Shinhan Financial Group Co Ltd Q1 FY2024 Earnings Call

Good afternoon. I want to start by expressing my gratitude to everyone for joining our Q1 2024 Earnings Conference Call despite your busy schedules. I will begin with our business highlights. In Q1 2024, we recorded a net income of KRW1.3215 trillion, even with significant non-operating expenses, due to the company's strong fundamentals and top-line growth. Interest income increased by 9.4% year-over-year, driven by our proactive loan growth strategy and effective margin management. Non-interest income grew by 0.3%, as we mitigated declines in securities-related income with a diversified portfolio. General and administrative expenses rose only 1.2%, despite inflationary pressures, due to our group's continuous efficiency efforts. With these expenses under control, our cost-to-income ratio improved to 35.9%, a 2 percentage point enhancement year-over-year, supported by solid operating income growth. The credit cost ratio for Q1 stood at 38 basis points, down by 10 basis points from the previous year. However, the recurring credit cost ratio, excluding preemptively recognized additional provisions, was 30 basis points, an increase of 1 basis point year-over-year. Next, regarding our capital ratio and shareholder return policy, the provisional CET1 ratio at the end of March was 13.09%. The Board of Directors has approved a dividend of KRW540 per share for Q1 and a KRW300 billion share buyback and cancellation for the next six months. Looking forward, we aim to maintain sustainable profitability and an active shareholder return policy while ensuring capital adequacy to adapt to changes in capital-related regulations, supported by our strong financial position. Now, on to our major income indicators. For Q1 2024, our group's interest income reached KRW2.8159 trillion, marking a 9.4% quarter-over-quarter increase. Interest-bearing assets grew by 3.6% year-over-year due to an increase in loans and an uptick in margins by 6 basis points. The bank's loan assets grew by 2.7% this quarter, with retail loans increasing by 1.2%, primarily for Jeonse and housing mortgages, and corporate loans rising by 3.9% driven by demand from larger companies and quality SMEs. We will continue to grow our assets selectively, balancing efficient RWA management, profitability, and market demand. The bank's net interest margin was 1.64%, an increase of 2 basis points quarter-over-quarter, with improved funding costs, although the growth in loan assets affected yields. We will manage margins actively through flexible interest policies and effective asset-liability management. Regarding non-interest income, it saw a year-over-year growth of 16.6%, with fee income rising across business areas like credit cards, securities, funds, Bancassurance, and investment banking. Insurance income increased by 21.4% due to growth in CSM write-offs, while credit card fees rose by 28.4%. Although transaction volumes increased by 3.8% year-over-year, we successfully improved operational efficiency by reducing high-cost promotions. Brokerage fees rose by 25.8% due to a KRW4.3 trillion year-over-year increase in stock trading. Despite the overall growth in recurring income, securities-related income dropped by 19.4% year-over-year due to preemptively recognized losses from overseas real estate. The group's credit cost decreased year-over-year in both nominal provisioning and the credit cost ratio, as additional provisions recognized early in 2023 were reduced. Our recurring provision for credit losses remained stable year-over-year, and preemptive provisioning was conducted in Shinhan Capital and Shinhan Asset Trust to brace for potential downturns in the real estate market and further financial soundness challenges. Moving forward, we will strengthen our loss absorption capabilities through proactive provisioning in real estate finance both domestically and abroad. As of Q1 2024, our CET1 ratio has decreased by 8 basis points quarter-over-quarter to a provisional 13%. Taking into account the adoption of Basel III transitional measures, rising foreign exchange rates, and an increase in operational RWA, we believe we are managing soundness effectively. Regarding our shareholder return policy, including the cancellation of treasury shares, we are focused on solidifying our top-line growth, credit costs, and other expenses while adhering to our BIS capital adequacy ratio. The planned share cancellations this year aim to approach last year's total of KRW480 billion. Considering the persistent risks, we must maintain strict management and oversight. However, as long as we continue our solid financial performance as demonstrated in Q1, we are on track to fulfill the shareholder return policies we outlined at the year's start. In terms of credit card performance, we experienced a 1% year-over-year increase in earnings, buoyed by rising transaction volumes and enhanced marketing expense efficiencies. In securities, while brokerage fee income increased with an uptick in equity market activity, proprietary trading income declined, leading to a 36.6% year-over-year drop in earnings. The capital and asset trust business faced challenges from preemptive provisioning, causing a decline in earnings year-over-year. In our global operations, a strategic focus on top-line expansion and efficient asset-liability management has improved operating profits, largely through increased interest income. Our proactive measures to recover non-performing loans resulted in a 35.4% year-over-year increase in earnings. Regarding our group-wide real estate portfolio, our exposure stands at KRW8.9 trillion, a slight decrease from last year, with a provisioning ratio of 3.61%. The following sections detail issues related to index-linked ELT products and our initiatives to strengthen internal controls and customer protection, as well as a summary of our digital and sustainability efforts. Lastly, I want to comment on the current macroeconomic environment and our strategic responses and outlook. This year has seen heightened interest in Korean financial stocks due to the corporate value program, but geopolitical risks have intensified volatility across macro indicators such as foreign exchange rates and inflation. At our last conference in February, we noted conservative expectations for one rate cut in the latter half of the year. Current inflationary pressures, exacerbated by Middle East risks, suggest this outlook remains valid. Various economic participants will likely face delayed improvements in financial soundness, with continued asset quality deterioration and rising credit costs. Nonetheless, as evidenced by our Q1 results, we are achieving solid top-line performance. Through preemptive actions to improve our loss absorption capacity and efficient capital management, we are focused on meeting new market demands while minimizing external sensitivities for greater financial stability. If these efforts yield positive results, we expect to maintain an adequate capital buffer while achieving consistent financial performance. We are aware of market concerns related to the shares held by our major strategic investors, and while many transactions occurred in the first quarter, we believe concerns about oversupply will gradually diminish. We remain committed to our social responsibilities and will work to enhance our corporate value through strong customer support, trust, and outstanding financial performance that benefits our shareholders. Thank you very much.

We are now ready to take your questions. For those asking questions in English, please note that there will be consecutive interpretation provided. Thank you. Let's begin with our first question from Mr. Park Hye-jin at Daishin Securities.

This is Mr. Park Hye-jin from Daishin Securities. I have two questions. First is about the ELS compensation. I wonder how much of that was reflected. The second is about the refinancing platform. Specifically in January, that was expanded for Jeonse and mortgage, but then I understand that the volume is larger than other companies. I wonder whether it will have an impact on the margin? If yes, how much?

Yes. Thank you for your questions. I believe there were two questions. Please bear with us as we prepare to answer your questions. Regarding ELT recognition and the refinancing platform, I believe the CFO of the bank can cover both.

Yes. Thank you very much for your question. So let me address both. First of all, regarding the ELS loss. The ELS compensation, the total sales amount is KRW2.6 trillion. So as of the end of March, based on our computations, about KRW274 billion in non-operating expense was recognized. Considering the level of the current index, we don't think that it will have an impact on our closing balance. Refinancing origination volume is larger than peers. What is the impact on our margin? That was the second question. Credit loans, mortgage loans, Jeonse, housing rental loans. In the first half of the year, our origination was larger than the others. It happens that in the first half, we wanted to build out the customer base, especially in household loans, and it's a consequence of this focused initiative. That is why. But in terms of overall loan growth, this, as a percentage, is not that sizable. So it was more in the interest of expanding our customer base, so any impact to our margin was not material. And NIM, in the first quarter, accordingly rose and improved by two basis points.

Next question is from Mr. Jung Jun-Sup at NH Securities.

Yes. I am Jung Jun-Sup from NH Investment Securities. In the first quarter, the lending growth was not slow. For the year, what does the company believe is going to be the loan growth rate? What is your strategy for loan growth? The second question is, it was also mentioned earlier, regarding the expected rate hike in the second half but now on the rate cut in the second half. Will there be an impact on the NIM? What is the expected NIM for the year?

Thank you very much for the two questions. I ask for your patience as we prepare our response. Thank you very much for your questions. Now, for the year, in terms of the loan growth projection and strategy and related to that, the annual NIM was the question. So now let us go to the bank CFO to respond to these questions.

Thank you very much for the questions. First, about the loan growth. This year, the loan asset growth strategy, under this strategy, in the first half, as mentioned earlier, in order to grow the customer base, we have been focusing on increasing the customer base at speed. We have made some achievements on that target. In the first half, as you focused more on growing the customer base, now as we move into the second half, we will be focusing more on profitability and asset quality. And in terms of overall growth, of course, this is going to be within the capital management level inside the Group. The second question about the margin. In the first quarter, the NIM rose by two basis points, related to the increase in core deposits and the maturity of high-interest products. As a result, there has been an improvement in the margin. For the rate projection regarding NIM, in the first half and in the second quarter, considering loan competitiveness, we believe that compared to the first quarter, it will fall slightly. But in the first half, it is going to be relatively flat Y-o-Y. In the second half, based on the expected rate cut and the anticipated general rate decline in the market, we believe that there will also be a slight fall in the second half, but we will be managing the NIM overall. Thank you very much.

Next question from Hanwha Investment Securities, Do Ha Kim.

I have two questions. I think this time, one-offs, nonrecurring factors, maybe it's me but I don't think they were there. I may have missed them. Can you comment? After the general elections are over, with real estate trust companies, a lot of the PF sites, I think there are some discussions about the arrangements where the developers actually committed to be responsible. So not direct loans but for the overall exposure beyond direct loans, what is the total amount? What is the provisioning amount as well?

Thank you for those two questions. We will also prepare. Just one moment.

Thank you. In the first quarter, you asked about what one-offs actually were affected and also about a question regarding the real estate trust business. In terms of the one-offs, it's not about provisioning but ELT-related costs are on the non-operating expense line under non-interest, so that may be one-off. In terms of our real estate PF and overseas commercial real estate investments, we did about KRW140 billion in preemptive provisioning against that kind of exposure. So I think those are our one-offs. Regarding Shinhan Asset Trust, there were many media reports recently regarding the real estate PF issue, responsible completion of construction. This is a type of real estate trust. For companies with a lot of exposure, there is now emphasis on the risks that are attached. We were mindful of this in advance of starting the preemptive provisioning in the first quarter this year. We have started to set up our provision preemptively for Shinhan Asset Trust. The outstanding balance is about KRW310 billion, and the provision amount is about KRW87.1 billion, giving us a provisioning rate of 8% against the exposure. So regarding Asset Trust, in the first quarter, we have set aside some preemptive provisioning already, but we will continue to do that in the second quarter through a full scope survey to identify whether additional provisioning may be required to fully absorb any possible loss. Given our recurring fundamentals, I think any impact to the Group will not be sizable. However, for any expected loans, we will continue to provision against that kind of prospective loss.

And also, please be informed that for English questions, there will be consecutive interpretation. From SK Securities, we have Mr. Seol Yong Jin.

Now it is about global business profitability. Compared to the past, I can see that global income has gone up. Specifically from which business areas has the company seen growth in income from the global business?

Thank you very much. Please, I ask for patience as we prepare our response.

Thank you. Regarding global business profitability, as you would be aware, Shinhan has a long history in this regard, and our growth in the global business has been coming primarily from interest income along with our provisioning. We have also seen reversals in provisioning due to effective management. Regarding overseas subsidiaries, we have recurring income, especially from London as well as from our NMC branches in Hong Kong and New York, which have all contributed to a 35.4% Y-o-Y increase.

Yes. So Doosan Baek from Korea Investment Securities.

Yes, this is Baek Doosan. I also have two questions. Regarding Shinhan investment securities, short-term trading results actually appear a little bit disappointing. Is it because of impairment loss from overseas investments, or is there any particular reason behind the poor performance? First quarter results and given your forecast for full year performance, how strong do you think the underlying earnings fundamentals are? Second, you said share buyback will be done in the form of a trust contract over the next six months, I believe. Going forward on a quarterly basis or semi-annually, that could be possible. In terms of the timing and the value amount allocated to each timing period, could you provide further details?

Yes. We will prepare to answer your questions, first on the stock trading business and share buyback. Thank you for the two questions. Regarding Shinhan investment securities, you asked about business performance and outlook. Additionally, the second question regarding share buyback can be addressed. Regarding overall share buyback, let me cover details. As we were presenting the annual business results and regarding the TSR, about the quarterly even payout and the share buyback and cancellations. So through these measures, we announced that we will be continuing to enhance shareholder value. The shareholder buyback and cancellation that we announced this time is in line with the overall direction. In the past, these actions were done on a quarterly basis; however, this time, it is on a biannual basis because we wanted to secure more flexibility in the share buyback. As seen in the first quarter results, we have strong fundamentals. Also, in terms of the capital ratios, despite the special circumstances in the first quarter, we were able to manage the capital ratios quite stably. We are confident and committed to improving shareholder value on a continuous basis. For the share buyback and cancellation for the next six months, it will continue until the third quarter of this year, meaning that the volume is going to be similar to last year's. In the fourth quarter, we will be looking into additional share buyback. Based on our judgment, the recurring revenue for the company on a quarterly basis would be about KRW1.5 trillion. Based on this trend, we believe that in the fourth quarter we could look into another round of sizable shareholder buyback and cancellation. This time, it was biannual; however, in the fourth quarter, if we have another share cancellation, it is likely to be on a quarterly basis. Of course, all of this would have to be determined at the BOD, but this would be the guidance for now.

Regarding the securities side, in the first quarter, prop trading results were quite sluggish. It can be explained in three ways. First, a reverse base effect; second, conservative response; and third, preemptive response. I mentioned the reverse base effect because last year's first quarter, our prop trading results were very good. Interest rates at the time had fallen abruptly and market conditions were quite favorable. We opened our bond position aggressively at the time. At the company level, we saw a very high record results from prop trading. Comparing the first quarter of '24 against that high base shows a significant year-on-year decrease. That's the first reason. The second reason relates to a conservative response. As you know, the timing of the rate cut from the U.S. is being postponed and deferred, and expectations regarding the number of cuts are also changing. The ongoing geopolitical situation, especially oil prices and inflation, brings uncertainty, so our trading desk is formulating a conservative strategy that has affected our performance. Thirdly, it is a preemptive response. In the first quarter, regarding acquisition financing, we were proactive because of ongoing uncertainties in business and economic outlook. Whenever possible, we reduced exposure in certain asset categories quickly to recognize loss quickly, reducing exposure. Therefore, it’s a combination of these three factors that led to lower performance year-on-year. As for future outlook, I believe there are still uncertainties ahead. Rather than focusing on driving profits, we want to focus more on stability in our prop trading business.

From Goldman Sachs, we have Park Sinyoung.

In the past quarter's results about the capital distribution plan, there was a growth of 6% and then 40% for shareholder return. Is there any long-term target for the shareholder return? Also, for AD, they mentioned how they're going to prefer shareholder buyback. I wonder what is the plan for SFG for the time being?

Thank you very much for the question and I ask for your patience as we prepare our response. Thank you very much for the question. Regarding capital allocation and valuation, as mentioned earlier, yes, growth remains at 60% and shareholder return at 40%. That remains unchanged. In terms of capital allocation, of course, in terms of Basel III, some special considerations need to be made. Overall, we will maintain the 60/40 allocation. About valuation and share buyback and cancellation, our company valuation compared to peer groups in other countries is on the lower end. Looking at our recurring ROE, even if our permanent growth rate is 0, we believe that our recurring ROE should be at least higher than those companies mentioned. Our target should be at least PBR 1 level. In principle, at or near PBR 1 level, we will be actively allocating for growth and shareholder return. Regarding the shareholder return target, this has been reiterated several times, and we believe that for the longer term, we should reach 50%. However, our initial target would be 40%. Whether we meet that target within this year will depend on several factors. Our principle is to keep increasing DSR, which will remain our direction. Thank you.

I think there is one final question.

Congratulations on the results. Just one question from my end. This quarter saw a decline Y-o-Y and some 30 basis points in credit cost. Is this the recurring credit cost we should see over the coming quarters as well? Or do you anticipate further reductions in the additional preemptive provisioning?

Thank you for the question. Please wait just one moment as we're prepared to answer your question.

Thank you. Regarding credit cost, as of the first quarter, our nominal credit cost is 38 basis points and excluding additional provisioning, our recurring credit cost is about 30 basis points. Relative to the first quarter last year, there were nonrecurring items last year. So nominal credit cost was about 29 basis points last year. This year, first quarter relative to last year, we are slightly higher than last year. Given various macro factors right now, we may see potential deterioration in asset quality for the time being. In terms of the percentage or credit cost, we do expect it to potentially increase somewhat. Last year, our full-year credit cost was about 57 basis points and recurring credit cost was about 38 basis points. With our currently available loss absorption capacity, we expect the full-year credit cost to be around 45 basis points or under. We management targets to keep it under that level at a recurring basis. Going forward, we will be very vigilant against any further deterioration of credit loss. We will preemptively set aside more provisioning to further bolster our loss absorption capacity.

Thank you very much for the response. At this time, we see no further questions. We will take the next question. Mr. Shim Jongmin from CLS Securities.

This is Shim Jongmin from CLS. I have one question. By the end of the year, what would be the target CET1? Also, how can this connect to the shareholder return policies? As the CFO has explained earlier, in the fourth quarter, there may be more and larger shareholder buyback and cancellation. Regarding the CET1, if it goes above a certain threshold, you mentioned that you would go with the option of shareholder buyback and cancellation. So the question is overall about the CET1 relation and shareholder return policy.

Thank you very much for the questions. I ask for your patience as we prepare our response.

Thank you very much for the question. The CET1 ratio target and how this can relate to our share cancellation. To put it simply, as was mentioned last time, the target CET1 ratio is 13%. That is the threshold. When we mention 13% threshold and if we consider various offers, it’s not just 13%, it could be 13.1%, etc., meaning that there has to be some buffer. In principle, it is 13%. If it goes over, we will consider shareholder return. So then additional share cancellations or shareholder returns should be in consideration during the fourth quarter.

There have been a number of questions asked and responses provided, and we see that there are no further questions in queue. I believe there has been sufficient discussion for now. With that, we will conclude the 2024 first quarter earnings conference call by SFG. We will strive to enhance understanding of investors, shareholders, and stakeholders in the SFG through our earnings release conferences. The information shared today can also be found on our website and the SFG IR YouTube channel. I ask for your interest and attention. Once again, thank you very much for your participation.