Shinhan Financial Group Co Ltd (SHG) 2022 Q3 法說會逐字稿

Good morning. I am Park Cheol Woo, Head of IR. We are conducting today's earnings presentation through our digital platform, to leverage engine Financial Group IR YouTube channel and the Zoom app, as we have announced last quarter, at the newly opened Shinhan Financial Group IR YouTube channel. Those of you who have missed a live streaming today, will be able to find the updated Korean and English presentation. So, please subscribe to our channel. (Operator Instructions) For more details, please refer to our home page www.shinhangroup.com.

Now we will begin the 2022 Q3 earnings presentation of Shinhan Financial Group. In today's presentation, we have with us our main presenter, CFO, (inaudible) of the group; and the group CMO, Heo Young-Taeg; the Group CRO, Bang Dong-Kwon; the Group CDO, Kim Myoung Hee; the group CSSO, Ko Seok-Hon; from Shinhan Bank CFO, Jung Sang-Hyuk; Shinhan Card CFO, [Moon Dong Kwon]; Shinhan Financial Investment CFO, Keum Sung Weon; and finally, Shinhan Life CFO, (inaudible).

(Operator Instructions) Today, we will first invite CFO, Lee Taekyung, for the business results of Q3 2022. And then CRO, Bang Dong-Kwon, will speak on the group's risk management; and the achievement of the digital sector will be presented by CDO, Kim Myoung Hee' and then we'll proceed to Q&A.

Now we will invite our CFO, Lee Taekyung, for the earnings presentation of Q3 2022.

Good morning. I am Lee Taekyung, the CFO of Shinhan Financial Group. First of all, I'd like to thank everyone for taking part in the earnings presentation for Q3 of 2022 despite your busy schedules. I'd like to walk you through the highlights of this quarter on Page 4 and then go into the details of the business results for Q3 of the group.

Page 4. In Q3 of 2022, the group's cumulative net income posted KRW 4,315.4 billion, posting solid results despite the deteriorating external environment. In Q3 alone, net income came to KRW 1,594.6 billion, and ordinary net income, excluding the gains from the sale of the office building of Shinhan Investment Securities posted KRW 1,272.8 billion. Thus, we were able to defend a stable net income by offsetting the sluggish performance of the noninterest income segment with the growth in interest income and decline in provisioning. In Q3, the cumulative cost income ratio CIR posted 40.1% and despite the increase in digital-related costs, the SG&A was managed at a stable level. The group's Q3 credit cost ratio was 29 bps maintained at a stable level.

Going forward, we plan to maintain our conservative provisioning policy. Finally, the group's capital policy. The per share dividend in Q3 was 401 and this was decided at the BOD meeting held on October 6 along with the treasury stock buyback and the cancellation of an additional KRW 150 billion. As has been noted last time, we will continue to make an effort to enhance shareholder value through a gradual improvement a shareholder return ratio while maintaining an appropriate capital ratio.

On Page 5, please refer to the key business results of the group as a whole during the third quarter. So please refer to it. Starting from Page 6. I will now explain about the detailed performance of the group. Page 6, the group's interest income. In Q3 of 2022, the group interest income posted KRW 2 trillion and KRW 76 billion, up 2.7% Q-o-Q. Interest-bearing assets grew 2.3% Q-o-Q, and this is due to the improvement in the bank NIM. In Q3, the banks then posted 1.68%, up 5 basis points Q-o-Q, but compared to Q2, the pace of growth of the bank's NIM has slowed down.

This is due to the rise in the funding cost owing to the repricing of the deposit interest rate, outflow of low-cost deposits and growth in time deposits. Now on the subject of the bank's loan in [KRW], which is of great interest to you, your reference, more details can be found on Page 29. The loan growth of the bank grew only 0.7% in Q3, owing to the continued decline in retail loans despite the solid growth in corporate loans. Segment-wise, the corporate loans grew 2.5% Q-o-Q due to an increase in demand for loans from large companies and audited companies, which resulted from the liquidity crunch in the corporate bond market. On the other hand, the retail loans was down 1.3% Q-o-Q impacted by strength in DSR regulations and declining demand from rapid interest rate hikes. On Page 7, we have attached Shinhan Bank's margin funding and lending status for your reference.

Next, on Page 8, the group's noninterest income. The group's noninterest income was down 28.8% Q-o-Q due to decline in fee income from the weak capital and real estate PF market as well as the declining gains on AFS securities and the FX derivatives arising from the growing market volatility. The fee income is down 16.1% Q-o-Q, and the decline owes itself to the fall in credit card fee income on the back of merchant fee, refund and growth in the season of promotional expense despite the solid growth of the credit purchase. Absence of investment banking fees related to IPO and the real estate big deal that occurred in the first half and the contraction of brokerage commissions.

Gains related to AFS securities was down 22.9% Q-o-Q driven by the growing volatility in the securities market and rising interest rate despite efforts to defend against losses as our investment portfolio adjustment and duration management. Next, on Page 9, the group's SG&A and credit cost. The SG&A increased slightly over the previous quarter, but excluding the expenses related to Shinhan Life HR integration that occurred in Q3, it is maintained stably at the Q2 level. The group's CIR grew 1.1 percentage point over Q2 driven by the fall in operating profit, but was up 1.4 percentage points Y-o-Y posting 40.1%. In Q3, provisions for credit losses was managed at a stable level, posting KRW 250.6 billion and is up when excluding the KRW 224.5 billion of countercyclical provisioning.

As economic uncertainties grow to address potential credit risk, we intend to continue our conservative provisioning policy. If you look at the delinquency rate, which can be taken as a leading indicator of credit cost, in the case of the bank, is maintained at 0.20% of 1 bp Q-o-Q. In the case of the car business, it is down 6 bps Q-o-Q. But when excluding the 7 bps increase owing to one of factors like the bank, the car business also posted 0.86%, up 1 bps Q-o-Q. Please refer to Page 10 for issues related to our preemptive preparations made to address future uncertainties. For greater details on the group's asset quality management, please refer to Page 11. Next, on Page 12, on capital management and profitability. As of the end of September, the CET1 ratio is expected to post 12.7%, similar to last quarter. Next, on Page 13, the group's income by subsidiaries.

Despite the weak noninterest income, net income increased in the bank Q-o-Q, thanks to the interest income growth led by NIM improvement and lower provisioning cost. In the case of nonbanking subsidiaries, Shinhan Cards recurring net income decreased somewhat despite the growth in credit purchases and operating asset increase driven by business diversification efforts due to rapid hikes in funding cost and the merchant fee cuts.

In securities, net income decreased owing to a fall in brokerage fees, reflecting slow market trading activities and valuation losses and securities on the back of higher interest rates. Shinhan Life insurance profit remained solid, although investment profit decreased due to HR integration cost and the decline in gains from disposal of AFS Securities. Shinhan capital net income decreased Q-o-Q reflecting valuation losses in IB-related securities on the back of rising interest rates and the increase of provisioning related to real estate-related PF.

In addition, in the case of capital market-related subsidiaries, namely Shinhan Asset Management, the Shinhan Asset Trust, the net income declined Q-o-Q due to the recent interest rate hikes and growing volatility in the market. For details related to the group's global business, please refer to Page 14. As there are heightened interest by our investors for the current state of our risk management owing to growing uncertainties for the future, we have added supplementary slides to explain about our preemptive risk management measures. Next, on Page our CRO, Dong-kwon Bang, will walk you through our preemptive risk management status.

Hello. I'm the Group CRO, Dong-kwon Bang. I would like to talk about the risk side of the group. Uncertainties in the domestic and foreign financial markets are increasing due to the recent tightening monetary policies and the strong dollar. If the contraction of the real economy intensifies going forward, then the potential risk factors may manifest. In this regard, I would like to address Shinhan Financial Group's risk management system and current status regarding soundness, liquidity and capital adequacy, which are the main concerns.

First, about Shinhan's financial -- The current status and countermeasures in preparation for possible deterioration of asset quality due to the big rise in the market interest rates and the impact of the economic recession. The graph on the left shows the trend of the loan ratio of the potentially vulnerable segments selected by the group on the basis of various risk factors such as income, debt level and credit rating. We're maintaining a stable proportion of vulnerable segments by refining the screening strategy for potentially vulnerable segments and strengthening credit line management.

To support the soft landing of potentially vulnerable borrowers, various internal programs such as temporary liquidity shortage support for borrowers are being prepared to minimize the system risks. Secondly, liquidity management amidst the recent strong dollar and the tight funding market. The graph in the center shows our group has maintained a stable liquidity ratio that far exceeds the regulatory standards through a preemptive and conservative liquidity policy.

In addition, to withstand the worst stressful situations, we have expanded our FX liquidity funds, and we have prepared an emergency funding plan to regularly check its availability. Lastly, to strengthen efficient capital adequacy management, we are strengthening portfolio rebalancing and management in consideration of asset sector, risk return profile. The risk weight level is maintained stably despite the recent sharp rise in the exchange rate through asset management by sector, mindful of the risk weight and the expansion of the RWA budget system.

In addition, the stress test results show that the capital ratio exceeds the regulatory requirements as can be seen from the table on the right. We will continue to strengthen the group-wide crisis management system to maintain a stable capital ratio even in the face of a financial crisis and take preemptive measures for sectors at issue. The digital strategy on Page 16, the group CDO, Kim Myoung Hee, will present.

Hello, I am Kim Myoung Hee, the group's CDO. I would like to go over the Q3 results based on the group's digital strategy. We're seeing continuous creation of quantitative and qualitative results centering on the 6 customer values. Along with the quantitative growth of the platform, its financial contribution is growing. In addition, we're actively fulfilling our social responsibilities by continuing our efforts to ensure the safe financial life of our customers and to overcome the digital divide.

By utilizing core technology, business experience is accumulated and process automation is expanded. We'll explain the main achievements for each key index on the right. First, more friendly, which is easier and convenient financing. The group's digital platform, MAU has surpassed 21 million, which is an increase of KRW 4.01 million Y-o-Y. Shinhan's 2 mega platforms, banks and card play continue to show solid growth, where the Life platform has nearly doubled the number of monthly users, YTD. Thanks to Shinhan's MyData service, chosen by 6 million people.

Shinhan's platform is developing into a platform where customers frequently visit and stay on for a long time. Second, more secure. There are 6 million Shinhan sign users benefiting from secure mobile financial transactions. As a result of stronger monitoring activities against vouching and fraudulent payments using the latest AI technology, we were able to prevent fraud induced loss of KRW 38 billion by Q3 this year. Moving on to more creative. The profit from the new digital business has increased to more than KRW 30 billion. Among them, the data business income exceeded KRW 10 billion and Life platform garnered more than KRW 20 billion in new business. After the stabilization of the pandemic, the investment system to expand the global ecosystem has been strengthened. Along with the creation of a global SI fund worth KRW 200 billion, we also reorganized the global base of start-ups. Please refer to the materials for data process, technology and people.

On the next page, about the platform growth and business strategy in more detail. The group's financial and nonfinancial platforms grew 33.3% Y-o-Y as a result of continuous improvement of ease-of-use and core functions of the financial platform, the number of customers and sales of financial products is increasing. Sales opportunities using digital are steadily expanding and efficiency is also continuously increasing. The growth of the lifestyle platform closely related to finance has translated to securing nonfinancial traffic and transactions. This led to an increase in sales from new businesses. We will continue with our digital strategy. Thank you.

Thank you, both CEO and CRO, the page 18 onward, there are detailed explanations of sustainable management activities and major indices for group and subsidiaries. With this, we would like to conclude the presentation and move on to Q&A.

(Operator Instructions) We'll take the first question from (inaudible).

Can you hear me well?

Yes, we can hear you well.

I have 2 questions. With regards to preempt risk management, after Q2, there has been steep interest rate rises, and there has been a big impact on the bond and stock markets. Starting from fourth quarter, I think there will be more concerns about their real estate PF market. What is the PF status? What is your future strategies for this segment?

The second question has to do with ESG. Making preparations for ESG is important and financial companies, I believe, are well prepared for ESG. However, because of the war this year, the fossil fuel cost has increased. And because of economic uncertainties, a lot of burden is imposed on the corporate sector. So, the pace of progress in ESG, I believe, will slow down. With regards to ESG going forward, portion of financial group. What is your strategy? We have experts here. So, with regards to sites about the pace of progress of ESG slowing down, what would be your view or the expert view on this?

Thank you, very much, Mr. Kim. With regards to risk question, real estate PF, the current status and strategy. That was the first question and our CRO, Dong-kwon Bang will answer that question. Second question, on ESG, the CSSO will answer the question. So for the risk question.

I'm Bang Dong-kwon, the CRO. Thank you very much for the good question. So the real PF or the bridge loans, there are a lot of concerns in the market. That is quite true. And in keeping with such a trend, strengthening the credit line management and the screening of real estate PSR strategy. If you look at our current status, among our total loans, the real estate PF and the bridge loan, their proportion is about 2% of the total portfolio.

Recently, across the group, PF and bridge loan, we had the total inspection conducted and according to that inspection, NPL is about KRW 20 billion. So, according to our current situation, I believe we are managing this risk very well. But going forward, what are we going to do going? Well for each business division and the risk-related divisions, we are engaging close our discussions. Next year, credit line management and business strategy is being discussed. The current strategy and policy need to be strengthened going forward. Thank you very much.

Second question on ESG. So let me get that question. This is my third earnings presentation this year. But this is my first question on ESG. As you have there is economic slowdown because of the rise in the price of fossil fuel, slowdown in progress is of concern. With regards to lowering carbon emissions, Shinhan, so it's also participating in this effort. All of the financial companies across the world is participating. That is quite true. The financial mission management is very important. That is our ultimate goal. But the capital intensity management starting from 2020, we have been lowering those emissions and 0.6% target has been read of a reduction by Q2, but we have to maintain sustained efforts on this front. But I don't think this is something that you achieved by Shinhan alone.

Globally, assessment criteria or standards have not been devised yet. So ISP, a draft version has come out. But by early next year, if an official version comes out, then I believe carbon emissions can be linked to that standard. Among the financial group, Shinhan is the very first and the only financial group that is actually using carbon emissions as a key criteria in assessing the CEO. So this is a very difficult task to be sure and the environment is truly daunting. However, we are making genuine efforts on this front. That will be my answer to your question.

We'll take the next question from Citi, Yafei Tian.

I have 2. The first one is more around the card business, seen quite a number of quarters of strong fee income coming through, but this quarter is a little bit softer than usual. So just wanted to understand the longer-term outlook for the card business. in terms of fee income as well as asset quality.

Second one is on the liquidity risk. Recently, Bank of Korea has injected liquidity into the system there seems to be a little bit of stress for corporates as well as for certain financial institutions like securities companies when it comes to liquidity risk. Can you help us to quantify how does this impact the funding cost for Shinhan Group going forward? Are there any area of stress that you are seeing in the system?

Thank you for the 2 questions. One was about the card key income and the asset quality. And this will be answered by the card CFO. And as for the liquidity risk and the effect it has on the funding cost, I will answer that. So the first question to the card CFO.

Hello. I am Shinhan Card, CFO, [Moon Dong Kwon]. Thank you for the question and I would like to answer the question. First of all, as for the card fee income, -- in conclusion, there are some cyclical and seasonal factors starting in Q4, we believe that the fee income will normalize. In Q3, it was soft. And as for that reason, the fee income was due to the merchant fee decrease and the marketing fee increase. And that's why it was soft temporarily in Q3. Of the Q1 and Q3 -- for the smaller merchants, we had a lot of refund given to the smaller merchants in Q3 and we also extended the refund to the smaller malls, and that is why we had KRW 14.2 billion less fee income.

And as for the marketing fee income in the second May, June, July and August, that was reflected in Q3. But starting in Q4, the fee income will be back to normal. As for the asset quality, the group CRO in his presentation mentioned that up until Q3, the asset quality did not cause any concerns. But starting in Q4, we may expect a slight hiccups, but Q4, we don't think there will be a huge instance, but we believe that this could become a bigger issue next year, and we will be prepared for that. So what will be the impact on asset quality next year?

On an annual basis, compared to the credit cost this year, we believe that the credit cost could rise by 19% to 20% next year. So, we will take the appropriate measures so that we will be able to maintain the recurring profit level. So that will be my answer. I will address the second part of your question about the liquidity risk. Yes, it has been highlighted since September, there were margin calls and the financial institutions had liquidity shortage. And the second reason because of the LCR and the ratios that were excused during the pandemic.

The regulations are being strengthened and as for the [LEGOLAND], there was the commercial paper issue, but yesterday and the day before, the government made announcements. There are many funds prepared by the government to inject liquidity. So, we put out the fire and as was mentioned by the CFO's presentation, for a long time, Shinhan Financial Group had enough liquidity. And even though there were some liquidity risks in the market, we were not affected. But with the rise in the interest rate, the funding cost is on the rise, but it's not because of the liquidity risk that will have a drastic impact on the funding cost. Thank you.

Next question is from Samsung Securities, [Mr. Jhou] Mr. Kim?

I have 2 questions. First is related to interest rate. The funding interest rate hiked up, and this is an issue in the month of September and also on the month of October, there's been a steep increase -- so in the past, when interest rate rises, we believe margins improved. However, nowadays, the situation is not that good. We have issues of whether this will actually come true. So I think there are risk issues as well. This will actually negatively impact margin, and also impacting asset quality. So, the next year margin -- What should be the outlook for next year guidance or your views?

And my second question is related to digital. We have looked at the slides that you showed us. One thing of note is that unlike other companies, you have many different applications that are levered, not just one single app. Of course, there is no one right answer, but this kind of strategy one ad versus many different apps. What is the difference between these kinds of business strategies? What do you intend to gain from using these diverse apps? We'll continue to expand the number of apps that you use or are you going to go in a different direction going forward.

Thank you very much for the question. While we are preparing the answer, please wait for a short while. Thank you. So those are 2 questions. The first question had to do with interest rate hikes and how it will impact the margins? Second question was on digital, on the apps. So with regard to the digital question, our CDO will take up that question and margin or the bank margin is most important, and the CFO will take that question. So for the bank, our CFO?

I'm Lee Taekyung, CFO of Shinhan Bank. Thank you very much for the question. The funding rate increases. In the banking sector, we believe this is a one-off or temporary phenomenon. And in the fourth quarter, in the banking sector, not only maturities, but also bond market instability. These are all coinciding and so the funding rate is increasing. After the fourth quarter is over, and starting from the next year first quarter, we believe things will become stabilized.

After the end of October, from the banking sector, our view is that the funding rate will not increase that deeply. But with regards to the funding rate increase, is that it will be translated to the loan interest rate. Well, there are vulnerable sectors in our society, we have to consider that. So, we cannot translate all of them to the loan sector. But because of U.K. rate hikes, basically, impact increased. We don't think this will be very much impacted.

Assistance for the vulnerable sector because our profit has increased because of the net increases, so we will be able to provide assistance to the vulnerable sectors. And next year NIM outlook, for this year, fourth quarter, vulnerable sector systems and fund rate increases. So temporarily, in the fourth quarter, we do believe that margins will be stagnated. Additional beta rate hikes at the end of the year, we do believe that the funding rate will be stabilized in Q1. So, given all of these, in 2023, we do believe NIM will continue to be improved. With regards to sensitivity, although not 100% can be reflected about 10 bps and more of NIM growth is possible in our view for 2023. That is all.

Additionally, let me add to that. That was the bank side. And at the group level, the NIM continues to grow. In the capital and other subsidiaries, the NIM is contracting because the funding rate is rising and the bank's outlook can be offset somewhat by negative impact to other subsidiaries because of assistance to vulnerable borrowers, it will not have a negative impact on the NIM competition for deposits and competition for loans. I think competition can intensify because of that. But as I've said, due to the interest rate hikes, the NIM can possibly continue to stably rise.

With regard to digital question, not using one app using diverse apps, what's different and the future direction of our strategy? That was your question. In today's earnings presentation, what I talked about is at the group level, Bankcard securities and Life. I talked about the apps at the group level. I talked about 21 million MAU. We are employing 2 strategies to the group level apps. Each subsidiary provides services that can be provided digitally. For the customers making use of these services, they are making use of these subsidiaries apps. One app strategy, universal convenient app strategy, that is also slightly different from other financial groups. They're a slightly different tilt.

Other financial groups, for instance, A lot of their efforts are focused on the bank, and that is the center of their (inaudible) strategy. But in the case of Shinhan, several years ago, Shinhan Plus, integrated app was launched already. And among the subsidiaries, services can be interlinked through this app and one step further. Going a step further, banks, securities a card and life. If they were all one single entity, what kind of integrated functionalities could be provided to the customers? This was the focus of our strategy.

And so this universal One app strategy is what differentiates us from others. This is a 2-point strategy. That is our current situation and our future strategy. In the month of August, the Financial Service Commission, universal One app guideline. I think it has been eased significantly. So, a lot of uncertainty surrounding the Universal One App [ad] has been lifted. I think this is beneficial for our strategy. Thank you very much.

We will take the next question from HSBC, Jaewoong Won.

Congratulations on a wonderful quarter. I have 2 questions. First is about overseas business. Looking at the results, there seem to be no major issues, but Vietnam, Indonesia, are there any details, NPL ratios or delinquencies, credit costs, NIM, some more detailed information? Could we get access to them? The second question is in the insurance sector, the IFRS 17 will kick in. Other insurers have to iron out some of the details. But I would like to know the overall trend for like the net income capital, what will be the direction going forward in preparation for IFRS 17 and insurance?.

Thank you. We'll get back to you with the answers in a short while. Thank you for the 2 questions. One was about the global Vietnam and Indonesia markets, you would like some detailed indicators. And the second question was about introducing IFRS 17 in insurance. The insurance CFO, will handle the second question and the CMO will deal with the first question.

First, about the second question, insurance and IFRS 17. (inaudible). Thank you for the question. IFRS 17, how we are preparing for it and the direction going forward? So we are at the last stretch of our preparation efforts. As for IFRS 17, internal preparation and preparation for the external audit, we are working on the final details and the accounting policies are not finite. With that in mind, I'd like to give you some numbers. What is most important is when IFRS 17 is introduced, the valuation will change and the capital will be affected. We will be using the 3-year method and so about KRW 4 trillion was on average but with the '17, the capital will increase by twice the amount. In the future, CSM, the margin, I think you will be interested in that, by 2023, we believe we'll be able to secure KRW 7 trillion. That is our estimate. Given that Shinhan Life standard loan P&L will be about an increase of 30% on a recurring basis. Thank you.

Hello. I am CMO Heo Young-Taeg. Thank you for taking interest in the global business. And as for the global business results compared to last year, we have seen a huge growth. Overall, in the global channels, there was even growth and the reasons were as follows: During the pandemic, the economies were sluggish, but there was normalization and our businesses benefited it was KRW 397 billion in 2019, and we expect KRW 600 billion this year.

Looking at the time series in 2020 and 2021, the net income had decreased, but it is now back to normalization and getting back on track. Our strength lies in Vietnam and Cambodia and Indonesia. These are the global markets that we are strong in and looking at the major indicators ROE in Vietnam is to 2 [NRA] 19 -- 15 NIM 13. As for Cambodia, ROE, 2.68 13 and NIM, about 4.6%. In Indonesia, ROE, 2% ROE, 4.6% and IM 2.8%. As for delinquencies, there are no outliers there within the range of 1.1% to 2%. So looking at the Southeast Asian market, going forward, we believe that there will be robust figures and growth. As for asset quality or any issues to be expected, we see none.

Well, last year -- until last year, I was the head of the Vietnam use. I couldn't recall the specific numbers. After the presentations are over, we'll send you the numbers.

Next question is from (inaudible).

I have just one question. Treasury stock buyback and other merchants have taken in order to raise the shareholder return ratio. I think a high level of dividend is expected by the market at the end of the year. So in the fourth quarter, do you think the dividend level will go down? Or do you think the current level will maintain going into the fourth quarter?

Thank you very much for that question. why we're preparing the answer. Please wait for a short while.

Thank you very much for taking interest in our shareholder return ratio and dividend-related question. Let me answer that question. basically, as we have noted in the earlier part of the year, that still stands. The cash dividend will continue to increase in a solid manner. So, we have done cancellation of our fare stock. And in the fourth quarter we have noted this previously, but we're going to maintain a solid increase. So our policy to increase in a solid manner. So I think you can figure out the level. The regulatory stands -- The regulators recently said that stress test must be done in a more sophisticated manner so that the capital ratio will be scrutinized closely.

Our CRO has noted the results of the stress testing in the global financial crisis situation, even in that kind of situation, the CET1 ratio will go beyond over an appropriate level and a more sophisticated stress setting has been done recently. We have shown relatively high CET1 ratio. And even if a different scenario, much change scenario comes upon is I don't think much will change. We will be using -- I think I'll be able to maintain the high level of shareholder return ratio. We'll continue to communicate with regulators and proceed accordingly. Thank you very much for that answer.

We'll take the next question from CLSA, Jongmin Shim.

I'm from CLSA. I have one question. It's about the PF loans. You did mention it recently. Overall, the real estate market is weak and risk management for real estate loans, how are you doing it for retail and corporate loans. And as for SOHO loans, the LTV is higher than for the mortgage loan. But if the weak real estate marketing continues, then it may increase the risk. How do you see this? How do you manage the risks?

Thank you for the question. Please wait for the answer.

Yes. There are many issues related to real estate. So we get another question about the real estate. The CFO had addressed the PF question earlier. And as for SOHO and retail, yes, the situation is as such, we did talk about the real estate PF earlier, but to develop on that. The delinquency is 0.09 for mortgage loans and the LTV is 40.2%. So, the delinquency is low and the LTV is 40.2%, and there is TCR. We do not consider this as a risk but as for the SOHO loans, the real estate collateralized loans you may consider SOHO as vulnerable borrower. But if they have real estate as collateral, they are also PB clients, they're well to do, and they have good quality real estate as collateral. So the delinquency for these segments is lower than the retail loans, 0.04 and for LTV is higher than retail but in the nonbanking financial institutions, the LTV is higher. But in the bank and in Shinhan, we are managing it tightly. So this is not causing any concerns. Thank you.

Next question from (inaudible).

I'm (inaudible). Just now among the questions, the funding rate increase will be reflected in the month of October. After that, it will come gradually down. I think that was your view. That means, in other words, the interbank interest rate competition is expected to be eased. I think that's your anticipation. The interbank deposit rate competition is linked to the loan rate increase. This is very important.

So first, recently, the interest rate [hiked] and the subsequent competition compared to 2005 to 2008, when there was interest rate hikes. I think the competition is much more intensive compared to that period. Why do you this is so? So your view is that this will be eased going forward, if it is in the lease, what kind of factors will drive that easing? Is there any internal views or ideas on that?

The second, question is: so R&D patient going forward is that the COFIX and the bank loans rates will go up and be okay if it goes additionally the average loan rate for the retail loans will go up steeply. Roughly next year, in the mid-to late there has -- it will be like latter half of 5% range. If the interest rate hikes, how much of asset quality deterioration will come about? For now, your NPL ratio is 0.24%. How much do you think this will go up additionally and not only vulnerable or very vulnerable borrowers, but more moderately vulnerable borrowers as well, how do you intend to respond to these sectors? I think if you share your views on this matter, it will be very helpful.

Thank you very much for those questions. While we are preparing an answer, please wait for a short while.

Thank you very much for those questions. Your first question I think it was already answered by the bank CFO. So in Q4, the funding rate increase will ease and what are the factors behind that? And second question, if interest hikes I continue, it will be reflected in loan rates, and this will have an impact on asset quality. What is our response or outlook? I think that was your question. So our first question, our bank CFO will take that question. And the second question will be taken up by RCO. The CFO first.

I'm Lee Taekyung, the banks' CFO. Thank you very much for that question. The banking sectors [inaudible] competition has intensified. The very first reason for that is because in the midst of the pandemic, the LCR ratio has been eased and it is now normalizing starting from third quarter, it is being raised to 92.5%. That's the biggest reason. And because of FX rate increases, and the derivative products volatility is increasing and also the BOK rate increases has led to highly liquid assets impact. In the fourth quarter, the funding maturity is coming due and starting from the month of July, the low-cost deposits has started to come down in the month of July.

So, until the end of September, there has been strong funding competition among the banks. That is true. The bond market is quite unstable now, and the government with regards to LCR regulation, they have postponed on normalizing the LCR regulation 6 months, and they said that they will review it after 6 months is over. The reserve ratio easing and qualified collateral reviews by the BOK, these have been announced by development regulators.

And so for the bank's liquidity situation, I think we will see some buffers starting from the month of October. But starting from September, the banks that have been raising funds. We do have the efficient room. In the fourth quarter, the fund inflow and the deposit inflow, we believe as we near the end of the year, it will increase. That is our view. So starting from the fourth quarter, as we near the end of the fourth quarry, the banking sector's funding rate competition is expected to be eased. That is our expectation. That is all.

The CRO, Bang Dong-Kwon, so let me see if I understood the question right. As the market rate coffee rate goes up, the average retail loan rate goes up. and this can have a negative impact on the asset quality and how are we going to respond to this. That is quite true. That is how the process will unfold, if it happens. But so asset quality deterioration, we do believe that will happen, and we are making preparations. As we have noted at the beginning, for the vulnerable segment, we have segmentized this sector. We are monitoring closely this segment.

The asset quality is being maintained at a stable level, but we do believe there will be some deterioration going into next year. So thorough management is called for. We are aware of that. With interest rate hikes, the repayment capability, the stress, the SR is being reflected in our screening process and not only enhance risk management centering around the vulnerable borrowers, we are providing liquidity in order to minimize the risks. So, customized programs and policies are being formulated. So with the rise of the interest rate. In order to respond to sudden asset quality deterioration, various responses are being formulated. Thank you very much.

The next question. We want to have this transparent in our process. Somebody with the Galaxy S has raised his hand, but we need to know your name. From JPMorgan, Cho Jihyun.

I have one question. With the interest rate rise, there is a correction in the real estate market, and it will affect profitability. What about the overseas real estate exposure? What type of exposure to overseas real estate and any precautionary assets that we need to watch out for? Going forward, any management strategies or expansion strategies for your overseas real estate exposure?

Thank you for the question. We'll get back to you in a short while. Please hold. This is about the overseas property and the CRO will address this question.

Thank you. That's a tough one. As you mentioned, the overseas property risk, we have a similar idea from a group perspective. The overseas real estate exposure is about KRW 3.5 trillion, and the forms are varied. We have PF and we have equity investments, real estate funds. But as of now, the risk is not that visible. As I was talking about PF earlier, we did conduct 100% investigation and the assets at issue and assets under management, there are 2 separate buckets. Because of COVID-19, we could not do due diligence but with eased regulation, I think we will have a more sophisticated monitoring system. Thank you.

Thank you very much for that answer. Because we are rather behind time, but we will receive the next question from (inaudible).

This a question about the interest income of the group and the bank when compared the nonbanking subsidiaries interest income seems rather low. I would like to ask a question about the funding for the card business. I think the funding increase has been larger than the others and the mix the CP ABS has been larger than other instruments. So the funding instrument mix and also the funding rate increase speed -- How should we view this? Also at the banking segment, the funding rate has risen steeply -- and the low-cost deposits has gone down by more than KRW 10 trillion. I think this has led to an increase in the time deposit as well. So in the banking sector, do you think that going into the fourth quarter, the low-cost deposits will continue this pace of decline as we have seen in the third quarter? What kind of view should we take about this matter going forward?

Thank you for the question. While we are preparing to answer, please wait for a short while. Thank you. This question was a funny real question for both the car business and the bank business. The card CFO will take got the question and the bank's CFO will also take the question on the bank. So first, the card.

With regard to the funding costs for the card business and the outlook I think was asked. Let me answer that question, recently, not only the card but the entire sector of the funding rate is increasing across the board. Compared to repayment size, the interest rate itself has risen by several fold. According to our anticipation next year, the average of funding currently, it's 2.2%. We think it will go to 3.2% going into next year. So KRW 31-,- 32 trillion will be the amount.

And the pretax amount will be about the KRW 300 billion to JPY 350 billion of funding cost increase is expected, and that impact is quite large. And how can we respond to that? Well, starting from the fourth quarter, various asset balancing effort and price realization and for various funding efforts, reorganization will be undertaken. So then the recurring of profitability of the company was monthly KRWA 50 billion will be achieved next year. To achieve that, we are making preparations starting from the fourth quarter. The funding related cost is also being prepared for and addressed.

Jung Sang-Hyuk, the Bank CFO. With regard to the liquidity reduction, yes, we are also giving this a lot of thought. In the case of the Shinhan bank up until the second quarter, compared to other banks, we had an increase of starting from the month of July, all of the banking sector has seen the reduction of low-cost deposits in the month of July, August and September decline and low cost deposits the absolute level is going down. According to BOK, the reduction of the low-cost deposits throughout the banking sector in July was KRW 3 trillion. In August, it was KRW 15 trillion.

And in September, it was KRW 3.3 trillion. The reduction level is coming down, but we believe that going into the fourth quarter, this reduction trend will continue because of various factors. In the first quarter of next year due to seasonal issues like the government spending and household bonus payment issues. Starting from the first quarter of next year, we believe that the low-cost deposit will become normalized.

This reduction trend will stop in our expectation. Is in the case of institution deposits, it was expended in the first half. There is a trend of this being reduced in the second half. So we're taking that into consideration and the case of Shinhan Bank, Seoul City, our 205 or project, $2.5 trillion will be reflected as well. So in the first quarter of next year, in the case of Shinhan Bank we believe that we will see a rebound of the low-cost deposit starting from first quarter next year.

Thank you for the questions. We are running out of time, and we won't be able to take questions, and we don't have any questions. With this, we would like to conclude Q3 earnings presentation of Shinhan Financial Group. I would like to thank you once again for your participation. You may visit the website and the Shinhan Financial Group IR YouTube channel for the IR materials. Thank you very much.

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