Shinhan Financial Group Co Ltd (SHG) 2018 Q4 法說會逐字稿

Greetings, everyone. I am [Park Cheol Woo], the new Head of IR in this year. Thank you all for participating in today's earnings call. Let us now begin the 2018 business results presentation of Shinhan Financial Group. We have here with us at today's business presentation our CSO, [Park Woo Hyuk]; CFO, Yu Sung Hun; and Head of Finance, [Kim Tae Yeon].

We will first hear the 2018 full year business results presentation by our CFO, Yu Sung Hun, and then have a Q&A session.

Let me now invite our CFO, Yu Sung Hun, for the 2018 business results presentation.

Greetings. I am Yu Sung Hun, the new CFO of Shinhan Financial Group from this year. I would first like to express my deepest gratitude to all the shareholders, investors, analysts and journalists from home and abroad who are participating in the 2018 full year business results presentation.

From now on, I would like to walk you through the 2018 full year business result of Shinhan Financial Group. I will start with the group income on Page 3 of the presentation material.

Shinhan Financial Group's 2018 full year net income posted KRW 3,156.7 billion, a 8.2% increase Y-o-Y. There were visible results of the 2020 SMART Project, which started from 2017. And with the One Shinhan strategy, the bank, investment, capital and other group subsidiaries' performance improved, leading to a record-high yearly net profit and a sustainable management basis was established.

On the other hand, the Q4 quarterly net income posted KRW 513.3 billion, a 143% increase Y-o-Y. This was because of the seasonal factors, which occurs in Q4 of every year, including ERP cost, and others greatly declined Y-o-Y.

I will now explain the 4 major characteristics of 2018 business results. First, through balanced growth between bank and non-bank, the net income of all group subsidiaries has achieved balanced growth Y-o-Y, leading to a 5-year in a row net income growth trend.

All operational fundamentals, including group fee income growth, cost management and provisioning stabilization trend is continuing, and in particular, with the balanced growth strategy between SMEs and household and the stabilization of the NIM through stable funding management, the group interest income grew again for 3 continuous quarters in a row.

Non-bank also, despite the difficult internal and external operating environments, grew stable portfolio organization posted more than KRW 1 trillion of net profit for 4 years in a row. Shinhan Investment Capital, Jeju Bank and Savings Bank all achieved the highest net profits since they were established. Going forward, through our balanced growth strategy and profitability-focused portfolio adjustment, we will expand our profit bases.

Second, based on the 2020 SMART Project, in the global and the capital market, efforts to strengthen One Shinhan competitiveness led to differentiated visible results, accelerating our group's profit diversification.

Bank global net income, in particular, through a long-term focus on profitability enhancement, posted KRW 321.5 billion, a 36.8% increase Y-o-Y and rose to 14% of the bank's profitability.

This year, in order to accelerate glocalization in non-bank as well, we will do our best to expand and diversify our profitability bases. On the other hand, in the capital market, through expanding the One Shinhan cooperation collaboration system, we are continuing our remarkable growth trend each year.

In GIB, our IB, KRW 479.1 billion of operating income was realized, a 58.1 percentage point, and PWM related to retail also a KRW 285.1 billion of operating income was posted, a 10% growth Y-o-Y.

Third, from a continuous strategic cost-cutting perspective, Shinhan Financial Group has been consistently implementing ERP each year. In Q4 of last year, a total of 296 employees in the Bank, Investment, Life Insurance and others were including -- included in the ERP, leading to around KRW 100 billion of expenses that was recognized in Q4 through continued efficiency improvement effort, a basis to stably continue the group's cost management in the future was established, through digitalization and organizational system that can nimbly respond to diverse market environmental changes was established last year and, last but not least, despite the factors that may lead to provisioning increase from asset quality deterioration, which has been building up from last year, our systematic and aggressive risk management continued, leading to a continuation of Shinhan's credit risk management advantage.

As a result, the group's normalized credit cost ratio recorded the lowest level in history and posted 26 bp, a 8 bp decrease Y-o-Y, and contributed greatly to the group's net income improvement.

Let's go to Page 4, the income in more detail. On the graph on the far left side, the group's interest income recorded KRW 8.58 trillion, a 9.4% increase Y-o-Y, and the bank's loans and [gone] through balance [flow] between household and corporate, increased 2.2% in Q4, a 7.2% growth YTD.

And through expansion of non-audited SME-focused differentiated growth, a robust growth trend is being maintained. In the case of the bank's NIM, despite the high asset growth, through asset management, taking into consideration profitability, and through stable funding cost improvement, the NIM decline was limited to 1 bp drop Q-o-Q and, on a cumulative basis, it posted 1.62%, a 6 bp improvement Y-o-Y, contributing to the group's interest income.

Let's now go to Page 5. The group's noninterest income rose 4.3% Y-o-Y to KRW 1,399.5 billion. Without particular one-off gains from securities transactions that occurred in the same period last year and except for the one-off gain on sale of Visa card stocks, the marketable securities-related P&L maintained a similar level Y-o-Y despite the considerable market volatility in 2018.

Fee income grew 13.3% Y-o-Y due to an increase in brokerage and IB fees.

Now moving on to SG&A cost. The group's SG&A increased 32.1% Q-on-Q due to the Q4 ERP but decreased 1.4% Y-o-Y. An increase in SG&A will be likely contained and managed appropriately as the strategic cost-cutting efforts through the digital platform are becoming more visible.

The group's and the bank's CI ratios are 47.5% and 47.3%, respectively, each showing an improvement of 4.9 percentage point and 6.6 percentage point. This is the lowest CI ratio in the past 6 years.

And now the group's credit cost. FY '18 group's provision for credit losses amounted to KRW 738.6 billion and cumulative group credit cost ratio 26 bp, showing the lowest level. Shinhan Bank's credit cost ratio also stood at 10 bp, which is far below the 5-year average of 30 bp. The steady trend is continuing.

And now moving on to Page 6, group's asset quality. As of year-end last year, the group's NPL ratio had improved 0.09 percentage point Y-o-Y, recording a historical low of 0.53%. This was possible because continued risk management efforts led to a 7.6% NPL reduction.

Shinhan Bank's and card's delinquency ratios each recorded 0.25% and 1.30%, showing a slight increase Y-o-Y, but they are still being maintained at a stable level.

The group's and the bank's BIS ratios were estimated at 14.9% and 16.0%, respectively, and CET1 ratios 12.6% and 12.8% each. Shinhan Card's adjusted capital ratio was 21.7%, keeping a stable level.

The BOD had proposed a dividend for FY '18 of KRW 1,600 per share. And if it is passed at that Annual General Meeting, we could expect a dividend payout ratio of 24% and dividend yield of 4%. This has been decided in consideration of reasonable capital adequacy required for future inorganic growth and strengthened capital ratio regulations.

We will continue with our consistent dividend policies that are aligned with both shareholder value and capital adequacy requirements. Please refer to the remaining slides in the back for further information about the subsidiaries. Please read them at your leisure for your reference.

May I direct your attention to Page 7, which talks about notable results of the 2020 SMART Project initiatives. First, balanced growth.

We built the 2020 strategy platform, which enabled the bank's net income to grow 33% Y-o-Y and non-bank income to grow 16% Y-o-Y. Robust growth continued due to harmonized improvement shown among banks and non-bank group.

We also implemented successful M&As to install new growth engines in the group's business portfolio. With the consolidation of Orange Life as a subsidiary and acquisition of Asia Trust announced in October last year, we expect the non-bank earnings base to expand at an accelerated pace.

Second, NI from bank's global business grew as much as 37% Y-o-Y, showing that glocalization is on the right growth trajectory. In addition, acquisition of PVFC and a search for a new growth engine for the group was given final approval in January.

We plan to expand the global business, not only in banks, but non-bank side. We plan to create unique results in the non-banking sector, concentrating on the core markets.

Lastly, concerning the upgrade to Digital Shinhan. Starting last year, the group's major platforms, including bank and card, were completely revamped to provide differentiated customer experience.

On the back of diversified digital platform, its contribution to operating income steadily increased, marking KRW 1,185.9 billion, up KRW 247.1 billion Y-o-Y. SF Group -- Shinhan Financial Group has executed differentiated growth strategies with a strong will and drive, and we will continue to do our best to create continued financial results, riding the One Shinhan growth momentum under a consistent strategy direction.

Lastly, we will continue to practice compassionate finance not only to deliver distinctive results, but to position ourselves as a sustainable management company.

Thank you, this concludes the business results presentation for the full year 2018.

Thank you very much, and now we will be taking questions from you. (Operator Instructions) And for your reference you may download the IR material that was presented today through the app on your tablet PCs as well as your smartphones. If you're using an Android phone, please enter SFGIR, and you may download the app. And if you're using an Apple phone, please enter mshinhangroup.co.kr, and you may download the IR app on your phone. Thank you for your cooperation. There may be a bit of a delay until we get questions coming in so please standby. We have the first question from BNP Paribas, Mr. Cha Munyoung, please.

I'm from BNP Paribas. My name is Cha Munyoung. I have 3 questions. My first question is about what was reported yesterday, which is about CPS, about KRW 750 billion that is to be issued. Regarding the amount of capital increase, can you give us some details? And there probably were other financial options, but why did you choose to go with CPS? I would like to know more about the background behind your decision. Second question is about the successful 59% acquisition of Orange Life. Going forward, I'm curious about how you're going to create synergy and when it's going to be wholly owned as a subsidiary and be part of an M&A? And are you going -- I heard that you're going to maintain your existing position of Orange Life for 2019, but after 2020, what is going to be happening to Orange Life? And I have also curiosity about how it's going to be working in tandem with Shinhan Life Insurance. Last question is about the dividend. There has been a slight difference, but compared to your competitors, it seems that the payout ratio was a little bit shy of others. Can you give us your future plan for dividend policy regarding maybe share buyback considering that option and if you have future M&As going forward? And do you think your capital policy will be affected by future M&A that might occur?

I would like to first answer your first and third question. Regarding your first question, it's about the CPS and the reason why we have issued the CPS and why do we choose to go with CPS compared to other financial options. Regarding the CPS, the amount is about KRW 750 billion. And in the case of the CPS, it doesn't be -- it doesn't become converted right away, it is 1 year after its issuance when you can convert the share and when it becomes 2023, at the fourth year, if it doesn't get turned into the common shares, then it will automatically be converted to a common share, so that is the structure.

Also, the issued price is KRW 42,900, so with the share price that have gone up recently, the issuance was at market value or market price, and the dividend rate is 4%. It has been finalized. And regarding the size of the share issuance, well, compared to 744 -- 74 million, it's about 1 -- 17.5 million shares, which is about 3.7%. I know some of the investors are worried about the EPS and dilution. But as aforementioned, for 1 year, it cannot be converted so that is the structure. And when it is possible, when Orange Life becomes our wholly owned subsidiary, we believe that will be the right timing for this to happen. Regarding other financial options, for example, hybrid bonds or others, why did we choose to go with CPS? The biggest reason is because of the changes in the international accounting standards.

And for the hybrid bonds, there are issues regarding capital adequacy, so we do not have any burden when we choose to go with CPS option. And we have KRW 1.5 trillion of hybrid bonds that we already have issued, so we want to diversify our capital funding structure, so that is why among the financial groups, we were the first to make the decisions to issue CPS. And what is most important is that, in the issuance, there could be some risk involved, but we have financial investors, IMM, so we were able to have very good issuance of the CPS clearly. And because they have joined us in the issuance with the purpose of participating in management, it will be long term, it will not be short term. And the management has -- they have the right to take part as managers, and we have the right to also take part. So a long-term investment is nearly guaranteed.

Regarding the possibility of selling in the market, because we have the right of first receivables -- we have the first right to buy the share and then, if it's needed, we can also allocate to a third party. So even at the point of sale, we can minimize impact of dilution. So we have the structure ready, so that is why we chose to go with the CPS. Yes, and as for the dividend, let me say a few words first. The dividend payout ratio is a bit lower than the market expectation, yes, that is true. But what we thought was, going forward, the payout ratio will continue to increase. That is our plan.

And last year, for the first time, share buyback started in the volume of 200 billion and this is going to continue. If the stock market looks similar to what it is now, we will actively look into the option of more share buyback. And going forward, as for the capital policy, I talked about the CPS issuance, but I left out something. The CET1 ratio with the acquisition of Orange Life and with the other M&A deals going on, we are down at 12%. So it took us about 110 bp, but we'll be able to make up about 33 bp in the CET1 ratio with the CPS issuance. So including the dividend policy and the capital policy, we have the room to be more active and be flexible, and we will be very consistent with the policies going forward.

Yes, I would like to add some more comments. In a financial holding company, in implementing capital policies, we need to think of 2 things. At the current, how to do the asset allocation in the group portfolio, where we should spend the capital. We could make the Orange Life subsidiary 100% wholly owned or we could look for other M&A options or we could -- we have asset size of KRW 4 trillion in Shinhan investment, and we need to build up that asset in order to make it a mega IB. So we have a lot of options, and we also have to think about the time frame. We have done some capital simulation in the group portfolio. And in the next 2 to 3 years, we need -- we feel that it's time for capital management. And after that, we will have some capital buffer. So simply put, ROE is 9% to 10% and ROA is 4% to 5%, then we will have more capital being accumulated.

So in doing the capital allocation in time, we have to first consider the dilution of common shares. So what we thought was how we can have more capital buffer that we will have in the future and have it now. And we wanted to have no dilution, and so we selected IMM as our strategic investor. So that was a third-party placement and conversion right is given after 1 year of issuance. And after 4 years has lapsed, they will be automatically converted. So we wanted to have some time buffer. And with this policy to have effectiveness, we need to have active share buyback to have more opportunities for M&A. And as was mentioned by the CFO, we need to diversify the funding sources. And yes, we have issued the hybrid bonds and they are nearing maturity. And so we thought about the time period as well in making our decisions. So with that, I would like to conclude.

I am [Park Woo Hyuk], the CSO. Regarding the Orange Life question, I would like to answer. We wanted to strengthen the non-bank of the group. And as of February 1, it became a subsidiary of our group. Going forward, Orange Life will go on a dual system with Shinhan Life, and the reason behind that is because they have their own competitiveness, which can be strengthened, and we want to actually minimize the confusion because it will become a part of our group and we want to have the dual-entity system so that they can be differentiated and to have their unique cultures. In the past, we have cases when we had dual entities in a M&A, so in order for us to have a successful integration, we have plans to have a joint management committee at the group level, and we will have a working party meeting so that we can have consultation of the business and investment plans and the 4 businesses between the 2 companies. We also will use our integrated platform and we have Shinhan Plus and we have [Tops Plus] for our VIP members.

We can also maximize the usage of digital transformation capabilities and to create better results with the GMS asset management, GIB and to have cross-selling through the group bank, card and investment and keep the best practices for Shinhan Life and others. Regarding the dividend of Orange Life, because it is already listed, we want to have consistent dividend policy in order to minimize the confusion of the investors. And upon the IP of Orange Life, higher than 50% of dividend payout ratio was promised to the investors, so we will keep that commitment. Going forward, we will look into the different capital situation others for the right timing to convert Orange Life to our wholly owned subsidiary.

From HMC, Mr. Jin-Sang Kim, please go ahead.

I have 2 questions. As for Life Insurance, I think you have made enough explanation. We have Life Insurance, Card and among the major subsidiaries, we see that the challenging times are coming in the business environment, and I think you would need a differentiated growth strategy. So as for Card and Life Insurance, what will be your strategic approach? Because as for Card, there is a lowering of the merchant fees and there are regulatory forces at play. And as for Life Insurance, you don't have enough top line growth and there is a lot of competition in the market. So what is your differentiated competitive strategy? And second is about the NIM prospect. Last year, it was very good, but this year, the interest rates environment doesn't look good, the LDR seems challenging and the government seems to be monitoring the situation on the NIM. So I don't think it will be very easy. So what is your outlook on this year's NIM and how will you position yourself strategically?

Yes, thank you. As for Card and Life Insurance, how we are going to differentiate ourselves, Shinhan Card's basic strategy as for now is the market share and the earnings rate, we want to maintain our current scorecard. And as was asked by Mr. Kim, yes, there's a lowering of the merchant fees and the profitability is being deteriorated. And the market is very challenging, but -- so what is -- the best option is to maintain the status quo. But fortunately, in that regard, Shinhan Card has some competitiveness because we have the economy of scale and we can make adjustments.

In the cost structure -- and as for the cost structure, I could mention it into 2 regards: one is the marketing expenses. Continuously, we can make the marketing expenditure more effective and efficient. And as for the second part, we started this last year, and we have the ERP. And as for SG&A, we have some room to cut down on these costs. So as for the recurring net profit for Shinhan Card, it's about KRW 500 billion to KRW 540 billion. And if we can maintain the status quo with headwinds coming in, in the market with the merchant fee cuts, I think there will be a reduction of about 10%. But according to our business plan, I think we will suffer less than the market expectation of 10%. So if we could maintain the net profit of KRW 500 billion, that will be the best scenario for Shinhan Card.

And as for the future strategies, as for now and -- we are trying to increase other additional fees and commissions in the payment platform. We are the largest card company and we have big data, and we could provide consulting services to the merchants and we could expand our platform business. And I think Shinhan Card has that strength. And as for Life Insurance, the story is similar. The reason why we decided to acquire shares of Orange Life is, as the market is concerned, we are continuing with -- we are trying to increase our market share, but there is limitation through the organic growth. And organic growth is not enough to maintain Shinhan Life's market share of 4%, but with the acquisition of Orange Life, we could increase the market share by 10%.

And Orange Life and Shinhan Life are complementary, so in the process of integration, because of the complementary, we do see a lot of synergies that will be produced. And if things go as planned as for the earnings, we have acquired 59% of Orange Life share, and that will be sufficient enough. And we will be having KRW 170 billion to KRW 200 billion plus earnings that comes from the acquisition. So as for Life Insurance, we were able to beef up our size and create energy with the acquisition of Orange Life. And I think this is a very feasible scenario to grow Life Insurance business further, yes.

And as for your second question, about the NIM forecast. Last year, the interest rate rose by 25 bp and the funding structure in the first half has improved. And so NIM was improved by 6 bp and reached 1.62% by the year-end. And in this year, there could be market interest hike and -- that we saw in November last year. And as for the cost structure, we -- if we pay more attention to the asset growth, we believe that there will be an improvement of the margin by 3 to 4 bp. The market consensus is looking at a low interest rate hike, but we will do our best to increase the margin.

Related to Life Insurance, I would like to add some comments. The fact that it's a holdings group, it means that, economically, it is already integrated. For Orange Life and Shinhan Life, the situation is a little bit different. For Life Insurance, using their own capital, there are 2 ways to do it, and first is to look at the volatility of the back side, liability side. And so most of the life insurance companies are suffering because of this. And for K-ICS or IFRS 17, they need to be prepared, and Shinhan Life is also working very hard to prepare itself. For Orange Life, they have enough capital, so using the capital in the liability side is not their way, but it could be a little bit aggressive. I think you could use it on the asset side, and we need to, of course, keep the duration but there could be long-term alternative investment or other investment vehicles so the profitability can be increased. So we plan to have it going into this direction and expand this going forward. Regarding Card business, well, if we consider the existing card industry, our plans could be a little bit challenging. But we want to expand into new territories, so we are actually conversing with the cards so that we can have this.

There are no other questions in the queue, yet, so we will wait until questions come in. (Operator Instructions). We'll take the next question from NH Securities, Team Leader Won Jaewoong, please.

Regarding the CPS, I have some questions. I don't know if you can answer my question, but you mentioned that through CPS, maybe we'll take capital-based [retraction] in the media or a third Internet-only bank investing in those vehicles or having future growth in other subsidiaries. Well, I am curious about how the CPS is going to be utilized. So if you can give us a direction on -- give us some pointers on the future direction, it will be greatly appreciated. And I heard that with POS, there is a high possibility you're going to venture into the Internet-only bank business. And in the case of other banks, they have already joint ventures for Internet-only and they have been operating for a year or so. But it seems that additional softness -- sources or other synergy factors remain unanswered, yet. So I'm curious about why do you want to join the ranks of Internet-only banks.

Regarding the CPS that we're going to issue, let me elaborate. Regarding the timing of the CPS issuance, well, we did not consider the possibility of M&A before our decision. We thought of the timing when Orange Life would be wholly owned by us, and we thought we would need capital at that point. So after issuing the CPS, if some -- our share values go up, well, we believe that we would have more leeway and flexibility of using our capital. So regarding the whole of our CPS issuance, it's not because only of the M&A possibility as a precondition. And we can have capital attributed to other subsidiaries, so I'm including that possibility as well.

And regarding the packaging of the CPS structure, the conversion timing is 1 year after the issuance. And we believe that, in April, we'll probably -- we'll finalize the issuance, so it means that you can only convert it from April of next year and, in some cases, within 4 years, it needs to be converted. So the 4% -- or below 4% of dividend ratio, well, for our common shares, it's not 3.9% for dividend payout ratio. And if we see the dividend ratio is less than 4% at the market value, then there is no incentive for us to do this. So it means that we have focused on Orange Life, and that is why -- that is one of the reasons why we decided to go ahead with the CPS.

Regarding the POS Internet-only bank, let me answer your question. We have made a decision to form a consortium with POS for Internet-only bank and the people behind it because with our financial bank the best in Korea and the Internet-only settlement system cost, we believe the mobile settlement system cost we believe that we could have synergies together. And POS has very easy convenient settlement service app, and we believe that their business could be expanded. So it was very appealing to us and the UX competitiveness of POS could lead to their innovative new services for our customers is what we believe. Shinhan Financial Group, in our digital transformation, we have such an enabler strategy.

And first, it present for our existing business and the other is to have disruptive innovation. So we want to have the coexistence in the financial system in Korea and to have compassionate finance where we believe that we can collaborate together with POS. Shinhan Group hasn't had very good services for those customers in their 20s, but POS is very popular with 20-something. So we believe that it will be very effective in that perspective. Shinhan Financial -- Shinhan investment in POS after they collaborated, there was [thesis] when they had a huge amount of CMS settlement that were approved of their collaborations.

So regarding the profitability, consortium structure and others, we will need to finalize the details with POS so that we can go to applying for a Internet-only bank with POS with a consortium. Please keep an eye on us, and we will let you know as soon as details are finalized in this consortium.

With no further questions, we will now conclude the business results presentation for the full year 2018 for Shinhan Financial Group. Thank you for your participation.