Shinhan Financial Group Co Ltd Q1 FY2025 Earnings Call

Good afternoon. This is Cheol Woo Park, Head of IR at Shinhan Financial Group. Thank you very much for joining the 2025 Q1 earnings presentation of Shinhan Financial Group. Today, we have our Group CFO, Sang Yung Chun; Group CSO, SeogHeon Koh; Group CRO, Dong-kwon Bang; Shinhan Bank CFO, Jeongbin Lee; Shinhan Card CFO, Haechang Park; Shinhan Investment Securities CFO, Jeonghoon Jang; and Shinhan Life CFO, Sunghwan Joo also attending. We will start with an update on the progress of the Value-up plan that we had announced in July and give you some details of what we have in plan this year before taking you through our Q1 business results. After the presentation, we will open the floor and receive your questions. From now our Group CFO, Sang Yung Chun, will take you through the presentation.

Good afternoon and thank you for joining the Shinhan Financial Group's Q1 earnings presentation for 2025. Before we discuss our Q1 results, I would like to start with the 2025 Value-up plan, which was publicly disclosed today. The plan is informed by the results of the 2024 implementation assessment led by the Board of Directors, as well as an evaluation of existing targets and newly established near-term goals for 2025. Reflecting on our 2024 performance, the group's return on equity (ROE) decreased year-over-year due to a decline in earnings from non-bank affiliates, though the Common Equity Tier 1 (CET1) ratio consistently remained above 13% each quarter amid increasing market volatility. However, given the sensitivity of CET1 to macroeconomic volatility and uncertainty, our current management levels were considered somewhat tight. In terms of shareholder returns, the active share buyback conducted last year reduced the number of outstanding shares to below 500 million by the end of the year, enhancing our shareholder return ratio to 40.2%. Based on this performance review, we opted to maintain our original targets through 2027 while setting plans for 2025, the first year of effective Value-up plan implementation. First, we intend to raise ROE by over 50 basis points year-over-year, supported by stable bank earnings and structural improvements in non-bank businesses. Second, we aim to enhance our capital capacity through efficient asset management, targeting a CET1 ratio of 13.1% or above, which is 10 basis points higher than our previous target level for added flexibility. Third, recognizing the current undervaluation at PBR levels, our buyback and cancellation efforts will prioritize a quicker shareholder return initiative, aiming to elevate the shareholder return ratio to 42% or higher in 2025. To accomplish the Value-up plan in 2025 with more effective execution, we will initiate key actions, including the structural improvement of non-bank businesses, efficient asset management, and stronger integration of evaluation and compensation. For details, please refer to our publicly disclosed materials. Pages 3 to 5 illustrate the progress of the Value-up plan as of the end of Q1 this year, and we will provide updates each quarter using the same format. Now, turning to our Q1 business results and starting with business highlights. Our preliminary Q1 CET1 ratio for 2025 stands at 13.27%, marking a 21 basis point improvement year-to-date. The group's effective management of reduced risk-weighted assets (RWAs) under Basel III and solid earnings growth from our banking sector contributed significantly to this healthy CET1 performance. As a result, the Board of Directors has approved a cash dividend of KRW 570 for Q1, which is a 31% increase quarter-over-quarter. Regarding our KRW 650 billion share buyback plan for the first half, we have already completed a buyback of KRW 285.7 billion by the end of March. Of this amount, KRW 150 billion announced last year is scheduled for cancellation in late April, and the remaining shares are set to be cancelled by the end of June. Our group net income for Q1 reached KRW 1,488.3 billion, reflecting a 12.6% year-over-year increase, largely due to the absence of one-off non-operating events and robust growth in interest income. Looking at capital management, despite our larger buyback program compared to last year, the CET1 ratio saw a 21 basis point year-to-date improvement, thanks to effective RWA management and stable net income. The impact of KRW 5.4 trillion in regulatory RWA increase from Basel III was countered by controlled loan growth and strategic RWA management, resulting in a limited increase of KRW 3.1 trillion year-to-date. We remain committed to maintaining a stable capital ratio through internal efficiencies and strategic oversight while adequately supplying necessary funds where they are most needed. As we analyze our group's income statement, the group net income growth of 12.6% year-over-year is attributed to the absence of non-operating one-offs and gains in interest income. Key metrics for the Value-up plan, including ROE and return on tangible common equity (ROTCE), improved by one percentage point year-over-year to 11.4% and 12.9%, respectively, and I will break down these details in the following pages. For interest income, despite a decline in market interest rates, our group interest income increased by 1.4% year-over-year, driven primarily by growth in income-producing assets. Bank loans in Korean won grew by 0.4% compared to the end of the previous year, primarily supported by blue chip SME loans. For further details, please reference Page 27. Despite a drop of 12 basis points quarter-over-quarter in the yield on interest-bearing assets, including loans in won, we mitigated funding pressure through adequate asset growth, seasonal deposit inflows, and broader profitability management, which in turn allowed for a 3 basis point improvement in NIM quarter-over-quarter. As a result, the group's NIM improved by 5 basis points, reflecting the increase in bank NIM. Turning to non-interest income, there was a year-over-year decline of 6.3% due to decreased commission and insurance-related income. The increase in proactive customer acquisition marketing spend adversely affected credit card fee income, and brokerage commissions also declined due to reduced brokerage trading volume in a volatile market. On a positive note, we experienced growth in interest fee income from fund and bancassurance sales tied to our banking operations, while investment banking commissions increased both year-over-year and quarter-over-quarter. After a challenging Q4, income from marketable securities, FX, and derivatives rebounded to more stable levels as market rates decreased, although other insurance-related income saw a year-over-year decline attributable to a high comparative base from last year where insurance sales were robust. Otherwise, we are managing at stable levels. Regarding SG&A and credit costs, group SG&A remained stable with no significant deviations from last year, and the cost-to-income ratio rose by 1.4 percentage points year-over-year to 37.3%. Although there was a decrease in additional provisioning for real estate project financing loans, arriving credit costs rose by 15.4% year-over-year due to increased recurring provisioning tied to the economic cycle. Consequently, our group's nominal credit cost recorded 41 basis points, an increase of 3 basis points year-over-year, while recurring credit cost ratio was at 38 basis points, up 8 basis points year-over-year. As we look ahead, while credit costs linked to real estate financing are expected to stabilize gradually, corporate borrowers are poised to encounter heightened credit risks due to a delayed economic recovery, potentially impacting vulnerable customers. Overall credit costs may surpass initial expectations, and recovery may take longer than anticipated. However, we have established ample loss-absorbing capacity and will maintain vigilant monitoring and control to uphold soundness and manage credit costs within our defined business objectives. For more information on our group asset quality and loss-absorbing capacity, please refer to Pages 13 and 14. As for our group and overseas business earnings, there was notable performance from solid interest income and a balanced portfolio for our banking division. Shinhan Card and Capital continue to face profitability challenges due to regulatory changes and the impact of high-interest rates, leading to sluggish performance under pressure on funding and credit costs. Investment securities showed gradual recovery in recurring earning power despite increased market uncertainty, propelled by strong performance in investment banking fee income and marketable securities. Insurance remains resilient, supported by a stable KICS ratio. The Asset Trust business, having suffered losses last year from substantial loan loss provisioning, has now turned profitable with completed guarantees on real estate trust exposure. Our overseas operations exhibit solid growth trends in Vietnam and Japan this year as well. Pages 16 to 18 detail our progress on digital and sustainability initiatives, including key digital metrics, updates on the Jeju Bank ERP banking efforts, and our greenhouse gas emissions reduction initiatives along with our inclusive financial programs. Detailed financials and performance metrics for our affiliates are provided in subsequent slides. In conclusion, while the Korean economy is grappling with structural issues and numerous internal and external challenges, including subdued domestic and export demand and limited corporate investment, we recognize our critical role as a financial group in supporting the real economy. Our aim is to move beyond being a mere intermediary and actively provide preemptive liquidity to competitive corporates while directing capital to productive sectors to aid the economic recovery and address prevailing challenges. As a value leader and a key player in capital markets, we are committed to fulfilling our corporate value pledges to the market while fostering customer trust and maintaining strong fundamentals. Thank you for your attention.

Thank you very much for the presentation. Now we will receive your questions. English questions will be consecutively interpreted into Korean. So please wait for a moment for that translation. Now we will receive the first question. Mr. Jaewoong Won from HSBC.

Can you hear me?

Yes, we can hear you well.

Well, despite the difficult situation, you've delivered good performance. And also, you've shown a lot of effort for shareholder value. I have 2 questions. First is group NIM. Your full-year guidance was that NIM may drop by about 7bps to 8bps. But looking at Q1, actually, in Q1, your group NIM went up by 5bps. So what about the full-year outlook? Do you see the need to change your full-year NIM outlook or can you give us your expectations of how NIM would move throughout the year? My second question is about asset quality. We do see signs of asset quality deterioration, not only at Shinhan, but across all banks. Your NPL coverage ratio has dropped from 143 to 129, a large drop. The current NPL coverage ratio, do you think there is additional downside room there? Or do you think that current levels you'll be able to keep? I would appreciate your thoughts on that.

Thank you very much for those 2 questions. Please give us a moment to prepare our answer.

Well, thank you very much for that question. Regarding the NIM outlook, and the second question was about asset quality, I think for NIM, it's best for our bank CFO to mention that. And regarding the asset quality, I myself and our group CRO will take the question.

This is Jeongbin Lee, the CFO of Shinhan Bank. You've asked about our NIM. First of all, I'll answer based on bank NIM, which increased by 3bps quarter-over-quarter. Group NIM increased by 5bps quarter-over-quarter. And the reason why it went up is that on the lending side, market rates did come down, so loan profitability is declining. That said, we also have the growth lever that we can use. So by maintaining loan growth at an appropriate level, we are able to somewhat defend or offset the decrease in loan yields. And then in Q1, the funding side, the funding cost decreased because there were some core deposits that increased and overall funding scale was decreased. This decreased our funding cost and that resulted in the increase of our NIM in Q1. Now for the outlook on NIM going forward from Q2, in Q1, we were able to manage our NIM, but market rates do continue to decline, and the BOK rate is likely to go down further this year. And so we are expecting that the declining market rates will impact our NIM, and we are expecting our NIM to come down. That said, we still have the asset side, the loan profitability levers that we can use to defend. And also, we can try to collect more of the deposit-based low-cost funding to maintain our funding cost to defend our NIM as much as possible.

So that was the bank CFO that answered the first question on NIM outlook. And as he mentioned, we are entering a rate declining cycle this year, and we still expect our NIM to decrease throughout the year. Our NIM did improve in Q1, and that is a bit of a seasonality. Usually, Q1 has better margins in terms of NIM seasonally. But looking at where the BOK rate is expected to go, our views have not changed. But about credit cost, as we mentioned in the presentation, we're expecting the credit cost to go up a little bit. But NIM may be the decline will be flatter than what we had originally expected, but that's very cautiously. Your second question is about the NPL coverage ratio. Our current coverage ratio number is probably the lowest in the past year or two. This coverage ratio is explained in two ways. One is not only Shinhan, but the overall market is in the lower part of the credit cycle, recovery is being pushed back and so substandard and below is increasing faster than planned, and that seems to be happening throughout the market. As you can see on Page 14 of our presentation, when we do provisioning at the end of each year, we do sales. But recently, the NPL sales conditions are not favorable. That's why at the end of March, Shinhan Bank sold less NPL than usual, strategically, that was a strategic choice. And that is the reason that decreased the coverage ratio. What we have been emphasizing, at Shinhan Financial Group level, we always prepare preemptively the loss absorption capacity, and we think that as the coverage ratio at the end of Q1 is most likely our bottom, and so that in Q2 and Q3, our coverage ratio is expected to improve.

This is the group CRO. If I may add to the answer, when calculating the coverage ratio, if we had conducted similar levels of NPL sales, our actual coverage ratio would have been 180%. We believe we can increase it to 190% by Q3 and reach a 200% NPL coverage ratio by the end of this year. That is our management target, and we are committed to that plan.

We'll take the next question. Mr. Jung Jun-Sup from NH Investment & Securities.

Thank you for the opportunity to ask two questions. First, I believe this has been addressed before. Regarding your target of a 42% or higher shareholder return, it aligns with your previous targets and guidance. However, considering current share prices and the shareholder returns from other companies, it seems a bit low. Additionally, your capital ratio is improving more than expected. As you work towards your 2027 targets, do you plan to accelerate your progress? Also, there have been discussions about different ways to reduce dividends. Could you provide more details on that?

Please bear with us as we prepare the answer.

In terms of the total shareholder return level and also the pace, 42% was our target. But actually, it's a minimal line. We're talking about 42% or more. As we mentioned during the presentation, regarding our corporate value program, we are approaching with speed, but the market valuation is quite low in terms of reduction in shares outstanding, whatnot. We are moving a little bit faster than planned. So as we mentioned, regarding our value program, we do want to speed up our shareholder return program. We will look at overall earnings this year and the market conditions as well. And so a share buyback and cancellation, we are actually open and committed to speeding things up more than our initial plan. But as we move through the second and third quarter, we will have to see the overall earnings circumstances, and the final decision will be made by the Board, but the PBR actually is quite undervalued at the moment. And so we think that as far as shareholder buybacks are concerned, I think it would make sense to move faster than planned. So when we make our earnings call in the third quarter, we will elaborate more about any changes to our plans in terms of shareholder buyback or shareholder returns in the second half. In terms of capital reduction dividends, the government actually is collecting some views from the industry about tax benefits. So early this year, other companies did announce capital reduction dividends. And so we did give it a light review, and we did have the resources to affect that if we felt it was correct. But we felt that other than retail investors, we have a lot of foreign investors, of course, corporate investors as well. So the benefits actually could vary depending on the investor. So that was one point of consideration among others. So first, you take the lead, we prefer just to observe the market developments and approach it slowly. So that was the conclusion of our initial review. So anyway, at present, as far as capital reduction dividends are considered, we do not have any plans at the moment. But we will see what the tax authorities decide later on, also developments by other companies as well, and we will make our decision on balance. And in terms of how we want to return more value to our shareholders, we intend, of course, to be flexible, and we will be open to various measures.

I hope that has answered your questions. We will take the next question from Hanwha Investment Securities, Do Ha Kim.

I have a question about the value update. I just want to check if I understood correctly, the CET1 ratio this year is 13.1% or above. That seems to be a sign of your confidence. But even in April, the authorities have demanded an increase of corporate loans. And the pressure could grow stronger as we move throughout the year. I think overall, we are seeing SME loans delinquencies coming up and credit card delinquencies are coming up faster than we had expected. So if you consider the external environment, considering export companies having difficulty, and looking where we are in the cycle, which may be prolonged, you have raised your hurdle on the capital targets. I'm a bit concerned about that. So is this more of a commitment? Or do you need to satisfy 13.1% or more CET1 to deliver on all the other business metrics that you have this year? Second part of the question is, if you have to give up more business loans than you had planned, would that increase your RWA versus plan? And how are you going to manage your CET1 if that happens?

Thank you very much for those questions, and please give us a moment to prepare the answer.

Well, thank you very much for that question. You've asked whether this is a sign of our confidence, the CET1 target this year of being 13.1% or above. Well, actually, we have always delivered our CET1 above 13%. And as you can see in Q1 CET1 numbers, our asset growth continues, and this is combined with internal efficiency efforts, such as data cleansing to deliver 13.1%. We have increased the target by 10 basis points, and that is explained by various issues. Last year, there was a lot of macro volatility, including exchange rates. We wanted to actually keep an additional buffer, and that's why it's 13.1%. This is comfortably deliverable. We have simulated this internally, and we are quite comfortable that we will be able to deliver at least 13.1% of CET1 this year. And then your question was, what would happen if business loans had to be increased and delinquencies? We are carefully watching the business cycle in Korea. But even at current trends, we will be able to comfortably deliver our business plan this year. And relatively speaking, Shinhan Financial Group, when it comes to asset quality, is a bit superior to others. This year, asset soundness management is the top priority as we manage our business. So we will be particularly more tight in our management. Now in terms of funding and asset growth, we are going to be delivering the CET1 while supplying the funds in the right places.

So we'll move on to Seol Yong Jin from SK Securities.

I would like to ask more about the Jeju Bank regarding your collaboration with Douzone Bizon. You were seeking a license as an Internet-only bank, but then it seems that you have shifted your corporate strategy product more about that. In the mid- to long term, what is the size? Do you have a target in terms of how much you want to grow your business? And then the overall directionality, it's positioned within the wider group, etc., if you could explain.

Thank you for your question. Please bear with us as we prepare our answer. For Jeju Bank's ERP banking initiative, the Group CSO will address your question.

Yes, this is Koh, Seogheon, the group CSO. I think I've been attending the IR session more than 10 times now, and I think I am checking the microphone. It's been quite a while. Regarding the background, in banking, of course, it's a red ocean domain with very intense competition. So in terms of remaining scope white space, well, of course, we have to look at the adequacy of financials, also, it's a matter of trust. So for non-audited SMEs or SOHOs, there's always some concern about the credit standing. How can we assess the credit standing of these types of potential customers to provide support? That's always very key. So that will be very key in terms of receiving licensing for an Internet bank. So yes, we did look at it as a potential. In terms of why we changed our direction, in order to become an Internet-only bank, there are many different stakeholders involved. There are about 4 consortiums that apply for a license and each actually have more than 10 stakeholders involved in each of the consortiums. With Douzone Bizon, we have set a clear direction in terms of what we want to achieve. If there are too many stakeholders, we will watch out whether it can be achieved. Then in terms of the capital size of the personnel, many resources or sizable resources are required, and there's a long period until we're ready to really launch products. So it will take a long time to become an Internet-only bank. Now Jeju Bank, as a regional bank, was based with various constraints. So we wanted to find some way to foster more competitiveness of Jeju Bank. So everything came together, and we ultimately decided to change our tact and direction. Of course, in the mid- to long term, embedded banking is the model that we have announced. So short-term corporate loans or SME loans, SOHO loans will be focused. Once that performance is validated, then employees, corporate employees, for example, may be included in the scope as we expand business. This is actually sort of a test bed for the group. In the short term, as you may know, we're thinking KRW 1.5 trillion to KRW 2 trillion. So we hope that things go well, somewhere around that level. But there are lots of things that we have to think hard about throughout the process. So whether our commitment and the desired direction can be achieved or not. We have to work very hard in order to really deliver on our commitments to our shareholders. So I look forward to a lot of interest and also a lot of support from everyone regarding this initiative.

We'll move on. Ms. Park Hye-jin from Daishin Securities.

Thank you very much for this opportunity. I have a question to Shinhan card. As we saw in the presentation, delinquencies are worsening and you said that the Shinhan Bank sold less NPL than usual because of unfavorable conditions. I don't think that is the case for credit card assets. Can you give us overall your expectations guidance for the credit card business this year?

Thank you very much for that great question. And please give us a moment to prepare our answers.

Well, regarding that, the Shinhan Card CFO will answer.

Yes, this is Hae Chang Park, the CFO of Shinhan Card. The self-employed businesses are the key reason for the higher delinquencies and they are now recovering. Interest rates did start to decline from Q3 last year, which helped improve business situations, but then there was impeachment. The impeachment is somewhat wrapped up now. We are expecting the overall environment to improve even for the self-employed small businesses. So we think that delinquencies will start to improve. Also from April, we have our direct recall free organization in our call centers to once again reduce our delinquencies. With that in place, we are expecting delinquencies to improve from Q3. The Shinhan Card business performance outlook, it's mainly in the credit cost and the funding cost, which is the burden, and we are at the peak of the funding cost. As market rates go down, our average funding cost will also go down, and that will be favorable to our P&L bottom line. As we approach the end of the year, we expect to recover to usual profitability levels.

Well, thank you very much for that answer. Currently, we have no other questions in the queue. We do know that there are other financial groups doing their earnings calls today. Perhaps that is the reason why we don't have more questions lined up. And I think this is a good place for us to end this earnings presentation. Actually, we have Do Ha Kim online.

Actually, I was applauding. That was the Applause icon, not the Raise Hand icon since I heard you were wrapping up.

Thank you very much then. With that, we will conclude our first earnings call for the first quarter of 2025 for Shinhan Financial Group. Please refer to our website and our YouTube channel for a video of today's earnings call. Thank you very much.