Shinhan Financial Group Co Ltd (SHG) 2018 Q1 法說會逐字稿

Good afternoon. I am Yu Sung Hun, Head of the IR team. I would like to thank everyone for taking part in today's earnings release for Q1 2018 despite your busy schedules. We now begin the 2018 Q1 earnings presentation. In today's presentation, we have with us our CSO, Woo Young-woong; and our CFO, Jang Dong-ki; and [Hyung Kim], head of the financial management team. Today, we'll first invite our CFO, Jang Dong-ki, to deliver the 2018 Q1 business results and then have a Q&A session.

Now I like to welcome our CFO, Jang Dong-ki for the 2018 Q1 earnings presentation.

Good afternoon. I am the Group CFO, Jang Dong-ki. First, I would like to thank our investors, analysts and journalists from both home and abroad for participating in today's earnings release. From now on, let me walk you through the main highlights of Shinhan Financial Group's 2018 Q1 business results. Please refer to Page 3 of your presentation deck, the group's income. Shinhan Financial Group posted KRW 857.5 billion in net income in Q1 of 2018. There appears to be a decline of 14.0% Y-o-Y. But if we exclude the one-off factor of KRW 360 billion in provisioning write-back that happened in Shinhan Card last year, the recurring net income is up 18.9% and showing healthy improvements in earnings. Let me briefly summarize what's noteworthy about the business results of Q1 2018.

First, based on a diversified profit base and continuously improving profit of the non-bank subsidiaries, quarterly recurring net income reached over KRW 800 billion confirming our ability to generate stable profit. Not only the group's interest income, but across the board our operational fundamentals continues to strengthen including increasing fee income and stabilizing provisions. With regards to capital markets and global business, the 2 key strategic directions to the group's 2020 smart project, visible results continue to be generated. Last year after the launch of a GIB organization for the first time in the Korean financial sector, operating revenue from GIB grew 20.9% Y-o-Y to reach KRW 147.4 billion. The group's financial products related fees have also expanded led by PWM channels.

In particular; securities, brokerage commissions and trust fees are up 60% Y-o-Y exhibiting significant growth. The bank's global business net income in Q1 falling last year is up 45.5% Y-o-Y posting KRW 76.1 billion. Secondly, in the retail and SME loans as we balanced growth in Q1, 1.0% growth rate was achieved. Growth in quality based on profitability and stable funding has led to sustained improvements in net interest margin resulting in solid interest income performance for the group. This year as well, we intend to implement an optimal growth strategy in consideration of both profitability and risk, focusing on high credit-worthy SMEs to expand the interest income base of the group. Third, with increase in other general administrative expense in Q1, the group's SG&A is up 2.1% Y-o-Y.

But through efficient channel strategy and intense business process, including expansion of digital customer base and digital operations, the group's CI ratio is at a 5-year low posting 44.5% attesting to visible improvement in cost efficiency and profitability. Finally, starting from this year despite the upward pressure on provisioning due to the implementation of IFRS 9, our growth strategy that takes various risk factors into account and preemptive risk management has resulted in credit cost ratio of 27 bp for the group contributing to enhanced group's net income. On Page 4, let me provide a more detailed breakdown of income. On the graph to the farthest left on Page 4, the group's interest income stands at around KRW 2.06 trillion, up 10.1% Y-o-Y.

The bank's loans in Korean won grew 1.0% Y-o-Y through loan growth focused on SMEs thus maintaining a healthy growth trend. The group's net interest margin also comes to 1.61% in Q1, up 3 bp from last year adding to the increase in the group's interest income. Next, Page 5. The group's non-interest income posted KRW 384.4 billion, up 29.3% Y-o-Y. The reason for such strong growth of the non-interest income is due to the significant increase in valuation gains and fee income related to FVPL financial products. Fee income despite a falling credit card fee income owing to the emergency cuts because of the increase in securities brokerage fees and financial product sales commissions is up 24.5% Y-o-Y. And now I'd like to talk about SG&A. The group's SG&A increased 2.1% Y-o-Y to KRW 1,087,000,000,000.

This is because other general expenses including rent went up 4.2% Y-o-Y. We expect our efforts to strategically cut cost through the digital platform will help manage the SG&A growth rate at an adequate level. The group's and the bank's CI ratios were improved by 4.7 percentage point and 5.2 percentage point Y-o-Y to 44.5% and 43% respectively. Now the group's credit cost. In Q1, the group set aside KRW 179.2 billion for credit loss provisioning. The credit cost ratio was maintained at 27 bp, a 7 bp improvement Q-o-Q. Shinhan Bank's credit cost ratio recorded 16 bp, a huge improvement over the past 5 years average of 30 bp and is showing a steady improvement. It is worth noting that Shinhan Cards credit cost ratio reached its historical low of 142 bp, which is a 27 bp improvement Y-o-Y.

Moving on to Page 6, group's asset quality. As of March end, the group's NPL ratio came down to 0.64%, a 0.12 percentage point improvement Y-o-Y. This was possible because NPLs were reduced by 9.4% thanks to consistent risk management efforts. The bank's and the card's delinquency ratios were 0.3% and 1.37% respectively, which were an increase of 7 bp and 10 bp Q-o-Q each but they improved on a Y-o-Y basis. The group's and the bank's BIS ratios were estimated at 14.8% and 16.3%. Their CET1 ratios were 13% and 13.3% respectively having grown 0.1 percentage point and 0.5 percentage point Q-o-Q. Shinhan Card's adjusted capital adequacy ratio was 23.2% this quarter, maintained at a stable level. Please refer to the remaining slides for the group's and the subsidiaries business performance and major indicators.

Finally, I would like to update you on the progress of Shinhan Financial Group's mid-term goal, 2020 smart project, by breaking it up into 4 major strategic areas. First, for the group's balanced growth strategy, a 2020 strategic platform was built leading to the non-banks net income growth rate of 34% Y-o-Y and non-interest income growth rate of 29%. To include a new future growth engine in the group's business portfolio, Shinhan REIT's management was launched. We plan to take bold steps and implement diversified growth strategies to create 1 Shinhan synergy in a speedy manner. Second, glocalization in the global businesses is going as planned showing visible results such as global banks' income growth rate reaching 45%. As of December last year, the acquisition of ANZ Vietnam's retail division has been completed.

And in January as the first large-scale non-bank M&A in the group, an agreement was signed to acquire 100% of PVFC shares, a Vietnamese retail financial company. As such, many inorganic growth strategies have been put to action. Going forward, we'll continue to strengthen the profit base in the core markets and achieve superior performance and results. The third point has to do with the task of upgrading to enable Digital Shinhan. To provide differentiated customer experience, we have transformed the platforms for major subsidiaries including card and bank since last year. In March, we launched the integrated platform's Sol app for the first time in the financial industry and currently serve 8.29 million digital customers.

The diversified digital platform has increased its contribution to the growth of operating revenue and in the first quarter, the operating revenue recorded KRW 280.3 billion. Lastly, in order to succeed and grow Shinhan Financial Group's organizational culture, we established a Shinhan Culture Leadership center in January and created a disciplined system for fostering and managing business leaders. We will continue to play a role as a sustainable financial company by providing compassionate finance. Thank you.

Thank you very much. And now we would like to take questions. (Operator Instructions) And for your reference, the IR materials can be accessed through the IR app on your tablet, PCs or your phones and the IR presentation that we are delivering to you right now will be soon uploaded. So please make full use of these materials. And other than the IR materials, we have also uploaded the Annual Report on corporate governance and the e-brochure for the Shinhan Financial Group in our website. So please make full use of these as well. We will take the first question. It is from HMC, Mr. Kim Jin-Sang. Mr. Kim.

I have 2 questions. First, this quarter's NIM has grown in a marked manner. Last year the NIM did not increase significantly, but within the bank it showed upward movement. And so the annual NIM -- do you foresee that the annual NIM will be as solid and also are you foreseeing an upward adjustment of the forecasted NIM for this year? And secondly, the CET1 ratio also has improved significantly in Q1 and is there any possibility of an upward adjustment of the year-end figures and dividend payout ratio or your capital policy? Would there be any meaningful improvements in this regard as well? I present you these 2 questions.

So let me take the question on the NIM. So with regards to the NIM question; for the bank and -- 4 bp for the group, the 3 bp for the bank. Well, this is something that we have expected largely. For the group, it's 4 BP and this is because the card's NIM last year by quarter it fell slightly, but it stabilized in this quarter, the first quarter and card's operating asset has grown. And so in terms of card even if the NIM does not go up, the margin is quite high and so the card's asset growth has contributed to the NIM increase for the group. It's not very easy to make predictions for the year-end, but our financial plan targets are bit stretched. But if you look at the market situation the pace into Q1, I don't think the pace will continue till Q4 especially the interest rates of U.S. and Korea are decoupling -- starting to decouple and so the pace we don't think will be maintained up until the year-end, but the appropriate pricing for the loan assets and also for the card. Last year we went through a difficult period and we tried to raise the efficiency of card and so we tried to improve our sales performance and if the results will come through, then we do believe that NIM will continue to gradually improve. However, as I've said, Korea's interest rate I don't think it can -- it might not be raised as much as expected so the improvement of pace may not be as rapid. And also regarding the CET1 ratio, it is continuously being improved and this quarter there's hardly any special factors and at the recurring level, we have about KRW 850 billion. So if this continues , then the CET1 ratio will also improve and with this improvement in CET1 ratio in terms of capital policy, well our priority is to have a good portfolio. After 2007, we did not expect any major changes. So in keeping with a changing environment, we are continuing to adjust our group portfolio. Of course this has to align to the market situation, but this effort will continuously be made. And so optimizing the group portfolio will be our first priority. And if the market situation is not as favorable going forward, then the dividend policy and the capital gains in terms of the overall profitability management policy, we'll look into these issues. But at the present moment, we do have this capital capability and we're going to place first priority on adjusting the group portfolio. If that is not feasible going forward, then we will look into the dividend and the capital policy.

Thank you. We'll take the next question. It's from Franklin Templeton, it's Jung Moo Il.

I'm Jung Moo Il from Franklin Templeton. I have a question about the retail loan growth. As of the 16th, the head of FSS said that the loan growth rate for the retail sector will be guided at 8.2% and what is the role as a private sector for the mortgage rules -- mortgage loans and that was the fact announced by the authority. And so because of loan management policies of the government, there is the market expectation that there will be some pressure for the commercial banks to extend loans to the household. So I think there is a gap in the market consensus and the bank and the government. So what is your strategy for the retail loan and what are your policies going forward?

I'll talk about the retail loans. As for Shinhan Bank for the past few years in the retail loan sector, we have been mindful of the serious issue of the retail loans nationwide so we have been very prudent. As for the mortgage loans, there was not much growth rate and we have securitized these mortgage loans and that's why there was not much growth rate visible. But we see that overall in the retail loans, the growth of mortgage loans should not be too high, we don't think that is desirable. So the policy that we have maintained for the last few years will be sustained. And so the mortgage loans will be repressed, but in terms of other types of retail loans, we have our own targets for the growth track and they would include SMEs and SOHO loans. In the first quarter these loan growth was not that high, but if we subtract the corporate loans, the SME loan growth was fair and moderate enough. In 2016 in SOHO loans, it was a cool down period and there was a chance for us to check the asset quality. So we don't -- we are not really mindful of what the other competitors are doing. We have our own guidance and our guideline for asset quality so we are moving at our own pace. That is our retail loan policy.

We don't have any more incoming questions so we will wait maybe for more questions. We will receive the next question. The next question is from Hana Securities, [Mr. Sung].

I'm from Hana Securities. One of the questions that were asked, I want to ask an additional question related to that. It's a very simple question. You talked about the capital policy that you're going to be aligned with the environment that you need to adjust the group portfolio that will be your priority. Of course the general direction has already been communicated, but more specifically can you provide a detailed explanation about this?

With regards to the group portfolio, I'd like to [run] the existing business lines. Among the business lines, we have some that are stronger and some that are weaker than others and how we're going to complement these weaker ones. And one of our key growth strategies is global strategy and so for the global market, how are we going to approach this market? And in January, as our CFO already mentioned, the PVFC is promising opportunity-wise so we're looking to them. So steadily and proactively we'll look into these opportunities going forward. But in implementing an M&A strategy,1 of the key principles that we abide by is not to go overpacing -- not to overpay portfolio that can improve our group's portfolio. That will be the ultimate objective of our M&A strategy.

We will take the next question. Back to Mr. Jung Moo Il from Franklin Templeton.

I forgot that I had another question to ask. Page 7, it talks about KRW 280 billion operating revenues from the digital platform. So how did you achieve this number and what are your growth strategies in terms of the digital platform?

So this is part of the 2020 project and we try to analyze what we are achieving through our digital transformation. It's not that -- this number did not come out of the blue. We did have such results. We have launched a Sol app and we tried to analyze how effective that is in the results. So KRW 280 billion we do not have the system capability to manage other than the bank and about 55% of the revenue is EBITDA so that could be recognized as our income before tax. In the digital platform, we do not have exact numbers and we do not have the accurate system for analytics purposes, but we are trying out this digital platform for the first time and we want to measure how much impact it has on our operating revenues. And I think it will take some time before we can finally and granularly come up the accurate numbers, but please keep in mind that 55% of the KRW 280 billion would be income before tax. In relation to the digital strategy, I'd like to make some more comments. We are now implementing the digital transformation and the first reason is we want to reduce the cost by applying the technologies. So that is our first goal. And to mention some specific examples and references, we have the tellers at the kiosk in the branches and now we converted that to tablet so there is less time that is consumed per consumer. And with the backup of such technologies, we had 700 people who signed up for the ERP and we are looking into another opportunity right now. The digital technology is going to implement the sales force and it could garner additional revenues. So to elaborate on that, we have the Sol app launched in January this year, it's an integrated app and with this app, 370,000 new customers were added to our customer base just with this app in the first quarter, in the first month. And for the Shinhan Financial Investment Corp., there is the [Sintec Company] Toss, which engages in money transfer and CMA account of Shinhan Financial Corp. is included in Toss and we have provided a platform in which small amounts of money could be transferred. And 450,000 new customers were created for a securities company, it's 460,000 new customers added, then this is a very high number of net new customers. We see that there are young customers and the volume is about KRW 100 billion right now. So there are a lot of new tools being developed and it will help create new customer base and garner new revenues. So that's our expectation.

There's no more additional questions coming in so we will wait for a while for further questions. There's no more further questions. So with this, we want to conclude the earnings presentation for Q1 of 2018. I like to thank everyone for taking part in today's earnings presentation despite your busy schedule.