Shinhan Financial Group Co Ltd (SHG) 2023 Q1 法說會逐字稿

Good afternoon. I am Park, Cheol Woo, Head of IR. I'd like to thank everyone for taking part in the earnings presentation for Q1 of 2023 of Shinhan Financial Group. Before we begin, a few words of announcement. The earnings presentation is being delivered via our digital platform, namely the Shinhan Financial Group IR YouTube channel and the Zoom app. The YouTube live channel is in Korean only. So if you want to see the presentation in English or to take part in the Q&A, please join us on Zoom. For more details on how to log in, please visit the Shinhan Group site, www.shinhan.com. We'll now begin the earnings presentation for 2023, Q1 of Shinhan Financial Group. For today's earnings release, we have with us the main presenter, the Group CFO, Lee, Taekyung; the Group CDO, Kim, Myoung Hee; and also the Group CSSO, Koh Seogheon; Group CRO, Bang; Dong-kwon; Shinhan Bank CFO, (inaudible); Shinhan Card CFO, Kim (inaudible); and also the Shinhan Securities CFO, Heedong; and finally Shinhan Life CFO, [Park Kyoung Won].

Today, we will first walk you through the overall business results of Q1 of 2023 and then proceed to Q&A. And now I invite CFO to take on for the presentation on the business results of Q1 2023.

Good afternoon. I am Lee, Taekyung, the CFO of Shinhan Financial Group. First of all, I'd like to thank you for taking part in today's 2023 Q1 earnings presentation. Today's earnings release data were prepared on the basis of K-IFRS 1117 that took effect in 2023. And for comparison, the 2022 business results were also retroactively restated. Let me go through the financial highlights on Page 5 of the presentation materials. On Page 5. The group's net income in Q1 of 2023 posted KRW 1,388 billion. Despite the fall in interest income owing to drop in bank margins, noninterest income, including fees and (inaudible) securities improved significantly posting solid profit. The CI ratio in Q1 of the group was at 37.9% in inflationary pressure as our sustained efforts to enhance cost efficiency, the CIR is maintained at a stable level. The group's credit cost ratio recorded 48 bps, but excluding the KRW 185 billion in countercyclical provisions recognized for borrowers with repayment (inaudible) real estate PF is stably managed at 29 bps. Finally, the group's capital policy. It was decided at the BOD that the per share dividend in Q1 will be KRW 525 today, and following the retired treasury stock of KRW 136.6 billion in Q1; in Q2, as well, KRW 150 billion in treasury stocks will be (inaudible) at the BOD today. Due to economic uncertainties, the regulators are expected to overhaul the capital adequacy going forward. And thus, we will closely monitor the changes in external environment while pursuing efficient capital allocation policy. Next on Page 6, the financial impact of IFRS 17 on Shinhan Life. And on Page 7, you'll find the group's Q1 key financial highlights, so please refer to it at your leisure. Now on Page 8, the group's interest income in detail. On Page 8, the group's interest income. In Q1 of 2023, the group's interest income posted KRW 2.541 trillion, down 10.2% Q-o-Q. This is due to the bank's margin decline and fewer number of business days despite a slight increase in interest-bearing assets. On a Y-o-Y basis, the interest-earning assets grew 3.5%, and the banks and NIM grew 8 bps -- but this is offset by the increase in other subsidiaries of funding costs and thus grew only 2.0% Y-o-Y. The bank's NIM during Q1 posted 1.59%, down 8 bps Q-o-Q due to the downward margin pressure of the short-term floating rate assets and impact from the high interest deposits procured in Q4 of last year.

The bank's loan growth is on par with last year year-end. Retail loans decreased 1.0% YTD on the back of falling demand as interest rates were hyped and also due to the impact of the DSR regulation. However, corporate loans grew 1.0% to YTD as demand from the large companies continued.

For more details, please refer to Page 32. Next on Page 9 is the status of margin and lending and funding status of Shinhan Bank for your information. Moving on to Page 10, the group's noninterest income. The group's noninterest income because of the absence of nonrecurring special factors such as the change in accounting treatment, preserving trust and impairment of alternative investment last quarter and due to the growth of the gains from marketable securities in the falling market rates -- and growth in fees from credit card and capital market, it increased significantly Q-o-Q. On a Y-o-Y basis, despite the following fee income due to the base effect of reduced gains from sales and disposition owing to rate hikes and the growth in gains from marketable securities, the group's noninterest income grew 17.0%. Next on fee income. The fee income grew Q-o-Q 18.1%. This is mostly due to the credit card fee, brokerage fee and investment finance fee. The credit card fee, despite the fall in credit purchases, grew 111% due to the decline in promotional expenses. The brokerage fees grew 32.9% Q-o-Q due to the rise in stock transactions. On a Y-o-Y basis, the fee income fell 14.0%. The credit card fee, despite the increase in credit purchase, fell 18.6%, impacted by the merchant fee cut that took effect last February. In the case of the investment finance fees, the decline due to the absence of underwriting arrangement fees arising from IPOs and real estate big deals. Next, on Page 11, the group's SG&A and credit cost. The group's SG&A fell 23.6% due to the absence of ERP and seasonal expenses that occurred last quarter. On a Y-o-Y basis due to the overall increase in G&A on the back of inflation, it grew 8.8%. However, excluding the KRW 32.3 billion ERP expense that took place in Q1 for the Shinhan Life, SG&A grew 6.1%. The group CIR posted 37.9%, up 1.0% Y-o-Y and is being stably managed. The group's provisioning in Q1 was maintained at the previous quarter's level with the growth in recurring provisions owing to a decline in asset quality and countercyclical provisioning of KRW 185 billion. The credit cost ratio posted 48 bps, up 22 bps Y-o-Y, but the recurring credit cost ratio posted 29 bps, up 11 bps Y-o-Y. In the case of delinquency ratio, which is a leading indicator of credit cost for the bank, it is up 6 bps Q-o-Q imposed to 0.28%. But in the case of card, it is up 33 bps due to the rising interest rate, increasing the applications for readjustment of new start fund and reduction of the credit line to preemptively manage asset quality. For our preemptive preparations to respond to future uncertainties -- we are trying to acquire absorption loss capabilities and also for the vulnerable borrowers, we are trying to provide a greater assistance. And so from the system perspective, we are making preparations. So for preemptive preparations, respond to future uncertainties, please refer to Page 12. And for more details on the group management of asset quality, please refer to Page 13.

Next moving on to group P&L by subsidiary. For Shinhan Bank, despite an increase in provisioning, recorded a Y-o-Y increase in net income, thanks to balanced growth in both interest and noninterest income. For nonbank subsidiaries, although Shinhan Card saw an increase in operating income throughout its business lines from an increase in credit card purchase, loans and lease assets, net income dropped Y-o-Y due to larger provisioning and abrupt rise in funding costs. Shinhan Securities, net income grew Y-o-Y, thanks to higher financial product fee income and proprietary trading gains despite a decrease in brokerage fees from less brokerage trading. For Shinhan Life Net income grew Y-o-Y due to an increase in valuation gains from security investments. Shinhan Capital, despite growth in operating income, net income decreased Y-o-Y due to increase funding costs and conservative provisioning against real estate PF exposure. The capital market businesses, including Shinhan Asset Management, Asset Trust and REITs, net income decreased Y-o-Y due to continued underperformance of the capital markets. Next page, moving on to our global business. So stable growth, recording net income of KRW 158.3 billion in the first quarter, making a greater -- stable contribution to our group's total net income. Next, on to Page 6 (sic) [16] for our capital and profitability metrics. As of the end of March, our CET1 was tentatively measured at 12.54%, which is a 25 basis point drop YTD. I will explain further on Page 17.

When excluding the impact from full adoption of the final BASEL III standards, which is minus 54 basis points, our CET1 improved by 29 basis points. Also when considering the conversion of KRW 750 billion in preferred shares to common shares scheduled for May 1 this year, CET1 will improve to 12.8%. As we anticipate the regulatory authorities to continue to streamline and enforce tighter capital adequacy requirements, we will continue to work to improve our capital ratios in line with the regulatory trends. Please refer to our shareholder return policies on Page 18. A -- now moving on to Page 19 for our digital strategy. I'll pass it on to our CDO to take us through this line.

Yes, good afternoon. This is the CDO, Kim, Myoung Hee. In 2023, we will be building on our underlying digital capabilities to carry out our due role in society to innovate the core of the financial industry. I would like to explain further not only on our quantitative achievements but also our qualitative outcomes as well. First -- the first quarter theme of our digital strategy is to make financial services more friendly. Our group's digital channel has achieved balanced growth not only in scale, but also as a competitive and convenient platform that our customers seek out and use frequently. We have an MAU of 23.51 million users who visit the Shinhan digital platform and 4.3 million daily active users, which is an increase of 16% year-on-year. The next core theme is, more secure. We have expanded our fleet of ATMs with AI-based UAD functions through all branches nationwide as of January this year in order to better protect customers from financial accidents. Also, we've been working to improve senior citizens access to digital financial services with seniors' usage of our financial platform growing by 7.1 percentage points year-on-year. The next theme is to become more creative, which is where we are exploring business expansion by fostering fintech startups and through collaboration with the fintech players.

42 new start-ups have joined the Shinhan Future’s Lab initiative, bringing the total number of alumni working together with Shinhan to 375. We're also collaborating with the Korea SMEs and start-up agency and the Korean Institute of Startup & Entrepreneurship Development to build a stronger system to support global business expansion. This platform for supporting start-ups provides linkages among alumni companies for follow-on collaborations, enabling expansion to even more innovative business areas. Next, moving on to our digital to value performance and how we are playing a social -- a stronger social role through digital. For Shinhan Financial Group's financial and nonfinancial platforms, gross MAU as of the first quarter has grown on average by 27% year-on-year over the last 3 years. Together with this quantitative growth of our platform, we have been working to improve customer engagement by improving UAD functionality, providing data-driven personalization services to achieve and drive qualitative growth. On the right side of the screen are examples of how we are strengthening our digital social responsibility. We are using AI technology to monitor and detect suspicious transactions across all channels. Notably, our ATMs are embedded with AI vision technology to identify suspicious activity in real time and to send to our customer alert messages as part of our heightened efforts to prevent financial accidents. Also, we continue to support senior citizens using digital finance. We provide senior mode, front-end screens for better readability provide education and digital finance, while also providing senior-friendly ATMs that are specialized to their needs to improve their usage of financial platforms. The Shinhan Financial Group will continue to work to achieve balanced growth of our financial platform while playing a greater social role and while offering greater financial benefits and utilities to our customers.

(presentation)

Thank you very much. That was our video. Starting from Page 21. Please refer to the slides for details on our ESG initiatives, subsidiary highlights and key financials. And with that, we'll conclude the presentation and now move on to the Q&A session. Thank you very much.

Yes, thank you very much to our presenters for the presentation. Now we will move on to your questions. For those of you with a question, please use the raise hand function on your Zoom screen. For those with questions in English, also use the right hand on Zoom as well.

Questions raised in English will be translated consecutively. So for those who are speaking in English, please wait for consecutive translation to follow your question.

So we do need a little bit of time to set up for the question queue. So please bear with us.

Yes, we have our first question, (inaudible).

I'm from Hyundai Motor Securities, (inaudible). I have 2 questions. First is related to digital. If you look at slide presentation, you talked about digital applications for senior citizens. So -- how are you expanding the (inaudible) senior citizens? What kind of strategies do you have? What kind of targets? And what kind of expected effect benefits you foresee? Second question is on Shinhan Life. In 2022, the [MTR] movement. In 2022, so new CSM flow -- the write offs and period end. Can you break it down into these categories? In 2022 why were there these differences in terms of the expected versus actual.

So please wait while we're preparing the answer. Thank you very much for -- the question, the digital, our CDO. And second question will be answered by our CFO from Life. So first, the digital question.

For senior customers, well, in the case of our group, the group's digital strategy that we have to offer is to provide more convenient digital financial services, more safer. And also 1 that enhances social value. What we mean by social values refer to digital gaps. So we are leaving nobody behind, especially because of the digital divide, people who are most vulnerable, we believe our senior citizens. For the senior customers, we are providing specialized services by enhancing providing expanded financial education and card play provided by the bank, a large letter services and dedicated -- our senior citizens are provided. And also in ATM, we have specialized ATMs that offers larger letters so that they can read them well. So as we have noted previously, compared to last year, 7.1% increase of senior customers was actually achieved. So what this means is that at our group, active senior customers, we have this customer base. And this customer base is actually expanding. The case of active senior customers compared to the share of the senior customers that come to our platform newly, -- that number has increased by 7.1% and -- so MAU from 1.1 million to 1.62 million. It has increased -- and so these senior customer-related initiatives, enhancing the social value that is offered by the financial institutions. Not only that, I believe they will also contribute toward financial performance as well.

This is [Park Kyoung Won] from Shinhan Life. Thank you for your questions. I think you asked about 2 things, first CSM movement and then the difference between expected and actual -- so I think it's on one of the pages, Page 6.

At the time of transition, the CSM was about KRW 6.5 trillion based on premium written. And then as of the end of 2022, it's KRW 6.9 trillion. So in terms of new business driven, CSM is about KRW 750 billion as of last year, of which about KRW 220 billion is interest-bearing. And so that was a driver for growth. And then P&L CSM release is about KRW 670 billion. The remaining KRW 140 billion actually was due to CSM adjustments from changes to underlying adjustments due to interest rate movement. So about KRW 300 billion in CSM increase is expected going forward. In terms of the difference between expected and actual, within last year, the amount actually was about KRW 27.1 billion. So about half was from the insurance side, the other was from loading expense. Now first quarter, there's almost none, less than KRW 5 billion or so. It's actually KRW 1.6 billion only. And [2023] 1st quarter new business CSM with improvement in business is about KRW 220 billion recently.

Next question is from Daishin Securities, Park, Hye-jin.

I'm Park, Hye-jin from Daishin Securities. I have questions about credit cost. So recently, the credit costs compared to the banks, the nonbank subsidiaries have seen significant increases in credit costs. So I have 2 questions. First, in 2023, what is your outlook for credit cost? And my second question is, can you break it down between the bank outlook and also nonbank subsidiaries. And also real estate PF that there are some concerns. And so you have conservatively set side provision according to your presentation. On an annual basis, how much -- in addition, do you plan to satisfy in terms of provisions. If you have such clients, can you share those with us?

Hye-jin Park, thank you very much for those questions. While we are preparing the answers, we would like to ask you to please wait a few seconds.

Thank you. This is about credit cost, the questions. The group CRO will take that question, and I will answer the remainder part of your question.

Good afternoon. I'm Bang, Dong-kwon, the CRO. Thank you very much for those good questions. In the case of credit cost, as our CFO has noted during his presentation, on an ordinary basis, 29 bps. And then additional provisioning added, it goes up to 48 bps. In this year's business plan, it was 35 bps of our credit costs. However, in 2023, in our view, -- given the trends in delinquency ratio, it is increasing. So given such trends compared to our existing expectations of 35 bps, we do believe it will become a bit higher than that. So 40 bps, about, is our expectation going forward with regard to real estate PF. So the hottest issue. Yes, it is a buzz word. One of the hottest issue in the market, especially real estate PF bridge loans is in a difficult situation. And 2% from our total provisioning, it's about KRW 8.8 trillion. And it's the KRW 175 billion. That is below precautionary. And up until the second half, you can't give accurate predictions. However, we do believe the amount will grow a bit -- so with regards to provisioning nonbank subsidiaries, they are setting aside additional provisions after the Q1, the presentation -- early presentation. With regards to PF provisioning, we are reviewing the possibility of setting aside additional provisioning. We will give this more thought and then give you -- get back to you later on. You talked about bank and nonbank subsidiaries in Q1 -- the banks. So KRW 178 billion provisioning are set aside for a bank and nonbank subsidiary takes up the remainder. So however, how much change will take place from this figure? We don't see that much change will happen. But with regards to credit cost provisions, regulators, they will consider changing the system -- regulations. And there may be additional provisions set aside in the second half. So I don't think I can give you a really precise answer at this point.

As I said, we have set aside KRW 85 billion. So it's KRW 129 billion for the bank, and then there's KRW 52.1 billion that is set aside by nonbank subsidiaries. Look at the portfolio movements from the figures that is set aside in Q1, 35 bps, we believe that will be the range that we will be actually moving along, as all noted.

We will move on to the next question from CLSA Securities, Mr. Shim, Jongmin.

Yes, I'm from CLSA, Shim, Jongmin. I have 1 question about your capital management plan. In this quarter, you will do KRW 150 billion share buyback quarter as well. So do you tend to sustain these types of buybacks throughout the quarters for the remainder of this year? Do you think it's sustainable? And for KRW 150 billion at the start of the year, you talked about KRW 750 billion in conversion of preferred shares to common shares. Is that accounted for already? Or is it in addition to that? So is there a goal for additional share buyback.

Yes, thank you for the question. Yes, just please give us a few moments to prepare.

Yes. Thank you for the question. I think you're asking about 2 questions. Let me try that together. KRW 150 billion share buyback this time. Well, the [KRW 750 billion] will be converted in May on May 1. It's a part of that number. And like you said, will we be able to sustain this on a quarterly basis going forward? -- while for conference calls or during IR sessions, we're always talking about 2 things: first, whether the economic uncertainty will unwind and the regulatory authority stress tests, findings and then also regulatory change. So again, it is subject to change depending on these variables. In terms of the regulatory direction of the government, I think there are some new aspects that are emerging. As for example, countercyclical supplementary or strength test capital buffer as mentioned. And the global stress test by BASEL committee. There is talk of Korea also joining that exercise. And the government of the FSS also talked about how we need to adopt asset quality measures comparing to more advanced countries. So likely regulatory tightening is expected. So we intend to respond adequately in that direction.

Going forward, how well can we keep aligned to the regulatory authorities? I think I can say that everything, of course, is fluid as we still work to align ourselves to the direction, but we are reviewing continuing quarterly buybacks.

Answer. So there is no further questions coming in at the moment. So we will hold for further questions. (Operator Instructions) Next question, (inaudible) Securities, (inaudible).

I'm (inaudible). Recently, the business environment is quite challenging. NIM has fallen in Q1 and loan growth is also flat. The annual NIM and loan growth for the year, do you have any revised outlook? Can you share those if you have any?

Mr. Zhang for your questions. So we are preparing the answers, please hold. Thank you.

So this is a question that pertains to the bank. So the bank CFO will take that question.

I'm (inaudible), the CFO of Shinhan Bank. Thank you for the good questions. In the case of Q1, the bank's NIM last year (inaudible) because of the liquidity crisis of the market, there were high interest deposits that were procured and the short-term free floating assets. The margins have come down. Because of this impact compared to previous quarter, 8 bps were down, 8 bps this quarter. But in the month of March, the money movement has stabilized. And NIM in the end of March, it has rebounded from February. Early February, I noted that the IR section at a certain level, and that level is kept. And the high interest, time deposits, that impact will actually be mitigated starting from May. And the core deposit will have a positive impact on NIM. But last month, the win-win financial assistance program goes into effect, then this will serve as a factor to partially reduce the NIM. So if we look at this issue comprehensively in the second quarter compared to Q1, we do believe new will up slightly on an annual basis, NIM on par with last year's level is our cautious expectation. And with regards to asset growth. So this year, the plan itself, the loan growth -- so KRW 10.5 trillion. So 3.7% close was expected. So in the household retail sector, the loan growth was very bad. So there was minus growth there. In the case of the corporate learning in month of January and February, there was intensified competition. And so there were some difficulties. But starting from March, we're on a rising trend. And so overall, compared to our business plan on an annual basis, we do believe we will be able to achieve our target in terms of the asset growth. Thank you.

Yes. Thank you very much. And I think there are no further questions pending. (Operator Instructions) So it appears that there are no further questions. I know that today, there are many other financial groups holding their earnings call. And so I know that you do have to be conscious of time because you need to attend the other sessions. So with that, we will close the 2023 1st quarter earnings call for Shinhan Financial Group. Thank you very much to all of you for joining us today. And today's presentation can be found on Shinhan Financial Group IR YouTube channel. So please refer to the video and slides. Thank you very much.