Shinhan Financial Group Co Ltd (SHG) 2020 Q4 法說會逐字稿

Good afternoon. I am IR, Park Cheol Woo, Head of IR. I would like to thank all of you for taking part in today's event, and we'll now commence the 2020 Q4 earnings presentation.

We ask for your understanding that only oral presentation is being provided due to the COVID-19 and since Q1 of last year. Once again, we ask for your understanding.

With us today is our CFO, Roh Yong-hoon; CMO, Heo Young-taeg; CSSO, Park Sung-hyun; and CRO, Bang Dong-kwon.

We will begin with the presentation of the 2020 Q4 business results by CFO, Roh Yong-hoon; and an explanation on the group's ESG strategy by CSSO, Park Sung-hyun; and afterwards, we'll move on to a Q&A session.

We'll now invite CFO, Roh Yong-hoon, to walk us through the business results of Q4 2020.

Good afternoon. I'm Roh Yong-hoon, the CFO of Shinhan Financial Group. I would like to thank all of you for taking part in the 2020 full year's earnings presentation of Shinhan Financial Group.

First off on Page 5. In Q4 as well the ordinary income of Shinhan Financial Group continues to be improved. In 2020, there were a number of uncertainties that prevented us from implementing the business plan that we had set up early in the year. As such, we have responded preemptively from a conservative point of view during Q4 to minimize the losses related to the redemption of suspended funds such as Lime and the uncertainties arising from COVID-19.

First of all, the response to products in dispute in overseas investment assets. In Q4, as we have already informed during Q3, we have reflected the valuation from the external audit for Lime and other such redemptions of suspended funds.

Accordingly, the bank has recognized KRW 69.2 billion of unexpected damages -- unexpected damages for customer losses as nonoperating expense. Meanwhile, the investment in core recognized a KRW 115.3 billion expense in Q4 losses related to Lime TRS, our proprietary asset.

Including Q4, in relation to financial investment products sold to customers, expenses totaling KRW 472.5 billion was recognized for the full year in 2020. And for the full year, the cumulative is KRW 520 billion that was recognized.

In Q4, though a conservative recognition of the losses in the financial investment products sold to customers, we expect to limit the recognition of expenses and future-related losses.

In addition, in some of the overseas investment assets invested with proprietary assets, the loss in valuation of KRW 69.6 billion assessed by an external audit were recognized as noninterest expense, and expenses that may arise in the future due to COVID-19 was preemptively reflected.

Second is the provisioning set aside related to COVID-19. In Q4 as well as in Q2, additional provisioning related to COVID was set aside coming to a total of KRW 187.3 billion. The future economic outlook was reflected conservatively so that additional provisioning of KRW 108.6 billion was set aside. The DCF and stages were reclassified for the loans to companies with short-term default risk, leading to a recognition of KRW 78.7 billion.

Through such preemptive and conservative expense recognition, we would like to once again emphasize that we have made the necessary efforts to reduce any uncertainties in improving the ordinary fundamentals in the future.

On Page 7, in the group business results highlights, I will provide a detailed explanation of the group's strengthened income fundamentals. The financial results of the year 2020 posted a net income of KRW 3.4146 trillion. Despite the adverse market conditions, it's up from 2019. In 2020, we saw profitability improvement on the back of increased income from growth in loan assets, increased stock transaction amount and growing income related to marketable securities.

However, due to COVID-19 provisioning and write-off of investment product losses, incomes were realized at level similar to last year. However, if COVID-19 provisioning and investment product losses are excluded, net income come close to KRW 4 trillion, showing improving income for 7 straight years.

The COVID-19 provisioning and recognition of investment product losses, as has been explained previously, was undertaken from the point of view of minimizing the future uncertainties, and we are closely monitoring the situation. So we don't anticipate any significant expenses arising in relation to this in the future. Including COVID-19-related financial assistance, fair asset growth rate was posted. And despite the fall in interest rates, the margins were successfully defended so that growth of 1.9% was realized.

Noninterest income, which is highly profitable, grew 7.9% (sic) [7.8%] Y-o-Y. Meanwhile, the group's cost income ratio posted record-low levels and costs are being managed stably. Also, after securing a sufficient buffer in preparation of the end of the group's financial assistance program, the credit cost ratio posted 41 bp, managed at a stable level.

Starting from Page 8, details of each line will be explained. In 2020, the group's interest income came to KRW 8,155.1 trillion, up 1.9% Y-o-Y. Interest income from both bank and nonbank subsidiaries grew Y-o-Y. As fair growth in size continued, we were able to offset the impact of falling margins, driven by the BOK rate cut in 2020.

In Q4, the group's margin now fell by 2 bp, showing the fall to have moderated. Barring a change in BOK rate cut, margins during FY '21 is expected to maintain the same levels as Q4.

In 2020, the Korean Won loans of the bank grew 10.6% Y-o-Y, and for the first time since 2015, realized double-digit growth. A breakdown by segment shows retail loans having grown at 9.0% while corporate loans grew 12.3%. The amount includes the COVID -- bank's COVID support program, including maturity rollover and suspension of principal repayment. The amount for interest deferral is KRW 6.4 billion (sic) [KRW 6.5 billion].

To strengthen asset quality monitoring, after the deferral period is over, we're aiming to minimize the impact of asset quality. And given the executed amount under the relevant programs, we expect that the impact of default won't be anything significant.

Next on Page 9, let me talk about the group's noninterest income. In 2020, the group's noninterest income stood at [KRW 3.3778 trillion], up 7.9% Y-o-Y. This is because fee income and income related to marketable securities jumped significantly. In particular, the fee income grew 11.3% Y-o-Y. And because of increasing stock transaction amount, the stock brokerage fees were expanded and the lease fees have surged as well.

Next on Page 10, expenses. In 2020, the SG&A posted [KRW 5.1225 trillion], up 1.5% Y-o-Y. The group's cost income ratio posted 45.2%, down 0.9 percent -- percentage point Y-o-Y. For your information, the group's ERP expense posted KRW 92.4 billion, slightly lower than the average year.

Going forward, we will endeavor to continue posting a low level of CI ratio through enhancing the efficiency of our operating system, driven by digital innovations. Meanwhile, the group's NPL coverage ratio stood at 46.3%, an increase of KRW 439.8 billion Y-o-Y.

From this, the additional provisioning for COVID-19 in 2020 was KRW 394.4 billion. In 2020, the credit cost ratio was 0.41%, up 9 bp from last year. The credit cost ratio, excluding the COVID provisioning, is 0.29%, down 1 bp Y-o-Y. Given that the ordinary credit cost ratio was in the north of 30 bp according to the 2020 business plan that had been drafted before the outbreak of COVID, the credit cost is quite stable.

Our expectation is that the changes on the asset quality will become visible after the COVID financial release program comes to a completion. The provisioning and the buffer included in the year's business plan should be more than enough to respond to any changes that may occur.

If you look at the delinquency ratio, a leading indicator of the future credit cost, both the bank and the card businesses saw the delinquency ratio drop Y-o-Y as well as Q-o-Q, implying no deterioration in the asset quality due to COVID-19.

Next on Page 11, our capital and profitability indicators. CET1 ratio is expected to be 11.7%, up 0.6% percent -- percentage point from the year-end. The figure here does not include the early introduction of BASEL III credit risk reforms. SFG will exert efforts to improve asset quality so as to be in line with the midterm goal of obtaining 4% based on solid net profit improvement on the back of its enhanced profit-generating capability. For your reference, the new CET1 ratio is 12.9%, and the impact of early introduction of BASEL III reforms will be 116 bp.

As the Board has not yet been convened, a dividend for FY '20 will be disclosed early March, after sufficient discussion with consideration to the various conditions and external environment. CET1 ratio changes from the end of FY '19 will be included in this IR presentation stack and uploaded onto the home page after the dividend decision has been taken by the Board.

As was mentioned during the Q3 IR presentation, quarterly dividend will be made available when various shareholder returns are possible with business conditions stabilizing, including the phasing out of COVID-19.

Our ROE for 2020 was 8.4%. It will be in the 9% range when largest capital increase is included. As of January 2021, Neoplux changed its name to Shinhan Financial Investment; and Shinhan Asset Management, formerly known as Shinhan BNPP Asset Management, is now a full subsidiary of SFG.

SFG will continue to enhance returns to shareholders by expanding capital market-oriented portfolio that improves the group's ROE.

Next page covers performance per business line. Thanks to its outstanding performance, the nonbanking business' contribution to net income recorded 41%, up 7% points from last year. Shinhan's diversified portfolio that can withstand high volatility of the capital market has been demonstrated, thanks to positive performance by capital, IB and trading business units. By matrix, operating income of WM business dipped due to COVID-19 and the private equity funding incident. However, highly profitable portfolio such as GIB and GMS performed remarkably well.

On the next page, detailed explanation of global business is provided for your reference.

On Page 14, I will cover the contribution by digital business. In the area of digital, strategic response to the big test will be made at the same time as seeking opportunities for our collaboration. Active support and investment for digital transformation will, of course, be continued. As mentioned during -- on the last earnings call, 10% of the group's net profit for the next 3 years will be set aside to support new businesses and to secure core technologies.

Now about financial digital business. In Q4, contribution to the group's revenue via digital activities was 12.7%, growing rapidly every quarter in 2020. Revenue growth in digital business of the Card -- Shinhan Investment Corp., especially a standout. Cost reduction due to digitalization rules compared to the previous quarter and in 2020, cost saved will be as much as by 38.7% compared to the previous year.

Since launching the open banking service in October of 2019, the number of clients as well as size of the assets have steadily increased with the number of users for the bank app, SOL, now reaching 12.5 million.

New business development continues to be active, as can be seen with its 13 new businesses being chosen as innovative financial services. The group aims to secure superior advantage by actively responding to changes in digital regulations, as can be seen in business license acquisition for MyData business by the bank and the card.

Lastly, as for the ESG activities on Page 15, Chief Strategy and Sustainability VP, Park Sung-hyun, will walk us through.

Greetings. I am CSSO, Park Sung-hyun. In November 2020, SFG became the first East Asian financial institution to announce its strategy of zero-carbon drive to respond to climate change. The plan is to achieve zero-carbon emission for the group's asset portfolio by 2030. It is indeed a very ambitious goal for a financial institution with our portfolio to reach carbon-neutral. The reason for such high-reaching goal is that the market environment is changing due to strengthening of regulations related to carbon neutrality by international organizations, nations and financial authorities, including Korea.

What this means is that business as usual and traditional role of finance are no longer applicable. Therefore, Shinhan aims to look at this, a change in environment, as the new business opportunity. It plans to do so by proactively trying to achieve zero carbon and entering early on into profit-generating markets, doing continuous research and collaborating with other stakeholders.

In order to reduce emissions from its asset portfolio by 38.6% by 2030, a quantifiable goal was set to make ecofriendly investment and assistance of worth about KRW 30 trillion. A reduction target was set by applying science-based target initiative guideline, as published in October of 2020, in order to implement Paris accords.

The scope of goal for carbon offset will be adjusted based on [case] taxonomy, the green finance standards to be announced shortly by the Korean government. Shinhan, in particular, will expand its support for renewable energy and development of ecofriendly new technologies and opportunities. This presents -- excuse me, this ends the presentation on ESG.

This is Roh Yong-hoon, the CFO. From Page 17 and onwards contain detailed earnings information of the group and its major subsidiaries as well as main business indicators for your reference.

We -- year 2021, as was the case with 2020, will be a year of complex uncertainties with added confusion and chaos. Vaccination does signal hope. However, in the financial plan for 2021, such factors as how much longer the current pandemic will last, how fast the digital players move into the market and how to restore the trust of WM clients, have been included. To prepare for a future with sustained growth, fundamentals will be made stronger, quality improvement of core businesses will be endeavored and new engines for growth will be explored.

This concludes the earnings presentation. In this auspicious year of write-offs, I wish you success in all of your future endeavors. Thank you.

(Operator Instructions) We have our first question from DB Securities. So we have Mr. Lee on the line.

I'm Lee Byung Gun from DB Securities. I have 2 questions. First is with regards to dividends. Although the CFO said further details will be disclosed later on, we do -- we would appreciate if you give us a follow-up on the current situation.

According to the current financial regulators, on all types of scenario, those who have passed this test can pay dividend above 20%. But even if you are capable, they have asked for restraint.

In the case of our company -- so in the case of Shinhan, what's your situation with regards to dividend payout ratio? Are you able to exceed the 20% mark?

As much as you can disclose, we would like to appreciate your guidance on this. And if the dividend payout ratio goes down compared to the previous year, then if the financial regulator's advise is eased, can it go up again?

My second question is in the IR material. You talked a lot about the ESG and recently, investors are showing a lot of interest in this area. Maybe this can be seen as a recommendation, but in the case of domestic banks, in the case of the banking industry, among the ESG, given the weights, I think that there's a little weight applied to E and the portions of S and G is rather larger than E. But as of now, because we're in the initial stages, only a lot of explanation is provided about E. But with regards to S and G, your assessments from outside and your efforts to improve upon S and G, we would like to see more materials, more data on these aspects.

Yes. Thank you very much for those questions. I'm the CFO, Roh Yong-hoon. With regards to first question, that was a difficult question about the dividend. Let me provide an explanation. Well, the financial regulator's perspective and the press reports that you have -- you read, yes, your understanding is correct.

However, in our case, we're taking time to consider the following. There is some discrepancy from our initial plans and -- so we are giving it a lot of thought. And so a BOD is scheduled in the earlier part of March, and I think a decision can be made then. So we will take our time to reach a final decision about our dividends.

However, as has been noted in the press report, the cap on the dividends will last till June. And according to the FSS officials, after the end of June, the basic policy line will be that the financial institutions all will be respected in their decision -- their decisions will be respected. With regards to dividend payout ratio, the advice from the FSS, if it has been accepted, then we would have been able to reveal our decisions. However, whether we will keep the 20% line or whether we will consider a different ratio, we would make a decision by March. And after the end of June, according to our plans at least, the dividend payout ratio has been lower than our initial plan. We will take that into our consideration in order to effect necessary changes. And also we'll make preparations for the quarterly dividend as well. But the timing of that is something that we have to wait and see. But the plan, net dividend payout ratio, if it's not executed according to our initial plans, then yes, we do have plans to execute as planned in the later half of the year.

And with regards to the ESG, I'm -- yes, Park Sung-hyun. With regards to ESG, yes, we have focused on E in the presentation. And that's because in the case of S and G, all the different companies have news in different portions for S and G. But in the case of financial institutions, they can actually change the trend of the industry itself if they take a lot of measures for E, and so that's the reason why we paid a lot of attention to this area.

But that's not to say that -- S and G is not being neglected. We are focusing on that as well. The Triple K, for instance, project nationwide in 5 largest cities, so we are creating the relevant hubs. In Seoul, Incheon and Daejeon, these innovative complexes have been created, and the other complexes are underway.

And other projects for the financially vulnerable, we have a full scatter of projects in order to help them to get jobs. And with regard to equality, there are programs in order to promote diversity as well as gender equality, we have a SHeroes program, for example.

With regards to investment products, customer-focused governance system is being employed.

With regards to G, in the case of Shinhan Financial Group BOD, more than any other companies, we do believe that we have the necessary professionalism in our BOD. So the BOD is leading the necessary policies in this area, and the CEO and the Chairman is executing these policies.

So in the Dow Jones or other external assessments, we have received very good assessments in the global that -- in their assessment as well. We have been selected 9 years in a row. So we are receiving the highest marks in this area among the financial institutions. Of course, there's still room to improve, and we will do our best to further fulfill our responsibilities as financial institutions.

We will now take a second question just (inaudible) from [Citi] Securities.

I have 2 questions as well. The first is a follow-up on the dividend question. Just wanted to understand if the 20% is a guidance from the regulator? Or is it something that you can still probably pay more than 20%, if you actually pass the stress test with flying colors?

And then the second question is on asset quality. It looks like the COVID-19-related provision that you have made in full year '20 is a bit conservative compared to some of your peers. Can you help us to understand what's driving that? It's higher than [PS] provision, is it because of the model difference? More conservative stance of your management? Or is it the portfolio mix difference?

And then looking ahead into full year '21, what's your expectation of loan losses? Are there any chance to write-back from this COVID provision?

(foreign language)

Yes, thank you very much. My name is Roh Yong-hoon, the CFO. That 20% that was -- is the guideline from the regulatory authority, and that is a recommendation. It's not legally binding.

So financial institutions, based on its capital adequacy, could -- no, depending on the Board's decision and also whether that agenda item passes at the shareholders' meeting, the dividend over 20% is possible.

However, the financial authority will do the -- has done the stress test to come up with that 20%. And if financial institution should go far beyond this recommended 20%, well, that means that there could be a bit of difficulty in communication with the financial authority. So all the financial institutions in Korea, according to the law, they can do a dividend payout more than 20%. However, the guideline of that 20% was decided after conducting the stress testing, so it will be quite challenging to test -- to go against that number.

Thank you for the question, I'm the CRO. And about the asset quality and about the loan loss rate -- let me talk about the provisioning first.

In 2020, we have set about KRW 394.4 billion for COVID-19 of provisioning. And of course, we will do the adjustments in the [SRC] adjustment. So for -- so we will have to look at the different credit left -- credit rating and based on DCF, so we will make changes to the provisioning. And we believe that our provisioning has been very conservative. This -- 2021 still remains quite uncertainty, however, I think it's still manageable.

And so in 2021, of course, we'll continue to manage the provisioning properly, and loan loss was about 41 bp. And our normal number will be about 35 to 36. So this year, I think we will be able to go near to our normal rate of about 35, 36.

I'm CFO. If I may give you additional information about the dividend, well, it's not legally binding, I just said, that 20%. But as I said, it's quite difficult for the financing institution to challenge that guideline of 20%. And despite that stress test results and if our financial institutions can come up with reasonable reasons and to -- and say that dividend ratio -- dividend payout ratio no -- is -- can be explained in a rational manner, and I think that other option is possible.

And of course, we respect the guidelines from the financial authority. But if we have -- but we are looking for a reasonable reasons to make upwards adjustments. However, Shinhan is just one of the financial institutions here in Korea. We will have to respect the guidelines from the financial authority.

We will receive the next question. The next question is from Kiwoom Securities, Seo Young-Soo.

I'm from Kiwoom, my name is Seo Young-Soo. First of all, I have a question also about dividends. What we had expected was, I think, one of them was a quarterly dividend. There has been -- the Korean regulators advised against over 20%. But in the case of quarterly dividends, I think it is possible within the 20% range.

Is there any problems in introducing this quarterly dividend? Are you in the review process of introducing the quarterly dividend? That's my first question.

My second question is, anyways, the government on the first half of the year, they will have this guidance intact. But if we assume that everything will be normalized afterwards, then there will be no more regulations afterwards. What I'm curious about is the year 2021, seen from the big picture, it will be something -- a year that's out of the box, so to speak.

Mid- to long-term dividend and payout ratio, what is your expectation for the mid- to long term? So what can we expect this year, because this year is so out of the ordinary? And another question in the case of the CET1 ratio, in the third and fourth quarter, it has dropped a bit. And when you made a disclosure, so the target CET1 ratio was 12%. But growth was strong. This fell back to [70%] range. Do you think this target is -- this 12% target, is it still valid? In order to get to the 12% level, what are you going to do about the group's policies?

Thank you very much for those questions. I'm the CFO, Roh Yong-hoon. With regards to quarterly dividends, this is something that we will implement for sure. That stands remain unchanged. But in our rules of incorporation, we do not have that cost yet. So in the general shareholders' meeting this year, we do have to change the rules of incorporation.

Afterwards, we can do that. But I don't think we can do it at the start of the first quarter. As we have explained last year, the timing of this, we'll have to take into consideration the COVID-19 situation and the improving economic situation. That was what has been announced last year. As we have just said, in the second half, whether the environment will improve, if it does indeed improve, then we will make the necessary preparations in the first half to implement it in the second half.

And with regard to dividend payout ratio, so 30% -- achieving 30% is our target as soon as possible, and then incrementally increasing it. That is our plan. That remains unchanged.

And the CET1 ratio, the target level of 12%, yes, that is correct. But achieving that 12% in 2021, No, that's not our -- what we think. In the mid- to long-term, 12% level -- at the 12% level, the CET1 level will be maintained, and that is our plan going forward, and the RWA increased this year.

According to our planned -- financial plans, [Shinhan's] loans, last year in the bank, it grew by 10% but this year, we don't think that kind of growth is possible for loans. Retail and corporate loans, 5% growth rate is expected this year. But noninterest income fee, we intend to expand significantly. The RWA, in that case, compared to last year, would not grow that much. CET1 ratio of 12%, that's our mid- to long-term goal.

Our next question, Mr. Kim Jin-Sang from Hyundai Motor Securities.

The management target or the goals, you have given some information. And so how do you plan to defend your NIM? End of last year, the asset growth rate was really high last year. Even if you grow by 5% this year, your interest income is expected to -- I mean I think it's -- need to grow substantially. Well, how much do you think that's going to be?

And as for the noninterest income, of course, you have to do provisioning. But I think even noninterest income was quite good last year. And so how much growth do you anticipate for your noninterest income as well?

And about your capital, to be differentiated from other financial growth, I think having quarterly dividend is one of the things that you can do in order to be differentiated from other financial groups. And after COVID-19 is over, your dividend payout ratio of -- it could be increased, you know, more than other financial groups to stand out. I mean do you think that would be too difficult? And I wonder if you have thought of any strategies or plans to make Shinhan to be differentiated from other financial groups.

Yes. I understand your questions. I'm CFO, Roh Yong-hoon. Well, as for NIM, in -- well we want to maintain it at the same level as Q4 of 2020. As you said, loan growth rate, well, it's not going to be as high as last year. But if we do maintain stable NIM, I think our interest income is going to grow. And so we do expect to see higher interest income as compared to 2020. As for the noninterest income, IB, the foreign exchange, well we -- and trust, we do expect noninterest income to increase and noninterest income increase rate, I expect this to be higher than last year.

And about a provision for COVID-19 and about the private equity fund of the expense of recognition, I think for -- related to the fund, I think would be -- we have already included it in our plan.

So overall, loan assets in terms of size, well, the growth rate is going to slow down, but noninterest income growth rate is going to be higher compared to last year. And so net income for this year, we believe, is going to be in the double-digit range unless we have a special one-off incident. We -- I think we will have more than KRW 1 trillion of net income. And that, we believe, is attainable given our fundamentals.

About differentiating ourselves with higher dividend payout ratio, well, we do want to make the dividend payout quickly. But increasing the dividend payout ratio -- as I said, our goal is about 30%. And of course, we're going to try to make the dividend payment earlier. But if we cannot do so as planned, we could buy back our shares so that we can give more back to our shareholders. So we do have that plan for the second half of the year.

Yes, at the moment, there is no incoming questions. So we'll wait for several seconds. (Operator Instructions)

We have no further questions. With this, we will end the earnings presentation of Shinhan Financial Group for the fourth quarter of 2020. Going forward, we will continue to make efforts in order to enhance our valuation. We'd like to thank all of our participants for taking part in today's presentation. We wish you all the success in your future endeavors. Thank you very much.

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