Shinhan Financial Group Co Ltd Q3 FY2022 Earnings Call

Good morning, I am Park Cheol Woo, head of IR. We are conducting today's earnings presentation. As we are on digital platforms, the Shinhan Financial Group IR YouTube channel and the Zoom app. As we have announced last quarter, the new Shinhan Financial Group IR YouTube channel, those of you who have missed the live streaming today, will be able to find the updated Korean and English presentation, so please subscribe to our channel. Before starting today's earnings presentation, a brief explanation on how to log in. For the YouTube Live channel will enable the participants to watch the Korean presentation and if you have questions, please log on to the Zoom app. Also, the YouTube channel will only stream to Korean presentations, so if you want to listen to English, log on to zoom and click English for the translation. For more details, please refer to our homepage www.shinhangroup.com. Now, we will begin the 2022 Q3 Earnings Presentation of Shinhan Financial Group. In today's presentation we have with us our main presenter, CFO, Lee Tae Kyung of the Group; the Group CMO, Heo Young-Taeg; the Group CRO, Bang Dong-Kwon; the Group CDO, Kim Myoung-Hee; the Group CSSO, Ko Seok-Hon; from Shinhan Bank, CFO, Jung Sang-Hyuk; Shinhan Card CFO, Moon Dong-Kwon; Shinhan Financial Investment CFO, Keum Sung-Weon; and finally, Shinhan Life CFO, Park Kyoung-Won. In order to provide detailed answers to our investors' questions, we like to give the opportunity to as many people as possible to ask questions. Today we'll invite CFO, Lee Tae Kyung for the business results of Q3 2022. And then CRO, Bang Dong-Kwon will speak on the Group's risk management; and the achievement of the digital sector will be presented by CDO, Kim Myoung-Hee; and then we'll proceed to a Q&A. And now we will invite our CFO, Lee Tae Kyung for the earnings presentation of Q3 2022.

Good morning. I am Lee Tae Kyung, the CFO of Shinhan Financial Group. First of all, I'd like to thank everyone for taking part in the earnings presentation for Q3 of 2022 despite your busy schedules. I'd like to walk you through the highlights of this quarter on page four and then go into the details of the business results for Q3 of the Group. Page four, in Q3 of 2022, the Group's cumulative net income posted KRW4,315.4 billion, posting solid results despite the deteriorating external environment. In Q3 alone, net income came to KRW1594.6 billion and ordinary net income excluding the gains from the sale of the office building of Shinhan Investment Securities posted KRW1272.8 billion. Thus, we were able to defend a stable net income by offsetting the sluggish performance of the non-interest income segment with a growth in interest income and a decline in provisioning. In Q3, the cumulative cost-income ratio CI posted 40.1% and despite the increase in digital-related costs, the SG&A was managed at a stable level. The Group's Q3 credit card's ratio was that 29 bps maintained at a stable level, and going forward, we plan to maintain our conservative provisioning policy. Finally, the Group's capital policy, the per-share dividend in Q3 was KRW400 and this was decided at the BOD meeting held on October 6th, along with the treasury stock buyback and the cancellation of an additional KRW150 billion. As has been noted last time, we will continue to make an effort to enhance shareholder value through gradual improvement of the shareholder return ratio while maintaining an appropriate capital ratio. On page five, please refer to the key business results of the Group as a whole during the third quarter. So, please refer to it. And starting from page six, I will now explain the detailed performance of the Group. Page six, the Group's interest income. In Q3 2022, the Group's interest income posted KRW2,716 billion, up 2.7% QoQ. Interest-bearing assets grew 2.3% QoQ and this is due to the improvement in the bank NIM. In Q3, the Bank's NIM posted 1.68%, up five bps QoQ, but compared to Q2, the pace of growth of the Bank's NIM has slowed down. This is due to the rise in funding costs owing to the repricing of the deposit interest rate outflow of low-cost deposits and growth in time deposits. Now, on the subject of the Bank's loan in Korean won which is of great interest to you, for your reference, more details can be found on page 29. The loan groups of the Bank grew only 0.7% in Q3 owing to the continued decline in retail loans despite the solid growth in corporate loans. Segment-wise, the corporate loans grew 2.5% QoQ due to an increase in demand for loans from large companies and audited companies, which resulted from the liquidity crunch in the corporate bond market. On the other hand, the retail loans was down 1.3% QoQ, impacted by strengthened LCR regulations and declining demand from rapid interest rate hikes. On page seven, we have the margin funding and learning status for your reference. Next, on page eight, the Group's non-interest income. The Group's non-interest income was down 28.8% QoQ due to declining fee income for the weak capital or real estate PF market as well as the declining gains on AFS securities and the FX derivatives arising from the growing market volatility. The fee income is down 16.1% QoQ and the decline owes itself to the fall in credit card income on the back of merchant fee refunds and growth in the seasonal promotional expense despite the solid growth of the credit purchase, absence of investment banking fees related to IPO, and the real estate big deal that occurred in the first half and the contraction of brokerage commissions. Gains related to AFS securities was down 22.9% QoQ, driven by the growing volatility in the securities market and rising interest rates despite efforts to defend against losses as an investment portfolio adjustment and duration management. Next, on page nine, the Group's SG&A and credit cost. The SG&A increased slightly over the previous quarter, but excluding the expenses related to Shinhan Life HR integration that occurred in Q3, it is maintained stably at the Q2 level. The Group's CIR grew 1.1 percentage points over Q2, driven by the fall in operating profit was up 1.4 percentage points YoY, posting 40.1%. In Q3, provisions for credit losses was managed at a stable level posting KRW250.6 billion and is up when excluding the KRW224.5 billion of counter-cyclical provisioning. As economic uncertainties grow to address potential credit risk, we intend to continue our conservative provisioning policy. If you look at the delinquency rate which can be taken as a leading indicator of credit cost, in the case of the Bank, it is maintained at 0.20%, up one bps QoQ. In the case of the Card business, it is down six bps QoQ, but when excluding the seven bps increase owing to one-off factors like the Bank, the card business also posted 0.86%, up one bp QoQ. Please refer to page 10 for issues related to our preemptive preparations made to address future uncertainties. For greater details on the Group's asset quality management, please refer to page 11. Next on page 12, our capital management and profitability. As of the end of September, the CET1 ratio is expected to post 12.7%, similar to last quarter. Next on page 13, the Group's income by subsidiaries. Despite a weak non-interest income, net income increased in the Bank QoQ, thanks to the interest income growth led by NIM improvement and lower provisioning costs. In the case of non-banking subsidiaries, Shinhan Card's recurring net income decreased somewhat despite the growth in credit purchases and operating assets increased, driven by business diversification efforts due to rapid hikes in funding costs and the merchant fee cuts. Shinhan Securities net income decreased owing to a fall in brokerage fees reflecting slow market trading activities and valuation losses and securities on the back of higher interest rates. Shinhan Life's insurance profit remained solid, although investment profit decreased due to HR integration cost and the decline in gains from disposal of AFS securities. Shinhan Capital net income decreased QoQ reflecting valuation losses and IB-related securities on the back of rising interest rates and the increased provisioning related to real estate-related PF. In addition, in the case of capital market-related subsidiaries, mainly Shinhan Asset Management and Shinhan Asset Trust, the net income declined QoQ due to the recent interest rate hikes including volatility in the market. For details related to the Group's global business, please refer to page 14. As there are heightened interest by our investors for the current state of our risk management owing to growing uncertainties for the future, we have added supplementary slides to explain about our preemptive risk management measures. Next on page 15, our CRO, Bang Dong-Kwon will walk you through our preemptive risk management status.

Hello, I'm the Group CRO Bang Dong Kwon. I would like to talk about the risk side of the Group. Uncertainties in the domestic and foreign financial markets are increasing due to the recent tightening monetary policies and the strong dollar. And if the contraction as the real economy intensifies going forward, then the potential risk factors may manifest. In this regard, I would like to address Shinhan Financial Group's risk management system and current status regarding soundness, liquidity, and capital adequacy, which are the main concerns. First about enhanced Shinhan financial current status and countermeasures in preparation for possible deterioration of asset quality due to the rapid rise in the market interest rates and the impact of the economic recession. The graph on the left shows the trend of the loan ratio of the potentially vulnerable segments selected by the Group on the basis of various risk factors such as income, debt level, and credit rating. We're maintaining a stable proportion of vulnerable segments by refining the screening strategy for potentially vulnerable segments and strengthening credit line management to support the soft landing of potentially vulnerable borrowers, various internal programs such as temporary liquidity, shortage, support for borrowers are being prepared to minimize the system risks. Second, liquidity management amidst the recent strong dollar and tight funding market. The graph in the center shows our Group has maintained a stable liquidity ratio that far exceeds the regulatory standards through a preemptive and conservative liquidity policy. In addition, to withstand the worst stressful situations, we have expanded our FX liquidity funds, and we have prepared an emergency funding plan to regularly check its availability. Lastly, to strengthen efficient capital adequacy management, we're strengthening portfolio rebalancing and management in consideration of asset sector risk return profile. The risk rate level is maintained stably despite the recent sharp rise in the exchange rate through asset management by sector mindful of the risk rate and the expansion of the RWA budget system. In addition, the stress test results show that the capital ratio exceeds the regulatory requirements as can be seen from the table on the right. We will continue to strengthen the Group-wide crisis management system to maintain a stable capital ratio even in the face of a financial crisis and take preemptive measures for sectors at issue. And the digital strategy on page 16, the Group CDO, Kim Myoung-Hee will present.

Hello, I am Kim Myoung Hee, the Group's CDO. I would like to go over the Q3 results based on the Group's digital strategy. We're seeing continuous creation of quantitative and qualitative results centering on the six customer values. Along with the quantitative growth of the platform, its financial contribution is growing. In addition, we're actively fulfilling our social responsibilities by continuing our efforts to ensure the safe financial life of our customers and to overcome the digital divide. By utilizing core technology business experiences accumulated and process automation is expanded. We'll explain the main achievements for each key index on the right. First, More Friendly, which is easier and convenient financing. The Group's digital platform MAU has surpassed 21 million, which is an increase of 4.01 million YoY. Shinhan's two mega platforms, Bank SOL and Card pLay continue to show solid growth, where the Life platform has nearly doubled the number of monthly users YTD. Thanks to Shinhan's My Data service chosen by 6 million people, Shinhan's platform is developing into a platform where customers frequently visit and stay on for a long time. Second, More Secure. There are 6 million Shinhan's Sign users benefiting from secure mobile financial transactions. And as a result of stronger monitoring activities against voice phishing and fraudulent payment using the latest AI technology, we were able to prevent fraud-induced loss of KRW38 billion by Q3 this year. And moving on to More Creative. The profit from the new digital business has increased to more than KRW30 billion. Among them, the Data business income exceeded KRW10 billion and Life platform garnered more than KRW20 billion in new business. After the stabilization of the pandemic, the investment system to expand the global ecosystem has been strengthened, along with the creation of a global SI fund worth KRW200 billion, we also reorganized the global base of startups. Please refer to the materials for data process, technology, and people on the next page about the platform growth and business strategy in more detail. The Group's financial and non-financial platforms grew 33.3% YoY. As a result of continuous improvement of ease of use and core functions of the financial platform, the number of customers and sales of financial products is increasing. Sales opportunities using digital are steadily expanding and efficiency is also continuously increasing. The growth of the lifestyle platform closely related to finance has translated to securing non-financial traffic and transactions. This led to an increase in sales from new businesses. We will continue with our digital strategy. Thank you.

Thank you, both CDO and CRO. The page 18 and onward, there are detailed explanations of sustainable management activities and major indices for Group and subsidiaries. With this, we would like to conclude the presentation and move on to Q&A. Thank you.

Thank you. We will take questions from you. We'll take the first question. Kim from DNK, please go ahead.

Thank you very much for the good results. Can you hear me well?

Yes, we can hear you well.

I have two questions. With regards to preemptive risk management, after Q2, there has been steeper interest rate rises. There has been a big impact on the bond and stock markets. Starting from the first quarter, I think there will be more concerns about their real estate PF market. What is the PF status? And what is your future strategies for this segment? And the second question has to do with ESG. Making preparations for ESG is important and financial companies, I believe, are well-prepared for ESG. However, because of the war, this year, the fossil fuel cost has increased and because of economic uncertainties, a lot of burden is imposed on the corporate sector. So, the pace of real progress in ESG, I believe will slow down. So, with regards to ESG going forward for Shinhan Financial Group, what is your strategy? We have experts here. And so with regards to such fears about the pace of our progress of ESG slowing down, what would be your view or the expert view on this?

Thank you very much Mr. Kim. So, while we are preparing an answer to your question, please wait for a few minutes. Thank you.

With regards to the risk question, real estate PF, the current status and strategy that was the first question, and our CRO, Bang Dong-Kwon will answer that question. The second question on ESG, the CSSO will answer the question.

So, for the risk question. Good morning, I'm Bang Dong-Kwon, I'm the CRO. Thank you very much for the good question. So, the real estate PF or the bridge loan, there are a lot of concerns in the market that is quite true. And in keeping with such a trend, starting the credit line management and screening of real estate PF is our strategy. If you look at our current status among our total loans, the real estate PF in a bridge loan, their proportion is about 2% of the total portfolio and recently across the Group PF and bridge loan, we had total inspection conducted and according to that inspection, NPL is about KRW20 billion and so according to our current situation, I believe we are managing this risk very well. But going forward, what are we going to do going forward? Well, for each business division and the risk-related divisions, we all engage in closed our discussion. Next year, credit line management and a bidding strategy has been discussed. The current strategy and policy need to be strengthened going forward. Thank you very much.

Second question on ESG. So, let me get that question. This is my third earnings presentation this year, but this is my first question on ESG. As you have there is economic slowdown, because of the rise in the price of fossil fuel, slowdown in progress is of concern. With regards to or lowering carbon emissions, Shinhan is also participating in this effort. All of the financial companies across the world is participating. That is quite true. The financial emission management is very important, that is our ultimate goal, but the capital intensity management starting from 2020, we have been lowering those emissions and 0.6% target has been reached of reduction by Q2, but we have to maintain the sustained efforts on this front. But I don't think this is something that can be achieved by Shinhan alone. Globally, assessment criteria or standards have not been devised yet. So, a draft version has come out. But by early next year, if an official version comes out, then I believe carbon emissions can be linked to that standard. Among the financial group, Shinhan is the very first and the only financial group that is actually using carbon emissions as a key criteria in assessing the CEO. So, this is a very difficult task to be sure and environment is truly daunting. However, we are making genuine efforts on this front. That will be my answer to your question.

Thank you very much. We'll take the next question. There's a bit of a delay. Yes. From Citi, Ms. Yafei Tian. Please go ahead.

Good morning. Thank you for answering my questions. I have two. First, regarding the Card business, we've seen several quarters of strong fee income, but this quarter appears softer than usual. I would like to understand the long-term outlook for the Card business in terms of fee income and asset quality. My second question is about liquidity risk. The Bank of Korea has recently injected liquidity into the system, and it seems that there is some stress for corporates and certain financial institutions, particularly securities companies, concerning liquidity risk. Can you help quantify how this may affect funding costs for Shinhan Group in the future? Are there specific areas of stress that you are observing in the system? Thank you.

Thank you for the questions. We will get back to you with the answer in a short while.

Thank you for the two questions. One was about the Card fee income and the asset quality, and that will be addressed by the Card CFO. As for the liquidity risk and its impact on funding costs, I will take that question. So, I will now pass it to the Card CFO for the first question.

Hello, I am the Shinhan Card CFO, Moon Dong Kwon, thank you for the question. I'd like to address the card fee income first. We believe that starting in Q4, the fee income will stabilize due to some cyclical and seasonal factors. Q3 was relatively weak, primarily because of a decrease in merchant fees and an increase in marketing fees. We also provided refunds to smaller merchants in Q3, resulting in KRW14.2 billion less fee income. While the marketing fee income from May through August was accounted for in Q3, we expect fee income to return to normal in Q4. Regarding asset quality, the Group CRO noted that there are no concerns up until Q3, but we might see some minor issues starting in Q4. We do not anticipate significant problems in Q4, but we believe this could become a larger issue next year, and we are preparing for that. In terms of asset quality impact next year, we expect the credit cost to rise by 19% to 20% compared to this year. We will take the necessary measures to maintain our recurring profit level. Thank you.

Thank you. I will address the second part of your question about the liquidity risk. Yes, it has been highlighted since September, there were margin cost and the financial institutions had liquidity shortage. And the second reason because of the LCR and ratios that were excused during the pandemic, the regulations are being strengthened. And as for the legal land, there was the commercial paper issue. But yesterday and the day before, the government made announcements and there are many funds prepared by the government to inject liquidity. So, we put out the fire, and as was mentioned by the CFO's presentation for a long time, Shinhan Financial Group had enough liquidity and even though there were some liquidity risks in the market, we were not affected. But with the rise in the interest rate by funding cost is on the rise, but it's not because of the liquidity risk that will have a drastic impact on the funding costs. Thank you.

Next question is from Mr. Kim, you’re online.

Good morning. I have two questions. First is related to interest rate, the funding interest rate is hiked up and this is an issue. In the month of September and also in the month of October, there's been a steep increase. So, the past when interest rate rises, we believe margins improved. However, nowadays, the current situation is not that good. We have issues of whether this will actually come true. So, I think there are risk issues as well. And this will actually negatively impact margin and also impact the asset quality? And so next year margin, what should be the outlook for next year guidance or your views? My second question is related to digital. We have looked at the slides that you showed us, one thing of note is that unlike other companies, you have many different applications that are leveraged, not just one single app. Of course, there is no one right answer, but this kind of strategy one app versus many different apps, what is the difference between these kinds of business strategies? And what do you intend to gain from using these diverse apps? And will you continue to expand the number of apps that you use? Or what are you going to go in a different direction going forward?

Thank you much for the question. While we are preparing the answer, please wait for a short while.

Those are two questions. The first is about interest rate hikes and their impact on margins. The second question concerns our digital strategy regarding the apps. Our Chief Digital Officer will address the digital question, while our Chief Financial Officer will respond to the margins question. So, from the bank, our CFO will take that question.

I'm Jung Sang Hyuk, the CFO of Shinhan Bank. Thank you for the question. We believe the recent increases in funding rates in the banking sector are a temporary phenomenon. In the fourth quarter, we are experiencing not only maturities but also instability in the bond market, which is contributing to this rise. We expect stabilization to occur after the fourth quarter and into the first quarter of next year. Our outlook suggests that funding rates will not see drastic increases after October. Regarding whether these increased funding rates can be translated to loan interest rates, we must consider the vulnerable sectors of society, so we cannot translate all increases into the loan sector. However, due to the rate hikes, our net interest margin (NIM) has improved. We anticipate that this improvement will allow us to assist vulnerable sectors despite the challenges. Looking ahead to next year, we expect the outlook for NIM will reflect the fourth quarter considerations, including assistance for vulnerable sectors and increases in funding rates. We believe margins may stagnate temporarily in the fourth quarter due to traditional Bank of Korea rate hikes at the end of the year. We anticipate stabilization of funding rates in the first quarter. Therefore, for 2023, we expect NIM to continue improving, and while it may not reflect 100%, we foresee a potential growth of about 10 basis points or more in NIM for 2023. That is all.

Additionally, let me add to that. That was the bank side. And at the group level, the NIM continues to grow and capital and other subsidiaries, the NIM is contracting because the funding rate is rising and the Bank's outlet can be offset somewhat by the negative impact to other subsidiaries. Because of assistance to vulnerable borrowers, it will not have a negative impact on the NIM competition for deposits and competition for loans. I think competition can intensify because of that. But as I've said, due to the interest rate hikes, the NIM can possibly continue to stably rise.

Regarding the digital aspect, not relying on a single app but instead using multiple apps represents a distinct approach and is part of our strategic direction. In today's earnings presentation, I addressed the group level, including the Bank, Card, Securities, and Life sectors, and mentioned our 21 million monthly active users. We are implementing two strategies across our group-level apps. Each subsidiary offers services digitally, which customers can utilize through these apps. Our universal app strategy is somewhat different from that of other financial groups, which typically focus heavily on their banking operations. For instance, many other groups prioritize their banks as the core of their single-app strategy. However, Shinhan introduced the integrated Shinhan Plus app a few years back, allowing for interconnected services among subsidiaries. Furthermore, our aim is to provide integrated functionalities across Bank, Securities, Card, and Life as a single entity to enhance customer experience. This universal one-app strategy sets us apart from competitors. To summarize, that is the current state and our future strategy. In August, the Financial Service Commission relaxed the guidelines around the universal one-app model, which has alleviated much of the uncertainty associated with it, ultimately benefiting our strategy. Thank you.

Thank you. We'll take the next question from HSBC, Jae-woong Won. Please go ahead, sir.

Congratulations on a great quarter. I have two questions. First, concerning international business, the results look good overall, but can you provide any specifics regarding Vietnam and Indonesia, such as NPL ratios, delinquencies, credit costs, and NIM? Could we receive more detailed information on these? My second question is about the insurance sector and the implementation of IFRS 17. I understand other insurers are still working through some details, but I would like to know the overall trends for net income and capital, and how you anticipate these will move forward in relation to IFRS 17 and insurance. Thank you.

We'll get back to you with the answers in a short while.

Thank you for the two questions. One was about the global Vietnam and Indonesia markets; you would like some detailed indicators. And the second question was about introducing IFRS 17 and insurance. The Insurance CFO will handle the second question, and the CMO will deal with the first question.

First about the second question insurance and IFRS 17, I'm Park Kyoung Won, thank you for the question. IFRS 17 how we're preparing for it and the direction going forward. So, we are at the last stretch of our preparation efforts. As for IFRS 17, internal preparation and preparation for the external audit, we are working on the final details. And the accounting policies are not finite, so with that in mind, I'd like to give you some numbers. What is most important is when IFRS 17 is introduced, a valuation will change and the capital will be affected and we will be using the three-year method and so about KRW400 billion was on average, but with the 17, the capital will increase by twice, twice the amount. And in the future, CSM, the margin I think you will be interested in that, by 2023, we believe we'll be able to secure KRW7 trillion that is our estimate. So, given that Shinhan Life standard loan, P&L will be about an increase of 30% on a recurring basis. Thank you.

Hello, I'm Heo Young Taeg, the CMO. Thank you for your interest in our global business. Compared to last year, we have experienced significant growth, with steady progress across our global channels. During the pandemic, the economy did struggle, but we are now witnessing normalization, which has positively impacted our businesses. We reported KRW397 billion in 2019 and anticipate reaching KRW600 billion this year. Although there were declines in net income during 2020 and 2021, we are now on the path to recovery. Our strengths are evident in markets such as Vietnam, Cambodia, and Indonesia, which remain robust for us. Key performance indicators show that Vietnam has an ROE of 2 and an ROA of 19; Cambodia's ROE is 2.6, ROA is 13, and NIM is approximately 4.6. In Indonesia, the ROA is 2%, ROE is 0.6%, and NIM is 2.8%. We have not encountered any significant delinquency issues, as they remain within the 1% to 2% range. Looking ahead in the Southeast Asian markets, we expect to see strong figures and growth. As for asset quality, we foresee no concerns. Thank you.

Thank you very much for those answers. Until last year, I was the Head of the Vietnamese unit. I couldn't remember the second numbers, but we will send you the figures after the presentations.

Thank you very much for those answers. Our next question is from DS Securities, Mr. Na, you're online.

Good morning. I have just one question. Treasury stock buybacks, another measure you have taken in order to raise the shareholder return ratio. I think our high level of our dividend is expected by the market at the end of the year. So, in the fourth quarter, do you think the dividend level will go down? Or do you think the current level will maintain going into the fourth quarter?

Thank you very much for that question. While we're preparing to answer, please wait for a short while.

Thank you for your interest in our shareholder return ratio and dividend question. To address that, we previously stated that the cash dividend will continue to increase steadily. We have conducted stock buybacks, and as mentioned earlier, we will maintain a solid increase in the dividend. You can anticipate the level of that increase. Recently, regulators have indicated that stress tests need to be carried out in a more sophisticated way to ensure the capital ratio remains robust. Our Chief Risk Officer has shared the stress testing results from a potential global financial crisis, and even in such scenarios, the CET1 ratio is expected to remain strong. Recent stress tests have demonstrated a relatively high CET1 ratio, and even if different scenarios arise, we believe our ability to maintain a high shareholder return ratio will not significantly change. We will continue to engage with regulators and move forward accordingly.

Thank you very much for that answer. We will take the next question from CLSA, Shim Jongmin. Please go ahead.

Hello, I am Shim Jongmin from CLSA. I have one question it's about the PF loans. You did mention it recently overall, the real estate market is weak and risk management for real estate loans, how are you doing it for retail and corporate loans? And as for SOHO loans, the LTV is higher than for the mortgage loan, but if the weak real estate marketing continues, then it may increase the risk. So, how do you see this and how do you manage the risks? Thank you.

Thank you for the question. Please wait for the answer.

Yes, there are several issues concerning real estate. We received another question about it. The CFO previously addressed the PF topic, and regarding SOHO and retail, the situation remains as discussed. In terms of delinquencies, the rate for mortgage loans is 0.09, and the loan-to-value ratio is 40.2%. This indicates that delinquency is low and the LTV is manageable. We also have a debt service coverage ratio in place. Therefore, we do not view this as a risk. However, with SOHO loans, while they are categorized as vulnerable borrowers, if they possess real estate, they usually have good quality collateral, as demonstrated by the lower delinquency rate of 0.04 in this segment compared to retail loans. Although the LTV for SOHO loans is higher than retail, we are maintaining strict control within the bank and specifically at Shinhan, so this does not raise any significant concerns. Thank you.

Thank you. Next question.

Thank you for the opportunity. I wanted to ask about the recent funding rate increase, which you mentioned will be reflected in October and then gradually decline. This suggests that the interbank interest rate competition is expected to ease. Could you elaborate on your thoughts regarding this? Specifically, I'm interested in why the current competition seems more intense than during the interest rate hikes from 2005 to 2008. Do you anticipate this easing trend will continue, and what factors do you think will drive such changes? My second question pertains to our forecast that bank loan rates will rise, which, combined with potential further increases in the POK rate, could lead to a significant rise in retail loan rates. Given this, what is your estimate for asset quality deterioration moving forward? Currently, your non-performing loan (NPL) ratio stands at 0.24; how much do you expect this number to increase? Additionally, how do you plan to address the challenges posed by both vulnerable and moderately vulnerable borrowers? Sharing your insights on this would be very helpful.

Thank you very much for those questions. While we are preparing an answer, please wait for a short while.

Thank you for those questions. Your first question was already addressed by the Bank CFO. In Q4, the funding rate increase will ease, and there are factors behind that. Regarding your second question, if interest rate hikes continue, they will be reflected in loan rates and will impact asset quality. What is our response or outlook? Our Bank CFO will handle the first question, while our CRO will address the second question. The CFO will speak first.

Thank you for your question. The competition in the banking sector has increased, primarily due to the pandemic which led to an easing of the LCR ratio. This ratio will start normalizing in the third quarter, with an increase to 92.5%. Additionally, the rise in FX rates has resulted in greater volatility in derivative products, and the Bank of Korea's increases have negatively affected highly liquid assets. In the fourth quarter, maturing funding and a decline in low-cost deposits starting in July will contribute to heightened funding competition among banks until the end of September. The bond market is currently unstable, and the government has postponed a review of LCR regulations by six months, indicating that they will analyze the situation afterward. The use of qualified collateral by the Bank of Korea has also been announced by regulators. We anticipate that bank liquidity will improve starting in October, as banks have been raising funds since September. As we approach the end of the year, we expect fund and deposit inflows to increase. Therefore, we predict that the funding rate competition in the banking sector will ease as we approach the end of the fourth quarter. That concludes my remarks.

I'm the Chief Risk Officer, Bang Dong Kwon. Let me confirm if I completely understand the question. If the market rate on retail loan rates increases, it can negatively affect quality, and we need to plan our response accordingly. This is indeed the case, and we anticipate asset quality deterioration. We are preparing for this, especially for the vulnerable segments we are closely monitoring. Currently, asset quality is stable, but we expect some decline heading into next year, which requires thorough management. We recognize this challenge. With interest rate hikes, our screening process now reflects the repayment capabilities and stress on vulnerable borrowers. We are actively managing risks by providing liquidity to minimize potential issues. Customized programs and policies are being developed to address the anticipated asset quality deterioration due to rising interest rates. Thank you very much.

The next question we want to has this transparent in our process, somebody with a Galaxy S has raised his hand, but we need to know your name. From JPMorgan Cho Jihyun, please go ahead.

Thank you for giving me the opportunity. I have one question. With the interest rate rise, there is correction on the real estate market and it will affect profitability. What about the overseas real estate exposure? And what type of exposure do overseas real estate and any precautionary assets that we need to watch out for? And going forward, any management strategies or expansion strategies for your overseas real estate exposure? Thank you.

Thank you for the question. We will get back to you in a short while, please hold.

Yes, this is about the overseas property and the CRO will address this question.

Thank you. That's a tough one. As you mentioned for the overseas property risk, we have similar idea. From a group perspective, the overseas real estate exposure is about KRW3.5 trillion and forms are varied. We have PF and we have equity investment, real estate funds. But as of now, the risk is not that visible. And as I was talking about PF earlier, we did conduct 100% investigation and the assets at issue and assets under management, they are two separate buckets. And because of COVID-19, we could not do due diligence and with that East regulation, I think we will have a more sophisticated monitoring system. Thank you.

Thank you very much for that answer. Due to time constraints, we will now move on to the next question.

Thank you very much for this opportunity to ask a question. The interest income of the group and the Bank when compared, the non-banking subsidiaries' interest income seems rather low. So, I like to ask a question about the funding Card business. I think the funding increase has been larger than the others and the mix. The CP ABS has been larger than other instruments. So, the funding instrument mix and also the funding rate increased speed, how should we view this? And also at the banking segment, the funding rate has risen steeply. The low cost or deposit has gone down by more than KRW100 billion and so I think this has led to an increase in the time deposit as well. So, in the banking sector, do you think that going into the fourth quarter, the low-cost deposits will continue this pace of decline as we have seen in the third quarter? So, what kind of view should we take about this matter going forward? Thank you very much.

Thank you for the question. While we are preparing answers, please wait for a short while.

The question raised is essential for both the Card and Bank businesses. The CFO of the Card division will address it first, followed by the CFO of the Bank division who will respond regarding the Bank.

Thank you very much. Regarding the funding cost for the Card business and the outlook, let me address that question. Recently, not only in the Card sector but throughout the industry, funding rates are increasing significantly. Compared to the size of repayments, interest rates have risen substantially. We anticipate that next year, the average funding rate, currently at 2.2, will rise to 3.2, which translates to KRW31,000 billion to KRW32,000 trillion in total. We expect an increase in funding costs of about KRW300 billion to KRW350 billion, which will have a significant impact. How do we intend to respond? Starting from the fourth quarter, we will implement various asset balancing efforts, pricing adjustments, and reorganizations of our funding strategies to ensure that the company's profitability reaches monthly KRW50 billion next year. We are making the necessary preparations beginning in the fourth quarter, and we are also addressing the funding-related costs.

Thank you for that question. Regarding the reduction in liquidity, we are indeed considering it carefully. Up until the second quarter, Shinhan Bank experienced an increase in liquidity compared to other banks. However, starting in July, the entire banking sector has seen a decrease in low-cost deposits. In July, August, and September, we observed a decline in low-cost deposits, with the absolute levels decreasing. According to the Bank of Korea, the reduction in low-cost deposits across the banking sector was KRW53 trillion in July, KRW15 trillion in August, and KRW0.3 trillion in September. Although the rate of reduction is slowing, we anticipate this trend will persist into the fourth quarter due to various factors. We expect that in the first quarter of next year, with seasonal influences such as government spending and household bonus payments, low-cost deposits will begin to normalize, and the reduction trend will cease. For institutional deposits, we saw a decrease in the second half after an extension in the first half, which we are also taking into account. Additionally, our KRW2.5 trillion project in Seoul City 205 will have an impact. Therefore, we expect to see a rebound in low-cost deposits starting in the first quarter of next year at Shinhan Bank.

Thank you for the questions. We are running out of time and we won't be able to take questions and we don't have any questions. With this, we would like to conclude Q3 earnings presentation of Shinhan Financial Group. I would like to thank you once again for your participation. You may visit the website and the Shinhan Financial Group IR YouTube channel for the IR materials. Thank you very much.