Shinhan Financial Group Co Ltd (SHG) 2017 Q3 法說會逐字稿

Good afternoon everyone, I am Yu Sung Hun, head of the IR team. I would like to thank everyone for attending today's earnings presentation, despite of your busy schedule. We will now begin the 2017 Q3 Shinhan Financial Group's Earnings Presentation. Today we have with us Vice President, Woo Young-woong, Head of Strategy; CFO, Yim Bo-Hyuk; and Managing Director of Finance, [Jeon Young Kyo].

Today we will begin with a presentation by CFO, Yim Bo-Hyuk, on the Q3 business results and then proceed to a Q&A session. Now we would like to invite CFO Yim Bo-Hyuk to deliver the 2017 Q3 earnings presentation.

Good afternoon. I am CFO Yim bo-Hyuk. First of all, I would like to thank our investors, analysts and journalists from both home and abroad who are taking part in Shinhan Financial Group's Q3 earnings presentation. From now on let me walk you through the highlights of the business results for Q3 2017 for Shinhan Financial Group.

First, on Page 3 of the presentation material, the Group's income. Shinhan Financial Group's 2017 Q3 cumulative net income is KRW 2,706.4 billion, up 25.1% Y-o-Y. The Q3 net income is KRW 817.3 billion, down slightly by 8.4% Q-o-Q. Let me briefly highlight what's noteworthy regarding Q3 results.

First, across all bank and non-bank subsidiaries, the Group's net income increased in a balanced manner Y-o-Y, and for 2 quarters straight over KRW 800 billion of current net income was posted. A solid improvement in the Group's overall business is being achieved, such as, increase in interest income and stabilizing provisions and SG&A.

In particular, the Group's 2020 Project's key pillar, our global business operation, is starting to show visible results starting this year. [Against] Q3, cumulative net income for the global operation is up 33.4% Y-o-Y, posting approximately $159 million. This is at a level similar to last year's net income of -- yearly net income of approximately $162 million, showing sound progress.

In the case of Shinhan Financial Group, we have continued for a long time to pursue a strategy to advance into global markets through localization with an emphasis in promising ASEAN markets. Strategic priorities for the 2020 Project is expansion into global markets and strengthening competitiveness in the capital market. And last July, we have completed a major organizational reshuffle and expansion to secure new growth engine for the future and to broaden and diversify our income streams as well.

Second, on the back of a differentiated loan strategy, centered around non- registered SMEs and stabilizing our NIM, the Group's interest income grew for 2 consecutive quarters. Shinhan has always been able to continuously expand our income base and lead the market through outstanding execution capabilities. This year as well through a differentiated growth strategy focused on non-registered SMEs and preemptive portfolio adjustment based on profitability, we are expanding our interest income base.

Third, through the same cost control efforts, SG&A growth rate is being stabilized. And as for the Group's credit cost ratio, it is down 20 bp Y-o-Y, posting 27 bp, contributing significantly to improving the Group's net income and this is possible due to an appropriate loan growth strategy based on risk management and maintaining our record strong asset quality.

Now let me go into more details of the Group's P&L on Page 4. If you look at the graph on the furthest left, the Group's interest income is approximately KRW 5.77 trillion, up 8.6% Y-o-Y. The bank's [Tier 1] loans in Q3 is up 4.0% YTD, or 3.2% QoQ, and through a differentiated growth strategy focused on non-registered SMEs for maintaining a healthy growth trend.

The bank's net interest margin is for Q3 1.56%, is showing a stabilized trend for 3 consecutive quarters. And on a cumulative basis, is up 6 bp Y-o-Y, posting 1.55% contributing towards the Group's interest income.

Next, Page 5. The Group's non-interest income in Q3 is down 13.0% Y-o-Y, posting KRW 1,110.5 billion. The biggest reason for the decline in non-interest income is the one-off gains from disposal of marketable securities that took place same period last year, and this year there was no such special one-off gains that occurred. On the other hand, the Group's fee income is up 9.8% Y-o-Y to post KRW 1,279.3 billion on the back of overall performance improvement of the fund, bancassurance, trust and IB business contributing to strengthening the income base.

And now moving on to SG&A. Our Q3 SG&A amounted to KRW 3,223.7 billion, a slight decrease of 0.2% Y-o-Y. Employee-related costs inched up by 2% due to a wage increase and et cetera, but the increase rate is kept at a minimum with Group-wide strategic cost cutting efforts, including efficient channel strategies and business process improvement. The Group's Q3 CI ratio improved by 2.2 percentage point Y-o-Y to 46.9%, maintaining a sub-50% level for 3 consecutive quarters.

And now the Group's credit cost. In the third quarter, the Group's cumulative loan loss provisioning was KRW 158.9 billion, a huge drop by 81.8% Y-o-Y, from KRW 871.2 billion. In Q3, the Group's recurring credit cost ratio recorded approximately 27 bp, exclusive of the one-off provisioning write-back worth KRW 360 billion, generated from Shinhan Card in Q1. As such, the credit cost ratio greatly improved by 20 bp Y-o-Y. In Q3, the Shinhan Bank's credit cost ratio fell significantly to 15 bp Y-o-Y from 35 bp. Shinhan Card showed a strong credit cost ratio of 135 bp, thanks to its best asset quality in history.

In Q3, the non-bank subsidiaries contribution to the Group's net income amounted to 40%, which is an improvement from last year's 35%. And now the major subsidiaries income. Shinhan Bank's Q3 cumulative net income was KRW 1, 695.9, up 12.2% Y-o-Y. The improvement was attributed to 10.5% increase in interest income, 56.5% decrease in credit cost and management of SG&A at 0.2%. Shinhan Card's Q3 cumulative net income was KRW 780.6 billion, up 46.6% Y-o-Y. Despite the decline in the small and medium-sized merchant fee income, the P&L is improving, due to an even growth in credit card, installment finance, lease et cetera, as well as stable asset quality management and sound provisioning management.

Other subsidiaries, namely Shinhan Investment Corp, Asset Management and Capital have expanded their sales base and recorded an increase of net income, Y-o-Y, by 83.2%, 42.2% and 122.2%, respectively. Shinhan Life's performance declined Y-o-Y, due to the disappearance of the one-off corporate tax gain a year earlier. But other than for the deferred corporate tax effect, the subsidiary is maintaining a fair P&L position.

Page 6, the Group's asset quality. As of quarter end, the Group's NPL ratio was 0.64%, improved by 0.08 percentage point Q-o-Q, recording a historical low. The delinquency ratios of the Bank and Card are both record low at 0.26% and 1.3%, respectively. As of September end 2017, the BIS ratios of the Group and the Bank are estimated at 15.2% and 16%, respectively. And CET 1 capital ratios are both 13.2%, each up by 0.5 percentage point and 0.4 percentage point YTD.

Shinhan Card's adjusted capital ratio as of September end was 24.3%, maintaining a stable level. From Page 7 and onward are the detailed information on the Group's and subsidiaries performance and major indicators.

This concludes the Shinhan Financial Group's 2017 Q3 earnings presentation. Thank you for listening.

Thank you. And now we would like to take questions from the analysts and investors. (Operator Instructions) So we'll get our first question. The first question is from HMC Securities, from Mr. Kim Jinsang.

I have 2 questions. First is, in this case, in this quarter the NIM is rather flat. And your loans' growth rate is quite high and so your overall performance is actually good. So the outlook for NIM and the annual sort of like the good target for the loan segment is my question. And secondly, sort of at the end of next year, the Basel III will be introduced, and you have enough capital. So including dividend, capital management, maybe not this year but starting from next year, we should have more visibility about the capital management strategies. So for the dividend policy or for the capital policy, the overall direction, is there any update to those directions? I would appreciate your answer to these questions. Thank you.

With regards the first question, the NIM, the Bank's Korean won loan growth rate was also explained to you as well. A special note this year is that Shinhan Bank's Korean won loan growth was not even across other previous quarters, but it was concentrated in this quarter, Q3. One of the reason for that is because for about 1 year, with regard to SOHO loan, so we have taken the time to lay the foundation. So it was rather slow, but starting from Q3, we have ended this review process. And in the case of cyclically sensitive businesses, we have tried to lower proportions and we have achieved even growth. And so already 70% of this year's -- our new target is achieved in this quarter. And so rather than even growth across the quarters, but if -- certain quarters see concentrated growth. Then in terms of funding, if you look at market rates right now, [the NIM], it should have improved by at least 1 bp every quarter. However, in Q3, the NIM, because of a temporary funding burden was rather flat for our Bank. However, our loan growth target for this year is already fulfilled. So going forward, given the market conditions, gradually, we believe our NIM will be improved. However, as you're well aware, there are some government policies that are posing regulatory issues. And so in the case of card, NIM, I think it will be difficult to improve in this [currently]. Yes.

Including the dividend, with regards to the capital strategy, let me take that question. As you're well aware, the BIS ratio is not low. And as Mr. Kim has noted, given the BIS ratio loan in terms of dividend or capital policy, it can become more flexible. However, the double leverage ratio and other regulated ratios need to be controlled and managed as well. And our Group, starting from this year, as we have noted, we have initiated the 2020 Project. And according to this strategy, the growth strategy compared to the past is becoming more broad -- broader compared to past. And so M&A yields are also included. So given all these factors, the overall direction of the capital policy is not all about the dividend, but we need to take a more flexible approach. However, the Group's overall capital policy is shareholder-friendly policy and strategy, that is the basic direction. When the 2020 Project ends in 2020, by March that year, if everything goes as planned, then the CET 1 ratio might even [rise] further. So not only dividends, but also other aggressive capital measures or policies can be possible by then. Thank you. With regards to the capital policy, let me add. Right now in the case of CET 1 ratio, it's fully stable, but as the CFO has noted, in the 2020 strategy, we have global and other inorganic growth targets. So we have to take all of these factors into account in the formulating our capital policy. And if we do a simulation of the 2020 strategy, our target growth and the targeted ROA, it is achieved and by 2020 our CET 1 ratio will also be more than sufficient. And if that happens, well not -- maybe not at the level of developed countries, but we will be able to engage in a fully shareholder-friendly policy, maybe not this year, next year, but by close to 2020, if we do the simulations now, it's not a far off future. Yes, it is possible. So please take -- please be referred about this as well.

Yes, we'll take the second question. It's from Franklin Templeton, Mr. Jung Moo il.

I have a question about the global strategy. You talked about the global [net effects] going up by 33%. So I have some questions about this. I know it may be tough, but in the global market, if you look at the assets and the debt, so what is the ROE level? And Shinhan Group is in Japan, Vietnam, Indonesia and is engaged in a global strategy, but it sounds a bit vague. So why is the growth rate high? So what's the background of such high growth? And the third question is, if you divide the bank and non-bank, about the high-growth businesses, what is the breakdown? And the fourth question is, in your global strategy, what is your ultimate goal? So what are some of the specific targets that you are aiming for?

Yes. I'd like to refer to some numbers in the global strategy and then the overall direction and philosophy will be added on by the other executives. The reason why we're going global is NIM, ROA, ROE, these financial indicators have been stagnating and the aging society is prevalent in Korea, but it's not the case in the other ASEAN countries. We are successful in Vietnam, and that's a case in point. The population in Vietnam is much younger than Korea and so the loan growth rate, NIM, ROA, these financial indicators look very sound in the Vietnamese markets. But yes, we do see some results in the global market, but we need to make some improvements. But because it seems the success is skewed towards Vietnam and Japan, and we need to replicate the success stories in other parts of Asia and as you asked in your question, the growth is mainly focused on the bank. If we add the non-banks, what should we do to further the growth in the non-bank subsidiaries in Vietnam and in Indonesia, in the leading ASEAN markets, we are using the banks and then we are venturing off into non-subsidiaries, like insurance and securities. And so that's what we are trying to expedite. But as for the non-bank subsidiaries, the merits are, the local regulations are a bit weak, so there is room for growth. But the downside is there is very few success stories of a Korean company that has gone global and has succeeded in non-bank subsidiaries. So we want to build best practices and combine that with the local circumstances.

Yes, I'm in charge of strategy in global market, what is the background of our high growth results? The access of the success stories overseas is Vietnam and Japan. In Japan, we have Shinhan's own unique niche markets we have developed. And so that was our key success factor thus far. And in Vietnam, we are behind localization, that is our key approach. And it has been very successful in retail banking. And some of the branches are doing corporate banking and the branch managers have been sent from Korea, but most of the branches are run by the local resources and retail banking is growing strong. And by next year, we have 8 channels in Vietnam and when they're integrated, we believe that the retail growth will be accelerated even further. And as for the non-bank subsidiaries, we do not see such visible results, but this year we are using the securities firm and we are going to Hong Kong, Vietnam and Indonesia. And we have added increased capital. And so next year, we are going to see some growth in the target markets and so compared to this year, next year we will see higher figure. And the last question was about what is our ultimate goal in the global markets. According to our Project 2020, we are doing very well in Vietnam, but in Indonesia, we want to grow further in Indonesia, because the bank business starts, and in 2020, we want the ASEAN market to be aware of the Shinhan brand. Shinhan Bank would like to gain such status in the market. Thank you. ROA and ROE was part of your question. So, overall, I'd like to just mention briefly, [SVJAI] -- we have a lot of capital in the countries. China is low, but as for the other countries, Vietnam, Japan and Indonesia, the ROA in these countries are 200 times higher than compared to ROA in Korea. The minimum is 50% higher in other markets. So for profitability, this is a green light for the Shinhan Group overall.

We will receive the next question from (inaudible).

I would like to ask a question about your subsidiaries. First of all, starting from August, there has been expansion of the merchant fee privileges that can be obtained by the some merchants. And the Shinhan Card has seen diminished net income, more than expected. So if you leave that, the Visa card, maybe it's not as low as it appears to be. So we'd like to know the impact of this merchant fee adjustment. And also Shinhan Financial Investment, you have seen the increase in your profits. Is this because of one-off factors that have led to such a higher profit? And finally, the Group's NIM, because the merchant fee issue -- the card segment, it has dipped a bit. Is it about 1 bp or was it larger, but because of the NIS factor, it was offset a bit, we would like to know more details about this.

So among your questions, the compression of cards, second quarter and third quarter, as we have said, the Visa card in Q3, we have [sold them]. The global stock market is really heated up right now, so we didn't believe that was necessary to sell it in the third quarter as well. But by the end of the year, we do have to sell it. That is our judgment. So if you exclude Visa factor, Shinhan Card is a recurring factor. So none have seen any significant decline, but as it has been predicted by the market, next year or the year following that in terms of price or in terms of interest rate, there will be some pressure, and that is for sure. In the case of Shinhan Card NIM, according to accounting standards, there is one that includes the merchant fees and there is one that excludes the merchant fees. And in terms of both standards, yes, there has been a drop, and for the point of view of Shinhan Card, starting from -- or after next year, the card's funding will no longer take place. So after next year, in the case of the Card business, there is a sense of crisis, and we are making preparations for emergency management. In the case of Shinhan Financial Investment, it does seem as the profits have risen a bit. However, it's not beyond the recurring range. But there has been a special one-off factor behind this slightly risen profitability.

With regards to the NIM, as we have said, in the case of Cards, in the short term, the NIM has dipped slightly. From an annual basis, the impact is negligible across the entire Group. The Bank's share is quite large and so compared to last year, Bank's NIM has gone up significantly and most recently it is being maintained at a very sound level, so the Group level it is quite fair.

And the fourth question from [Daishin Securities, Mr. Kim Jae Woo].

Yes, I have 2 questions. One is about the SME. So other banks have provisioned in Q1 and Q2 and for Shinhan it seems that you'll be provisioning in Q4. So what is your plan? A transaction was made, so are you going to go buy the stock price or are you going to go buy the book price and make up for the losses? So how much loss could we expect from the SME provisioning in Q4? And you talked about how difficult it would be to see a rise in Shinhan Card NIM. Of course, it could have to do with the merchant fee issue, but it also has to do with the delinquencies. The delinquencies will be improved and so, the cost on the delinquent loans will be decreasing. So I know it's hard to predict, but how much impact do you think it will have on Shinhan Card income?

Yes, I would like to answer your first question about the SME. The exposure at default is KRW 299.1 billion and the provisioning rate is 12.4%, equivalent to KRW 37 billion. And as [Mr. Choi] just mentioned, in Q3 we have extended or executed the loan, and how will we do the debt-to-equity swap, and how will we provision against that, as for that issue we have not confirmed yet. And so in Q4, we would probably need additional provisioning and we would probably decrease the amount. But as far the actual amount, nothing has been determined yet. And for your reference, in Q3, we have additionally provisioned KRW 6.3 billion and if a decision is made, we will communicate with the market going forward. And as far as the provisioning, I'd like to add a few more comments. IFRS 9 is ahead of us and so, empirically, we have made estimations and when some accounting standards change, then the financial institutions go through a transition period and they conservatively provision more. So that was the tendency in the past. So in Q4, we will probably take all these into considerations and provision in accordance with the accounting transition period.

So that is my guess. And as far that Card, yes, there are a lot of bad news about price, about delinquency, of cost. And so yes, we believe that the recurring income in Card will go down. If we were to simulate this, there are so many assumptions. So it's very hard to produce an exact number out of these simulations. But in order to gain some market share, some are engaged in cost competition, but we have abstained from that because we want to get rid of these bubble demand and we want to lay a solid foundation. And so we are prepared against unfriendly income loss and so we will tighten our belts and look at the reality. Yes. As for delinquent assets in Card, that's not a serious issue. So as a result, according to our estimates, even if the rates on the delinquent loans change, I don't think it will have a severe impact on the Card income itself.

There are no more incoming questions. So with this we would like to conclude the 2017 third quarter earnings presentation. I would like to thank everyone for taking part in today's presentation despite your busy schedule.