from the loan debt dropped KRW110 billion YOY and this is because of the reduction in sales of loan debt as well as the absence of the securitization effect of the safe conversion loans which was implemented in 2015.

Next on page 8, the Group's SG&A. The Group's SG&A YOY increased only 0.7% on a tier 2 basis, it grew 19.8%, the main factors being the ERP program that was carried out and the temporary increasing costs during Q4.

The bank's SG&A grew 3.7% YOY driven by the increase in the number of early retirement applicants. The COI of the Group and the bank in 2016 is 51.3% and 52.2% respectively.

Next, page 9, the net income by subsidiaries. The net income of the bank and the non-bank subsidiaries net income after consideration of contribution is KRW1,957.6 billion, and KRW1,045.7 billion respectively. The non-bank subsidiary's contribution to income is 35% excluding the one-off gains related to corporate tax, it's maintained at 39%.

Next, on page 10, the business results of 2016 by subsidiary. The bank's net income grew 30.2% due to strong improvements in the bank's performance, in the case of non-bank subsidiaries, the Shinhan investment and Shinhan Capital saw their net income decline but the income of card and life insurance grew so that overall, the non-bank subsidiaries saw a slight decline in profit YOY.

Page 11, Shinhan Bank income and NIM. The Bank's 2016 net income increased 30.2% YOY, both interest income and non-interest income showed even growth and SG&A and credit costs were well managed, resulting in 8.2% growth in earnings before tax.

In Q4, gains from sales of AFS Securities fell and seasonal factors like ERP kicked in which led to a net income decline of 11.6% QOQ. Page 12 includes detailed information on the bank's non-interest income for your reference.

Moving on to page 13, Shinhan Card income. Shinhan Card's 2016 net income increased 3% YOY, interest income grew on the back of growing amount of card loan volume. Interest payment decreased due to lowered funding rate and increased funding from security sales including those of VISA.

For your reference, gains on VISA sales in 2016 was KRW205.6 billion and in 2015, gains from sales of VISA and Mastercard securities recorded KRW179.5 billion. SG&A decreased 1.6% due to the absence of previous year's ERP effect and credit cost increased 13.4% due to an increase in loan assets and decrease in income from recovery of bad debt.

Page 15, the Group's total consolidated assets grew 6.8% YOY to KRW396 trillion. Page 16, Shinhan Bank loans and deposits. As of yearend, Shinhan Bank loans in Korean Won recorded KRW185 trillion, a 4.4% growth YOY. Retail loans grew 6.3% YOY as non-mortgage loans such as credit and transit loans increased.

Mortgage loans grew 0.6% but considering the securitized loans, the annual growth rate is 12.1%. The overall corporate loans grew 2.5% over the year due to an increase in loans to prime SMEs not subject to outside audit. In Q4, loans in Korean won decreased 1.6% due to an increase in mortgage loan securitization and decline in large corporate loans.

Next, Shinhan Bank deposits. In 2016 year end, Shinhan Bank's deposits in won grew 4% YOY to approximately KRW188 trillion, low cost core deposits increased 9.9% thanks to efforts to acquire more accounts for payroll transfer and merchant's payments. LDR was 97.5%.

On page 17 are the details on Shinhan Card's transaction and funding activities. Operating assets of card went up 7.2% YOY to KRW22.9 trillion at the end of the year on the back of credit purchase and card loans. Total credit transaction volume on the top left shows an increase of 13.5% YOY (sic - see slide 18, "13.3%") to KRW168.4 trillion in 2016.

Asset quality on page 19. At the end of 2016, the Group's NPL ratio was 0.74%, 0.13 percentage point drop YOY hitting a record low since the establishment of the Group. This has been possible by reducing the NPL by 11.2% with risk management efforts.

The Group's NPL coverage ratio is 219% and it is 120% excluding the loan loss reserves. Pages 20 to 22 include details on asset quality of Shinhan Bank and Shinhan Card, and for your reference, the Group's annual bad debt sales and write-offs amounted to KRW1.7 trillion down by KRW175 billion YOY.

Page 24 capital adequacy. As of yearend, Group and Bank's estimated BIS ratios are 15.1% and 15.8% respectively, up 1.7 percentage point ad 1 percentage point YOY respectively.

And the year's common equity tier one ratios are expected to be 12.8% and 12.9% for the Group and the bank respectively. In the fourth quarter, the Group's CET1 ratio went up by 1.6 percentage points because the [SIRD] approach was approved to the card business in estimating the risk-weighted assets of the Group and also because the credit loss reserves were recognized as common equity.

Shinhan Card adjusted equity capital ratio recorded 26.2% in 2016. For your information, the [BOT's] resolution for the dividend payout for the fiscal year 2016 was KRW1,450 per common share. If it is passed as is at the regular shareholder's meeting, the payout ratio will be 25% and dividend yield, 3.1% approximately.

Following last year's precedence, we paid close attention to the shareholders' opinions, improved dividend payout steadily and gradually and we will continue to do our best to maintain this trend by increasing sales and profitability in the future.

Page 25 and onwards are additional earnings information on other subsidiaries, major business indicators, and Shinhan Bank's loans and SMEs.

This concludes the report on business performance of Shinhan Financial Group for the year 2016. Thank you very much.

(interpreted) Thank you very much. And now, we will be taking questions.

(Operator Instructions).

Mr. [Kim Jin Sung], HMC Securities.

(interpreted) Good afternoon. Thank you very much for those excellent earnings. I have two questions. First is with regards to the dividend, the dividend per share is actually because of the higher earnings is higher than expectation, the payout ratio itself is 25% because of the improved capital ratio, mainly you can go up higher than that.

So last year, one-off corporate taxes, there were some gains from that, and because of special factors, maybe this has had a lowering impact on the payout ratio. If it was in a more normal situation, it would have been higher, the payout ratio? That is my first question.

And my second question is and you also said that you are going to continuously raise the payout ratio going forward, but more specifically, in 2018 perhaps, the target level in 2019, do you have any target levels for these years, do you have a road map?

And secondly, I think the NIM is defended well and this year's NIM and this year's loan growth, what are the plans?

And so the net interest income, what kind of guidelines do you have for this year, 2017?

(interpreted) with regards to the dividend policy, let me provide an answer for that question. We have said the dividend per share is KRW14.50, and the dividend payout ratio is 28% and the one-off factor is (inaudible) corporate tax, that is excluding, it's actually 28%, the payout ratio.

But if we combine this all together, all these special factors included, then it comes to 25% [resulting from the past] and onwards, as we promised the market, gradually, continuously, we are raising the payout ratio and going forward, the trend we are trying to continue this trend, this direction.

For the mid to long-term, we do not have any specific guidelines for the target level of dividends but the market -- with regards to the current dividend level, yes, we do fully understand that market expectation is for higher dividends than the current level, and the future, in our dividend policy, we will try to reflect those expectations in order to fulfill such market expectations of our Group.

Thank you very much.

(interpreted) I am Jeon Young Kyo, in charge of Finance, I would like to talk about the margin. The Group is affected by the [BOK] base rate and its margin in our last year's business plan, we were thinking that the base rate will be stabilized at a lower level and with the launch of the Trump administration, we see that there are conflicts between the two countries' interest rates and so we have to come up with a new forecast.

Today, in Korea, the Korean interest rates are affected by the US rates as well as the Korean economy and the outflow of the US dollars, and the pendulum swing will affect the Korean base rate. And as such, in the financial markets, the interest rate will affect the NIM in the following manner.

In Q4, there were some favorable conditions for the NIM and so AUM is going well and as for the mortgage loans, they are fixed rate products so these are some favorable conditions.

But these could be temporary and in the long-term, well, independent of the base rate, we are going to have more flexible AUM and we are going to differentiate interest rates on the loans depending on the credit worthiness.

And looking at the loan growth forecast for this year, basically, we will be looking at the markets and we will also look at the GDP and that will be about the level that we are seeking.

(interpreted) Mr. Jung Moo il, Franklin Templeton.

(interpreted) Good afternoon.

(interpreted) (Operators instructions) Mr. [Li Joon Ho], UBS Securities.

(interpreted) Good afternoon, I am Li Joon Ho, first of all, thank you for the very healthy earnings.

With regards to the credit card, I have a question, recently, as reported in the newspapers, the credit card NPL ratio does seem to be dropping, it seems to be rising gradually so there is a lot of talk in the market about this, about the assets quality so can you comment at the outlook for the asset quality of the card business?

(interpreted) With regards to the asset quality of the card business, as of yet, there are no clear signs of any deterioration and as is stated in the earnings presentation, please look at page 21 of the presentation material in the case of delinquency ratio, it is 2.43% kept at a very low level and in case of a card business, one month delinquency is important and there are two months of delinquency rule rate is very important -- stands at 0.33%.

So at this point in time, the asset quality is deteriorating, there are no signs that would deem that is still and with regards to the composition of their assets, in the case of cash advances, the assets have fallen below their KRW2 trillion mark and so high risk and highly sensitive assets have been reduced.

And so with regards to asset quality of the card business, going forward, it might be a source of concern but at this point in time, there are no signs of sharp deterioration that could give rise to the increased positioning. That is our understanding.

(interpreted) Mr. Jung Moo il, Franklin Templeton.

(interpreted) Yes, I pressed the wrong button and so I am back. I have two questions. The first one is in Q4, Shinhan Bank's loans increased and compared to the previous quarter, it seems that there was a slight decrease.

While looking at the Shinhan Bank's growth rate, I think it was the first time that the loans decreased and is there any reason why there was a QOQ decrease in loan growth? Is it for risk management purposes? Is that how we should understand the message?

As for the new chairman, what is the direction of his management style? Is there any tip that you want to share with the shareholders and the investors?

(interpreted) Yes, as for the loan growth rate, I would like to answer. In 2016, in Q4 loan decreased and that was because of low mortgage loans and in order to manage the BIS ratios, seasonally, we do reduce the corporate loans and it's a seasonal factor reducing the corporate loans and home mortgages, well, we had intentionally reduced the home mortgages because the first reason was the housing market was not booming and in Q3, I think there was an overshoot in the home mortgage loans and we wanted to stabilize that and we securitized the loans and that is why the retail loans decreased in Q4.

Yes, we are always doing the risk management in loans and so there was no drastic change in our policies. It's just that during the last two years, the home loans had increased a bit too much and we -- there were some raising of the interest rates for some risky assets.

And as for the new chairman's management style, in 2015, we had set up a three-year midterm plan for the Group business and we are now in our second year of implementing the mid-term plan and I'm sure the new chairman will be committed to this plan and also he is going to be committed to globalization, digital transformation, and proactive risk management.

These are going to be some of the points that he will stress and so on a continuum of the Shinhan Financial Group business, he will continue to look for more growth engines but he is not yet in his position yet.

So I'm sure there will be another chance for him to directly communicate his messages. Thank you.

(interpreted) (Operator instructions). Mr. Lee Byung Gun, Dongbu Securities.

(interpreted) I have just one question. IFRS9 will be implemented starting from next year. And I'm sure you have undergone the simulation, it will have an impact on the capital ratio but also compared to other companies, the life insurance, the size of this company is quite large.

This is not applied yet to the insurance company, it's only applied on a consolidated basis so with regards to this, IFRS9 related, what kind of impact it will have on capital and what kind of impact will it have on the P&L management this year?

That is my question.

(interpreted) With regards to change in accounting method, so let me take that question. We have two accounting methods, the 9 and 17 which is applied to the insurance sector.

In the case of IFRS9, it's actually a plus, a positive for the capital ratio. The loan loss reserves of the present -- rather the loan loss reserves have already been converted in 2016, I'm sorry, and provisioning actually, general provisioning is slightly expanded, then in tier 2 segment, there will be a positive impact.

Aside from that, there will be no major impact to the capital ratio. With regards to the marketable securities, the volatility of marketable securities might go up and so P&L management might have to become more precise.

So with regards to 2017, it has a great impact on the insurance sector, it had a great impact on capital ratio because that is solid at the market level and so the debt levels go up. But we do have some time remaining and so we are making preparations at the Group level. First of all, the product size must be made more appropriate and more guaranteed products must be expanded and the savings products must be reduced.

And the capital [kind] of growth depending on the changes in method but if we decide to grow the capital, then going forward, volatility will grow and so we need to look at this from a multiple perspective and make the appropriate decisions.

(interpreted) There are no further questions it seems, with this, we would like to conclude the 2016 Shinhan Financial Group earnings presentation. Once again, thank you for your participation.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.