Edited Transcript of 055550.KS earnings conference call or presentation 24-Apr-20 7:00am GMT

Next, on Page 6, let me provide some additional explanation about measures against the COVID-19. Along with such support measures for our customers and the society, the group subsidiaries have put into action their risk management systems. Against such a backdrop, Shinhan had kept a clear focus on our core capabilities, posting KRW 932.4 billion in Q1 of 2020 as net income, up 1.5% Y-o-Y. However, the coronavirus impact on the real economy has only started to become reflected in the business results since March. And thus, uncertainties regarding the performance from Q2 onward is growing.

As can be seen in the monthly indicators in March, loans mostly to large companies have grown sharply in anticipation of liquidity tightening and credit purchase sales of the card business also contracted in February and March compared to January. Bank delinquency, before write-offs and sales, was up in the month of March as well, an increase in the core deposit of the bank, cash equivalent increased as parts of effort to manage risk. Thus, we can see that the impact from COVID-19 started to become visible since March.

Key subsidiaries, the bank and the card company’s asset quality remain stable at present, but we must be prepared for Q2 and beyond when the real economy will deteriorate in earnest. In order to minimize the credit cost volatility, we plan to manage the risk as we go forward in accordance with detailed scenarios for various possible situations.

We have summarized the business highlights of Q1 on Page 7 for your reference.

Next, on Page 8, let me walk you through the group’s financial highlights. In Q1 of 2020, the group managed to maintain sound fundamentals in terms of interest income-focused earnings, so that net income posted KRW 932.4 billion. Ordinary income, excluding the lower income, tax impact from the treasury stock disposal losses, posted to the north of KRW 800 billion, same as last year. However, when excluding the effect of acquiring the remaining or implied equity and the effect of lower write-off expense of intangible assets, ordinary income comes to mid-KRW 800 billion, down Y-o-Y, partially reflecting the impact from COVID-19. The Korean won loans of the bank was up 2.9% YTD, including expansion of assistance to SMEs and households. Due to the increase in size, the interest income of the bank grew 3.8% Y-o-Y. Meanwhile, due to the expanding volatility in the financial market, actually more severe than during the 2008 global financial crisis, financial product losses have grown so that the noninterest income of the group fell 10.6% Y-o-Y.

By engaging in strategic cost management in the midst of the coronavirus crisis, the cost-to-income ratio of the group posted 43.7% and is being managed within the financial target. By harnessing digital technology from a mid- to long-term point of view, productivity will be enhanced, thus enabling continued cost efficiencies. We’re at a point in time when striking the right balance between financial support that fulfills corporate social responsibility and maintaining asset quality is highly critical. To minimize any possible shocks, all subsidiaries within the group are implementing risk management systems and closely monitoring asset quality.

On Page 9, let me explain in detail about the group’s interest income. In Q1 of 2020, the group’s interest grew — interest income maintained sound fundamentals, increasing 5.0% Y-o-Y (sic) [YTD]. During Q4 2019, 25 bp cut in the BOK rate was executed on top of which, an additional cut of 50 bp was carried out in March 2020, thus raising the downward pressure on the net interest margin. However, low-cost core deposits was up 9.3% YTD, thus partially offsetting the margin decline. Also, solid growth is being realized overseas, thus contributing to a higher interest income.

And now the bank’s loan growth. To secure liquidity early on with the credit spread widening, large corporates have preemptively increased their credit portfolio. And as a result, loans to large corporates increased 15.5% YTD, driving the overall loan growth. With inclusive financial policies in place, SME loans increased 2.3% YTD. Loans to the nonaudited SMEs, relatively more vulnerable to COVID-19, increased 3.6% YTD. SOHO loans also increased 2.4% YTD. Loans in this segment are on a par with the initial business plan.

Next, the group’s noninterest income on Page 10. The group’s noninterest income fell 10.6% Y-o-Y to KRW 734.2 billion. This is because the gain on marketable securities and FX derivatives decreased with higher volatility in the capital market indices. Q1 fee income increased 10.8% Y-o-Y to KRW 531.5 billion. The pandemic froze up consumption, slowing down the credit sales growth and leaving a dent in credit card fee income. However, with the significant increase in stock trading volume, brokerage commissions increased, offsetting some of the loss in credit card. Lease financing fees and other fees from relief debt conversion program increased, contributing to an increase in fee income overall.

The group’s SG&A and credit cost on Page 11. The Q1 SG&A increased 2.5% Y-o-Y. The group’s CI ratio is 43.7%, being managed within target. There will be continuous effort made for cost control by selection and concentration strategy to prepare for the uncertainty in the second half. The group’s credit cost ratio recorded 35 bp, up 1 bp Y-o-Y and 5 — up 5 bp Q-o-Q. Compared to the previous quarter, the banks’ and cards’ delinquency ratios have increased 5 bp and 9 bp, respectively, showing signs of the COVID-19 effect partially. From the second quarter and onward, when the outbreak impact will be more pronounced, it is possible that the credit cost may go up. Depending on which scenario unfolds, we will implement risk management measures accordingly.

Page 12, capital adequacy. This quarter, with the completion and the remaining stake purchase in Orange Life, the decline of the common equity ratio pursuant to the acquisition has come to a stop. In January this year, even though we acquired the remaining stake in the insurance company, due to our preemptive capital management, the effect on our capital ratio was minimal, and additional downward pressure on the capital ratio was relieved. Despite the higher volatility in Q1 FX rate and interest rate, by maintaining earnings power and stably managing risk-weighted assets, we were able to improve the group’s CET1 ratio by Basel III standards by 23 bp Q-o-Q to 11.4%. As part of our capital policy in connection to the finalization of the Orange Life deal, the Board decided in March to buy back and cancel KRW 150 billion of treasury shares, which will be executed in Q2.

Contribution by subsidiaries and by matrix on the next page. We reinforced nonbank side of the business with Shinhan Card buying lease assets and the finalization of the Orange Life transaction. Wealth management seems to have taken a hit due to the financial market volatility and losses on the investment products, but with the growth in IB and global businesses, we’re able to confirm once again Shinhan’s diversified business portfolio. Going forward, we will continue to strengthen nonbank business so that we can enhance the fundamentals of the overall group’s earnings base.

More detailed explanation about the global business on the next page. The group’s income from the global business was KRW 89 billion in Q1, up 13.6% Y-o-Y with increased earnings from Japan and Vietnam. We will continue to manage profitability, liquidity and soundness in each country under the pandemic.

Sustainable management activities on Page 15. In March 2020, Shinhan Life was the first Korean life insurer to become a signatory to the UNEP Finance Initiative’s Principles for Sustainable Insurance. In Q1 this year, eco-friendly, renewable energy loans and investments have been newly executed, bringing up Q1’s green financing to KRW 449.4 billion. New technology financing in Q1 amounted to KRW 4.2421 trillion. And the cumulative, innovative and inclusive financing as of Q1 amounts to KRW 5.6639 trillion.

At the FY ’19 General Shareholders Meeting, a female outside director was appointed, enabling diverse representation of the Board. The remaining slides are for your reference, guiding you through the subsidiaries’ performance and business indicators.

2020 will be a year in which group-wide efforts are made to overcome the crisis posed by COVID-19 and to grow our fundamental strength to weather the storm. We will pay heed to the sound advice given us by the clients and the shareholders. We will live up to your expectations and perform our duties and roles more proactively. We sincerely hope the coronavirus will be conquered in the near future. Thank you.

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Cheol Woo Park, Shinhan Financial Group Co., Ltd. – Deputy Head of IR [3]

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Thank you very much. That was the CFO’s presentation, and now we will take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

We will take the first question from Hyundai Motor Securities, Mr. Kim Jin-Sang.

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Jin-Sang Kim, HMC Investment Securities Co., Ltd., Research Division – Analyst [2]

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I have 2 questions. First of all, the group’s CET1 ratio has been enhanced despite the growth in assets. Yes, it provides reassurance to all of us. The 12% — however, you are still below 12%. You don’t have that much of a leeway. And the government, for its part, the dividend payout ratio — they do have a very cautious approach about this. So by the year-end, the group’s CET1 ratio — what is your outlook for the year-end — the CET1 ratio? And do you think it’s possible to continue to improve the dividend payout ratio going forward?

And my second question. I think the credit cost has been well managed, as you have said, preemptively — because of the growing uncertainties, preemptively setting aside provisions. I do believe that by the year-end, this will be possible. So for this year, what is the level of credit costs that you expect? And do you intend to more proactively set aside provisioning? Well, what can serve as a trigger for this to happen? Do you have any internal scenarios that you have simulated? So can you share that kind of information with us?

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Sunghun Yu, Shinhan Financial Group Co., Ltd. – Deputy President & CFO [3]

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Thank you very much. I’m Yu Sunghun, I’m the group’s CFO. With regards to the capital ratio question that you have asked, given the financial plans for 2020, BIS ratio is targeted at 14% and CET1 ratio is later half of 11%. So that is our financial plan going forward. But when we set up the financial plan initially, what we didn’t take into consideration was that the FSS has now decided to introduce in advance the Basel III components. And so if the regulations are eased somewhat, then compared to what is in the financial plan, the CET1 ratio and BIS ratio will go up more than 100 bp. Of course, this is a temporary increase only. And using this — us engaging proactively to create leverage affect that, I don’t think will be possible.

And secondly, with regards to the dividend policy. Through our disclosures, we have provided an explanation. The long- to mid-term capital policy is being formulated at the moment. And dividend payout ratio will go over 30%, and this is more timing and the size and treasury buyback and the cancellation size. And the target BIS ratio and the target CET1 ratio are included. But we only have plans, but we have to, I think, postpone communication with the market at the moment because in this crisis period, we need to secure more capital. And so we need to wait and see how long this crisis will be protracted. So after the general directions are more clear, I think we will be able to provide you with more details.

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Unidentified Company Representative, [4]

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I’m [Kim Tae-yeon] from the finance team. I have some additional information. With regards to the CET1 ratio — so the dividend shareholder return policy, every year, 20 bp improvement is being planned. Because of coronavirus, if we satisfy more capital, then the CET1 improvement rate was going to be even quicker. In a normal situation, we believe that 20 bp improvements annually can be possible. Before coronavirus, the capital policy that we had in place was very much focused on shareholder return. So I would like to emphasize that.

With regards to the preemptive provisioning, that was a question that you asked. JPMorgan in China, they’ve recommended preemptive provisioning, but there’s a difference in accounting methods. There’s a general reserve in other countries when the economy turns bad, not particularly borrowers, but general provisioning can be satisfied preemptively. But for particular borrowers, provisioning can be used. But in the IFRS that is being applied to Korea, the borrowers and the provisioning are matched. So the preemptive provisioning, the necessity for that is there, of course. If a certain borrower of financial status will turn that, I think more detailed analysis or anticipation or evaluation is required. About 3 to 6 months of very intricate and elaborate evaluation is necessary. And with regards to — the 40 bp is the target for us.

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Operator [5]

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Yes, from DB.

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Byung Gun Lee, DB Financial Investment Co., Ltd., Research Division – Team Leader [6]

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I am from DB, Byung Gun. Congratulations on the good results under difficulties. I also have 2 questions or they could be tied into one question. In the beginning, you talked about the COVID-19 response measures. You talked about the status in great detail. And as for the maturity program and deferment of the interest payments that will be protected until September, what do you think will be the loan size? And with regards to COVID-19, the government is running the super low interest rate loan. So how much of that do you have left? And if you are going to have additional KRW 10 trillion, how much of that will be your exposure? And KRW 1 trillion of loans will be under the moratorium of the interest payment. I think that’s related to the KRW 3 trillion program. So could you explain about that?

And the second question is you had large corporate loans in March. And up until the 21st of April, there was significantly large corporate loans. And as a major bank, you will play your role accordingly. And of course, you will be very cautious with your asset quality. The loan growth may come out differently from our expectations. So what — how high do you think the asset growth will be? And right now, the interest rates are low, and how far do you think the margin will fall? And at which level do you plan to defend it?

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Unidentified Company Representative, [7]

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Yes. I will answer your question. As for the COVID-19 measures, SMEs and self-employed people are given relief programs so that they can defer their payment of principal and interest. KRW 42 trillion is at stake, and out of that, we believe people will be applying for KRW 15 trillion from that. Well, this is just one of our scenarios, and we believe KRW 15 trillion will be how much people will apply for.

And at the year-end, how will this affect our book? We are doing and running a lot of analyses. We cannot share with you the details at this point, and it’s too early to share with you the results of the stress test. But this is within our control.

We believe that we can stomach this kind of loss. And if the principal and interest payment — how can we soft land this whole situation through new financial products. That’s what we are studying at the moment.

And as for the new loans extended and rolling over the existing loans, the new loans amount to KRW 2 trillion and to KRW 100 billion. As for the rolled-over debt, it’s also about KRW 5.500 trillion.

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Sunghun Yu, Shinhan Financial Group Co., Ltd. – Deputy President & CFO [8]

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Yes. I will answer the second part of the question. I am the CFO. When we are making up the financial plan, the loan growth was conservative at 3% to 4% asset growth. But as you said, we are now in a completely different situation with the government measures. And to inject liquidity into the market, we already had significant growth in the loans. So it’s at 5% now. It’s above our target. And yes, we are concerned about NIM as well.

From the bank side, in Q1, the NIM fell by 5 bp. And on an annualized basis, we believe the NIM could fall by 10 bp. And the NIM is falling and in connection with the loan growth we will have to figure it out again. So we are going to focus more on the noninterest income to offset that.

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Operator [9]

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Ms. Kim-Do Ha will ask the next question from KT (sic) [Cape Investment & Securities Co.].

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Do Ha Kim, Cape Investment & Securities Co., Ltd., Research Division – Analyst [10]

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I have a question on noninterest income. FBPL profit-related noninterest income, so FBPL and FX derivatives. You have large changes. I think they mostly come from the securities area. So can you give us more figures and details about this matter by each segment?

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Unidentified Company Representative, [11]

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I’m [Kim Tae-yeon]. In Q1, with regards to FBPL, if you look at marketable securities, compared to last year, profit has been reduced. It appears that it has been reduced significantly. And so as of March ’19, the marketable securities, it had appeared solid. And then suddenly, steep losses appeared. In the case of our company, DNSc and GIB, I think we had defended Q1 well. In the case of Shinhan Life, we don’t have much stock holdings. And overseas investments have realized quick growth and profits. And our income has been diversified. If you look at each item, FX and fixed income valuation losses have been minimized. KRW 7.2 billion in losses have incurred. And so — and KRW 5.4 billion in gains have been realized overall. And derivatives-related CBA because there has been no changes in the credit rating, so there’s been no significant changes. And CBA-related losses have not occurred.

And with regard to lines, the valuation losses, last year, KRW 56.5 billion was recognized in fourth quarter and in this quarter. With regard to line or KRW 19.6 billion losses have been additionally recognized. So much of the losses have been already recognized. But going forward, there is potential of additional financial losses coming from line-related investment. So that is all.

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Operator [12]

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It seems that there are no questions on queue. (Operator Instructions) We’ll take the last question from Lee Byung Gun.

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Byung Gun Lee, DB Financial Investment Co., Ltd., Research Division – Team Leader [13]

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It seems like no one was interested in asking a question, so I’d like some elaboration on the earlier question that I have asked. Other companies have — are targeting 5% for asset growth. So I don’t think that’s a low figure. But the government has its plans already, and loan is growing in April. So I think we’re going to exceed 5%. And if you think of the securitized amount, I think the loan growth will be higher than 5%. So what is your take on this?

And NIM fall by 10 bp. That’s what you expect. But compared to last year, it seems like we have gone over that. So for each quarter, in Q2 and Q3, what is your forecast for NIM?

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Cheol Woo Park, Shinhan Financial Group Co., Ltd. – Deputy Head of IR [14]

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Thank you. I am Park Cheol Woo, in charge of IR. Thank you for your additional questions. As for asset growth, well as of now, the government is providing livelihood loan programs, and they have started in earnest in April, and we’re still in the initial stage. So we don’t know how this will unfold. We will have to wait and see to be able to say with some certainty about the loan growth trend. And so we will be updating you with further communication. And as for the margin, this is pretty much the similar. We have seen drastic changes as we went through March, and we don’t still have the COVID-19 outbreak under control. So it’s very early to come up with any specific figures. So I’d like to ask for your understanding.

There are no further questions. We will conclude the 2020 Q1 Shinhan Financial Group’s Financial Presentation. We hope that the outbreak is conquered soon. I wish you health and all the best. Thank you.

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