Shinhan Financial Group Co Ltd (SHG) 2017 Q4 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 taking time out of your busy schedules to take part in today's 2017 full year earnings presentation. We will now begin the 2017 full year earnings presentation.

In today's presentation, we have with us our Vice President, Woo Young-woong, Head of Strategy; and our CFO, Vice President, Jang Dong-Ki; and [Hyung Kim], head of the finance management team.

Today, after hearing our CFO, Jang Dong-Ki, 2017 full year business presentation, we will hold a Q&A session.

And now we will invite our CFO, Jang Dong-Ki, for the 2017 full year earnings presentation as well as Q4 earnings presentation.

Good afternoon. I am Jang Dong-ki, the CFO of Shinhan Financial Group. First of all, I'd like to thank the investors, analysts and journalists from home and abroad for taking part in the earnings presentation of Shinhan Financial Group.

Let me now walk you through the key financial highlights of Shinhan Financial Group 2017 business results. On Page 3 of the presentation material, let's start with the group income.

Shinhan Financial Group's 2017 full year net income is KRW 2,917,900,000,000, up 5.2% over last year and improving for 4 straight years since 2014.

During Q4, the net income came to KRW 211.5 billion, down 74.1% Q-o-Q, owing mostly to seasonal factors typical of the fourth quarter, including ERP, and impairment losses and provisioning.

Let me briefly summarize what's noteworthy of the 2017 business results. First, bank and nonbank subsidiaries alike all achieved balanced growth in terms of net income and maintained the net income growth trend for the fourth straight year.

Sales improvement of the overall business, including increase in interest income and stabilizing provisions continued. And especially last year, we became the first financial company in Korea to introduce an expanded matrix organization divided into GIB, global and digital businesses, to ensure differentiated strategic growth based on the 2020 smart projects.

[Such when] Shinhan efforts to enhance competitiveness have started to yield visible results. The net income of the global division of the bank is up 30.8% Y-o-Y [reaching] KRW 235 billion. This is a result of focusing on reinforcing profitability in the key Asian markets for quite some time. And this year, by engaging a broad range of growth strategy, we will do our best to expand and diversify our profit base.

The acquisition of the Prudential Vietnam Finance Company announced last month is also part of our strategy to identify new growth engines and will contribute substantially to accelerating globalization.

Secondly, our differentiated loan growth strategy of focusing on nonaudited SMEs and improving NIM have led to the group's interest income growth for 3 consecutive quarters. This year as well, through a differentiated growth strategy focusing on SMEs and based on systematic adjustment of the portfolio anchored on product visibility, we will continue to expand our interest income base, a key source of profitability for the group.

Thirdly, in Q4, we carried out the early retirement program at Shinhan Bank and Shinhan Card. In Q4, the number of applications received was up from last year, with the bank and card company receiving 707 and 199 number of applications and expense recognized were KRW 280 billion, approximately.

So with this latest round of efforts to reform our cost structure, we'll be able to further enhance our cost efficiency and profitability on the financial front. And organizationally, for the group, we will be able to establish a dynamic company culture that is characterized by strong execution and agility.

Finally, the group's recurring credit cost ratio posted 34 bp, down 13 bp Y-o-Y on the back of record strong asset quality and risk-weighted optimal growth strategy, greatly contributing to improving the group's net income.

Page 4, SFG income by category. As you can see from the table on the far left, the group's interest income reached KRW 7.84 trillion, up 8.8% Y-o-Y. Shinhan Bank's loan in won increased 1.9% Q-o-Q and 5.9% Y-o-Y through balanced growth in both retail and corporate loans. A robust growth momentum is maintained with the growth strategy of concentrating on nonaudited SMEs.

The bank's NIM improved 2 bp Q-o-Q to 1.58%, thanks to efforts made for active loan growth with defensive pricing policy, enjoying more low-cost deposits. On a cumulative basis, the NIMs of the bank improved 7 bp Y-o-Y to 1.56%, contributing to the group's overall interest income gain.

Now please turn to Page 5. The group's non-interest income fell 15% Y-o-Y to KRW 1.3412 trillion, mainly due to the disappearance of last year's one-off factor where there had been considerable gain on securities disposal. And it also has to do with impairment losses of approximately KRW 150 billion in Q4 2017. On the other hand, due to sound performances coming from the trust fund and bancassurance products, the group's fee income rose 9.3% Y-o-Y to KRW 1.711 trillion, contributing to a stronger income base.

And now moving on to SG&A. The group's SG&A increased 6.7% Y-o-Y to KRW 4.8112 trillion. This was due to the Q4 ERP. And if we exclude that factor, other nonwage-related expenses, such as advertisement costs, is continually decreasing. So overall, the SG&A is maintained at a sound level. We will continue to devote ourselves to strategic cost-cutting efforts to minimize the expense increase by employing efficient channel strategies and improving work processes. The group's CI ratio has been improved by 1 percentage point Y-o-Y to 49.3% and is at a sub-50% level.

And now the group's credit cost. The group's provisioning amounted to KRW 544.3 billion, which was a drastic reduction of 53.3% from last year's KRW 1.165 trillion. The group's credit cost ratio was greatly improved by 13 bp Y-o-Y to 34 bp, even if we exclude the write-back of KRW 360 billion from Shinhan Card in Q1. Shinhan Bank's credit cost ratio also significantly dropped from last year's 33 bp to 21 bp. Shinhan Card's credit card ratio is showing a robust 150 bp, thanks to the strongest asset quality in years.

Page 6, group's asset quality. As of year-end last year, the group's NPL ratio was 0.62%, a 0.12 percentage point improvement Y-o-Y and posting a record low level. This was possible because consistent risk management efforts paid off in bringing down the NPL by 11.5%.

The delinquency ratios of Bank and Card are at their historical lows of 0.23% and 1.27%, respectively. The group's and the bank's BIS ratios are estimated to be 14.7% and 15.4%, respectively; and their CET1 ratios, 12.8% and 12.7%, respectively. The group's CET1 ratio was up 0.1 percentage point Y-o-Y and the bank's down by 0.2 percentage point.

Shinhan Card's adjusted capital ratio at year-end was 24.5%, maintaining a stable level. The group's dividend per share for the fiscal year 2017 was resolved at KRW 1,450 at the BOD meeting. And if it is passed at the Annual General Meeting, then the dividend payout ratio is expected to be 23.6% and the dividend yield 2.9%. The decision has taken into consideration the rational level of capital in light of the regulatory movement for higher capital ratios. We will continue to implement our dividend policy with consistency, balancing both shareholder value and capital adequacy.

Page 7 and onward discusses more detailed information about the group's and the subsidiaries' performance as well as major business indicators.

This concludes the earnings presentation for the whole year of 2017 of Shinhan Financial Group. Thank you very much.

Thank you very much. And now we will be taking questions. (Operator Instructions) And English questions will be translated into Korean, so for those of you who post your question in English, please wait for the Korean translation, after which, the answer will be given. We will take the first question. It is from (inaudible) Securities, (inaudible).

I have 2 questions. First of all, in the fourth quarter NIM, the group -- the bank is quite healthy, but the group is rather flat, and I think that's because of the card business. The contribution from the card business was lower than in the past. And the reason, has been explained, that short-term loans has not been growing adequately and the funding cost is also a factor. And this year as well, I believe the situation is not that feasible. It will be difficult. So from a comprehensive point of view, including card and banking business, what is your NIM forecast for this year? Especially in the card business, is there any likelihood of the contribution from the card business going up? And second question is, in the case of last year, the 2020 project was a differentiated strategy that you had [before]. This was a mid- to long-term strategy that was presented by this group. In 2018, strategically speaking, what kind of differentiated plans do you have going forward?

In the case of the fourth quarter NIM and the 2018 NIM forecast, so as we have mentioned, the fourth quarter NIM, where the bank has been up by 2 bp, but the group's NIM is flat. This is because, in the card business, there has been a 6.5 bp decline. In the case of the card business, the funding cost, rather than that being a factor, regulatory pressures have been a bigger factor. And so at end of last year, 199 ERP applications were received in the card business. And so in order to overcome this business -- difficult business environment, there are a lot of efforts being made for cost control. And in the fourth quarter, such efforts, we believe, has been implemented quite well. In 2018, our forecast is that, in the case of the banking segment, the NIM will increase moderately. But if you look at the profitability curve, it is changing slightly, so there might be some fluctuations there. But our forecast is that basically, there will be a moderate increase. But in the case of the card business, we believe the NIM will decline slightly. But starting from last year, with regards to drop in NIM, we have been coming up with counter responses, such as cost control efforts. And so my perspective, the card business is well prepared for cost control efforts. And in a new business environment, we will identify new game rules as the first mover in this environment. And we do need to adjust ourselves to this new environment.

Yes. I am the Vice President in charge of strategy. With regards to 2020, the action plan for 2018, what is different from other companies. Broadly speaking, last year, the 2020 project was a time where we are designing the details of the project. And based on this road map, all kinds of infrastructure and the structure has been completed. And this year, in 2018, this completed road map, based on this, in each segment, we will take concrete actions and generate visible results. That is our basic plan going forward. So in more detail for each segment. In the past, we had traditional strengths in the banking sector. These areas, we will strengthen our key competitiveness. Continuous efforts will be made in that front. And for new areas, capital market is our key focal point. We had a JV launch last year, and GMS earlier this year was launched. The proprietary assets of their company will be managed by this business unit, so this is a new organization that has been launched. And so we intend to ensure that our profitability is further strengthened going forward and the JV segment as well. And GIB also produced concrete results last year, but we're going to further enhance its profitability from GIB as well. And in the global segment, we had some results last year. But this year, in terms of numerical values, we will have a strong result as last year, more, as has been explained to you in the presentation. In the Vietnam market, in the nonbanking M&A segment, we had some acquisitions. And so our competitive business strengthened in that area. And in Indonesia, the banking integration, IFRS, have been completed last year. And so starting from this year, we will start operating in earnest. So that's another factor to consider. And another key focal point is that, in the key markets in the Southeast Asian markets, inorganic growth will continue, so that will lead to differentiated results in the global markets. So this year, when the results are presented to you after the quarter is over, we will be able to present to you more differentiated numbers. So to our investors and shareholders, I think we will be able to deliver some good news, so please give us your continued support.

Yes. Moving on to the second question, it's from DB Investment, Lee Byung Gun.

I have 2 questions. First, CET1 ratio is maintained at a fair level and the government is strengthening regulations -- is planning to strengthen regulations, and we have to be Basel III compliant and compliant. And so how will these regulations affect your CET1 ratios going forward? And if all these are taken into consideration, by the year-end, what is your target for the capital ratio? And my second question is rather simple. It's related to IFRS 9. CET1 ratio could be affected, but since you have Life Insurance, because of the asset classification, there could be some volatility in your PL by quarter. So of the assets that were not classified, are there any changes in the asset classifications?

Yes. Let's talk about the capital ratios first. Right now, SFG, the group and the bank, we are both targeting -- we have the buffer capital. We want to have 1% for CCC buffer, and so CET1 ratio 12% and BIS ratio 13%, and a total of 15% for the BIS ratio. But as of now, the group and the bank, because of the -- well, the subordinate bonds, they are being absorbed in the market well, and we don't think we need to catch up with the subordinate bonds that much. We need to think and concentrate more closely on BIS ratio than CET1 ratio. It's in the range of 12.7% and 8%, but we want to -- if the standard regulations are going to increase, our AW might be pressured. And in our Project 2020, our target is to alleviate any of the financial uncertainties. So we have until 2020 to have more capital buffer. And if that is possible, then the next step we can take is increasing shareholder value. So I think we have many means to contribute to shareholder value. And as for the capital ratios, at the group-wide level, we believe it will be maintained at a similar level to this year. And as for the banks, if there are many regulations that changed, it could have a positive factor and it could have a negative impact, but we believe that the capital ratios will continue to improve. And in relation to IFRS 9, as for Life, we could make many choices, but if we think of ourselves as other insurance companies that are now part of financial holding companies, we want to safeguard our Life Insurance subsidiary, so we want to adopt an accounting measure that is more protective. And our VP of Finance will give you more further explanation. There are going to be 2 changes in the accounting IFRS 9 on the asset side, that has a lot more volatility on the marketplace, and IFRS 17 will kick in in 2021. And since there is a time lapse according to the accounting principles, there could be an -- so we have a transition, and IFRS 9 could be suspended and IFRS 17 has -- we have still that much room to prepare. And group-wide, we will apply IFRS 9. But as for Life, by the year 2021, we will not apply IFRS 17 until then.

Yes. We have not received the next question yet, so we will wait a while for the next question. For your reference, let me provide further explanation while we're waiting. Today's earnings presentation materials -- this presentation material can be viewed again through our IR app -- the IR app, if you download this application. Not only today's earnings presentation, but the past earnings presentation materials or disclosures can be viewed. So it's very accessible. So please make use of this IR app.

Yes. So we received our next question from DB Financial, we have another question. This is another simple question that, by 2020, the accounting method and other uncertainties exist. So concerning this, you're going to have more buffer for the capital ratio, and there are many ways to achieve that. That's what you said. But compared to what we have seen in the market, the dividend payout ratio and the dividend amount itself is rather lower than in the past. In the case of the dividend payout ratio, we had expected it to go up. And of course, the regulators, they have conveyed several opinions that was reported. When deciding the dividend payout ratio, what are the factors that you took into account? And given your current calculation this year and up until 2020, what will be the general trend, the direction of the dividend payout ratio? I would appreciate such guidelines.

With regards to dividend payout ratio, starting -- compared to last year, it is down by 1.2%, that is true. In making this decision, there were some factors that we considered. First of all, the Vietnamese acquisition, the scale was not that large, but they are -- it's over 20% for this company. And so at the global segment, we will not undergo any excessive M&As or overpay for any acquisitions. However, for those that have the potential for the synergies with existing subsidiary, we will continue to pursue such M&A opportunities. And we will seek companies that have an ROE of over 20%. So through such methods, I think we can further raise our ROE. And the current backdrop is, as has been widely reported, the market volatility is going up quite substantially, and that means the credit cycle is healthy and the capital market is a bull market. However, this cycle does have an end, that is a source of concern. And if it will near that end, volatility will widen, and temporarily, there may be market shocks. And so in this case, not because of regulatory opinion, but our own internal decision is that Korean won is not international benchmark currency, and so we do need to have preemptive buffers in place. And after that is fulfilled, there are many ways that we can implement enhancement of shareholder values. Across the world, interest rates are being raised, and so using only dividend, managing shareholder value is not the only way. Aside from dividends, we can also consider capital gains. So various methods, various means can be considered. Going forward, up until 2020, the capital policy is -- compared to the past, we will engage in more diversified method. We will not rely solely on dividend policy, but also look into other alternative, other options in order to enhance the shareholder value. Thank you very much.

Yes. Next question is from SK Securities, Kim Do Ha.

I have 2 questions. I have question about NIM. It seems that there has been a change in the NIM figures, excluding the merchant fees. And so I was wondering if you have changed the policy and are you looking for M&A opportunities not only in global markets, but also in the domestic market? And could you elaborate on -- in which business segments?

Yes. As for the NIM, according to the accounting principles, the merchant fees are not included. And in 2011, when IFRS was adopted, the time series data could have been easily compared, and that's why the merchant fees had been included. But now -- as of now, according to the accounting principles, the NIM shows the figures net of merchant fees. And as for the inorganic growth strategy, since last year, we have been talking a lot about our inorganic growth. This is our thinking. In the past, when there were big M&A deals by Shinhan, there were success stories. And internally and also externally, people think that we have a good success rate of M&A. But Chohung Bank, LG Card, I think they were exceptional because if you think about M&As, we have to do a lot of searching, due diligence, and we have to have accumulated knowledge in order for these deals to succeed. And we should not chase after M&A deals. We should not overpay. In the case of the Korean domestic market, there are not that many candidates that require our ROE target of over 20%. We are closely watching the markets, and we want to have a good benefit that is in line with our ROE 20% target and also with our Project 2020, and we will take time. Especially for the Korean candidates, we will take time and search for the right partners.

Yes. I would like to add a few words on the M&A strategy. We have our core principles for our M&A deals. There is limit in ROE, limit in just the domestic market. And in order to go overseas, we have to partner with a company with -- that is in an industry that can free us from those restrictions. And we have to think about scalability and future growth. There is limitations in the Korean market, so we have to partner with rather a global player. So these are some of the principles that we abide by, and we are searching for the right M&A candidates.

Yes. We'll receive the next question from BNP Securities, Mr. Cha Munyoung.

I am from BNP Securities. My name is Cha Munyoung. I have 3 questions. First of all, in 2018, with regards to the forecast, specific numbers will be appreciated. But as much as you can share, how do you forecast the 2018 year as a whole? And in 2018, what is, in your view, the greatest risk factors? There are market volatilities and the ending of the credit card cycle. I think you mentioned those factors -- those risk factors for them. How likely are they, in your view? And what are other risk factors in your view? And second question is, this might be a similar question to what has been asked before, but with regards to dividend, in the past, you have indicated that gradually, in a sustainable manner, you will expand the dividend, so that kind of indications were given out in the past. But I think there has been a slight change in tone. According to our understanding, highly profitable and the focal markets is Southeast Asian market M&As, I think you're giving priority to those markets. Is that true? And I think there have been a number of one-off factors. So although they're minor, please summarize those one-off factors.

In the case of 2018 forecast, because we have fiscal year policy issues, we can't give out any concrete details. But in the case of the corporate income tax hike, that is considered and there will be some minus factors because of that. However, in terms of interest income, there will be a steady growth. In the case of noninterest income, starting from this year, in the invested securities, I don't think any gains are to be expected. So the noninterest income segment will be normalized starting from this year. In the case of noninterest income, last year, one-off factors were reflected, and it was down over the previous year. However, in 2018 compared to 2017, noninterest income can improve. In the case of SG&A, actually, it enjoyed the brightest prospect, since last year, our major subsidiaries had engaged in preemptive cost control in restocking with that effect. And so this year, in the case of CI ratio, it will be very stable. And then finally, in the case of credit cost ratio, we are rather cautious about mentioning about this because for the past several years -- or compared to the past, this year's credit cost ratio has been rather low, and we said that it will be difficult to maintain that level. However, we were able to achieve lower levels of -- however, because interest rate hikes are continuing, last year's [income] level was 34 bp, I think a slight increase is possible. In the case of 2017, despite the interest rate hike, the credit cost ratio has gone down, so it was an exceptional year. In 2018, we need to see whether that kind of trend will continue. But compared to 2017, we believe credit cost ratio will be raised slightly. And by segment, in the GIB sector, we do expect higher profits and globals, our group's strength will continue. And GMS, which has newly launched, because the market volatility has increased this year, we can't be too aggressive. However, the bank's asset management capabilities of securities will be enhanced through the asset management company's level, and so we can look forward to good results. And the greatest risk factors for this year is, last year, noninterest income has gone down. However, in terms of fee income, there has been good results. And in the case of trust and fund, there were very strong results. However, because of the market volatility increase, in terms of managing customer factor, we need to be more cautious. So I believe there is a risk factor in that area. And recently, market confusion has increased because there were concerns that United States might raise interest 4 times. Even if there are 4 interest rate hikes in the United States, the BOK monitor policy will become that much difficult to manage. And so if this is realized, that will post that much greater risk for us as well. With regards to dividend, as we have mentioned before, for the past several years, [and on] the risk-free interest rate has been -- risk was low. But recently, yield GAAP, the risk-free interest rate has gone up. And so rather than focusing on dividend, we should also pay attention to capital gains. And that kind of shareholder value policy is necessary in our view. And so including M&As with high ROE, so we will look into a myriad of different ways to enhance shareholder value going forward. With regards to M&A, our regional focus, there was a question about that as well. We have said our priority is on high-growth markets, the Southeast Asian region. Also, in the case of financial companies, they are achieving stable growth, so that is our priority. However, having said that, we're not looking only in those segments across the entire global markets. The 3 principles that I have aforementioned, these are criteria. If they are fulfilled by the candidates, we will actively pursue those M&A opportunities. And in Q4, the one-off, I'd like to give you information. In Q4, there were majorly 3 types of one-offs. And as was explained earlier in the presentation, contrary to the market consensus, the one-off, the greatest amounts came out from ERP. If you look at the 5-year trend, it was about KRW 100 billion to KRW 120 billion in that range. But in Q4 2017, the ERP was KRW 285 billion, and so twice the 5-year average. So that was the one-off that stood out. And second, provisioning; and third, impairment loss. They did have an impact. I'm sure you're aware of the SME. We provisioned about KRW 30.6 billion and a total of about KRW 120 billion of provisioning, including for the SME. And as for impairment loss, there was KRW 147.6 billion for D'Live. And it could be summarized into 2, I presume. So that was the ERP cost. The SG&A was larger, and provisioning and impairment loss. Because these were recognized, these were the major one-offs in the Q4.

It seems there are no further questions. With this, we would like to conclude the business results of Shinhan Financial Group FY 2017. I would like to thank you for your participation. Thank you.