Shinhan Financial Group Co Ltd (SHG) 2018 Q3 法說會逐字稿

Good afternoon. I am Yu Sung Hun, head of the IR team. I'd like to thank everyone for taking part in today's earnings presentation.

I would now like to begin the 2018 Q3 earnings presentation.

Today, we have with us Vice President Woo Young-woong, in-charge of strategy; and our CFO, Jang Dong-ki; and Managing Director Kim Geun, who is in-charge of finance. In today's earnings presentation, there will be a presentation made by our CFO, Jang Dong-ki, on the business results of Q3 2018. And then we will have a Q&A session.

And now we would like to invite our CFO, Jang Dong-ki, for explanation of the business results for Q3 of 2018.

Good afternoon. I am Vice President Jang Dong-ki, the group CFO. First of all, I would like to thank investors, analysts and journalists from in and out of Korea for taking part in the earnings presentation of Shinhan Financial Group.

From now on, let me walk you through the main highlights of Shinhan Financial Group's 2018 Q3 business results. We will begin from Page 3 of the presentation deck, titled group's income.

Net income of Shinhan Financial Group in Q3 of 2018 is up 3.7% Y-o-Y, posting KRW 847.8 billion. And cumulative net income is KRW 2,643.4 billion, although it appears to be down 2.3% Y-o-Y when excluding the one-off card provisioning write-back of last year, same period. Quarterly net income is up 8.8%, maintaining a solid improvement.

The results of the 2020 SMART Project, which has been building up since last year, is becoming more visible and bearing fruit. Let me briefly, some of the key highlights of the performance for Q3 2018. First, driven by balanced growth between the bank and non-bank subsidiaries for 3 straight quarters, ordinary net income of over KRW 800 billion has been posted, attesting to the sound recurring profitability of the group. Net interest margin has stabilized into stable funding and lending as well as balanced group strategy between SMEs and the retail segment. This has led the interest income of the group to grow for 3 consecutive quarters. Going forward, we intend to continue to expand our profit base through a balanced growth strategy and a portfolio adjustment focusing on profitability.

Second, the key strategic pillar of the group's 2020 SMART Project is the global business division and GIB division, which are seeing accelerated income generation. The net income of the bank of global business is up 24.4% Y-o-Y. It compares to KRW 244.8 billion. And GIB posted KRW 379.6 billion in operating income, up 52.2% Y-o-Y through an expanded system of One Shinhan in collaboration.

Third, the group's SG&A in Q3 is down 3.3% Q-o-Q on the back of stabilized general and administrative expenses. Also, efficient channel strategies and business processes improvements translated into expanded digital customer base, resulting in the Q3 CI ratio posting the lowest level in 6 years of 44.0%, demonstrating that fiscal cost efficiency and profitability improvement continues.

Finally, systematic and proactive risk management continues, reconfirming Shinhan's strength and in credit risk management.

The group's NPL ratio is at a record low, coming down to 55 bps. And the credit cost ratio has seen downward stabilization, posting 27 bps, thus contributing to the group's improving net income.

On Page 4, let me provide more details about each income item.

Now if you look at the table at the farthest left. The gross interest income is up 10.1% Y-o-Y, to reach KRW 6.35 trillion. The bank's Korean won loan is up 5.0% over last year, maintaining a solid growth trend. The net interest margin of the bank, despite the fall in the market rate in Q3, is down only 1 bps, standing at 1.62%, contributing to the increase in group's interest income driven by qualitative asset growth strategy and stable funding of deposits -- funding of low-cost deposits.

Next, on Page 5. The group's noninterest income is KRW 1,061 billion (sic) [KRW 1,161], up 5.1% Y-o-Y. Income related to marketable securities is down 13.1% Y-o-Y due to the impact from a bearish capital market, but fee income is up 15.3% Y-o-Y on the back of securities brokerage and financial product sales commissions.

Let me now move on to SG&A costs. For Shinhan Financial Group, the SG&A cost at KRW 3,302.6 billion is an increase of 2.4% Y-o-Y but decrease of 3.3% Q-o-Q. The costs, we expect, will come well under control as strategic cost-cutting efforts begin to bear fruit. For your information, CI ratio for the group and the bank recorded 44% and 43.2%, improvement of 2.9 percentage point and 3.1 percentage points, respectively.

Next is credit costs for the financial group. Shinhan Financial Group's Q3 cumulative credit cost provisioning is KRW 568 billion, with a credit cost of 27 bp, which is a record low for Q3 of any given year. The credit cost ratio for the bank remains on a stable trend at 10 bp, far lower than past 5 years' average of 30 bp.

Page 6 covers the group's asset quality. At the end of September, NPL ratio for the group posted record of -- record low of 0.55%, an improvement of 0.47 percentage points compared to the previous year. NPLs dropping by 5.2% as a result of consistent risk management led to the record number. Delinquency ratio for the bank and the credit card stand at 0.6 -- 0.26% and 1.44%, respectively. Tentative numbers for the group and the bank BIS ratio at the end of September 2018 are 15.3% and 16.4%. CET1 for the group and the bank were up from the end of last year 0.1 percentage point and 0.05 (sic) [0.5] percentage point to 13% and 13.3%, respectively.

Capital adequacy ratio of Shinhan Card at the end of September was kept stable at 21.7%.

Please refer to the rest of the presentation deck for more detailed earnings results and major indicators.

Now on Page 7 I would like to present you the progress on the 2020 SMART Project, group's mid-term goal by 2020 by breaking down by major strategic tasks.

First, in terms of strategies for the group's balanced growth, building of 2020 strategic platform has led to continued and balanced growth between the bank and other subsidiaries. The bank and the non-bank subsidiaries saw their net income grow by 13% and 14% Y-o-Y, respectively. Interest and noninterest income were also up 10% and 15%, thus maintaining steady growth trends. To strengthen non-bank business competitiveness, announcement to acquire Orange Life was made last September. Shinhan Investment Corp. launched an asset management fund in Indonesia, a first for a Korean financial institution.

Second, glocalization in relation to globalization continues to do well, with the bank's global income growing 24%. Net income contribution by the global channel reached 13%, mainly from the core Asia markets helping to overcome the growth limitation within a Korean market.

Lastly, the progress on the upgrade to Digital Shinhan. Since last year, platforms of major subsidiaries such as the bank and credit card were broadly reformed. Contribution by the diversified digital platforms to the growth of operating revenue continued, recording KRW 712.9 billion cumulatively in Q3. Shinhan Financial Group, with its clear orientation towards execution, has boldly implemented differentiated growth strategies. Going forward in 2019, efforts will continue to ensure sustained financial innovation through consistent strategy of One Shinhan.

Lastly, utmost efforts will be made to ensure ever improved business performance and sustainability through the group's mission of compassionate finance.

Thank you.

We'll now take questions. (Operator Instructions) And we'll take the questions as they come in. And for those asking questions in English, we're going to be providing consecutive interpretation. While consecutive interpretation is being provided, please wait until the interpretation is finished.

And for your information, the presentation deck is also available on our IR app. And we have also updated e-brochure recently. So if you want to learn about more information about Shinhan Financial Group, please visit e-brochure. And I hope that you make use of the e-brochure and the app. And we also have a video on 2020 SMART Project. We will upload the video. I hope that you will watch the video when time allows.

And we'll now take questions. And before we take questions, let me give you a brief announcement: Related to Orange Life, I believe that there could be quite a few questions. We are still in the process of working through SPA. And we are still working on to include Orange Life as one of the subsidiaries of the Shinhan Financial Group, so although we want to provide you with detailed information, we're still in the process of preparation. And therefore, there will be limit to the details of the information that we can provide you.

And we'll now take the first question.

The first question comes from Mr. Kim Jin-Sang, who is from Hyundai Motor Securities.

I have 2 questions. First, the new DSR has been introduced. And what kind of impact has it on the loans? Maybe it's too early to ask this question, but even a rough estimate would be welcome on this question. And how do you intend to respond to this new measure? And this will also have an impact on NIM. Is that your perspective as the new loans will decline? And second question is, in this situation next year, roughly, how do you estimate the loan growth situation for next year for each different segment, SMEs, retail and large companies? So I would like to ask your answer for these questions.

With regards to the loan growth in the case of this year, Shinhan's loan growth rates, compared to our peers, is a bit slow. You might get that impression. However, our loan growth rate, and according to our business planned, it is actually moving within the rate that had been set as a target in our business planned. And overall, next year, up until the midyear, the Fed, United States, is -- interest hike is undertaken. Then like in the mid-2000s, the Fed's policy rate, we do believe that it will go over the neutral rate. However, if we look at past credit cycles at the Federal Reserve, after they hike the interest rate and that goes over the level of neutral rate, it does have a negative impact on the emerging markets and credit cycles. Because we have that experience. From our point of view, the -- we are intending to pursue selective loan growth and to engage in moderate growth. We don't think this is a problem. And in the case of this year as well, rather than retail loans, the SME loan growth is a bit higher, as you can see from the figures of Q3. And we believe that the situation, similar situation, continues next year. And when we estimate the credit cost, last year, this year, we are seeing very good figures in terms of credit costs, but when we make projections, we look at the average of the past 5 years and we are doing several simulations to that effect. And so from the point of view of Shinhan, already starting from 2016, for SOHO we have been pacing the speed of loan growth. And for several years, retail, especially mortgage loans, we are pacing the speed of growth. And so the household debt growth and for some industries, so with regard to SMEs, there might be some concerns about the asset quality. And so in terms of further past credit history of Shinhan, when there is a major turning point of the credit cycle that is expected, rather than becoming more aggressive, we do try to follow the GDP growth. So we intend to be more cautious going forward. So when we take a cautious approach in terms of loan growth, the net interest margin -- maintaining the net interest margin well is very important for us.

We'll now take the next question. The next question is from Mr. Won Jaewoong of NH Securities.

I have 2 questions. And question one is this: Related to FVPL revaluation. In Q2, there was increased again from FVPL. When I talk to somebody in your company and -- you said that it was accumulated and then reflected at once. And you said that there would not be much change, but in -- it seems that there's a bit of volatility in Q3. So do you think there will continue to be volatility related to FVPL? And is this related to equity market, or is it more related to interest rate? So is there an indicator that's related to FVPL? And my second question is related to provisioning. I understand that it has increased, although slightly, but it was quite low in Q1 and Q2 as well. And this provisioning in Q3 -- well, is there going to be a higher provisioning going forward? Do you think that provisioning will be maintained at the level that we've seen in Q3?

Well, let me try to answer the question related to provisioning, first. When in terms of provisioning, I believe that this is something common in the industry. If you look at September, there was the lunar-year-related holidays, and because of that, there was less operation days. In case of the credit cards, the settlement dates or the -- was -- because of the vacation or the holiday, was shortened. And so as a -- temporarily. So there was an increase in provisioning. Excluding that, the group and the bank, compared to the first half, we do not believe -- in terms of provisioning, it did not increase much. But when it comes to the credit card, because of the seasonal effects, well, it may have returned to normal level in Q4, but we'll have to wait and see. And about FVPL volatility, well, Shinhan Financial Group is, well, managing this quite well with the IFRS 9. So there are more to be managed, and therefore we do expect there to be some sort of -- or some level of volatility. In Q2, the market was quite good. In Q3, the market is not as good, as you know. In case of debt or bond, it does not trade according to the direction. You use the yield curves of the spread as well as trade-based trading. Well, we believe that things are quiet stable when it comes to debt or bonds, but when it comes to equity, I think we're doing quite well in terms of defending against the market volatility, but there's far less potential to make a profit. And so we do expect to see some volatility in the equities market, as compared to Q2. And so the gains that we have made in Q2 was better than we -- what our fundamentals tell us, but in Q3, we believe that the gain -- in the past, we used to have about KRW 850 billion, which is quite good at a recurring level.

We will receive the next question. The next question is from Franklin Templeton, Mr. Jung Moo Il.

I would like to ask a question about asset quality. Generally, the equity market is forward looking compared to the real economy, but if you look at the stock prices of Shinhan as well as other peers, the real economy is not expected to do well. But however, if we look at the business results that have been presented today, that possibility seems to be quiet low. And so it seems that your performance and the real economy seems to show a very big gap. So the current stock price, you say this to be justified. Is -- or the asset quality is to determine, to justify the current stock price. How much should the asset quality deteriorate? And what do you see as the possibility of the asset quality deteriorating that much?

And so early this month, I went to Hong Kong and met with 3 credit rating agencies. And in the month of August, where we issued the hybrid securities dollar denominated, we have met with debt investors in Hong Kong. We had a lot of one-on-one meetings. And they -- with regards to Shinhan Group, they knew well the Korean financial industry, and when we met with them, the story is quite obvious. Starting from last year, credit costs are extremely low. And we'll just continue that with the question asked. And after the first half, the credit cost, there is no signs of the credit cost deteriorating. And so with these investors, we talked about the credit cost in Korea and how we should see the credit cycle going forward in Korea. And through these meetings, we have reached a conclusion that, first, in the case of banking holding groups in Korea, the credit profile in Korea is concentrated on high-quality customers. Overall, in Korea the pace of growth of household debt is quite worrisome. However, if we break down into different industries, the banking side, it's not that worrisome, but in nonbanking sectors, retail loans are seeing higher growth. So for banking holding groups, credit, relatively speaking, will see less impact. And in the case of SMEs, going forward, there are some points of concern. And among the SMEs, those that trade or transact with the banking holding groups, they have high-quality creditworthiness. And so many people, although -- they worry about that there'll be too low credit costs. However, these figures for the past 1.5 years have continued throughout the industry. And so for us, if the credit cycle deteriorates, Shinhan, compared to our peers, we have history of outperforming our peers. And the banking holding companies' risk management practices have been generally upward adjusted. And so although the outperformance level will not be that great as in the past, we do believe we have experience in terms of past credit history that we will be able to respond well to these deteriorating cycles. So in this perspective, we do believe that we will be able to respond to down cycles. However, in the equity market, PBR, it -- there is low, although it can be managed. In the banking sector in terms of loan growth, I don't think we can have that high an expectation for loan growth and such. And recently, compared to United States, Korea's economic growth rate appears to be underperforming. And so taking that all together will have an impact on the valuation of the equity market. And the PBR is about 0.6. It's not coming up from that level. And another factor actually is the Basel III standards. And the financial stocks, it will have a negative impact. That's very clear. The capital ratio is expected to maintain over the 15% level. So these will have an impact. For the next 1 to 2 years of the banking holding companies in Korea, these need to be managed well. And if they are proving to be well managed, then in terms of valuation of these companies, I think we will see another turning point.

We'll now take next question, and it's from Mr. Lee Byung Gun of DB Investment.

About regulations on loans. I think there was a question related to this previously and the answers seemed to be very macro economically, so I want more micro answers. If you have a specific numbers, could you give us the specific numbers? And as you know, RTI regulation has been strengthened recently. And it's according to FSC or FCC, in the RTI world, there were some exceptions, as -- and I understand -- and there were some mentions on the RTI going beyond 20%. And about loans (inaudible) and there's -- I think that there will be a regulation on those that have many houses. And so for Shinhan Financial Group -- and I'm sure FSS was talking about the numbers of the past 3 years, so I wonder if you have more specific numbers. And with stronger regulation on loans, the loans that have been approved previously, they have been carried out in early October. And so therefore I believe that loan growth was quite good, but it's been about a week since that loan, I guess, date. And I'm sure that we are seeing some impact of that regulation or control on loan growth. So if you have any numbers on last week compared to the previous week, what was the trend of loans being made?

That's a very specific question. And we are talking to the subsidiaries about our business plan for next year. We have not exchanged opinions or data with much details, so I -- besides the macro economical numbers, I will not be able to provide you detailed micro economic numbers. Once we've had internal discussions that is officially about the business plan or the management plan for 2019, and if you do have significant information, I think, through the other channels, we may be able to share that information. And for your question, I think we need to find out, and we will contact you separately to provide you with the explanation.

We have not received another question, so we will wait a few seconds for the next question to come in. Yes, we will receive the next question. The next question is from Taishin Securities, Mr. Kae Jongwoo.

I'm [Kae Jongwoo]. Relating to the bank, I would like to ask a question about the M&As and card business. First of all, in terms of card, because of the diminishing business days, you had an impact, but even if you take that into consideration, the provisioning seemed to be very high. So is there any other factors aside from the diminishing business days? And also -- and the card loans have been declining in this Q3. I do know that you have limiting guidelines. So the card loans have reduced -- been reduced significantly, so is there any strategic reason behind this decline? So that's my question about the card business. And there has been an announcement in the media about acquiring the Asia Trust company. With regards to this acquisition, I'm sure you have a reason for this acquisition. So what do you think are the possible rooms for synergy improvement? And you try to increase new site, but is this going to be to far regions or to other means? How are you going to increase your size? And Hana, KB and other peers, they have less capital than yourselves. So how much do you intend to invest going forward?

With regards to card provisioning, let me get that question first. As we have said, during the quarter, there was KRW 120 billion that we needed as provisioning. And for this quarter, it was KRW 150 billion, so it has decreased in this (inaudible), but with regards to number of settlement days, when we have analyzed this, KRW 20 billion additional provision and in pretax terms is about KRW 30 billion, what we had to set aside as additional provisioning. And so although there is a KRW 30 billion impact for the quarter, most of it is owing to all the diminishing business days. But I just have said overall asset quality continuously seems to be declining slightly. And 1 month more overdue status is 1.44% for credit card company. And so short term -- not short term in delinquency, but more than 1 month overdue is actually growing. So in terms of asset quality, , it is deteriorating slightly, but we do not believe that it's going to significantly raise the provisioning from the recurring level. And second question, regarding card loan: There is no significant strategic direction changes. As you are well aware, by the year-end, 7%, we need to match this target. So with regards to this aspect, including this year and next year, well, we'd like to explain that there has been no significant strategic changes.

I'm Woo Young-woong, in-charge of strategy. With regards to the second question, about the Asia Trust company, about the media reports to this regard: The 2020 project, well, we explained about this last year. We already explained that. Going forward, among the business lines, those that need a -- some supplementation, we will do so. That was the crux of our announcements back then. With regards to Asia Trust, Korea's household asset or real estate-related characteristics are rather different from other countries. If we look at Korea, 70% of the household asset is concentrated in the real estate area. And secondly, the investment vehicle also is quite limited. Investment instruments are quite limited for individual investors. And so the reason why we're taking interest in real estate is because, starting from the very development, and we look at financing and also producing or providing financial products for real estate to individual investors, we thought that this was an area that the market needed. So we're focusing on this. And we are pursuing this area, but nothing has been finalized as of yet. And as soon as things are finalized, we will make a disclosure. And with regards to business plans, because the negotiations have not been completed -- when it is completed and when it becomes a subsidiary, then we will be able to disclose our business plans. With regards to the real estate trust, we do occasionally receive questions. The real estate or property market is expected to contract. And if the timing right, from the point of view of our group, KB or Hana, compared to our peers, from the development stage of real estate, we do not have license to do such business. So from the group's perspective, real estate is a full business cycle. We do need a company that should be able to come in, in early stages of real estate business development, as we have taken interest, starting from the second half last year. And with regards to business model you talk about, if the targeted company is actually acquired by us, we're not going to rush into things. That's not realistically possible. And so in the initial stages, we're going to stabilize the company and we're going to continue on with the existing business model. And after some time has passed of about 2 or 3 years and -- we need to find a business model that is appropriate for the holding company. And our group is currently trying to foster the GIB business, and we do believe that there's going to be a lot of connections to the GIB business.

Well, Mr. Lee Byung Gun from DB of -- Investment seems to have further questions.

And if we could follow up on -- with more details about the -- with the answers to the questions that I have asked. About a dividend: So what would be the best dividend scenario that you can tell us at this moment?

I think this will be depending on who is looking at this. And I -- we -- a lot of people see that Orange Life is going to bring about a many changes. And CET1, if you think about a dividend, could drop somewhat. But I don't think it's going to be a big problem, but CET 1 is going to drop.

So at the end of this year, when it comes to dividend, what would be the best scenario? And will you maintain your existing dividend payout ratio?

When it comes to dividend policy, we provided the answers in April. And those -- what I've answered in April have actually been put into action. About the acquisition of Orange Life, it's going to help us to optimize the overall portfolio of our business at Shinhan Financial Group. And in April, I talked about capital gains and dividends, and I said now we're going to take a very balanced view. And we are thinking about a process of acquiring and making Orange Life 100% a subsidiary of Shinhan Financial Group, and that's going to be a significant demand for buyback. And we -- buyback is usually done in order to enhance the investors' value, but here in Korea, in the financial industry the buyback of stocks changes the value of investors of -- or shareholders. That's going to take some time, but with Orange Life, we're going to take a buyback. There's a clear exit. And given our BIS ratio and other ratios, we will look at the market situation and we will be very flexible. And so when it comes to -- so we will have to look at dividend and buyback. So what will -- so what we are going to return to the shareholders in terms of -- in dividend and buyback, that's going to be, we believe, better than previous years. But there are shareholders who think that cash dividend is important and there are shareholders who put more emphasis on capital gains, but we cannot ignore any of the two. We need to satisfy both types of shareholders, so we will have to take a more integrated return for our shareholders when we look at policies related to dividend and buybacks for the next 2 or 3 years.

Since there are -- no more questions are coming in. And so with this, we would like to end now the earnings presentation for Q3 of 2018 of Shinhan Financial Group. We'd like to once again thank all of you for taking part in today's presentation.