Shinhan Financial Group Co Ltd (SHG) 2021 Q2 法說會逐字稿

Greetings. I am Park Cheol Woo, the IRO. With the resurgence of COVID-19, we have been conducting our business results presentations in audio for more than 1 year, although we had planned to go back to video. We wish to see you via video in the near future. And from now on, we will begin the Shinhan Financial Group 2021 first half business results presentation.

We have here with us at the earnings presentation our executives, and from the previous quarter's earnings release, we are holding it earlier in the day so that the market can analyze our performance in more detail. We would like to ask, not only institutional investors, but also individual investors, for your keen interest. As I had mentioned, we have here with us our Group CFO, Roh Yong-hoon, Group CDO and Shinhan DS CEO, Yi Sunny; Group CMO, Heo Young-taeg; Group CSSO, Park Sung-hyun; and Group CRO, Bang Dong-kwon.

First, CFO, Roh Young-hoon, will walk us through the 2021 first half business results, and then we will engage in a Q&A session with all of you. I would like to invite our CFO, Roh Yong-hoon, for 2021 first half earnings presentation.

Greetings, I am Shinhan Financial Group CFO, Roh Yong-hoon. Thank you for taking part in the 2021 first half business results presentation despite your busy schedules.

On Page 4 of the earnings release presentation material, there are 3 major highlights that I would like to cover. First, we were able to achieve a record high half year net income with improvement in our fundamentals. With asset growth in our traditional bank business and improvement in our nonbanking, including capital markets, our basic fundamentals are continually leveling up. 2021 first half group's income has a 5:5 breakdown between the bank and the nonbank. It is evolving as a differentiated profit model of global financial companies. Bank net income rose 20% Y-o-Y through margin management and quality asset growth. Nonbanking recorded a record high half year net income, a 68% improved Y-o-Y.

Looking at the breakdown for nonbanking, the earnings for capital markets, including securities, capital and asset management; as well as the retail finance, including card and savings bank and insurance, are all evenly growing. In particular, net income for the capital market subsidiaries with high ROE posted KRW 507.4 billion, which is 43% of the group's nonbanking income. This is a level up from the 29% yearly average contribution between 2017 to 2020.

Going forward, through efficient capital allocation, synergy expansion between subsidiaries and through securing inorganic growth opportunities, we will continue balance earnings improvement centering on high ROE business. Secondly, uncertainty is continuously decreasing. With the additional financial support on the back of COVID-19, we have been continuing high loan growth from last year, but asset quality trend is sound. Group's first half provision for credit losses decreased 56% Y-o-Y and even 9% Q-o-Q. Even excluding the COVID-19 provisioning that was additionally provisioned in the first half of last year and the provisioning for problematic investment products, it has decreased 30% Y-o-Y. For the qualitative improvement of loan assets, we strengthened our corporate, SOHO, retail CSS approval strategy, and we are closely monitoring new asset inflows.

In addition, we have expanded and revised preemptive management selection standards and criteria, and we are doing our best for risk management so that we can effectively respond to future economic downturns. On the other hand, Shinhan Bank's interest deferment principal balance in the COVID-19 support program posted KRW 152.4 billion, and after it increased until end December 2020, as of the first half 2021 now, it decreased below the level of end June in the previous year. In addition, for a problematic investment products, through verification from KPMG and external assessment institution, we are receiving appropriate assessments each quarter. We are actively responding to minimize related uncertainties.

Third is capital profitability. ROE posted 11.5% and on the back of record high half year net income, we achieved 2-digit ROE. Based on efficient growth management, based on RWA, we increased ROE, and through efficient capital allocation, we are generating sustainable profit. The increased amount of RWA in 2021 Q2 was KRW 2.2 trillion, and it was managed at a level which was less than half that of KRW 4.8 trillion, which was the increased amount in Q1.

I would like to touch on our shareholder return policy. We are reviewing dividend plans based on press reports on the conclusion of the financial authority's capital management recommendations. First of all, we are reviewing quarterly dividend payouts to shareholders who own shares as of end June. We are considering equal quarterly payouts, taking into account the previous year's EPS and the details, including dividend amount, will be decided at the BOD, which will take place in August. Since the COVID-19 situation is still serious, we will closely monitor the market situation and execute our shareholder return policy.

From Page 5, I will explain in more detail about the 2021 first half financial results. Despite complex uncertainties, including (inaudible) of COVID-19, we were able to record KRW 2,443.8 billion of net income, which surpassed recurring income fundamentals of KRW 1 trillion per quarter and KRW 2 trillion on a quarterly basis that we had been mentioning from last year. Q2 net income posted KRW 1,251.8 billion. This is a record high quarterly net income since we were established as well as, at the same time, a record high half year net profit. So we could confirm that our diversified recurring income base is expanding. In particular, financial support for companies and households is continuing. We acquired early sales growth engine, improved our margin and the first half interest income posted KRW 4,356.4 billion, a 8.3% improvement compared to the previous year.

Loans in won increased 4.2% YTD, and SME loans increased 7.6% YTD and drove growth. To elaborate on growth from a qualitative management perspective, the SME loans and SOHO loans that we newly handled in the first half of this year increased in the high premium loans of A minus or higher rates and the proportion of SME loans with higher than BBB+ rating also increased 4.6 percentage points Y-o-Y for externally audited companies and more than 5.4%p for nonaudited companies.

In addition, the collateral ratio of newly handled at SME loans increased. Non-audited collateralized loan ratio increased 8.8%p Y-o-Y and SOHO also improved 5.5% Y-o-Y. If early asset growth was pursued in the first half, in the second half, based on RWA, we will control growth speed and focus on qualitative growth.

If Shinhan Financial Group's base scenario under the 2021 business plan becomes a reality, in which the BOK freezes its base rate this year, then the bank NIM is expected to rise 1 bp every quarter in the second half. We will make efforts to enhance the NIM further by improving the loan yield and managing the low-margin unused credit line.

Income from the nonbank side increased significantly also. Noninterest income in the first half increased 13% Y-o-Y to KRW 2,014.3 billion. This is thanks to the increase in the fee income as well as the profit gained by the subsidiary companies and the capital markets segment. Strategic cost cutting continues to this day. Along with the offline channels made more efficient, cost cutting is continued thanks to digital initiatives, enabling CI ratio of 41.4% in the first half. And as part of the effort to continuously improve the cost structure, Shinhan Bank and Shinhan Investment Corp. implemented ERP. The CI ratio, excluding the ERP cost in the first half, is 40.4% managed below the interim target.

In the first half, about 20 branches were consolidated. And in the second half, we'll continue to downsize the face-to-face channels and realign human resources in the core business lines such as capital markets so as to enhance the operational efficiency. The group's credit cost ratio is being managed stably at 20 bp. The bank's credit cost ratio in the first half was 8 bp, a 21 bp fall Y-o-Y and record low level. This was possible due to the flexible response under COVID-19 and preemptive risk management effective against market uncertainties.

The delinquency rates of Shinhan Bank and card, which are considered leading indicators for credit cost, both fell Y-o-Y, not showing signs of asset quality deteriorating due to the pandemic. Please refer to Pages 6 to 9 for detailed financial performance by item.

I will now go right to Page 10 to talk about the group's profit contribution and performance by Matrix.

Page 10. The net income contribution in the group is broken down 53% for bank and 47% for nonbank, which clearly shows the diversified profit structure. Even within the nonbank segment, the profit is evenly distributed over retail, insurance and capital markets. Looking at the operating income by the Matrix organization, GIB global retirement pension realized record high half year profit. And wealth management that had contracted due to the problematic financial products is slowly recovering. Customers' assets increased by KRW 4.9 trillion Y-o-Y and the number of high net worth with more than KRW 500 million increased by 1,700 people Y-o-Y and by 1,100 Q-o-Q.

Moving on to digital on Page 11. In order to actively respond to the competitive digital environment, we are expanding the group platform's coverage for the customers. With the customers' digital needs rising under the pandemic, the group's MAU is increasingly rapid -- increasing rapidly since 2020. The MAU for Shinhan Bank SOL has grown 9% YTD to 7.48 million and that of Shinhan Card, PayFAN increased 26% to 5.14 million.

Let's talk about the earnings. The digital channel's operating income before expenses recorded KRW 824 billion in first half, up 52% Y-o-Y from KRW 543 billion. Everything about the bank, including the process, content, space, et cetera, being upgraded to enable customers' digital experience. Shinhan Bank, as part of its upgrade efforts, is opening Digilog branches, which are a mix of digital and analog, which is expected to allow for an innovative financial experience for the customers. Please visit our Seosomun, Southeastern, Central and Mok-dong PWM Digilog branches and see for yourself what interesting banking experiences are available.

We are actively expanding our strategic digital investment. We have created and are managing the group's SI fund of KRW 300 billion. And in the first half, investment was executed in a digital platform company and others in the areas of mobility and smart city cooperation. Please refer to the slides for further details on earnings creation and cost saving from digital channels and digital coverage.

We are highly committed to ESG activities as a Korean financial institution, and the results are shared on Page 12 for your reference. Also, check out the website for the 2020 ESG report published in July.

Page 13 summarizes the main results of FRESH 2020s, which are the group's mid- to long-term business strategies and the following pages after that list the groups and the subsidiaries' performance and major business indicators for your reference.

Up until now, I've gone over our business results. We are headed in a consistent strategic direction, and we're producing upgraded recurring profits without one-offs. And we will do our best to show better results in the second half. As for now, we will watch out for and manage the asset quality for the financial support program that is to expire at the end of September. And we'll do our best to maximize the results from collaboration in the digital investment and continue to upgrade capital profitability.

This concludes my presentation, and we will proceed with Q&A.

(Operator Instructions) The first question is from Hyundai Motor Securities, Mr. Kim Jin-Sang.

Thank you for your good earnings. I have 2 questions. First, regarding your performance, it is very good. Your asset quality seems to be very good, too. But with the resurgence of COVID-19 for the SOHO, it seems that there are more difficulties which can lead to some deterioration going forward. And for Shinhan Financial Group, can you tell us your outlook and what will be your response going forward? And for the integration of life insurance, I know some time has passed, and I believe that there will be some results at your yearly earnings. I'm curious about the profit. And with the IFRS 17 adoption, can you give us any simulations you have attesting to what will happen going forward?

Thank you very much, Kim Jin-Sang, for your insightful questions. I'm Bang Dong-Kwon, the CRO. In the first half, for the SOHO loans, as was mentioned by our CFO, we have portfolios for different credit ratings and for different collateralized ratings. So we are seeing a market improvement actually in both. And looking at the delinquency as well, you can see for the SOHO loans, they are actually showing more stability. However, as you had voiced your concerns because of the COVID-19 resurgence, there are, of course, potential risk factors going forward. In our case, if the current trend continues, we believe that a favorable flow will continue. However, for the interest deferment and others, we are able to withstand the burden. And additionally, for SOHO loans, for our members, [margin] members and for different cases, we have different credit rating models that we are developing. So if that opens in the latter half of the year, we will have differentiation so that we can still maintain stability like we are now. Thank you.

For the second question, our CMO, Heo Young-taeg will answer that question. Actually, our CFO, Roh Yong-hoon will answer the question.

Well, let me give you the first -- the bigger picture first. You asked about the integrated life insurance company, Kim Jin-Sang, and our net income goal is about KRW 400 billion or so. And with the adoption of IFRS 17, we believe that it will go up from that amount. For details, I will give the microphone to our CMO, Heo Young-taeg.

I am CMO Heo Young-taeg. As of July 1, successfully, we had integration of the 2 companies and launched our promotion model. I think it's showing the future of Shinhan Life. So we actually think of this as very positive. For both of our subsidiaries -- companies, the goal is about KRW 400 billion, and it was about KRW 300 billion in the first half. And we had some successful investments that were reflected. But on the whole, you can see that the P&L is very stable. So I think that we will have a surpassing of the goals we had set forth for the year. Well, maybe I'm being overly confident, but that's the current picture.

And for the IFRS, when this becomes adopted, that on the whole, we will have more strength in the transparency. And we believe that we will have an overall level up. It's because, looking at our ALM structure, compared to any other life insurance companies, we are being very well managed. So IFRS adoption will, we believe, lead to our market differentiation. Thank you.

And we will have Park Sung-hyun, who will also answer the question.

I'm in charge of strategy, and it's 300% for the IBC, then it is top (inaudible) insurance company. And for the life insurance firm, there were some difficulties in sales. And it's because there were some aggressive life insurers that had very aggressive sales leading to lower margins in the industry. But for the IBC ratio, there was -- it was nonbinding. So we had that. But with the IFRS adoption, we believe that in the insurance industry, there will be a market of quality that will take root and our integrated insurance company will actually have a hold over the market and lead to very positive effects on our income. Thank you.

(Operator Instructions) Next question is from a Seo Young-Soo of Kiwoom Securities.

Congratulations on a wonderful first half. This is a minor question. As for Shinhan Card, relatively speaking, it had a good performance, and I think it contributed to good income coming from the nonbank side. Shinhan Card, if you look at the details, the fee income and other income -- operating income -- the operating expenses seem to have gone down. And I think that has led to improved results for Shinhan Card in Q2. So could you tell us, is this a trend or is it a one-off? Could you explain the reason? And looking at Shinhan Financial Corp., I think this is integration cost. As for Orange Life, compared to Q1, it seems that the net income increased in Q2, but for Shinhan Life compared to Q1, the net income decreased significantly. So what happened?

Thank you for your questions. Please hold as we get ready for the answer. Yes, Mr. Heo Young-taeg will answer.

Yes, I'm the CMO. As for Shinhan Card, the cost for acquiring customers has decreased, and we were able to save on the expenses. And looking at the revenue stores of Shinhan Card, we had the -- we can divide into new sales and credit sales, and we're able to implement cost control for new sales. And there is the decrease in merchant fees. And so through cost control efforts, we are continuing with the growth. And I think that strategy has worked well, and we have positive outlook going forward.

And there's auto loans and overseas assets, and there is the new growth. And if we include the CB business, if we look at the growth trend in the new sector, we're seeing continuous growth. And of the industry peers, qualitatively and quantitatively, Shinhan has the most diversified portfolio. And so I think these factors will be maintaining a steady income flow going forward. And Shinhan Card, it's not going to happen that we are going to see overnight increase in income, but we will see a steady income increase going forward.

And the difference between Shinhan Life and Orange Life, the income growth, well, it has been mostly strategic. We have sold long maturity bonds. And we have implemented the strategy with the integrated life insurance as a whole. And this came from our strategy of selling the bonds. So it's not a matter of difference between Shinhan Life and Orange Life. I think you should look at the entity as a whole.

I am Roh Yong-hoon, the CFO. I'd like to add. If you just look at Shinhan Life, in Q2 compared to Q1, yes, the numbers look smaller. That is correct. In Q1, we had a one-off. We had sold off the acquisition finance. But the net income is KRW 92 billion, and compared to the target, the progress looks quite good.

(Operator Instructions) We have no questions in the queue, and we will wait while we have more questions coming in. We will take the next question from Hanwha Investment Securities, analyst [Kim Do Ha].

I am [Kim Do Ha], and I have a question about digital. There's Kakao Bank, an online bank, and they are saying that they're going to have new loans on non-face-to-face manner or digital loans. And for your side, do you have any new lineups for loans that you have in store in the case of non-face-to-face loans?

Thank you very much, analyst [Kim Do Ha], and we will soon answer your question. Our CDO, Yi Sunny will answer your question.

I am Yi Sunny, the CDO. In the latter half of this year, we will start. And for example, we have a plan to have a contract with First American, and we have planned other plans as well for non-face-to-face, and we think that it will be a great help.

I am CMO, Heo Young-taeg. For the bank -- non-face-to-face bank collateralized loans, we plan to launch it sometime in August. And for the bank's retail products, ultimately, we believe that they will all turn digital or non-face-to-face.

We'll take the next question from JPMorgan Securities, Cho Jihyun.

Hello. I am Cho Jihyun from JPMorgan. I have 3 questions. In the beginning, you talked about a quarterly dividend, and you will be paying that out after the BOD meeting in August? And is it half year or quarterly? And will there be a share buyback plans going forward? And in the beginning, you talked about the scenario of the base rate being frozen and then the NIM will be improving by 1 bp per quarter. Is it only coming from the low-cost deposits? What is the detail of this scenario? And the rate hike will be steeper? So at the end of the year and maybe next year, there could be a rate increase once or twice? And what will be the track for the NIM improvement? What is your guidance?

And you said that mostly the bank's retail products will turn non-face-to-face. But collateralized loans, if they're handled online like credit loans, is it technically feasible? That is what I'm curious about. Maybe you could make the loan application online, but as for the underwriting, is it done at the screening department? So what makes these products transition from offline to online?

Thank you very much for your questions. We will hold while we get ready for the answers. Mr. Roh Yong-hoon, the CFO, will answer the questions.

As for the quarterly dividend, it's not an interim dividend, but we are thinking of quarterly. So we are going to pay out the quarterly dividend to the shareholders who own the shares as of June end. But because of COVID-19, we'll be monitoring the market very closely. And every quarter at the BOD meeting, we'll come up with prudent decisions. And as for as share buyback, that was part of your question. If the COVID-19 situation relaxes and if there are no macroeconomic and business problems, we will look into share buyback more actively. But even before that, if we look at the group, the shares, the treasuries, after acquiring Orange Life, we have all used them up. And so if there are further M&A opportunities and if there is a need for equity swap, then we will need treasury shares. But as for the amount and timing, we have not decided on anything.

And as for the second question about the NIM, if you look at the bank, the NIM has increased 1 bp to 1.4% Q-o-Q. And this is due to -- and if we take into the factor of 0.7 bp reduction due to deposit insurance rate changes, then it has increased by 1.7 bp. And we expect it to increase by 1 bp every quarter when the base rate is frozen. But as of October, if the base rate is increased by 1x, then the bank margin is expected to go up 1 bp in Q3 and by 2 to 3 bp in Q4. And other than that, we will work on improving the NIM by improving the loan yield and by managing the low margin -- and using the low margin unused credit line to improve the NIM by 1 to 2 bp additionally in the second half. Yes.

And as for the online loan handling, ultimately, what we are thinking is the retail loans, we want to handle it non-face-to-face for customer convenience. That is the overall direction. 100% non-face-to-face, it includes technological issues and regulatory issues. And as for the technological issues, I think time will resolve the issues. And as for the regulations, for customer benefit, I think the regulatory authorities will relax the regulations and so we are counting on deregulation. So the strategic direction that our group has is, we want to put customer convenience first. So for retail loans, we want to go non-face-to-face ultimately. That is the big picture. And as for this, I don't think it's just our financial group. Most of the other financial groups have that picture in mind.

Non-face-to-face mortgage loans. Ultimately, the customers would want that because they don't want to visit the banks anymore. That's good for their convenience. And so that will be the ultimate direction. But for the time being, all the processes may not be handled online. And some of the parts -- because of regulations, they cannot be transitioned online. And so some of the processes may be handled manually, but ultimately non-face-to-face. That is our objective.

Yes. I am Yi Sunny, the CDO. Technologically, it's not difficult to handle the collateralized loans digitally. Application scraping, submitting photos, submitting electronic documents, they can be done online, but the legal and regulatory issues as for the transition of ownership that require some legal issues. So we will work through our legal proxy -- we'll work with the attorneys, and then we'll be able to turn this into a non-face-to-face transaction.

We have no questions in the queue currently. (Operator Instructions) We have the next question from Goldman Sachs, Park Sinyoung.

I'm Park Sinyoung. I have only 1 question. You mentioned shareholder return policies previously. And for the cash dividends, I think it was 30%. And I think you have mentioned that you're going to make it more regular. And for optimal CET1 ratio, for those over 12.5%, I think you mentioned that additional returns will take place. And can you tell us about the ratio of total shareholder return? If you have a target standard, then can you brief us on it?

Thank you for your question, Park Sinyoung. CFO, Roh Yong-hoon, will answer your question.

Thank you for your question. As you have mentioned, for the CET1 ratio of 12%, that standard still stands. And we're not saying that we're going to achieve it right now, but I spoke about it based on the previous standard because we have already accomplished it. But -- we believe that it might not go there or surpass that, but in the mid- to long term, we want to stably maintain 12%. So that plan still stands. And for the total shareholder return ratio, we are going to manage it based on this. And regarding the target, we are still reviewing this. So we need to consider a more comprehensive capital policy. So we will communicate it to you in an appropriate -- at the appropriate timing.

Yes. Next question is from Won Jaewoong from HSBC.

Congratulations on a good half year. I have a question on the fintech side. As for Kakao Bank, it is targeting the mid-interest rate market aggressively, and the credit rating model seems to be more detailed. They're setting it up, and they're working in a different mode. I think that is their strategy. And as far as Shinhan, you are not going to go there? Or is it going to pose a threat? Is that going to be Kakao Bank's own initiative only? So what is your take on that competitor?

Thank you for the question. Please hold as we get ready for the answer. CRO, Bang Dong-Kwon will answer your question.

Thank you for the question. As you rightly mentioned, the fintechs are going to expand in the mid-interest rate market -- And I'm sure you've heard of the alternative rating model. And I think the fintechs are working on that. I mentioned in the beginning, Shinhan Financial Group, as for the alternative data, it's not just the traditional financial data. There are other types of market data, and they are used as input factors to build the model. We are getting data from NPS, from affiliates and internal data, and we are creating big data. And for each segment, we are creating alternative models. And starting in August, we are going to roll them out consecutively. And for Kakao Bank and other fintech players, we will be able to compete with them head-to-head in the mid-interest loan market.

The CDO, Mr. Yi Sunny, will add some comments.

As for card companies, the first [CP] license was acquired, and this is quite an achievement for alternative modeling. And so Shinhan Card is getting ready for this segment of the market.

There are no questions in the queue currently. We will wait until further questions come in.

With this, we will conclude Shinhan Financial Group's 2021 first half earnings release presentation and Q&A session. We will look forward to seeing you in the next quarter with more improved earnings. Thank you very much for your participation, and please have good health during the COVID.