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Edited Transcript of 086790.KS earnings conference call or presentation 24-Apr-20 7:00am GMT

Seoul Apr 28, 2020 (Thomson StreetEvents) — Edited Transcript of Hana Financial Group Inc earnings conference call or presentation Friday, April 24, 2020 at 7:00:00am GMT

Hana Financial Group Inc. – Chief Risk Officer & Deputy President

Hana Financial Group Inc. – Head of IR Team

Hana Financial Group Inc. – CFO & Deputy President

Samsung Securities Co. Ltd., Research Division – Analyst

Junghoon Lee, Hana Financial Group Inc. – Head of IR Team [1]

Greetings to everyone taking part in Hana Financial Group’s business results presentation. I am Lee Junghoon, the IR Team Leader of Hana Financial Group. Thank you to all shareholders, analysts and other market participants joining our earnings call via the phone or the internet despite your busy schedules. Let us now begin the 2020 Q1 business results presentation.

I would like to introduce our group’s management who are here for today’s earnings release. First, from Hana Financial Group, we have our CFO and Deputy President, Lee Seung-Iyul; CRO and Deputy President, Hwang Hyo-Sang, is also here with us. From Hana Bank, SEVP, Lee Hu-Seung, from Planning and Management Group is here with us. And from Hana Financial Investment, Deputy President, Lee Sang-Hoon of Management and Planning Group is here with us. From Hana Card, Division Head of Management Strategy Division, Kim Tae-Young is here with us.

We will first hear the earnings result from CFO and Deputy President, Lee Seung-Iyul, and then have a Q&A session via phone.

I would like to invite our CFO and Deputy President, Lee Seung-Iyul, to cover our 2020 Q1 business results.

Seung-Iyul Lee, Hana Financial Group Inc. – CFO & Deputy President [2]

Greetings. I am Lee Seung-Iyul, in-charge of Hana Financial Group’s Finance. I would like to cover the 2020 Q1 group business results presentation.

First, the major business highlights of the group. Please refer to Page 3 of the material. Hana Financial Group’s 2020 Q1 net income grew 20.3% Y-o-Y, posting KRW 657 billion. With the spread of COVID-19, domestic and global uncertainty deepened, with the rapid expansion of global financial markets’ volatility and concerns over economic depression. But on the back of our group-wide efforts to overcome the crisis, we were able to achieve solid earnings.

This year, we forecast that the domestic economic growth rate will record the lowest level since the Asian financial crisis. And there are also concerns that the financial industry management environment will also greatly worsen following the contraction in the real economy. Hana Financial Group will do our best so that we can maintain sound earnings through internal efforts to more efficiently manage costs and by strengthening risk management and improve our profit stability.

Now let me cover our 2020 Q1 major financial highlights. First, Q1 group interest income posted a similar level Y-o-Y. Despite the soft — slight drop in the quarterly NIM, the interest income maintained a similar level, mainly due to the aggressive response to domestic company’s preemptive funding demand and adequate growth of loan assets on the back of sustained household and SME loan-based growth trend as well as interest income growth of global division, including China and Indonesia.

On the other hand, in the case of fee income, it went off Y-o-Y on the back of credit card fee income and improvement in loan and foreign currency-related fee income. Accordingly, the core earnings comprised of the group’s interest income and fee income slightly increased Y-o-Y, stably maintaining the group’s recurring income.

Next, as a result of continued recurring cost rationalization efforts of the group after one-off retirement expenses, including wage peak ERP, which was recognized in Q4, Q1 end group SG&A expenses dropped 12.1% Y-o-Y and was stably controlled.

Q1 cost-to-income ratio also greatly dropped Y-o-Y, improving our cost efficiency. Overall, through preemptive expense execution late last year, this year’s G&A growth burden was eased, and we expect that it will contribute to the stabilization of the bottom line in the difficult management environment going forward.

Lastly, through the asset quality-centered asset growth strategy that has continued for the past several years, the group’s provisioning was stably managed in Q1. In addition, the risk component adjustment, which was traditionally done early in the year, actually changed to being executed late in the year. And also with the completion of additional provisioning in late 2019, there was an underlying effect of nonrecurring items being absent compared to the same period in the previous year. Accordingly, the group credit cost ratio as of end 2020 Q1 realized 13 bp, a 12 bp drop Y-o-Y, and also improved 5 bp Q-o-Q attesting to the stable management of the group’s asset quality.

Looking at the bottom left of the page, the group ROE and ROA as of end Q1 2020 posted 9.38% and 0.63%, respectively, and went up Y-o-Y and Q-o-Q. Group’s cost-to-income ratio posted 48.7%.

Next, please refer to Page 4. The group’s 2020 Q1 NIM comprised of Hana Bank and Hana Card posted 1.62%, a 6 bp decline Q-o-Q. Hana Bank’s NIM recorded 1.39%, a 2 bp drop Q-o-Q. With the BOK rate cut early in March, loan-to-deposit pricing slightly weakened, but the drop was offset by portfolio efficiency through increase in low-cost deposits. A major reason for the decline was the absence of underlying effects caused by the sizable collection of overdue interests at the end of the previous quarter. On the other hand, due to repercussions from COVID-19, card NIM under a situation when the domestic and global credit card settlement profit declined, which led to a decline Q-o-Q since a part of the drop in the fee-related expenses was not reflected in the NIM calculation, and this also had an effect on the group NIM.

On the other hand, the credit card fee income, which fully reflected the drop in expenses maintained the previous quarter’s level and had only a negligible effect on the group’s P&L.

Group’s 2020 Q1 interest income despite the NIM drop maintained the previous year’s level on the back of loan asset growth. Fee income centering on credit card fees and loan and FX-related fees rose 2.0% Y-o-Y.

Accordingly, the group’s Q1 core earnings posted KRW 1.9606 trillion, a slight increase Y-o-Y. On the right side of the material, you can see that the bank’s loans in won, with overall solid growth of loan assets, saw a rapid rise in large corporate loans, leading to a 2.0% growth Q-o-Q, marking KRW 222.7 trillion.

Now let’s go to Page 5. 2020 Q1 end group’s NPL ratio recorded 0.47%, a 1 bp drop Q-o-Q; and delinquency ratio posted 0.31%, a 1 bp increase Q-o-Q. In addition, the group’s credit cost ratio as of end Q1 posted 0.13%, a 5 bp Q-o-Q improvement, as aforementioned, attesting to the stable management of overall asset quality indicators. With concerns over spread of COVID-19, in case economic activity normalization is prolonged, economic depression and asset quality worsening possibilities are expected to heighten. And going forward, we will prepare for diverse scenarios and review risk factors and aggressively respond accordingly. The group’s 2020 Q1 and CET1 ratio is forecast to post 11.89%, a 7 bp drop Q-o-Q.

A major reason was the RWA increase due to the quarterly spike in the won/dollar exchange rate. And when the FX rate is stabilized later on, we forecast that, along with the realization of a recurring level of quarterly earnings, the group CET1 ratio can gradually be improved.

I will now cover the group’s management performance in more detail by line. First, refer to the group’s consolidated income statement on Page 7. Group’s interest income among the group’s 2020 Q1 general operating income posted KRW 1.428 trillion, a level similar to the previous quarter, and the same period in the previous year. Q1 fee income posted KRW 532.6 billion, a 5.8% drop Q-o-Q due to the decline of M&A advisory fees. But compared to the previous year, as aforementioned, on the back of robust improvement, including credit card fee income, grew 2.0% Y-o-Y.

In addition, the — with fee — these FX-related fees and asset management-related fees and other bank income-related fees may have some difficulties. But for credit cards and for brokerage, we will do our best to actually safeguard our assets. In addition, the group’s 2020 Q1 disposition valuation gains posted KRW 74.1 billion. With the quarterly rise in the won/dollar FX rate, KRW 109 billion of nonmonetary FX translation losses incurred a drop Y-o-Y. And compared to the previous quarter, there was a reverse effect from absence of one-off derivative gains related to BIDV equity investment and greatly fell. However, excluding these one-off items, the recurring level of disposition valuation gains on the whole posted a sound level.

Lastly, the group’s Q1 SG&A expenses posted KRW 927.9 billion, a 20.7% Q-o-Q and 12.1% drop Y-o-Y. This was mainly a result of group-wide efforts to continue to manage costs more efficiently and since the wage peak early retirement expenses were preemptively executed completely late last year.

Now moving on to Page 8 for business results by subsidiaries. Hana Bank, which is, of course, a major subsidiary of the group recorded net income of KRW 554.6 billion in the first quarter of 2020, up 59.1% Q-on-Q and 15.6% Y-o-Y. Although there was significant nonmonetary FX translation loss due to weakening of the won, core profits remained robust, while SG&A and credit costs were well managed at stable levels, resulting in sound earnings performance.

Next Hana Financial Investment’s Q1 net income decreased by 32.2% Q-on-Q and 25.2% year-on-year, respectively, recording KRW 46.7 billion, amid a sharp rise in volatility across the global financial markets, which led to a decline in M&A advisory fee income and SMT performance. The Hana Card saw an uptrend in credit card fee income in the first quarter, recording KRW 30.3 billion in net income, a significant increase on both a Q-on-Q and Y-o-Y basis, thanks in large part to one-off earnings. Please refer to the slide for the business performance of our other subsidiaries.

And from Pages 9 through 11, please refer to those slides for further details on other metrics, such as NIM, noninterest income and SG&A, which I’ve already mentioned.

Now moving on to a breakout of total assets, liabilities and equity for the group, as of the end of Q1 2020, group total assets reported KRW 440 trillion or KRW 556 trillion (sic) [KRW 565 trillion] including trust assets of KRW 126 trillion. Total assets of Hana Bank, the anchor subsidiary of the group was KRW 451 trillion, including trust assets. The group’s total liabilities stand at KRW 441 trillion and total equity at KRW 29 trillion.

Moving on to Page 14 for an update on KB Hana Bank’s won loans and deposits. As of the end of Q1 2020, Hana Bank’s Korean won loans recorded KRW 222.7 trillion, up 2% Q-on-Q from the end of last quarter. If you look at a breakdown of the loan growth by segment, corporate loans increased to KRW 106.9 trillion, up 3.1% Q-on-Q. Large corporate loans increased by 14.4% Q-on-Q to KRW 15.6 trillion and made a surge in funding demand at the end of the quarter amid widening of financial market volatility.

SME loans showed continued growth driven by real funding demand from quality mid-tier SMEs, recording KRW 89.4 trillion, which is an increase of 1.7% compared to the fourth quarter. Meanwhile household loans grew 0.9% in the first quarter, recording KRW 115.8 trillion on the back of continued demand for corporate loans and unsecured credit loans, same as in the previous quarter.

Deposits in won as of Q1 end rose by 3% Q-on-Q to KRW 237 trillion. Low-cost core deposits increased by 5.8%, MMDA by 13.8%, increasing the share of low-cost deposits in the funding mix to 35.1% versus the end of the previous quarter. And for your reference, as you can see on the bottom right graph, as of the end of the first quarter 2020, the loan deposit ratio stood at 96.8%. And Page 15 provides a breakdown of Hana Bank’s loans by type. So please do refer to the slides.

Now moving on to asset quality on Page 17. Group’s total credits grew 3.1% Q-on-Q, reporting KRW 295.4 trillion as of the end of the first quarter. The NPL amount increased 2.6% Q-on-Q to KRW 1.4 trillion. As a result, the group’s NPL ratio decreased by 1 basis point Q-on-Q to record 0.47%.

If you look at the top right, you can see that the group’s new NPL formation prior to write-offs, loan sales and debt-equity swaps in the first quarter was KRW 290.2 billion, an increase versus the end of the previous quarter, following partial regulatory change in the assets down as classification criteria applicable to a nonbank subsidiary.

Now I will take you through further details on the bank’s asset quality on the next slide. Hana Bank’s total credit as of the end of the first quarter rose by 3% Q-on-Q to KRW 256.6 trillion, with the NPL amount recording KRW 1 trillion, which is a decline of 2.2%. Asset quality NPL coverage ratio increased by 1 basis point Q-on-Q to record 95.1%. The bank’s delinquency ratio as at the end of the first quarter rose by 1 basis point to 0.21% and has been managed at stable level.

Next moving on to provisions on Page 19. The group recorded a credit cost ratio of 0.13% as of the end of Q1 2020. As you can see on Page 20, KEB Hana Bank’s credit cost ratio was 0.06%.

And lastly, on to Page 21 for a breakdown of our capital adequacy position. The group’s BIS ratio and Tier 1 ratio are estimated at 13.8% and 12.5%, respectively. And the common equity Tier 1 CET1 ratio is expected at 11.89%.

As previously mentioned, the won weakened significantly during the quarter, resulting in an overall drop in our BIS ratio compared to the prior quarter. That being said, our capital adequacy remains well managed with a sufficient buffer. And of course, we’ll continue to do our best to further enhance our capital efficiency and shareholder value through improved performance.

And with that, this brings me to the end of Hana Financial Group’s earnings presentation for the first quarter of 2020. Thank you.

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Junghoon Lee, Hana Financial Group Inc. – Head of IR Team [3]

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Yes. Thank you very much. We’ll now move on to the Q&A session. Let me explain the protocol briefly. So in order to take part in our earnings call, you should call in using the numbers that we have provided, or you can join the conference call online at our website through online streaming. Please be advised that in that case, if you should have any questions, you do need to phone in to ask questions. So we’ll now go ahead and receive questions. Thank you.

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Questions and Answers

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Junghoon Lee, Hana Financial Group Inc. – Head of IR Team [1]

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We have no questions in the queue. We will hold.

We will take questions from Korea Investment Securities. We have Mr. Baek Doosan on the line.

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Doosan Baek, Korea Investment & Securities Co., Ltd., Research Division – Research Analyst [2]

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I am Baek Doosan from Korea Investment Securities. And I would like to ask 2 questions related to risk management. The first question is, in this quarter, regarding your provisioning and with other capital adequacy indicators, it seems that you did not see a worsening. So looking at the details, in April are there any sectors that have worsened? Or do you have any plans to manage them going forward?

Second question is about Hana Financial Investment and PF-related rollovers or other issues that I believe exist. So can you tell us about the securities, PF-related risk management plans going forward?

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Junghoon Lee, Hana Financial Group Inc. – Head of IR Team [3]

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Thank you for your questions. Please hold until we prepare an answer for you.

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Hyo-Sang Hwang, Hana Financial Group Inc. – Chief Risk Officer & Deputy President [4]

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I am Hwang Hyo-Sang, the CRO of Hana Financial Group. Related to capital adequacy in April, let me answer the question for asset quality. Actually, in Y-o-Y, our delinquency was well-managed and our NPL ratio was well-managed as well.

In April as well, the amount of delinquency, the net growth does not show a great worsening. However, for SMEs and SOHO, compared to Q1, we believe that for — in delinquency, there is a possibility that it may grow, and we are managing those possibilities. From April to Q3 or Q4, we have different policies related to COVID-19. So we don’t believe that the delinquent amount will increase. But in the latter half, from Q4, we expect that it may grow. So we are preemptively managing this.

Related to Hana Financial investment, you asked about PF and risk management plans going forward and all the IB loans that it has, well, we have reviewed all of them, and there is about KRW 4.5 trillion of loans that we are managing, and there is only a negligible amount that could be problematic. And on the whole for delinquencies, there is no cause for concern. Going forward, with sell-downs and in PF, there are some that may be influenced by COVID-19, but we’re going to have very limited risk management and deal with these.

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Junghoon Lee, Hana Financial Group Inc. – Head of IR Team [5]

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We’ll move on to the next question, Mr. Kim Jin-Sang from Hyundai Motor Securities.

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Jin-Sang Kim, HMC Investment Securities Co., Ltd., Research Division – Analyst [6]

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Yes. Thank you for the very detailed answer. I have 2 questions. First of all, due to corona, your capital management policies, there is now growing uncertainty for certain and the regulatory financial authorities are more cautious. So the situation does not appear to be favorable, it’s quite difficult. So your overall dividend policy, are there any changes to your baseline policies? Do you intend to continue with your policies to increase payout consistently? Is that still viable in your view? And for overall banking, margins tend to be soft, but there is demand for loans due to special reasons. So I think volume growth-wise is quite good. So NIM and loan growth for this year, what is your outlook? Your net interest income? How do you think this year’s net interest income will be compared to last year?

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Junghoon Lee, Hana Financial Group Inc. – Head of IR Team [7]

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Yes. Thank you. Please bear with us as we prepare for the answer.

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Seung-Iyul Lee, Hana Financial Group Inc. – CFO & Deputy President [8]

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So this is the CFO, Lee Seung-Iyul. Let me provide the answer for you. In terms of our dividend policy, up to now, we still have a long time left, and the BOD will engage in sufficient discussions to make a decision. But given current levels, nothing has been decided at the moment as to what we will do just in terms of the overall direction. There is still a lot of time left. And it will be subject to in-depth discussions by the BOD. We had always said that in the mid- to long-term, it’s all about shareholder return, and that will be something that we continue to seek.

And regarding NIM, or actually, loan growth was something you asked about. On an annual basis, we’re looking at 3.4% broad growth overall for total loans. Our BIS ratio, we are in a position of having to proactively manage our BIS. So we are looking at loan asset growth on a more conservative stance.

Regarding NIM, recently NIM, our market rates have dropped, and the government is also — they have cut policy benchmark rates by 50 basis points, which also weighed on NIM. Going forward, I think, first quarter NIM for the bank is about 1.39%. We think it’s likely that there might be a further drop in the NIM for the banks, but it will not be a significant drop, but just a slight decrease in my view. It’s not a source of a major concern. And that is my outlook.

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Junghoon Lee, Hana Financial Group Inc. – Head of IR Team [9]

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Yes, there is no pending question yet, so we will wait.

Next question from Samsung Securities, we have Mr. Kim Jaewoo on the line.

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Jaewoo Kim, Samsung Securities Co. Ltd., Research Division – Analyst [10]

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Yes. I am Kim Jaewoo from Samsung Securities. I have 2 questions. First is about your interim dividend that you normally pay and you actually answered the dividend question previously, but can you give us your take on the interim dividend for this year?

Second question is about provisioning. And your RC numbers have been adjusted last year, as you said. But at that time, it was before COVID-19 was rampant. So can you tell about — tell us about any changes to RC that could occur? And I know that it will happen at the end of the year, but are you going to have early adjustment of the RC, maybe after half of this year is past? And I think that you have some plans in mind. And can you tell us about provisioning scenarios that you have reviewed? For loans, I know that maturity rollouts have been happening. And without adjustment to RC by the end of the year, then if you’re going to reserve provisioning, well, are you going to just then with that? Or are you going to adjust some of this in between looking at the situation?

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Junghoon Lee, Hana Financial Group Inc. – Head of IR Team [11]

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Thank you very much for your question. Please bear with us until we give you the answer.

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Seung-Iyul Lee, Hana Financial Group Inc. – CFO & Deputy President [12]

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Yes. As I answered to the previous question about dividends, I think we do have several months before we need to make a decision about dividends. And I believe that the BOD will need to have lengthy discussions about the dividend. So regarding the interim dividend, I cannot give you a clear direction at this time. As I previously mentioned, in the mid- to long-term, we have different dividend policies for shareholders that we have in mind.

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Hyo-Sang Hwang, Hana Financial Group Inc. – Chief Risk Officer & Deputy President [13]

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To answer your second question, I am the CRO, and let me answer. Regarding the adjustment of RC, as you are probably well aware, in the past we used the bankruptcy data of the past, and there is the data — the default date of the past, and we see the loss rate as well. And you can see for the default rate for our bank, well, it is actually going down. So if we adjust the RC at this point in time, then I believe the direction will be opposite of what you just mentioned. And I think by the end of this year, we believe that the default rate might rise, and it will be appropriate to adjust it at the end of the year. What we are concerned about is that at the end of the year, if delinquencies increase then in the first half of the year or in second quarter or in the third quarter, when there are some companies that may see some worsening, then we need to reflect that and we need to connect it to provisioning. So we have conservative plans to reserve provisioning.

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Seung-Iyul Lee, Hana Financial Group Inc. – CFO & Deputy President [14]

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Regarding our shareholder return policy, let me elaborate. As was mentioned by our Deputy President, our group’s shareholder return policy is in the mid- to long-term, actually improved this for the shareholder returns. So that is planned by our management. So at the current point, we are going to improve this in the mid- to long-term, and our group is the only group that has interim dividends among all the financial groups in Korea. And at the timing that you have asked about, well, we still have 2 or 3 months left. And we have COVID-19, which is unprecedented. So we believe that we will need to look at the situation when it is time for us to have interim dividends. So at the end of the day, we don’t have any concrete plans going forward. But the overall shareholder return policy will be improved in the mid- to long-term, which has been our direction by the management, and that will still hold.

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Junghoon Lee, Hana Financial Group Inc. – Head of IR Team [15]

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We have no other questions on the line yet, so please hold.

So we will wait a moment more as there are no incoming questions.

So Mr. Jaewoo Kim, you’re online again.

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Jaewoo Kim, Samsung Securities Co. Ltd., Research Division – Analyst [16]

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I’m sorry, I have one further question to ask. Regarding provisioning, last week, U.S. banks, if you look at their earnings, were talking about reserve build-up. JQ, for example, set aside about 2.3% in provision, for example. For us, of course, we’re not an easy — we’re in a very favorable position to do that kind of preemptive provisioning. But we have actually less provisioning in comparison — in the first place about the low end of 1% or so. Would it be fair to say that that kind of existing level of provisioning is sufficient? And credits, loans, because our quality has improved, do you feel confident that due to the improvement in quality, that level of provisioning will be sufficient? Could you explain the logic?

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Seung-Iyul Lee, Hana Financial Group Inc. – CFO & Deputy President [17]

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So the American U.S. banks, to apply what they have announced is not easy for us. But for large borrowers, regarding their credit rating, we’re very conservative in terms of assessment. So that can be considered. And for precautionary or — there is a separate case-by-case exposure review. So in that case, that can be a reason for increasing provisioning in the first quarter in certain cases.

You asked whether our provisioning amount is enough. Well, compared to other banks, the provisioning ratio may be less, that is true. But this is because, as we’ve explained in prior sessions, it’s because the collateral ratio is higher than other banks, which is one reason why the level of provisioning is less for us. And after 2017, if you look at what has happened, our provisioning rate actually has consistently increased. So NPLs of center or below has gone down, and we have continued with provisioning. So the provisioning ratio itself has continued to improve. As of the end of June, 3% to 4%, we think that the provisioning ratio will improve further by that margin. So we feel that we have manageable levels of provisioning in place.

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Junghoon Lee, Hana Financial Group Inc. – Head of IR Team [18]

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I think that was a sufficient answer. And there is nobody with a question at the moment. So we’ll wait further.

We have no other questions on the line. And with this, we will conclude 2020 Q1 Hana Financial Group earnings release presentation. Please visit our website, and you can listen to the presentation again, and we also will have our data IR book on the website as well. Please contact our IR team if you have any further questions, and we will do our best to answer them. Thank you for listening.

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

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