Shinhan Financial Group Co Ltd (SHG) 2019 Q1 法說會逐字稿

Greetings, I am Park Cheol Woo, the Head of IR. I express my gratitude to everyone taking part in today's earnings release. We will now begin the 2019 Q1 business presentation.

For this quarter's earnings release, we inform you that Orange Life Insurance has been included as a subsidiary of Shinhan Financial Group as of February 1, 2019, and that Orange Life business results have been included from this quarter.

We have here with us our CSO Park Woo Hyuk, in charge of Strategy; CFO Yu Sung-Hun; and Head of Finance Kim Tae-yeon.

We will first have CFO Yu Sung-Hun's presentation on 2019 Q1 earnings results presentation and then have a Q&A session.

Let me invite CFO Yu Sung-Hun to deliver the 2019 Q1 business results.

Greetings. I am Yu Sung-Hun, the CFO of Shinhan Financial Group. Today, I would like to thank all the shareholders, investors, analysts and journalists in and out of Korea, for taking part in our 2019 Q1 earnings release.

From now on, I would like to elaborate on the major highlights of Q1 business results.

Let me go to the group business result highlights, and Shinhan Financial Group's Q1 net income posted KRW 918.4 billion, a 7.1% increase Y-o-Y. In particular, we have Orange Life Insurance as our new family member in Q1, and with the 2020 SMART Project strategies achievements during the past 2 years continuously being realized, a sound earnings improvement trend is taking place.

Let me summarize the 5 major characteristics of Q1 group earnings. First, the KRW 918.4 billion of net income in Q1 of this year was a result of the more diversified nonbanking income fundamentals through the integration or inclusion of Orange Life Insurance and the banking sector income improvement through our stable and sustainable earnings generation capability. We were able to confirm our capability, once again, in particular, following the HRV organization, which was implemented earlier than usual late last year. The group subsidiaries sales capability was driven earlier than before, which led to a higher growth rate. Second, the bank started preemptive growth from Q1 and, in particular, in the SME and household sectors, through a balanced growth strategy a 2.6% growth rate was recorded. In addition, despite the margin pressure of factors due to the higher growth rates through funding and management based on profitability, the bank NIM maintained 1.61% level similar to the previous quarter, and as a result, the group's interest income rose 5.1% Y-o-Y. This year, we will also continue our growth strategy considering risks centering on SMEs.

Third, since Orange Life Insurance was included as the fourth subsidiary in the nonbanking sector, the insurance segment's income basis was expanded through a more differentiated business portfolio, noninterest income grew 31.2%, Y-o-Y.

In particular, Shinhan Capital realized KRW 100 billion of income last year, and KRW 45.6 billion of income in Q1 of this year and has leaped forward to become a subsidiary contributing largely to our group income. You can see that the performance improvement of nonbanking sectors forecast to contribute to the group's income, safety and continuity. The group's G&A or SG&A has increased 7.5% Y-o-Y with the increase in employee-related expenses, but this was an effect of the Orange Life insurance integration. And excluding this, SG&A is being maintained at a 2.8% level, in particular, along with a sound increase in our operating income through expansion of digital customer bases and efficient channel strategy and improvement of working processes, including management efficiency. The group's cost-income ratio recorded a historically low level of 42.8%, continuing cost efficiency results and profitability improvements.

Lastly, the group's asset quality is being stably maintained with continued high-quality assets centered growth and continued systematic and aggressive risk management. The group's NPL ratio posted 54 bp, a 10 bp increase Y-o-Y. In particular, the NPL coverage ratio posted 164%, maintaining our conservative provisioning policy.

Next from Page 4, before explaining in more detail the other income items for your reference from Q1 of this year, to present our financial information more effectively and to reflect the IFRS 17 accounting standard, the interest portion of provision for policy reserve, which was previously categorized as noninterest expense is now categorized as interest expense. On the material that you can see, when you see the left-hand graph, the group's interest income posted KRW 1.9 trillion and increased 5.1% Y-o-Y. The bank's loans in won grew 2.6% in Q1 through balanced loan growth in household and corporate loans.

The bank's net interest margin, despite the market interest rate decline in Q1 and high asset growth, maintained the previous quarter level of 1.61% through asset management, taking into consideration profitability and stable funding cost improvement, as mentioned previously. And the group's interest income rose 5.1%.

Let's move on to Page 5. The group's noninterest income posted KRW 821.7 billion and greatly increased 31.2% Y-o-Y. With the inclusion of Orange Life Insurance, the insurance-related income increased more than 2x compared to the same period last year. Securities-related income grew by around 70% Y-o-Y, with the investment income and fixed income valuation gain expansion following the GIB sector growth.

On the other hand, fee and commission income maintained a level of the same period last year, despite factors including increase in credit card sales and expansion of participation in IB deal underwritings. In particular, despite the difficult environment of decline in merchant fee commissions through steady efforts to grow sales and through the new lease businesses, credit card fees and commissions and lease-related fees and commissions went up 13.3% and 121.6% Y-o-Y, respectively.

Next is the SG&A. The group's SG&A along with the employee-related expense increased by -- the integration of Orange Life Insurance in Q1, increased 7.5% Y-o-Y. Excluding the Orange Life Insurance effect, it is being maintained at a stable level of 2.8%, and going forward -- 2.8% increase. And going forward, we believe that the increase in SG&A will be maintained at an appropriate level with the realization of our digital-based strategic cost-cutting efforts. And we believe that it will be well managed.

For your reference, the group's CI ratio has improved by 1.7 percentage point Y-o-Y to 42.8%, lowest in the recent period.

Next is the group's credit cost. The annual credit cost ratio of the group on a cumulative basis is 34 bp, having improved 5 bps compared to the past 5-year average, but up 7 bps Y-o-Y. This is because of the growth of operating assets such as card loans and installment purchases, leases and one-off factors or namely to the change in the risk and prudence, these were reflected.

On the other hand, the credit cost ratio of Shinhan bank has improved 1 bps Y-o-Y and 24 bps over the past 5-year average to reach 15 bps. And it is maintained at a stable level. Going forward, on the back of preemptive credit cost management and asset rebalancing, the volatility of the group's asset quality is expected to be kept low.

Next on Page 6. The group's asset quality, as of the end of March, the group's NPL ratio has improved by 0.10 percentage point Y-o-Y to post 0.54%, a record low figure. This is due to sustained risk management efforts, which resulted in the NPL falling by 5.9%. The delinquency rate of the bank and a card is 0.29% and 1.37%, respectively, similar to same period last year. And so despite conservatively deteriorating asset quality, it still being maintained at a stable level.

Next, with regards to capital adequacy ratio, as at the end of March 2019, the group and the bank, BIS ratio is expected to reach 14.0% and 15.9%, respectively. And the CET 1 ratio is 11.8% and 12.8%, respectively. The group's CET 1 ratio is down by 80 bps Q-o-Q, due to the inclusion of Orange Life Insurance as a subsidiary into the group last February. However, based on stable recurring profit of the group going forward, we expect gradual recovery of the figures. For your information, Shinhan Card at the end of March adjusted capital adequacy ratio is 21.1%, maintaining a stable level. For greater details and major financial highlights of the group and the major subsidiaries, please refer to the presentation material.

Finally, let me conclude today's presentation by providing you with a brief explanation of the implementation results of the 2020 SMART Project by major strategic tasks. This will help you understand the strategy of Shinhan Financial Group as a sustainable company and the direction of our performance.

So there are 4 strategic tasks. And after this explanation, let me conclude today's presentation. The first strategic task is the balanced growth strategy. Differentiated income continued to increase in the nonbank noninterest income statement due to the acquisition of Orange Life Insurance. On a Y-o-Y basis, net income growth rate of 3% in the bank segment and 16% net income growth rate in the nonbank subsidiaries was achieved, continuing a solid growth trend. And interest income and noninterest income also saw growth rate expansion of 5% and 31% each, respectively. Also, nonbank subsidiaries share of the income was increased to 36%, it is continuing to expand.

Also, the acquisition of Asia Trust, which was pursued to establish a new growth engine in the group's business portfolio, received final approval on April 17th. So we expect to begin -- moving more quickly to create synergy in this front.

Secondly, in the capital market and global business sector, efforts to strengthen One Shinhan is yielding visible results, so that the process of diversifying the group's income is being accelerated.

GIB's operating income posted KRW 172.1 billion, up 82% Y-o-Y, demonstrating remarkable growth, in particular, by significantly contributing toward improving the income of life insurance and capital subsidiaries, One Shinhan synergy generation is being expanded. The group's global section's net income for the quarter is up 4% Y-o-Y, to post KRW 79.1 billion and maintaining the stable growth trend for the past 5 years. This is due to the fact that for a long time thorough preparations have been made to expand the global business based on localization and sustained efforts made focusing on the Asian core markets, which are now bearing fruit.

Meanwhile, with closing of the acquisition of Prudential Vietnam, consumer finance business that has been pursued for the past year, localization of nonbank global subsidiaries is being realized as well.

This year, we intend to focus on qualitative growth of the global business, as we're upgrading internal control process, such as local review, risk management and compliance as well.

Finally, the results of the upgrade toward a digital Shinhan, we have overhauled the represented platforms of major subsidiaries and 33 million digital channel customers were newly brought into our fold as of the end of March. Based on such diversified digital platforms, contribution toward operating income gradually expanded, so that in Q1, KRW 276.4 billion of operating income was posted. In addition, to ensure proactive participation in the digital ecosystem, we had expanded Shinhan futures now for the past 5 years and a total of 100 companies are supporting, including the 40 companies that were newly selected this year. Going forward, through identifying companies with a potential for innovative growth, we are committed to continuously enhancing the digital capabilities of the group.

Up until now, leveraging the 2020 SMART Project, the mid-term goal of Shinhan Financial Group, this group has engaged in a consistent and differentiated growth strategy based on strong execution. This year, as well, under a consistent strategy and based on the growth engines of One Shinhan, we will continue to generate sustainable and stable results.

With this, let me conclude the presentation of major highlights of this quarter's performance. Thank you very much.

From now on, we will receive questions. (Operator Instructions) Questions that are asked in English, consecutive interpretation will be provided. Those of you who ask your questions in English, please wait a while, while consecutive interpretation is being provided.

For your reference, today's presentation material can be easily downloaded through your tablet, PC and cellphone's IR app. For Android users, please search for Shinhan Finance IR or SFGIR and you can download the IR app. And for Apple iOS users, you should enter m.shinhangroup.co.kr and download the IR app. We would like to ask for your interest in this regard.

We do have a bit of a time lapse until questions are begin to commence, so we'd like to ask for your patience.

The first question is from DB Securities Investment, Mr. Lee Byung Gun.

I am Lee Byung Gun of DB Financial Investment. Thank you very much for your good performance despite the difficult environment. As you mentioned, you mentioned that before you changed the standard, you were preemptive in reclassification, the interest expenses. And I would like to ask 2 questions. My first question is about your high loan growth rate and your management -- good management of the NIM. For your competitors, some have thought that aggressive sales was involved, but looking at the presentation materials compared to your competitors, I think there was a difference in NIM. In the case of your competitors, it seems that for the loans in won, it was the loan interest rate that went up 6 to 7 bps, and the funding in bp also went up to a similar amount. So that is why the growth was not as high. But for Shinhan, the funding in interest rate was about 3 bps and same for the management. So I think there was a difference between Shinhan and competitors. Can you tell us in more detail about how you manage your NIM and about your future loan growth strategy or plans from Q2? That was the first question.

Second question is about life insurance. And you were preemptive in changing your standard. And I would like to ask a question to you that was talked about in the market. And you know the LAT standard is being reinforced, and with the implementation of IFRS 17, then it is preemptive of reflection of the liabilities. And the LAP compares to the past, while the interest rate has gone down substantially, so the scenario probably will not change in the time being, but I think some have concerns in the market that there might be need for further reserve.

Of course, for Shinhan Life Insurance, I think your LAT is very ample and in the mid- to long term, if you think of synergy with Orange Life, it will not be problematic. But there -- if you have any possibility of the surplus going down before the integration because the LAT buffer, I think, has gone down for some others. So when you reflect the current interest rate, the changes in the LAT standard, how do you think it will impact Shinhan?

Let me first answer the question about NIM and loan growth. As you mentioned correctly in Q1, compared to the past and compared to our competitors, we had overall loan growth, which was quite high and it was about 2.6%.

Regarding our loan growth, one of the reasons behind our high growth was, I think, -- for 2 reasons. And first, when I first explained about the earnings at the beginning, I mentioned that in December of last year, we actually had our HR reorganization earlier than usual. So from January, not only the bank, but credit card and capital, all were able to drive their sales capability earlier than before. So that was one of the reasons why, compared to other quarters -- compared to the previous year, for example, in Q1, we had 1% growth, and the year before that, we had 0.5% minus growth. And the reason why we were able to have high growth in this Q1 was because of the advanced HR reorganization, which took place earlier than usual.

And secondly, our growth focus using our sales capability was for corporations, focus more on SMEs. And for SMEs, in Q1, there was 3.1% growth. Also, within SME category, we also focus more on SOHOs, and there was 3.3% growth for SOHOs. So you can see that the loan growth compared to the past took place quite higher than before. And in this type of high-growth situation, some might actually worry about margin squeeze. And as you mentioned in Q1 in loans, well, you can see, compared to the previous quarters, there was about 3 bps improvement. So it was 3.38%. And for this, we can say, comparatively, it's low, but I think that would be a fair assessment. And compared to the past, we have been growing, focused on safe assets, which have a tighter spread. So our growth was based on those loans. So that is why in the loans, our margin was not as affected as might be expected. And in funding in the past, we had very high growth of low-cost deposits. And in Q1, it was about 2% growth. And for time deposits and others that took higher funding cost, the growth was higher in funding. So that is why they was 3 bp increase. And I think as you correctly mentioned in the asset side, our margin didn't recover that much. And also in the -- on the funding side, the margin just maintained the previous quarter level in Q1.

Then how are we going to have our growth strategy going forward? Well, from Q1, you can see that, because we had a higher growth rate than before and taking into consideration our average balance, we are going to, I think, be quite good in managing the speed. And in the latter half of this year, we're going to monitor the economic situation and we will probably need more growth. Centering on asset quality on a yearly basis, we want to have 4% to 5% of annual growth, and we believe that we are more than capable of accomplishing this. And from the latter half of this year, we're going to think of actually adjusting the speed and having more asset quality-centric growth.

Thank you very much, and I would like to answer the second question. For Shinhan Life Insurance, in this industry is well-known for being very advanced in the early implementation or preparations for IFRS 17 adoption. And with those results, there are some items that already have been implemented in our management. For example, from last year, we are trying to cut down on just bloated growth and just have been growing, centering on our focused products. And according to different interest scenarios, we have been responding and coming up with different measures. In last year, well, the general market expected an interest rate hike. But in our group, we also put weight on interest rate decline. And keeping in step with that forecast, we did the appropriate evaluation of the policy reserves for provisions and so on. So for our LAT, as you mentioned, that there could be an effect, but we believe that the effect will be quite subdued and limited.

We do have some plans to have capital raising for example, hybrid bonds or subordinated bonds. So we want to issue those types of capital-intensive bonds or other measures so that we can raise our capital. And in the case of Orange Life, among the life insurance companies in Korea, it has almost perfect management compared to other companies in Korea. And for Orange Life, we believe that it will be -- it will have a better result and an interest rate declining environment rather than an interest rate climbing environment. So we believe that for that, there need not be any concerns.

So our next question is from HMC Securities, Mr. Kim Jin-Sang.

I have 2 questions. So first of all, the CIR results, the SG&A, as Mr. Kim has said, that record low level and compared to you, it appears very low. And this is very good news, of course. However, on the other hand, how much can it further improve? In the mid to long term, what kind of targets you have for CIR? And this additional improvement is possible, how do you intend to go about this investment?

My second question is with regards to Orange Life Insurance, you've acquired this company and you have acquired new growth engine. However, at the same time, the dividend service stock buyback, something that you can engage in for more direct capital management.

With regards to expanding returns to the investors, I think it's rather more limited. After the acquisition of Orange Life, the capital management strategy is going forward. And other peers, they are planning on sticking growth to M&As. So in this situation, after the Orange Life's acquisition, you do intend to go towards the inorganic path in terms of leverage and in terms of capital management. What are your strategies going forward?

With regards to the first question, SG&A, let me get that question first. As you have mentioned, the cost income ratio, CI ratio, is record low level, 41.8%. Improvement has been made. But further improvement of this figure, I don't think the possibility of that is very high. However, stably maintaining this level, we believe it's possible. And especially cost and operating income, if you break that down in terms of cost, the annual growth rate is about 2% to 3%. Cost increase is targeted at that level. In terms of operating income, it is -- being undertaken in a very rapid pace because -- especially we have acquired a very good company, in Orange Life Insurance as a subsidiary. And so we have come down to the 42% level. Going forward on this front, management of SG&A, how we can maintain that level to 2% to 3% is actually very important issue for us. And in terms of operating income, how can we maintain this level will be a critical factor in maintaining the current CI ratio. That will be one of the key factors in my view.

And your second question, with regards to our capital policy. So the M&A transaction, capital flexibility may have been lessened according to some views. However, that is not the case with regards to this issue. There are some preparations that are being made by us. But before the first half is over, with regards to the flexible capital management, implementation will be made. Execution will be made so as to defuse some of these concerns.

With regards to the dividend, this year's dividend, we're still in Q1, so it's rather premature. But more than anything else, what's important is that the overall -- do they -- income surplus growth.

Do we have room to increase this? Inside, the performance of Q1 continued throughout the year than by the year-end. Undertaking a flexible capital management policy is something that is possible. So with regards to capital policy, as you have questioned, a more flexible capital policy is, we believe, the right strategy going forward.

I'm Park Woo-Gyun, VP in Charge of Strategy. With regards to the inorganic growth strategy, with regards to our group's M&A, what we aim at is actually 3 things, we have 3 principles. The first, it has to enhance the group's ROE, and a company that has growth potential and does it has new growth engines. As we have said, in Asia and also the acquisition of Orange Life, the financial targets of the 2020 project was achieved by these transactions. So we'll continue to look for such deals going forward. And [Digital Shinhan] and through One Shinhan project, we intend to create synergies and we will continue to look for opportunities. I think domestically, this portfolio competitiveness, non-legacy subsidiary type can enhance profitability if we do engage in M&A transactions domestically. And the business line that we have already in domestically, that allows us to expand our business portfolio. Those kind of opportunities will be sought after. And if the effects become visible, we will be able to consider those options. And overseeing growth potential and profitability is considered, but also risk factors are very important. And the emerging markets, integrated M&A for bank, nonbanking sectors are also looked into. Asia is intact. Orange Life, they have become subsidiaries into the group. We have to settle them down. We have to make our business preparations. In the midst of all that, we will continue to pursue opportunities for inorganic growth.

The next question is from Cha Munyoung of BNP Paribas.

I am from BNP Paribas. Congratulations on your good performance. I have 2 questions. Officially, now Orange Life has become a member of your company, of your group. But even before the news of the acquisition, many investors were curious about something. And I think you mentioned this briefly there in one of your answers, and it's about the acquisition of the remaining shares of Orange Life. When do you think the remaining shares will be acquired and in what fashion? If you can elaborate on this, please mention this in terms of your capital plans.

And my second question is about something that you have actually answered somewhat. And is after Orange Life has become integrated into Shinhan Financial Group, what areas of synergy are you looking at? And is there a special goal that you're aiming for? If you can share that with us, it will be greatly appreciated.

First regarding the acquisition of remaining shares of Orange Life, let me answer your question. At this point in time for Orange Life insurance, as you're well aware, we have 59.15% of the shares and there is about 40.85% of the remaining shares. And we don't have a very specific plan of a fully owned subsidiary road map yet. But in the market, because there is some uncertainty in the market that might be unnecessary, well, if possible, then we will do our best to think that there will be a possibility for us to consider turning Orange Life into a wholly owned subsidiary by us. And in 2018, we have the February 2018 whole year earnings conference, and we had actually made a decision to issue KRW 750 billion of CPS, or convertible preferred stock, and that was a part of our preparations to acquire Orange Life insurance. And we will do our best so that we can minimize the unnecessary uncertainty in the market, and we will be very prudent in considering this possibility.

In addition, from the current point in time, there has not been a very big changes in the share price of Orange Life, and we believe that considering the possibility of turning Orange Life into a wholly owned subsidiary might be important to consider the share price fluctuations.

You also asked questions about synergy and some performance goals that we might have in numbers. Well, it will be hard to answer in numbers, but they were included as a part of our group as of February 1 this year. And looking at Orange Life and Shinhan life, there is their own competitiveness, which do not overlap, which is unique to each company. So we want to actually maximize the -- both companies' competencies. So having one life as the first step and having the new life as the second stage. So 1 plus 1 is 2, but what we want to do is we want to actually hone the competencies of both companies and to strengthen the competitiveness of Orange Life especially.

And in insurance, well, you can see the market and the regulatory environment is changing quite rapidly. So considering this, we want to have good business plans and management plans to keep in step and going into this one step further. Well, we want to also expand our customer base and to provide more target-oriented products to these customers. We believe that we can have synergy for that and for different channels because the channels do not overlap between the 2 companies. They are very competitive. And we also have differentiation in the management of assets. So we have a long-term business plan and a shorter-term business plan so that we can have synergy together. And to hone their own competencies, so they can be #4, if you just add them together. But we believe that going forward, we may have business plans so that they can actually afford to become #2 in the market and to -- for us to reap better performance. Thank you.

As of yet, we have no further incoming questions. We will wait for further questions. (Operator Instructions)

We have no further questions. And with this, I would like to conclude the earnings presentation of Shinhan Financial Group Q1 2019. I'd like to thank everyone for taking part in today's earnings presentation. Thank you very much.