Shinhan Financial Group Co Ltd Q1 FY2020 Earnings Call

Good afternoon, everyone. I am Park Cheol Woo, Head of the IR. I'd like to thank everyone for taking part in today's event and will now begin the 2020 Q1 Earnings Presentation. We'd like to ask for your understanding that for this particular earnings presentation, as part of our efforts to observe social distancing, we will only be providing audio contents with minimum outside attendees. Joining us today are CFO, Yu Sunghun; and CSO, Park Sunghun; and the Managing Director of Finance, Kim Tae-yeon. After a presentation by CFO, Yu Sunghun, on the business results of 2020 Q1, we will be holding a Q&A session. I now invite CFO, Yu Sunghun, for the earnings presentation for Q1 of 2020.

Good afternoon. I am Yu Sunghun, the group CFO. First of all, I would like to thank the shareholders, investors, analysts and journalists from home and abroad for taking part in the earnings presentation for the first quarter of 2020. Before going into the Q1 performance of Shinhan Financial Group, let me go over the issues and responses related to COVID-19. This is Page 5 of the presentation deck. The coronavirus is posing a severe threat to both people's livelihoods and the economy. Shinhan is doing its utmost to faithfully undertake its social roles and responsibilities in the broad effort to overcome the economic crisis caused by the COVID-19. The first and foremost step, in line with the government's livelihood financial stability package program, is that an inclusive financial policy is being pursued proactively to ensure that funds are provided in a speedy and timely manner to society at large and our customers. As of the 20th of April, the bank has extended KRW4.9 trillion, a total of 32,510 loans as financial support to SMEs. A new loan to SMEs has been increased from KRW1 trillion to KRW3 trillion. Not only the bank, but the card, savings bank and the insurance arm of the group are taking part in various financial support programs, including assistance to individuals. Secondly, Shinhan is actively involved in government-led policies to stabilize the financial market through liquidity provision. We have contributed KRW1.770 trillion to the fixed income market stabilization fund, and another KRW1 trillion will be provided for the securities market stabilization fund targeting the stock market. Contributions are being made at present within the limit. Thirdly, we are at the forefront of providing necessary community-level assistance to the most vulnerable groups and to health professionals. Going forward, we will continue to spearhead the efforts and proactively respond to the COVID-19 crisis, as befits the standing of a world-class financial company such as ours. Next, on Page 6, let me provide some additional explanation about measures against the COVID-19. Along with support measures for our customers and society, the group subsidiaries have put into action their risk management systems. In this backdrop, Shinhan has kept a clear focus on our core capabilities, posting KRW932.4 billion in Q1 of 2020 as net income, up 1.5% Year-on-Year. However, the coronavirus impact on the real economy has only started to become reflected in the business results since March. Thus, uncertainties regarding the performance from Q2 onward are 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, with an increase in the core deposits of the bank of cash equivalents as part of the effort to manage risk. Thus, we can see that the impact from COVID-19 started to become visible since March. Key subsidiaries, including the bank and 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 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 concerning interest income-focused earnings, so that net income posted KRW932.4 billion. Ordinary income, excluding the lower income tax impact from the treasury stock disposal losses, posted to the north of KRW800 billion, the 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-KRW800 billion, down Year-on-Year, partially reflecting the impact from COVID-19. The Korean won loans of the bank were up 2.9% Year-to-Date, including expansion of assistance to SMEs and households. Due to the increase in size, the interest income of the bank grew 3.8% Year-on-Year. 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% Year-on-Year. By engaging in strategic cost management during 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 income maintained sound fundamentals, increasing 5.0% Year-to-Date. During Q4 2019, a 25 bps cut in the BOK rate was executed on top of which, an additional cut of 50 bps was carried out in March 2020, thus raising the downward pressure on the net interest margin. However, low-cost core deposits were up 9.3% Year-to-Date, thus partially offsetting the margin decline. Additionally, solid growth is being realized overseas, thus contributing to a higher interest income. Regarding the bank's loan growth, to secure liquidity early on with the credit spread widening, large corporates have preemptively increased their credit portfolio. As a result, loans to large corporates increased 15.5% Year-to-Date, driving the overall loan growth. With inclusive financial policies in place, SME loans increased 2.3% Year-to-Date. Loans to the nonaudited SMEs, which are relatively more vulnerable to COVID-19, increased 3.6% Year-to-Date. SOHO loans also increased 2.4% Year-to-Date, with loans in this segment being on par with the initial business plan. Next, the group's noninterest income on Page 10. The group's noninterest income fell 10.6% Year-on-Year to KRW734.2 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% Year-on-Year to KRW531.5 billion. The pandemic froze up consumptions, 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 losses in credit card. Lease financing fees and other fees from the 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% Year-on-Year. The group's CI ratio is 43.7%, being managed within the 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 bps, up 1 bp Year-on-Year and up 5 bps Quarter-on-Quarter. Compared to the previous quarter, the banks' and cards' delinquency ratios have increased 5 bps and 9 bps respectively, showing signs of the COVID-19 effect partially. In 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. With the completion of 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 bps Quarter-on-Quarter 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 KRW150 billion of treasury shares, which will be executed in Q2. Contribution by subsidiaries and by matrix on the next page. We reinforced the 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 the 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 KRW89 billion in Q1, up 13.6% Year-on-Year 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 KRW449.4 billion. New technology financing in Q1 amounted to KRW4,242.1 trillion. The cumulative, innovative and inclusive financing as of Q1 amounts to KRW5,663.9 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 heed the sound advice given us by the clients and 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.

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

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

I have two questions. First, the group's CET1 ratio has improved despite asset growth, which is reassuring. However, you are still below 12%, leaving limited flexibility. The government's cautious stance on the dividend payout ratio raises concerns. What is your outlook for the group's CET1 ratio by year-end? Do you think it is feasible to enhance the dividend payout ratio in the future? My second question is about credit costs, which you have managed well by proactively setting aside provisions in light of growing uncertainties. What level of credit costs do you anticipate by year-end, and are you planning to set aside provisions more actively? What might trigger such decisions? Have you run any internal scenarios, and can you share that information with us?

Thank you very much. I'm Yu Sunghun, the group's CFO. With regards to the capital ratio question that you have asked, given the financial plans for 2020, the BIS ratio is targeted at 14% and the CET1 ratio is targeted at the latter half of 11%. That is our financial plan going forward. But when we set up the financial plan initially, we didn't take into consideration that the FSS has now decided to introduce in advance the Basel III components. 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 bps. Of course, this is a temporary increase only. As for the dividend policy, through our disclosures, we have provided an explanation. The long to mid-term capital policy is being formulated at the moment. The dividend payout ratio will go over 30%, and this is dependent on the timing and the size of the treasury buyback and cancellation. The target BIS ratio and the target CET1 ratio are included. However, we only have plans, but we have to postpone communication with the market at the moment because in this crisis period, we need to secure more capital. We need to wait and see how long this crisis will be protracted. After the general directions are clearer, I think we will be able to provide you with more details.

I have some additional information. With regards to the CET1 ratio and the dividend shareholder return policy, every year, a 20 bps improvement is planned. Because of the coronavirus, if we satisfy more capital, then the CET1 improvement rate will be quicker. In a normal situation, we believe that 20 bps improvements annually can be possible. Before the coronavirus, the capital policy that we had in place was very much focused on shareholder return. I would like to emphasize that. Regarding the preemptive provisioning that you mentioned, JPMorgan in China recommended preemptive provisioning. However, there's a difference in accounting methods. There's a general reserve in other countries when the economy turns bad, but for particular borrowers, provisioning can be used. In the IFRS that is being applied to Korea, the borrowers and the provisioning are matched. Thus, the necessity for preemptive provisioning is there, of course. If a certain borrower's financial status worsens, I think more detailed analysis or anticipation or evaluation is required. About 3 to 6 months of intricate and elaborate evaluation will be necessary. The target for us is 40 bps.

I am from DB, Lee Byung Gun. Congratulations on the good results under difficulties. I also have two questions, which could be tied into one. In the beginning, you talked about the COVID-19 response measures. You elaborated on the status in great detail. 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? With regards to COVID-19, the government is running the super low interest rate loan. So how much of that do you have left? If you're going to have an additional KRW10 trillion, how much of that will be your exposure? And KRW1 trillion of loans will fall under the moratorium of the interest payment. I think that's related to the KRW3 trillion program. Could you explain that? The second question is regarding the large corporate loans in March. Up until the 21st of April, there were significantly large corporate loans. As a major bank, you will play your role accordingly. Of course, you will be very cautious with your asset quality. The loan growth may come out differently from our expectations. What do you think the asset growth will be? And right now, with interest rates being low, how far do you think the margin will fall? At which level do you plan to defend it?

Regarding the COVID-19 measures, SMEs and self-employed people are being given relief programs so that they can defer their payment of principal and interest. KRW42 trillion is at stake, and out of that, we believe people will be applying for KRW15 trillion from that. This is just one of our scenarios, and we believe KRW15 trillion will be the amount people will apply for. At the year-end, how will this affect our book? We are conducting 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. Nevertheless, we believe that we can manage this kind of loss. If the principal and interest payment needs to be soft-landed, we are currently studying new financial products. As for the new loans extended and rolling over the existing loans, the new loans amount to KRW2 trillion and the rolled-over debt is also about KRW5.005 trillion.

I will answer the second part of the question. As the CFO, when we created the financial plan, the loan growth was conservatively estimated at 3% to 4% asset growth. However, as you said, we are now in a completely different situation due to government measures. To inject liquidity into the market, we have already seen significant growth in loans, which is currently at 5%—above our target. Yes, we are concerned about the NIM as well. From the bank's perspective, in Q1, the NIM fell by 5 bps. On an annualized basis, we believe the NIM could fall by 10 bps. As the NIM falls, we will have to reevaluate our strategy. Therefore, we are going to focus more on noninterest income to offset that.

I have a question on noninterest income. FBPR related noninterest income, such as FX derivatives. There have been large changes. I think they mostly stem from the securities area. Can you provide more figures and details about this matter by each segment?

In Q1, regarding FTPL, if you look at marketable securities, the profits have been reduced significantly compared to last year. As of March '19, the marketable securities appeared solid. Then, suddenly, steep losses appeared. In our case, DMSC and JIB defended Q1 well. For Shinhan Life, we don't have much in terms of stock holdings. However, overseas investments have realized quick growth and profits. Our income has diversified. Regarding FX and fixed income valuation losses, KRW7.2 billion in losses have occurred, while KRW5.4 billion in gains have been realized overall. In terms of derivatives-related CBA, there have been no changes in the credit rating, so no significant changes have occurred there. CBA-related losses have not occurred. Regarding lines, last year, KRW56.5 billion was recognized in the fourth quarter, and in this quarter, an additional KRW19.6 billion in losses have been recognized. Much of the losses have already been recognized, however, there is potential for additional financial losses coming from line-related investments moving forward.

It appears there are no questions in the queue. We will now take the final question from Lee Byung Gun.

It seems like no one was interested in asking a question, so I'd like some elaboration on the earlier question that I have raised. Other companies are targeting 5% for asset growth, which is not a low figure. The government has its plans, and loan growth has indeed surged in April. I believe we will exceed 5%. Considering the securitized amount, I think loan growth will be higher than 5%. What is your perspective on this? Regarding NIM, you expect it to fall by 10 bps. However, compared to last year, it seems we have already surpassed that level. For each quarter, in Q2 and Q3, what is your forecast for NIM?

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 certainty about the loan growth trend. Therefore, we will be updating you with further communication. Regarding the margin, the situation is quite similar. We have seen drastic changes as we went through March, and we don't still have the COVID-19 outbreak under control. Thus, it's very early to arrive at any specific figures. I would 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.