Shinhan Financial Group Co Ltd Q3 FY2025 Earnings Call

Good afternoon. This is Cheol Woo Park, in charge of IR. I thank everyone for joining us at the 2025 third quarter earnings release by Shinhan Financial Group despite your busy schedule. Today, we have here with us 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 Securities CFO, Jeonghoon Jang; and Shinhan Life CFO, Sunghwan Joo. We will start out with the CFO's presentation on business performance of Q3 2025, followed by a Q&A session with the executives present here with us. Let me now go to CFO Chun to start the presentation.

Good afternoon. Thank you for joining us for the third quarter 2025 earnings release. I will begin from Page 2, business performance highlights. As of the end of September 2025, the group's CET1 ratio was preliminarily estimated at 13.56%, maintaining a stable level. It results from our unending RWA management effort combined with robust profit generation despite the won depreciation and growth in loan assets for future preparedness. Based on this, the Board today resolved on a cash dividend of KRW 570 per share for the third quarter. Shareholder return in 2025 is expected to be around KRW 2.35 trillion with KRW 1.1 trillion in cash dividend plus KRW 1.25 trillion in share buyback. The shareholder return policy is expected to remain unchanged in the foreseeable future given the stable CET1 ratio and financial soundness. In Q3, the group's net income was KRW 1.4235 trillion despite the decrease in securities-related profits as credit costs were well under control. The cost/income ratio also remained stable. The credit cost ratio stood at 46 basis points, up 2 basis points year-on-year, but has generally improved, decreasing quarter-on-quarter. But whether the asset quality will turn around to a decreasing trend, we will have to wait and see due to the current combination of factors such as uncertainties in the macro environment and domestic economy. Next is Page 3, capital. As explained earlier, the group's CET1 ratio was kept at 6 basis points lower quarter-on-quarter, thanks to stable net income despite the numerous factors driving up RWA. The group's RWA increased by KRW 8 trillion quarter-on-quarter, driven by growth in foreign currency-denominated RWA due to won depreciation and loan-driven asset growth. We will keep our utmost focus on maintaining a stable capital adequacy ratio by supplying sufficient funds where and when needed, while improving internal efficiency and strategic resource allocation. Please refer to the slide for details on assets and liabilities on Page 4. Page 5, group's profit and loss. The group's Q3 net income was managed at an 8.1% decline quarter-on-quarter. There was a decline in securities-related profits, reflecting market rate movements, but credit cost was well controlled. ROE and ROTCE, key indicators in the corporate value enhancement plan, rose by 0.7 percentage points, respectively year-on-year to 11.1% and 12.5%. I will go into more details by item from the next page. Page 6, interest income. Group interest income rose by 2.9% quarter-on-quarter, thanks to profitability-based asset growth and active margin control. The bank's loan in won increased by 2.7% quarter-on-quarter. The retail sector grew by 3.1%, primarily driven by policy funds on the back of growing market demand, while the corporate segment grew by 2.3% through proactive funding, also thanks to the active growth strategy from July. Please refer to Page 26 for further details. The bank's NIM rose to 1.56%, up 1 basis point quarter-on-quarter. Although the interest-bearing asset yield fell by 12 basis points quarter-on-quarter, reflecting market rates, including won-denominated loans, it was more than offset by the improvement in funding cost. Next page, noninterest income. The group's noninterest income decreased quarter-on-quarter, reflecting market conditions. Gains on securities, FX and derivatives declined, while fees remained stable. Credit card fees decreased quarter-on-quarter due to increased promotional expenses in response to seasonal factors like the Chuseok holidays, but brokerage fees, IB-related fees and product sales fees, including funds, surged quarter-on-quarter on the back of recent capital market activities. Insurance-related profits decreased by 2.4% quarter-on-quarter, but profitability remained stable, thanks to scaled up CSM management. Moving on Page 8, group's SG&A expense and credit costs. Group's SG&A increased by 2.2% quarter-on-quarter due to recognition of voluntary retirement costs at Shinhan Card. However, CIR on a cumulative basis remained stable at 37.3%, maintaining a sound level. Credit cost decreased by 30.1% quarter-on-quarter, reflecting the expiration of corporate credit rating impacts recognized in the previous quarter and the group's continued efforts to manage asset quality. Additional provisions arising from the government-led real estate PF workout plan also decreased significantly quarter-on-quarter, remaining within our anticipated range. Credit risk among corporate has risen due to delayed economic recovery and challenges persist among vulnerable customer segments. Along with timely funding, more prudent asset quality management will be needed. Turning to Page 9, here are the group's asset quality indicators. Group's NPL coverage ratio declined by 2.9 percentage points quarter-on-quarter as the balance of substandard and below loans in the nonbank sector increased. However, the bank's NPL coverage ratio improved by 12.17 percentage points quarter-on-quarter, supported by the NPL sales and strengthened asset quality management. Delinquency ratio at both the bank and card are also gradually improving. Detailed information on the group's loss absorption capacity NPL sales provided on the following page. Page 11 is profit and loss of our subsidiaries and overseas businesses. Shinhan Bank's earnings declined slightly from the previous quarter, impacted by noninterest income factors, including marketable securities. For details, please refer to Page 21. Shinhan Card posted higher earnings over the previous quarter despite the decrease in merchant fee income and recognition of voluntary retirement cost, thanks to reduced credit cost supported by improved asset quality. Shinhan Securities earnings decreased quarter-on-quarter due to lower product management income. However, the company continues to restore its structural earnings capacity year-on-year through enhanced competitiveness in its core business areas. Shinhan Capital continued to face pressure on funding and credit cost showing a subdued performance. Specialty credit subsidiaries, including card and capital, are steadily improving fundamentals through asset rebalancing and various self-help measures and are expected to gradually recover profitability. Overseas services delivered differentiated results in Q3, particularly in Japan and Vietnam despite ongoing domestic and global uncertainties. Page 12 through 13 summarize our performance in digital initiatives and sustainable management activities. From Page 15 to 18 are the progress of our corporate value-up plan. Overall, the group has achieved solid results in terms of execution, speed and outcomes compared with the plans announced last year and early this year. Please refer to the materials for detailed information. From Page 18 onward, we will find details on the financial status, P&L and funding and investment operations of each subsidiary. The Korean financial industry faces challenges, and a productive financial transformation is required to support Korea's economic recovery and sustainable growth. Forward, Shinhan Financial Group will continue its consistent approach of allocating resources to corporate finance while providing timely and efficient funding. We will lead in fulfilling the financial industry's core role in intermediating capital management, managing risk and supporting growth. This concludes our presentation. Thank you very much for your attention.

Thank you very much. Now we will take your questions. The first question will be delivered by Mr. Jung Jun-Sup from NH Securities.

I am Jung Jun-Sup from NH Securities. So I have 2. Now first is about the capital policy. So the government recently is talking about the dividend payout, the separate taxation and then also the similar situation in other industries as well. So now then in terms of the dividend tax, I wonder whether there have been any discussions about changes in the group's dividend policy? And then second is about the loan. The government continues to control the household loans. I believe that there has been a bit of an excess in the quota that has been given. Then also more recently, deposits are also appearing to decline. It seems as if both the loans and deposits are unlikely to grow much in the future. Looking ahead to the fourth quarter and beyond, what would be the outlook for the group's loans and deposits? How does the group intend to respond to these changes?

Thank you very much for the questions. And please wait a moment for us to prepare our response.

Thank you very much. So there were 2 questions. Now first, about the capital policy, I will respond to that. With regards to the loan and deposit outlook for the longer term, that will be responded to by the bank's CFO. Now first, about the capital policy. So you talked about the dividend payout, separate taxation and then the non-tax dividend payout. First, regarding this, we have had some discussions at the Board of Directors. Through the workshop, we have discussed the shareholder return policy. But given the fact that we have yet to come up with the business plan for next year, we have not made any decisions. With this being said, with the dividend payment separate taxation, we also intend to slightly increase the dividend payout. Having said that, there are a number of indicators for our shareholder return policies. For example, shareholder share buyback and cancellation, so even if we do that, this will not undermine each of our policies. We would also look into that. Next is about the tax-exempt dividend payout. Yes, we have also discussed this several times. Yes, we do have some profit available for dividend payout. But then considering the industry trends, we would have to wait and see, but we would also be positive about the changes as well. With regards to these overall changes, I believe that we will be coming to some kind of decisions as the Board has to come up with the business plan for next year. Overall, I can say that we are positive about both aspects.

Thank you very much. And now this is the CFO of the bank. So the question was about the deposits and loans. Now first, about the loans, in the first half, given the fact that we have grown in the previous year, we were conservative in terms of our loan growth outlook. This was for the corporate loan. There was some increase. Yes, in terms of the banks, we are a bit over the guidance that was given by the government. But for the fourth quarter, I believe that we will be in line with that. For the corporate loan, as I mentioned earlier, there was over KRW 1 trillion growth in the corporate loan. This year, we were actually planning for about KRW 9 trillion growth. The actual utilization will be about KRW 7 trillion to KRW 8 trillion. The loan in won is aligned to grow by about 5%. Looking ahead to next year, for the loans growth, there are a number of regulations that create a specific environment for this. It is not likely for the household loan to grow very much, but there will be some policy funds to be provided by the government. For corporate loans, compared to this year, I believe that there will be more growth than this year. Next year, it is likely to be around 5% to 6%. Also, there were discussions about the deposits. Funding is very important, and the cost management is also very important. For this year, we have focused on funding control to defend the NIM. We also have a funding management strategy. In the fourth quarter, we traditionally see a funding maturity period for the bank, and we are making preparations. The expected difficulties for deposits are evident, particularly for individuals. The time deposit is being reduced, but we are also managing the interest rate quite tightly. Next year, we anticipate more appropriate management of interest rates so that we will be able to have stable funding.

Lastly, regarding funding moving to the capital market and how the group is making the decision for this. As the bank's CFO mentioned, it seems as if there is little change in terms of the capital flow in and out of the bank. However, the money flow continues to be stable. In terms of resource allocation, for next year, rather than resource allocation in the bank, we would allocate more resources to the capital market, and we intend to be flexible depending on market circumstances.

I hope that answered your question. We will move to the next question. HSBC's Won Jaewoong, you have a question. Please go ahead.

Thank you for good results. Now looking at Page 9, the bank delinquency rate seems to be staying stable, which I find encouraging. Do you think this trend in the fourth quarter will continue into next year as well? That's my first question. The next question is about the card delinquency rate in the third quarter, which dropped significantly. Will this improve further due to the public relief support? Or do you think there are also signs of stabilization on the card side? The next question is about the credit cost. This year, the guideline was about mid-40 basis points. I believe that was your target range. In the third quarter, you managed quite well. Given that in the fourth quarter, seasonality means a greater need for provisioning. Do you think that credit costs need to be expected at higher levels than anticipated, and is there a risk of one-off provisions being more significant?

Thank you for your question. While we prepare for the answer, please bear with us.

Yes. Thank you for that question. In terms of the asset quality prospects and second one relates to credit costs. About credit costs, I will answer first. The asset quality overall situation, the Group CRO will respond to that. Our Bank and Card CFO will talk about banks and cards asset quality related issues, respectively. In terms of guidance on credit costs, if I may give you the conclusion first, as I stated, the mid-40 basis points in the first half earnings call, I think it's going to hold for the coming period. Of course, seasonality will require more provisioning. But our simulation shows that this mid-40 basis points range would cover everything. Of course, in the future, on a short-term basis, unforeseen circumstances may arise, but I believe that the mid-40 basis points range still stands going forward.

Let me give you an overall response to the asset quality. The bank delinquency rate, as you said, is stabilizing. From a group level, not only for the bank but for all of our subsidiaries, including the nonbank side, we are seeing signs of flattening in terms of asset quality. However, there are many uncertainties in terms of the economic outlook and other external uncertain factors, including the tariff situation. Regarding price and current policies, again, any forecast is uncertain. In terms of the flattening and whether it will go down further, it is premature to make a judgment. Until the fourth quarter and the first quarter of next year, we need to wait and see. If we maintain the current trend up to that time, I think the results will be positive. As you know, our bank is relatively strong in asset quality compared to the rest of the banking sector in Korea. We will do our best to maintain that.

If I may add a response to the CRO. For Shinhan Bank, in terms of asset quality, up to a few years ago, we were actually falling a bit short compared to the top 4 banks in Korea. While continuing growth is important, we have made various efforts for asset quality management. As a result, among the top banks, delinquency and other metrics have been positively received. It is arguably too early to say that the delinquency rate has stabilized. The flattening seems to be continuing, but we need to remain vigilant. For the first half of next year, we need to closely monitor asset quality and manage it tightly. Additionally, on the banking side, we are managing credit costs too. In the fourth quarter for credit cards, we will implement more prudent policies. Thank you very much.

We look at the card delinquency ratio on a monthly basis and keep a close watch on it. We also monitor new loans that become delinquent. It peaked at 0.45%, but improved to 0.41% in September. This is attributed to the government relief fund, which increased small merchant sales, thereby improving their overall finances. However, we must continue to monitor this. For example, the government has mentioned about KRW 10 trillion allocated for low-interest lending for small merchants. If this policy continues, it could provide additional support as we have seen in the pandemic era.

Thank you very much. I hope that has answered your questions, and we will take the next question. Yes, there is a question from Hanwha Securities, we have Kim Do Ha.

I'm not sure whether it is a question that would have a specific answer, but I would just like to get your thoughts on these topics. Looking at the slides, for the first time in a while, I could see that the interest spread was rising by 3 basis points. Since last May, while interest rates were falling, it seems that considering the circumstances, you were able to really defend the margin. If this trend continues into next year, could we expect a higher margin? Additionally, it seems that the securities performance is also very good. Will the shareholder return increasing be the only focus? Or if the margin improves or securities profitability increases, will there be room for more allocation towards growth? I understand that this is not an easy question to answer, but I was curious about the group's perspective.

Thank you very much for the questions. Please give us a moment to prepare our response.

Thank you very much for the question. The question you have raised is actually something we have been considering for quite some time. First of all, regarding the interest spread, this is my perspective. The policy rate was cut twice this year, and we believe that there will be one more cut. Gradually, interest rates are falling. However, when we look at the market rate, considering usage and conditions in Korea and FX, it is uncertain that we will see a clear fall in the interest rate. The margin has not fallen as much as expected compared to last year. For the short term, while the long-term outlook indicates a potential interest rate drop of at least 50 basis points or even more than 70 basis points, we must be conservative about this forecast. On the other hand, we are positive about noninterest income which is performing well, which includes brokerage and investment banking. These are areas we need to promote for growth, and resource allocation may tilt more towards capital markets next year instead of the banking sector. However, we remain committed to our shareholder return policy targets. Even though ROE is improving, it still lags behind our cost of equity. Therefore, we will maintain flexibility around our resource allocation. But overall, we plan to follow our corporate value enhancement strategy which may include additional allocation toward capital markets as market conditions dictate. Thank you.

Thank you. I hope that has answered your question, and we will take the next question. Next is Kim Jiwon from DAOL.

My question is regarding the CET1 ratio. It seems the lending side has grown, as you said, RWA is relatively on the household lending side, and you mentioned it would be in alignment with government policy. Higher growth seems to be expected on the corporate side. Can you share how you see RWA management strategy going forward? Are there factors where you could grow the CET1 ratio further?

Please wait as we prepare an answer to your question.

Regarding RWA and the future direction, we've seen a slight growth in Q3. Compared to the previous year, it remains on the lower side. RWA growth in Q3 will be lower than expected. Going forward, the RWA growth rate will likely follow the trajectory of this year. Internally, household lending saw high demand in Q2 and Q3 but due to regulatory environments, further growth is limited. Corporate loans will drive growth, but we need to manage overall resource allocation. The CET1 ratio is slightly higher than last year, but we expect some variability. It is not necessarily better to keep the CET1 ratio as high as possible. The current mid-13% range is adequate. By Q4 seasonality, earnings will dip slightly, but we aim to keep it at a sustainable level overall for shareholder returns while allowing for growth planning.

Thank you for your response. We will now move on to the next question. It seems there are no further questions. We will conclude the 2025 third quarter earnings release conference call for Shinhan Financial Group. Today's presentation is available on our website and the Shinhan Financial Group IR YouTube channel. If you have any additional questions, please reach out to the IR team. We look forward to seeing you in February next year for the earnings release for 2025. Thank you.