Shinhan Financial Group Co Ltd (SHG) 2020 Q2 法說會逐字稿

Greetings. I am Park Cheol Woo, Head of IR. I would like to thank all the participants in our business results presentation and begin the Shinhan Financial Group 2020 First Half Earnings Release.

From Q1, we have been holding this website with only voice and without video to minimize the number of participants amidst the COVID situation. We ask for your understanding. We have here with us our CFO, Roh Yong-hoon; CSO, Park Sung-hyun; CRO, Bang Dong-kwon; and Head of the Finance Management Team, Kim Tae Youn.

We will first hear the 2020 first half business results presentation by CFO, Roh Yong-hoon, and then engage in a Q&A session.

I will now invite CFO, Roh Yong-hoon, to deliver the 2020 first half business results presentation.

Greetings. I am Roh Yong-hoon, CFO of Shinhan Financial Group. Thank you for participating in the 2020 first half business results presentation.

Amidst concerns over spread of COVID-19, it is still cautious to have confidence in economic recovery. Since it is hard to look into the future at this time in this situation, it is important to make efforts to minimize future uncertainties. Shinhan Financial Group in Q2 continued financial support to customers to overcome COVID-19 and actively responded to the economic downturn cycle through additional provisioning.

In addition, we have been working hard to recover trust by taking preemptive actions regarding customer losses related to financial investment products, including Lime and Heritage. It is evident that this is the most opaque business environment with many unusual factors. However, compared to Q1, with the stabilization effect of the financial market in Q2, recurring financial performance and business indicators improved. I will walk you through the related content from Page 5 to Page 8 and then elaborate on the group's first half performance.

Let's go to Page 5. I will explain about our response to the COVID-19 crisis. Keeping in step with the government's financial relief package for corporate and retail clients, we have been continuing our inclusive compassionate financial policy so that prompt funding can be provided to our society and customers. Until July 3, we provided a cumulative KRW 16.7 trillion of support for SMEs. We not only extended new loans, but have programs to extend maturity and defer principal repayments. Shinhan Bank supported around 135,000 cases. On the other hand, bank and card additionally provisioned KRW 180.6 billion against COVID-19 to preemptively respond to the uncertainty in the COVID-19 crisis.

With the change in the RC value adjusting future outlook data, including economic growth slowdown, bank and card additionally provisioned KRW 115.5 billion. In addition, there was KRW 65.1 billion of additional provisioning through identification and application of DCF valuation for vulnerable loans. Including KRW 4.1 billion of COVID provisioning from capital and other subsidiaries, a total of KRW 184.7 billion of provisioning from the group is reflected in Q2 performance.

In the second half, we will also comprehensively monitor the financial market, real economy and group assets and continued efforts to minimize future uncertainty. We will protect our proprietary assets and customer assets and also improve our capital efficiency through RWA management leading to optimal growth.

From Page 6, I would like to explain about our digital platform sales expansion responding to COVID-19 crisis. After the COVID outbreak, the numbers of non-face-to-face channel customers wanting to utilize Shinhan's trusted and solid digital platform increased. In particular, the numbers of MyAsset users, our comprehensive asset management service, increased from 1.95 million in 2019 end to 4.17 million as of end June 2020.

It was not only a simple lock-in effect, but we had been closely watching and monitoring user behavior so that we can expand the high value-added WM sales base. The operating profit through non-face-to-face channels compared to the previous year rose 26.6%, posting KRW 830.6 billion.

Let's go to Page 7. I will elaborate on the response to the financial investment products. Shinhan, regarding the financial investment products that were recently an issue, has considered the possibility of losses through sold products as well as reconciliation recommendations, and we are pushing for preemptively compensation and liquidity supply to customers. The financial dispute resolution committee has not decided whether to accept the financial investment sales, Lime fund recommendation, but we included this and posted it conservatively in the nonoperating costs. For Heritage trust, we also considered the expected collateral recovery amount and liquidity supply amount and provisioned accordingly.

Accordingly, we reflected pretax KRW 201.6 billion in our financial statement to respond to the financial investment products in the first half of the year. We improved the product sales process so these types of incidents won't occur again, changed our KPI so that it is customer-centered and have made so-called Happy Calls or follow-up calls after selling all products and have implemented early subscription rights. From Page 8, there is a summary of first half and Q2 major financial overview for your reference.

Next, I will cover group's financial highlights from Page 9. We maintained our strong recurring fundamentals in the first half of this year of 2020. Even after our active response system was implemented, including COVID-19 provisioning to resolve market uncertainties, we posted KRW 1.8055 trillion of net income. We had realized recurring income of around KRW 1 trillion through efforts to strengthen fundamental profitability. On the other hand, with expansion of COVID financial support, bank loans in won grew 5.5% YTD. Even under an interest rate cut regime, we guarded our margin from falling through active ALM management.

In Q1, with the expansion of financial market volatility surpassing the volatility of the 2008 financial crisis, financial product losses increased. But in Q2, it greatly stabilized and the group's noninterest income went up 1.8% Y-o-Y. In the COVID crisis, through strategic cost management, SG&A increased 2.7% Y-o-Y. Group CIR posted 42.5%, a 0.1% point drop Y-o-Y and is being managed within our financial business plan.

As aforementioned, we provisioned to be prepared for the possibility of credit risk expansion following future economic downturn, leading to a 50 bp credit cost ratio in the first half of the year. However, excluding COVID provisioning as well as investment product-related one-offs, it stands at 32 bp, a 3 bp drop Y-o-Y.

All the subsidiaries in the group are closely monitoring asset quality. From Page 10, I will explain about group's interest income in more detail. In the first half, the group's interest income grew 3.1% Y-o-Y through both asset growth and proactive margin management. In the first half, the base rate was cut 75 bps, increasing the downward pressure on the NIM. However, due to proactive ALM measures amidst the low interest rate trend, we were able to contain the fall within 2 bps over the quarter.

The bank's loans in won grew 5.5% YTD. By segment, household loans increased 3.1% and corporate loans, 8.2%, on an annualized basis. Loans for SMEs and self-employed in need of COVID-19 credit support increased, driving the overall loan growth. Large corporate loans had exceptionally grown because the companies were in need of liquidity. However, the monthly growth is trending downward as the market stabilized. In the second half, the group will do its best to maintain its fundamentals through risk-sensitive, adequate growth and ALM measures.

Next, the group's noninterest income on Page 11. The group's noninterest income in the first half rose 1.8% Y-o-Y to KRW 1.780 trillion. This is due to valuation gain on securities due to capital market stabilization and also due to increase in fee income. In the first half, the fee income increased 3.7% Y-o-Y to KRW 1.1293 trillion. With a significant increase in stock trading, brokerage fee income increased 86.7% Y-o-Y. In Q2, consumption partially picked up, showing signs of recovery in the credit card fee income.

The group's SG&A and credit costs on Page 12. The first half SG&A is up 2.7% Y-o-Y. The group's CI ratio fell 0.1 percentage point Y-o-Y to 42.5%. There will be continuous effort made for strategic cost saving to prepare for the uncertainty in the second half. The group's credit cost ratio increased to 50 bps, which is inclusive of the one-offs: 11 bps for the COVID-19 provisioning and 8 bps for the Heritage issue. If we were to take these out, the credit cost ratio would be 32 bps, a 3 bp decline Y-o-Y.

The bank's and card's delinquency ratios are being maintained at a stable level despite the pandemic. In case credit risk goes up when the COVID-19 support programs expire, we will implement continuous risk management.

Next, on Page 13, capital adequacy. Thanks to strong fundamentals and stable management of the cap on RWA, the group's CET1 ratio under Basel III posted 11.4%, 30 bps improvement from the end of last year. In May, with the completion of KRW 150 billion worth of share buyback and cancellation, there was a 6 bps impact on the group's BIS ratio, but capital adequacy is being improved with stable recurring earnings power. In the first half, ROE and ROA each recorded 9.6% and 0.65%. Normalized ROE and ROA without the one-offs are at a similar level Y-o-Y.

The subsidiaries' income and business performance on the next page. In the first half, asset prices fell due to volatile capital market, and the group had to set aside conservative provisioning against COVID-19, which impacted earnings in WM and global. However, thanks to card insurance capital and IB's performance and Shinhan's diversified business portfolio, nonbank's net income weight increased to 38%. Going forward, we will continue to strengthen nonbank business so that we can enhance the fundamentals of the overall group's earnings base.

More detailed explanation about the global business on the next page. The group's income from the global business was KRW 152.7 billion in the first half, down 14.7% Y-o-Y. Although income from major overseas network, both interest and noninterest, were resilient and recurring profits remained at a similar level Y-o-Y, we provisioned against COVID-19 conservatively for the global segment, complying now with the local standards. But according to the domestic standard, we will continue to manage profitability, liquidity and soundness in each country under the pandemic.

Next, ESG on Page 16. ESG has become a relevant topic due to COVID-19. Under the challenging business environment, we are continuing with investment in and execution of eco-friendly, inclusive and innovative finance. In the first half, total amount of green finance was KRW 1.1296 trillion. New technology financing in the first half amounted to KRW 10.8385 trillion. And the cumulative, innovative and inclusive financing in the first half amounts to KRW 14.7873 trillion.

The remaining slides are for your reference, guiding you through major subsidiaries' performance and business indicators. So please read them for your reference.

In the second half, we continue to face headwinds and we will not be expecting too much of the high results, but we will do our best to minimize the uncertainties in the second half. We will work hard to building the fundamentals. And based on the future growth engine, we will ride over the crisis, and we will continue hard to enhance the value for the shareholders and for the society.

With this, I'd like to conclude my presentation, and we will be taking questions. Thank you.

(Operator Instructions) First question, Mr. Kim Jin-Sang from HMC.

I have 3 questions. They are quite simple and short. And you mentioned 2 bp went down for bank's NIM and 5 bp for card. And it seems that for your users, they -- users were getting financing from the banks. So it seems that maybe it was temporary with the weakened financial products, the impact on the card. Is that right, my assumption? Do you believe that after time passes, card NIM will have a turnaround, so your group NIM will recover more quickly compared to the bank NIM and be normalized? So that is my first question. And I also would like to know about the different quarterly NIM outlooks.

The second question is regarding the different government's forbearance policies. And amount-wise, well, the amount is quite sizable, if it's KRW 70 trillion or so, so there will be credit risk or downward pressure on the margin because of the government support policies. I believe that it may be already embedded in your Q2 results. But if you -- if they are not, can you have a breakdown for us regarding the different provisioning that may occur? Additionally, so can you tell us about the burden that the government's policies may have going forward?

The third question is about your asset growth. From Q1 to Q2, your total asset, it seems that hasn't grown much. And I know that you have solid loan growth and you have quite high-quality asset growth. But number-wise, it seems that your group's total assets haven't grown from Q1 to Q2. So if you can elaborate, it will be very helpful.

Thank you for your questions. I'm the CFO. And regarding the NIM, as you mentioned, it is true that compared to the bank, others haven't grown, and it seems that low-cost deposits have grown much, about 11% or so. So I think we have done very good ALM management. But in card, the NIM decline was steeper because of cash advance services and others, which was impacted. But if this increases, then we believe that we will have recovery in card and others.

On the whole, regarding the NIM outlook, if there is no change to the BOK rate, we believe, on a yearly level, it will be mid-1.3% or so. So that will be the goal that we are going to aim for and manage.

I'm the CRO. Thank you for your questions. Regarding the credit risk forecast going forward, I agree with what you said that in the second half, we will see more provisioning. And as was mentioned, we had provisioned more to prepare for a credit loss. And going forward, we're going to have more detailed and sophisticated monitoring. And with the results regarding the credit risk, we're going to have further plans to respond to the fluctuations. We believe that it may continue into next year. And we are going to have short-term and longer-term plans going forward. Thank you.

I am the Head of IR. And regarding the total assets, as you mentioned, our loan assets have grown. But on the whole, other than loan assets for FTE assets and trust, all of that are included. And our loan assets grew, but trust and others did not grow as much. So that is why the total assets seem to be at a standstill.

(Operator Instructions) The next question, Kim Do Ha from Cape Investment.

So you have a more recoverable amount than the prepaid amount, so it does not have impact on the net income. So what is your basis on concluding that you may recover more than 50% of the amount? And in relation to the bank line and -- are there additional costs or provisions in Bank or Investment Corp. related to non -- others than Lime and Heritage? Any others in the second half?

Thank you. This is the CFO. As for the Lime exposure in Shinhan Bank, 50% percent was decided to be paid in advance, and provisioning was not considered. We are getting accounting reports from the auditor, and the valuation amount of recoverable amount was 52%. Of course, due diligence cannot take place on site. So through the accounting firm, we got the numbers, and we requested for a second due diligence. And we are basing our conclusion on this. And when the second report comes out, we could adjust the number. But we believe, for the time being, 52% will be the recoverable amount. And if there is any change, we will let you know.

This is the CSO answering the second part of the question. So any other entities than Lime and Heritage -- well, we have the biggest issue with Heritage, KRW 400 billion. That's the amount sold, and the underlying assets are all good assets. And there is some amount that margin call was not secured because the market is not good. And we are continuing to discuss the issue with Hong Kong, and we are coming up with additional measures to help the customers. Sorry, I am talking about Gen2, not Heritage. I was talking about Gen2.

We'll take the next question from HSBC, Won Jaewoong.

Congratulations on your performance. I have a question, and I read an article yesterday, which was about extension of the COVID-19 loans. What we can know was just that much from the bank. Do you know in more detail about how long it will be extended? And if you can extend the loan until maturity, is this going to be positive or negative? I think this will be positive, but can you tell us about the impact of low maturity extensions and others? And what kind of impact this will have on the bank?

I am Park Sung-hyun, the CSO. Yesterday, the Head of the Financial Securities Commission said after a luncheon meeting -- a breakfast meeting that the maturity extension will be seen in a favorable light.

Regarding the details about who's going to extend the loans and others, well, they will also be decided by the bank. But it seems that the interest-related amounts have not been recovered much, and we thought that more than KRW 10 trillion would come in, but only KRW 250 billion of interest income came in. So it means that interest deferral actually took place, and it seems that COVID-19 has not had a huge impact as we had -- were concerned about.

Regarding the maturity extension, we need to also invigorate the economy and the infrastructure. So we also believe that this is quite positive, but there might be other suggestions from the government. So we believe that we still have some time left. So we will actually look into this issue more closely and respond.

I'm the CFO. And regarding the maturity extensions, to elaborate, regarding the COVID-19 loans and the principal repayment of extensions and the maturity extensions, I know that there are concerns in the market. But we believe that we have different thoughts because even without the COVID-19 crisis, when there is the maturity extension, well, we need to look at the borrower situation and their credit rating. And we get sometimes amount of principal recovered and then we extend the loan. So that has been going on even before the COVID-19 crisis. So we don't feel that the extensions will be a great burden to us, and we believe that's the role that the financial institutions need to play at this time. However, when this gets bigger, we are going to vigilantly monitor the situation so that we can ride this crisis.

We'll take the next question from Korea Investment & Securities, [Victor Hah].

I have a question about card asset quality and about the provisioning outlook for the second half. Shinhan Card for COVID-19 provisioning, you provisioned about KRW 30 billion. And in Q2 only, provisioning had decreased 36% Q-o-Q. And I think many people will be in difficult situations. Is there any reason for the good asset quality in Shinhan Card? And in the second half, at the group level, how much will be the provisioning? Do you have any ballpark figure?

This is the CFO. As you mentioned, in the second quarter, card -- Shinhan Card had the provisioning and also write-back. Cash advance services had decreased. And as in the case of Shinhan Card, the operating assets in the first half is KRW 28 trillion, and it's a decrease of KRW 620 billion. And provisioning does look smaller Q-o-Q. And going forward, the second part of the question will be answered by the CRO.

This is the CRO. Provisioning in Shinhan Card decreased with smaller assets. And this was also impacted by the relief from the government. And with the relief, people had liquidity, and they did not rely much on the cash advance services. And in the second half, the group's provisioning plan, well, as to that, as was mentioned earlier, in the first half, we adjusted the RC and provisioned conservatively.

And now looking at the company, starting from the year 2017, there were difficult -- they had difficulties in making profits and carrying out businesses, and they were hard hit even more with the COVID-19 crisis. And so this is the reality that the companies are faced with. And so the economic situation is very challenging, and the government policies may not be producing good effect. And the monitoring interval is getting shorter and shorter.

And so we need to be more granular and monitor more closely and discover areas that are more challenging and consider more provisioning. We do not have concrete plans to adjust the risk component yet. In other words, we will monitor, taking a segmentation approach. Thank you.

We do not have any questions in the queue yet, so please hold.

With this, Shinhan Financial Group 2020 First Half Earnings Release will be concluded. With the COVID-19 outbreak that is continuing, we would like to thank you for your participation. We hope for your good health in your homes and in your company. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]