Shinhan Financial Group Co Ltd Q1 FY2021 Earnings Call

Greetings. I am Park Cheol Woo, in charge of IR. It is now April with beautiful spring weather. Thank you, everyone, for participating in today's earnings release. And from now on, we will begin the 2021 Q1 business results presentation. From this 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 institutional investors and individual investors for your keen interest. We have here with us at the earnings presentation our CFO, Roh Yong-hoon; CMO, Heo Young-taeg; CSSO, Park Sung-hyun; and CRO, Dong-kwon Bang. First, CFO, Roh Yong-hoon, will walk us through the 2021 Q1 business results and then engage in a Q&A session with you. I would like to invite CFO, Roh Yong-hoon, for 2021 Q1 earnings presentation.

Greetings. I am Shinhan Financial Group's CFO, Roh Yong-hoon. Thank you, everyone, for taking part in the 2021 Q1 business results presentation. I will cover the 2021 quarters business highlights from Page 5 to 6 and explain the details regarding our group's Q1 business results. Let's go to Page 5. 2021 Q1 nominal net income posted KRW1,191.9 billion, and the size of our recurring income considering one-offs recorded approximately KRW1,230 billion level, recording the highest level ever since we were first established. What is more meaningful than the highest-ever quarterly earnings is that this was not just due to one-offs, but that our earnings are consistently expanding through our strong fundamentals, which are based on diversified recurring earnings, in particular, aligning with our long-term strategic direction pursuing efficient growth. We are seeing improvements in both bank and nonbank income. Noninterest income increased by 40% Y-o-Y and 55% Q-o-Q. Nonbank net income before reflecting ownership posted KRW620 billion, an 84% increase Y-o-Y, which is also a record-high quarterly income. Core profit also grew. The net interest margin, which declined due to the low interest rate, rebounded in 2.5 years. And along with loan growth, the group's interest income grew by 5.7% Y-o-Y. On the other hand, uncertainty related to future expenses for LIME in 2020 and COVID-19 provisioning is greatly declining. On April 19, the Dispute Settlement Committee determined the compensation rate regarding the LIME CI Fund sold by Shinhan Bank, and on a pretax basis, KRW62.6 billion of compensation expenses related to investment products, including the LIME CI Fund, were recognized as nonoperating expenses. With this, the ongoing Dispute Settlement Committee has all been concluded, and as mentioned in the previous Q4 conference call, there is a very low possibility that we will need to additionally recognize a large amount of expenses related to investment products at once. Additionally, through our preemptive asset quality management last year, the size of provisioning this year's Shinhan Card decreased by 34% Y-o-Y. The COVID-19 Financial Support Program, which has been extended 3 times due to the continuing COVID-19, has been slowing down in 2021. Lastly, I want to emphasize shareholder return. Based on our fundamentals, which have been leveled up, our capital ratio and double leverage ratio are becoming more solid. As we have promised, we will utilize this for qualitative growth and diversified, aggressive shareholder return. In particular, the Article of Incorporation amendment was completed at the Ordinary Shareholders' Meeting in March so that we can allow quarterly dividends from this year. Going forward, we have the environment to execute more diverse shareholder return policies. Let's go to Page 6. From Page 6, I will explain our mid- to long-term strategic direction. From 2017, centering on forecasts that show harmonious growth, localization upgrade to digital Shinhan, and creative inheritance of Shinhan culture was set. We set the strategic direction of the S-M-A-R-T, or SMART, project and have successfully executed them. In 2020, we expanded SMART of 2017 and established F-R-E-S-H, or FRESH, 2020s' mid- to long-term strategic direction. Our financial target is to become the local top in terms of customer investment return and from a shareholder value improvement perspective, we have the goal of over 10% return on equity, expanding and continuing shareholder return policy and emphasizing nonbank and noninterest and matrix-focused growth. As our 4 strategic initiatives, we chose pursuit of efficient growth, global connection and expansion, innovation opening for digital transformation, and ESG for sustainable management and performance generation. We have selected core KPIs for each initiative and are continuously managing them. The consistent strategic direction that we have pursued for the last 4 years is gaining visibility as reflected in our Q1 performance. From Page 8, I will cover Q1 financial performance details. As aforementioned, with consistent strategic execution, diversified earnings were realized, leading to record-high quarterly earnings. Since 2013, the profit side has been continuously increasing. Net interest margin has been improving, and corporate and household financial support expansion has continuously supported the core interest income increase. The group's noninterest income grew by 40% Y-o-Y and contributed significantly to the high growth of our income. Notably, solid profit growth from card, capital, and securities income also further improved. On the other hand, through digital-based cost-cutting efforts, the group's CIR posted 40.6% and decreased 3.1 percentage points compared to the previous quarter. The group's mid- to long-term CIR is also in the low range of management, leading to more investment capability for digital transformation going forward. Credit cost is also being managed very stably. Taking into account the COVID-19 financial support and economic situation, we are focusing on credit risk monitoring and management. Q1 credit cost ratio posted 22 basis points, and the non-performing loan coverage ratio posted 142%. Let's go to Page 9. 2021 Q1 group interest income grew by 5.7% Y-o-Y posting KRW2,118.1 billion. Bank loans in won grew 2.5% YTD and are maintaining an SME-centered solid growth rate. The bank's net interest margin posted 1.39% and improved 5 basis points Q-o-Q. This is the first margin turnaround since Q3 of 2018. With the bank's time deposit repricing taking place in earnest, demand deposits grew 16.6% YTD. Since October of the previous year, after reaching the lowest point, our monthly net interest margin is rebounding with the Q1 margin improvement. Through maintaining and managing appropriate growth, we will ensure solid growth rates of core interest income. Let's go to Page 10. It's group noninterest income. In Q1, group noninterest income posted KRW1,030.8 billion, growing 40.4% Y-o-Y. There was income growth for all nonbanking subsidiaries, and major subsidiaries including card and capital greatly contributed to our earnings improvement. In particular, the securities sector, where profits decreased last year due to investment product expenses, recovered, and the securities net income increased by 260% Y-o-Y. The matrix business also witnessed significant growth, thanks to fixed income increases from collaboration among the group companies in businesses such as the solar power business in Japan and real estate investment trusts. Further details will be provided later on Page 14. On Page 11, group G&A costs and credit costs. In Q1, G&A costs increased by 6.8% Y-o-Y. The group CIR at 40.6% was at its lowest in a decade. It was possible to secure investment for digital innovation, thanks to low CIR. We are confident that we will effectively manage the costs thanks to continued operational efficiency. The group's provisioning for credit cost declined by 33.6% Y-o-Y. Credit card provisioning declined by KRW59.7 billion due to a drop in the 2-month delinquency roll rate. It was possible to reduce the credit cost to 22 basis points as the need for additional provisioning declined, thanks to proactive asset quality management. Looking at the bank and card delinquency ratios, which serve as leading indicators for credit cost, both ratios are lower than the same period last year with no signs of asset quality deterioration due to COVID-19. However, thorough and careful risk management is more important now than ever as COVID-19 support programs are still ongoing and economic uncertainties persist. We will prepare for uncertainties with an early warning system based on big data and check the COVID-19 recovery speed of each industry. Now on Page 12. The group's CET1 ratio is 13.0%, and it is, however, 11.9% when calculated according to the previous criteria before the introduction of Basel III credit risk revision in September of 2020. A 2-digit ROE of 11.2% was possible thanks to record-high quarterly profit. Continuous efforts will be made to improve the earning capabilities of the assets and the capital. Capital ratio movement will be explained on the next page. The group's CET1 ratio as of March 2021 was 11.9% according to the previous criteria and 13% according to the new one. As mentioned before, due to the earlier introduction of parts of Basel III and resulting temporary improvement of 110 basis points, the CET1 ratio is conservatively managed according to the prior criteria. Compared to the end of 2020, the CET1 ratio improved by 10 basis points as a result of a 46 basis point increase from net income and a 30 basis point decrease from risk-weighted assets. Risk-weighted assets increased, while others were strictly managed so that the shareholder return policies can be implemented as planned. Page 14. As for operating income for matrix organizations, GIB saw 19.6%; GMS, 61.2%; WM, 8.7%; and global business, 6.8% growth Y-o-Y, showing continued operating income diversification at the group's level. In particular, it was possible to realize profit from the sale of Japanese solar PS shares by arranging a tentative loan through collaboration among nonbanks, Shinhan Asset Management and SPC on the group's collaboration platform. On the following page, digital transformation and contribution are explained on Page 15. Amidst accelerated digital transformation, in March of 2021, Shinhan has become the first financial institution in Korea to create a KRW300 billion strategic investment fund for digital business with investment from bank card investment and life insurance companies of Shinhan. We will establish a broad portfolio composed of AI, blockchain, cloud data and healthcare start-ups, as well as non-financial content platform companies going beyond the existing industrial boundaries. We have also launched Shinhan Pay to respond to the big tech and fintech trends. We hope to become a leader in the simple, easy-to-use pay business by combining the bank's potential customer pool, its infrastructure, and core businesses, along with a 2.7 million merchant network. Thanks to these efforts for innovation, in Q1, the contribution by the digital activities to the group's income was 14.2%, which is on a sustained upward trend. Please refer to the presentation material for more details on digital coverage, revenue generation, and cost reduction from the digital channels. Lastly, on Page 16, there are results of our ESG activities, where Shinhan leads among current financial institutions. On this page are indices to measure specific loan, investment, and carbon goals included in the zero-carbon drive declaration from last November. In the upcoming earnings release call, we will share the results of our climate change-related activities. Please take another look at innovative finance and inclusive finance results that have been updated and provided to you. For more detailed information on ESG activities, please refer to the ESG highlights, which include TCFD and diversity report on the group's homepage. We are confident that under consistent strategic direction, we will improve our capabilities to create income on a continuous basis. We ask for your continued support and interest. We will be holding earnings presentation calls earlier in the day starting this year. We hope that you will see this as an effort on our part to better communicate with the market.

I have two questions. First, regarding your operating income, it was very good, and the CIR is quite formidable. Looking at your G&A expenses, in Q2, I think there was an increase in employee-related costs, labor costs. Were there any bonuses that were seasonal or other one-offs? Can you tell us about your forecast for the G&A increase for the year that you have in your plan? My second question is about your card business, which showed very good performance. Overall, the figures are quite outstanding, and there was a readjustment of merchant fees that will also be taking place. Was there any pressure on you to readjust the merchant fees, and could you tell us your plans going forward? Give us some guidance related to readjustment of the merchant fees.

Thank you very much for your questions. I am the CFO. First, regarding the G&A question, I would like to explain. Regarding the increase in labor cost, it is true, we had two factors that led to the rise. First is for investment. Since we had a good market environment, there was some sales-related, performance-linked pay that was given, about KRW20 billion, and there were the performance shares that went up as well because the stock market improved. So there were some performance share-related expenses, which were about KRW35 billion. These two led to the rise in labor expenses. For the G&A, according to our financial plan, we believe that there will be a slight rise compared to the previous year. It's because, as you mentioned, our CIR ratio is quite low. We believe that we don't need to artificially push it down very hard, and we have new businesses related to digital and others. Therefore, we believe that the CIR ratio will probably slightly increase this year compared to the previous year.

Thank you very much for your questions. Regarding the card, for online and department stores, we are seeing more credit card sales, and you can see that credit card-related transactions have been increasing steadily. Shinhan Card is ranked #1 in the market, which I believe had a big influence. Regarding the credit card-related fees, we are analyzing this, and from next year, we will apply adjustments, while considering the federation. We will look at the different costs and market trends, and we will determine the credit card fees accordingly. We don't believe there will be an impact on our earnings from these fees this year. Thank you very much.

Yes. I have two questions, if I may. This is Yafei from Citigroup. The first question is on the net interest margin outlook. Congratulations on your sequential Q-on-Q expansion. Would it be possible to provide a bit more color on how much further you think the funding side improvement can go in the coming quarters? Additionally, how much further upside could there be for the net interest margin for the rest of the year? My second question is to follow up on the fee income. Can you give us an update? Is it true that the LIME Asset Management-related issue is now fully provisioned for, and there will be no further LIME-related cost that will be booked going forward? Consequently, looking at the trust-related fee income, it appears to be lagging behind peers. Are there any organizational changes that you're implementing to drive the strength of the trust-related sales to boost fee income growth going forward?

I'm the CFO. Thank you very much for your question. Regarding NIM, in Q1, we've seen a lot of improvement due to the enhancement of funding costs. There was an improvement of 5 basis points in Q2. We’re not so sure if we will see as much improvement as in Q1, but we do believe there will continue to be improvements. Regarding LDR, it is relatively low, with room for improving asset-liability management related to NIM. For your second question about additional provisioning needed for LIME, we do not believe there will be any financial impact because LIME related issues have already been incorporated. We continually assess private equities with external organizations quarterly. Excluding the numbers from a Dispute Assessment Committee, we don't think we have to make any changes again. We will include objective assessments from the external accounting front once we receive them.

I’m the CMO. I would like to speak about the fees. Noninterest income increased by 40% Y-o-Y, which is significant compared to our peers. I think we have a different baseline due to our credit card fees, and those core fees are increasing quite healthily. Regarding trust product fees, we are maintaining the same sales levels as the same period of last year. Our financial fund fees are also increasing at about 10%. We have realized a turnaround in the sales of funds and trust products. As for retail investors, their numbers have risen and can impact the market significantly here in Korea, potentially increasing fee income due to this trend. We do expect the fee income to increase more than it currently is. Therefore, for the trust product fees and other types of fees, there have been turnarounds and solid growth.

I'm from DB Financial Securities, and I am Lee Byung Gun. I have some simple questions, and then I will ask about your dividends. I would like you to confirm first, regarding your earnings for Orange Life; they were quite good. I think there were some gains from the sale of securities. Is this related to variable products, or were there other one-offs? My second question relates to trust. It seems that your proportion of ELS is lower than others. Regarding the Consumer Protection Act, I understand you have some obstacles to sales from March. In your opinion, will this influence your performance related to interim dividends? Do you see any possibility of interim dividends going forward?

Yes, thank you. I'm the CMO, and regarding Orange Life earnings, strategically speaking, there was something there because, in the long term, we have been concentrating on profitability at Shinhan Life Insurance. This is something I hope you can focus on. As for insurance, we had good results, and it is true that we had gains from the sale of securities due to the strong stock market. However, we focus on strategies aimed at improving our profitability, even if they have impacted our market share over time. Regarding trust-related fees tied to the Consumer Protection Act, it is true that there was some confusion at the teller's windows. Yet we can observe that, over time, the confusion is resolving, and understanding is improving. We are adhering to the Financial Consumer Protection Act, and I believe consumers are adapting to the new environment. We don't expect significant financial impacts due to the enactment of the Financial Consumer Protection Act.

I'm the CFO, and I would like to address your question regarding dividends. From last year, we have indicated our intention to implement quarterly dividends going forward. We have reviewed various aspects of this. While we acknowledge the presence of external factors, we are conscious of these influences. We believe these factors will not hinder us significantly in executing our plans. As you know, we have set a dividend payout ratio, and we plan to consider that in our quarterly dividends. The shareholder return ratio will be robust, and we are committed to executing our plans moving forward. This was consistent with our progress last year, and expenses will be accounted for in Q4, contributing to our overall dividend strategy.

I'm Seo Young-Soo from Kiwoom Securities. Congratulations on your excellent performance. I have an additional question related to the Financial Consumer Protection Act. Will this act essentially focus on the trends concerning funds and trusts? Understand that this act applies to various financial products, including funds. It seems that the company will need to strategize differently per product type. Can you detail how you are preparing and what strategies are being implemented? It has been about a month since this act went into effect.

Regarding this act, since it has only been about a month since it went into effect, the implications remain somewhat unclear. However, as I mentioned previously, we aim to adapt to these changes. We have dealt with private equity fund issues, and based on our experiences, we are very cautious in selecting the products to offer our customers. Our strategy is to prioritize carefully chosen products for our customers. Regarding the implications of this act, we have seen improvement since it first took effect. Given that the financial institutions had insufficient time to prepare, they have encountered some challenges. However, institutions are now reviewing the act and implementing necessary adjustments, and we are witnessing positive changes.

As previously mentioned, deposits and loans are also influenced by the Financial Consumer Protection Act. Approximately 70% of the deposits and loans are being processed online, especially among younger customers. The procedures related to the Financial Consumer Protection Act would differ substantially from offline transactions. We are closely monitoring our approaches and how we implement this act, and we will provide further updates later.

Looking at the earnings for the bank, they are strong. You have good noninterest income as well. Your earnings are consistent. Shinhan has made many efforts for M&A going forward. My question is regarding your growth plans in both overseas markets and your Korean subsidiaries. If so, what are your specific plans? Hana Financial Group also approved a KRW500 billion capital increase. With the ongoing COVID-19 environment, are you focusing more on overseas expansion or other initiatives? I'm curious about your M&A strategy abroad.

Thank you for your question. Regarding M&A and the group's new business, I think they are aligned. Regarding our Korean M&A strategy, there are still segments of our portfolio we wish to enhance. We are continuously monitoring these opportunities with our own standards. The return on investment criteria need to be above 10%, and we need to evaluate the synergy generated by the M&A. If we find opportunities for synergy that help accomplish our strategic goals, we welcome them. For international prospects, we remain vigilant toward potential opportunities in Southeast Asia, including Indonesia and Vietnam, where we already have some operations. So, any chance for synergy would be very welcome.

I am the CMO, and let me elaborate on two more points. Regarding inorganic growth, when we discuss the group subsidiaries, both bank and nonbank sectors, we are focusing on ROE in our business strategy. The CET1 ROE is at the center of our assessment. We aim for an efficient allocation of resources and desire to grow the ROE of our group subsidiaries, which will be our strategy moving forward. I believe we will intensify our efforts in that direction and execute our plan.

Since there are no further questions, we would like to conclude the Q1 2021 earnings presentation of Shinhan Financial Group. We will continue to enhance our recurring earnings and strive to differentiate ourselves. Thank you for participating in today's call, and I hope you have a wonderful, beautiful weekend.