Earnings Call Transcript - SHG Q4 2022

Park Cheol Woo, Head of IR

Good afternoon. I am Park Cheol Woo, Head of IR. I would like to welcome everyone to the Shinhan Financial Group’s 2022 Fiscal Year Earnings Presentation. Before we begin, I want to mention a few housekeeping rules. Today’s earnings presentation is being held via digital platforms, including the Shinhan Financial Group IR YouTube channel and Zoom applications. The YouTube live channel is in Korean only, and questions cannot be asked there. If you would like to view today’s IR in English or have questions, please join us through the Zoom application. More details on how to join are provided on our website www.shinhangroup.com. We will now start the 2022 fiscal year earnings presentation. Joining us today are the Group’s CFO, Lee Taekyung, who will be the main presenter; the Group’s CDO, Kim Myoung Hee; the Group CRO, Bang Dong-Kwon; the Group CSSO, Ko Seok-Hon; Shinhan Bank CFO, Kim Kihoon; Shinhan Card CFO, Kim Nam-Jun; Shinhan Securities CFO, and from Shinhan Life, the CFO, Park Kyoung Won. The presentation will proceed as follows: CFO, Lee Taekyung will discuss the overall business results for 2022, followed by achievements in the digital area presented by Kim Myoung Hee, and then we will have a Q&A session. I now invite CFO, Lee Taekyung to present the business results of 2022.

Lee Taekyung, CFO

Greetings. I am Shinhan Financial Group CFO, Lee Taekyung. First of all, thank you for participating in our fiscal year 2022 annual business results presentation despite your busy schedules. On Page 4 of the business results presentation, I will first go over the highlights. Please go to Page 4. ‘22 Q4 due to factors such as non-recurring items and recognition of costs to prepare for future uncertainties, net income was lower than the market consensus and recorded KRW326.9 billion. Regarding the major non-recurring items which occurred in Q4, I will explain in more detail from the next pages. On an annualized basis, the group’s cumulative net income posted KRW4.6423 trillion and despite uncertain economic conditions at home and abroad, we steadily improved net income excluding the KRW321.8 billion of sales gain from Shinhan Securities HQ building sale income, resulting in a 7.5% increase YoY. The group’s annual CIR posted 45.5%, and despite the digital-related cost increase and inflationary factors, it is being managed at a stable level. The group’s annual credit cost ratio posted at around 33 bp level and despite additional provision for future uncertainties due to deterioration of the internal and external economic environment, it is being maintained at a stable level. And going forward, Shinhan Financial Group will maintain a conservative provisioning policy. Last, I would like to go over the Group’s capital policy. At the BOD meeting held today, the 2022 year-end dividend per share was decided at KRW865. If the previous quarterly dividends are included, the annual cash dividend payout ratio is 23.5%. In addition, if we include the two rounds of share buyback and cancellation that took place last year, the 2022 TSR is 30%. Going forward, we will strive to maintain an appropriate capital ratio and also continuously improve our shareholder return ratio. Let’s go to Page 5. First, I will go over the main reasons why Q4 performance fell short of the consensus. The first item was the KRW146.4 billion of valuation loss, which was recognized for the Principal Protected pre-2000 Personal Pension Trust, which was newly recognized because of the newly released interpretation by the Korea Accounting Institute. However, since this was mostly valuation loss from bond price decline due to interest rate hikes, losses will be recovered in full amount when the bond reaches maturity, and most of this will be recovered as valuation gains within 2 to 3 years. The second was the customer investment product-related losses of KRW180.2 billion, KRW130.7 billion after-tax. At the beginning of last year at the 2021 annual business results presentation, I mentioned that the estimated loss related to the sale of investment products could rise up to a maximum of KRW200 billion after tax. Of this, considering the amount recognized in 2022, an expected loss of about KRW70 billion should have remained, but we had about KRW80 billion in unforeseen losses at the time such as the decision of the Heritage Fund dispute Mediation Committee, resulting in a total of KRW150 billion worth of additional losses expected going forward. Third, valuation loss on non-marketable securities increased by KRW73.5 billion YoY, recording KRW104.1 billion. For this, the ERP expenses amounted to KRW145 billion. Lastly, reflecting factors such as a conservative future economic outlook, an additional provisioning was KRW197 billion. On Page 6, there is a major business performance overview of the group. So please refer to it if needed. Then starting from Page 7, I will go through the detailed performance of the group. First, Page 7 is the group’s interest income. The 2022 annual group interest income went up by 17.9% YoY, recording KRW10.6757 trillion, driven by a 15 bp quarterly group margin increase in interest-bearing assets, with a 4.5% YoY increase. Q4 quarterly bank NIM, on the back of decreased core deposits continuing from Q3, accompanied by an increase in funding costs following LCR management, posted 1.67%, a 1 bp decline QoQ. I will now cover bank loans. Bank loan growth, despite the continuous decline of household loans, saw solid corporate loan growth and grew 3.8% YoY. Corporate loans, driven by increased demand from large and medium-sized companies following the direct funding market crunch, grew 11.2% YTD. On the other hand, household loans saw a sharp rise in interest rates, leading to demand decrease and DSR regulatory effects, decreasing by 3.7% YTD. Please refer to Page 31 for more details. Next is Page 8, for Shinhan Bank’s margin loan and deposits. Next is Page 9, group non-interest income. The group’s non-interest income, following securities-related income, decreased due to market interest rate increases and fee income decreased following capital market and real estate market deterioration, down 30.4% year-over-year, a significant decline compared to the previous quarter due to factors including the aforementioned changes in accounting for the principal protected trust and recognition of alternative investment valuation losses, going down 89.8%. Fee income decreased by 5.6% YoY. This was mainly due to credit card fees, securities, brokerage fees, and fund bancassurance fees. Credit card fees decreased due to factors such as lower merchant fee rates, although credit card purchases increased. It decreased 13.6% QoQ. Credit card fee income declined due to a reduction in interest-free installment plans, leading to lower volume and an increase in seasonal marketing promotional expenses. IB commissions decreased due to the real estate market slowdown in the capital market downturn. Next, on Page 10, group G&A and provisioning; trading costs increased by 4.7% YoY due to the decrease in ERP size, due to DT-related marketing expenses and overall increase in general cost levels due to inflation. The group CIR recorded 45.5%, up 0.2 percentage points YoY and is being managed stably. The group’s annual credit cost posted KRW1.3057 trillion, driven by items such as KRW517.9 billion of additional provisioning to respond to uncertain economic conditions, increased by 31%, but the credit cost ratio posted 33 bps, a 6 bp increase YoY and is being stably managed. As economic uncertainty grows, we plan to continue our conservative provisioning stance. Additionally, through actively supporting vulnerable borrowers for individuals and companies and supporting high-quality businesses among problematic real estate PF, we will continuously work hard to mitigate this risk. Looking at the delinquency ratio, which can be a leading indicator of credit card performance, in the case of the bank, it is maintained at 0.22%, up 3 bps QoQ. However, in the case of credit cards, with the interest rate rise and increasing requests for readjustment of fresh start fund and financial products, along with credit limit cuts for preemptive asset quality management, it went up 18 bps QoQ. Please refer to Page 11 for a preemptive preparation plan for future uncertainties and refer to Page 12 for details on the group’s asset quality management. Next is Page 13, capital management and major profitability indicators. As of the end of December, the CET1 ratio increased by 0.1 percentage points QoQ and is tentatively expected to post 12.7%. This is attributable to a sharp decrease in credit RWA due to a decrease in foreign currency loans and currency derivatives as the value of the yuan rose despite factors that reduced the ratio due to year-end dividends. Next, on Page 14, the group subsidiaries income. Despite the negative non-interest income trends and spikes in provisioning, the bank’s net income grew YoY owing to the increase in interest income on the back of margin improvement. In the case of non-bank subsidiaries, in the case of the Shinhan Card, despite an across-the-board increase in operating profit, including credit purchases, loan, and lease, a rapid rise in funding costs, merchant fees, and provisioning increases led to a slight decline in net income. In the case of securities, operating profit declined due to losses and valuation of AFS securities and volume transaction volume. The net income rose YoY due to gains from the sale of the head office. In the case of insurance, despite the falling income from asset management due to the base effect of the ERP program from last year, operational profit – the insurance profit increased, resulting in higher net income YoY. In the case of Shinhan Capital, capital saw net income grow YoY due to solid growth in interest income. But on a QoQ basis, net income fell due to increases in real estate PF-related provisioning and valuation loss and equity securities due to rising funding rates. The case of subsidiaries related to the capital market, including asset management, asset trust, and REIT management faced a decline in net income YoY due to the continued downturn in the capital market business. The next page is on the Group’s global business and please refer to it at your leisure. Starting from Page 16, I will talk about the mid-term capital policy of the company. This is Page 16. The shareholder return policy has been reported to the BOD last February and communicated through IR presentations to the market. The mid-term financial targets for 2025 have been resolved at the BOD of last August. In the case of the mid-term financial targets, this is a framework necessary to enhance corporate value and to achieve sustainable growth for various stakeholders, including short-term shareholders, customers, employees, and society as a whole. First of all, from the double-digit ROE, we have changed our ROE target to more specific numbers, and our ROTCE, which deducts intangible assets from ROE has been added as a management indicator. Although this is not an easy number to achieve, the 10.5% and 12% respectively are the midterm goals set. Towards this end, we intend to pursue growth in the less capital intensive Capital Life business, and for the more capital-intensive areas, growth in quality will be pursued to achieve efficient capital allocation. In this process, asset growth will be managed at the nominal GDP growth rate level. This must be achieved on the basis of solid robust capital stability. Our plan is to maintain the CET1 ratio above 12% at a stable level and utilize as much surplus capital as possible for shareholder returns. That is our principle. The reason for setting the CET1 ratio above 12% is that we consider the 10.5% regulatory ratio, and after going through regular stress testing, we consider the CET1 ratio that will allow us to continue providing credit and financial services to customers and society at large. Next, on Page 17, the results of the 2023 shareholder returns and the 2023 shareholder return policy directions based on the mid-term financial targets were discussed at the BOD that was held today. Our company has resolved to pay out year-end dividends of KRW865 per share through this resolution to quarterly cash dividends up until now and the two treasury buyback cancellation included, we have achieved a 30% total shareholder return ratio that we announced back in last February. Let me now explain the 2023 shareholder return policy discussed in the 2023 business plan that was passed last year at the BOD. First, to raise the predictability of dividends, not only the quarterly dividend but the year-end dividend will be of the same amount. For instance, for a total of KRW2100, it will be KRW525 each. Also, the treasury buyback and cancellation will be reviewed quarterly. Meanwhile, the distribution of profit generated this year will be in a 6 to 4 ratio, and retained earnings is set at 68%, while the remaining 40% can be used for shareholder returns. Depending on whether the economic uncertainties continue and the results of the regulators' stress testing, we expect a total shareholder return ratio of 30% to 40%. As part of the 2023 shareholder return policy today, our BOD resolved to buyback and cancel KRW150 billion of treasury stock. The size of this treasury stock buyback and cancellation will depend on the CET1 ratio this year, but given the dilution of the shareholder equity, we are taking into consideration the volume that will be converted to common stock as of May 1 this year. Next, from Page 18, I will talk about our digital strategy, and our CDO, Kim Myoung Hee will take over.

Kim Myoung Hee, CDO

Good afternoon. I am Kim Myoung Hee, the CDO. Let me walk you through the Shinhan Financial Group digital division’s 2022 business results. In 2022, based on the digital division strategies, we have pursued the creation of 6 customer values and strengthening of four core capabilities by each key index of the digital strategy framework at the right, the key highlights will be explained. First, the more friendly financial services; the digital platform of the group has grown into a financial platform, which is visited by 22.28 million a day, up 30% YoY. The two mega platforms, the Bank SOL and the card businesses, led to growth, while non-financial platforms had 3.62 million visitors, up 92% YoY. The group’s MyData service users are 6.96 million. Bank card, securities, and life insurance are opening on MyData services, and so in all financial areas, customized personal services are now being provided. The second area is more secure. 6.71 million customers use the Shinhan Sign Certificate to safely access not only the Group’s financial platform but also public and private sector partner sites safely. The digital innovation branches, which utilize a range of video technologies and devices, have grown twice as high YoY and expanded to 173 branches. Next is the more creative; through the digital new business, KRW9.5 billion in operating profit was posted, while operating income from data business and non-financial platform sales growth has started becoming a new source of income for the Group. As of today, the Group has invested KRW260 billion in strategic investments to expand the future digital ecosystem. For the four core capabilities, namely data process, technology, and people organization, please refer to the presentation materials. On the next page, I will explain the DP results posted and the strengthening of the foundation for sustained growth going forward. The Group's digital platform since 2020 has posted a yearly average of 26% growth, continuing a solid growth trend. Key financial platforms such as SOL pLay and Alpha have posted 18.6 million MAU. The successful launching of the new SOL, the accessibility of the Card pLay, and strengthened consulting services and the U.S. improvement of Alpha have become more customer-friendly. These were the key reasons behind the MAU increase. As you can see from below, the digital new business operating income also showed steady growth on the right-hand side. The efforts to strengthen the basis for the Group’s growth are described. The license necessary for digital life has been preemptively acquired to pursue relevant business opportunities. Despite the rapid changes in the digital age, we aim to carry on the core values of the financial business and ensure sustained growth. We are also strengthening the data utilization framework and pursuing ICT modernization. The Shinhan Financial Group will continue to place top priority on creating customer value in 2023 and will strengthen our digital core capabilities toward this end. Thank you very much.

Lee Taekyung, CFO

Thank you, Mr. Kim, for that detailed explanation. Starting from Page 20, the corporate sustainability and other details about the Group and the affiliates are included, so please refer to them at your leisure. With this, let me conclude the presentation, and we will now move on to Q&A. Thank you.

Park Cheol Woo, Head of IR

We have the first question. The first question is from Yafei Tian from Citi Securities. Yafei Tian, please.

Yafei Tian, Analyst

Thank you. I have two questions. The first one is on net interest margin. We saw a small drop in the bank net interest margin this quarter. And subsequently, this year-to-date, we have seen further decline in the interest rate environment. So would appreciate management’s forward-looking outlook on net interest margin for this year, please? And the second one is on the capital return plan that you have laid out. Compared to some of your peers, the CET1 ratio target of 12% is a bit lower than peers. Can I understand what is the reason behind that? And also, the full-year ‘22 payout ratio of 30% is also a little bit lower than peers. So just wanted to understand, going forward, are we likely to see a divergence in payout ratio among different Korean banks? And also, so far, what is the feedback from regulators on your ambition to increase the payout ratio towards 40%?

Park Cheol Woo, Head of IR

Thank you very much, Yafei Tian, for your question, and we will soon answer your question. Thank you.

Lee Taekyung, CFO

Well, I believe that you asked two large questions. First is about NIM. The second is about capital policy. So for our NIM, we will hear from our bank’s CFO, and I will talk about our capital policy going forward.

Kim Kihoon, Bank CFO

Thank you very much. I am Kim Kihoon, the Bank’s CFO. Thank you for your great questions. And for Q4, looking at the market interest rate, it rose greatly from Q3. Until Q3, I think we had some room, but from Q4, we had some funding adjustments. This led to an increase in funding costs, which I believe contributed to the downward NIM trend in Q4. In addition, as we entered 2023, we are seeing the market interest rate stabilize; however, the overall funding costs are still a bit higher than the time deposit rate. We believe that the downward trend witnessed in Q4 will likely continue into Q1 of this year. However, from Q2 onwards, we anticipate a stabilization trend as previous higher interest time deposits will start to roll off. We believe stabilization will occur between Q2 and Q3, with expected reversal in trends. Thank you very much.

Lee Taekyung, CFO

I would like to address your question regarding our capital policy about the CET1 ratio of 12%. You mentioned that it is slightly lower than our peers. We have consistently targeted a CET1 ratio of 12% primarily due to the regulatory framework. We have a capital buffer ratio of 4.5% at DSIOP, bringing it to roughly 8%. If we add the cyclical CapEx, that brings it to around 10.5%. There is also a management buffer against M&As and other factors, which is 2.5%. So that is how we reach that number. During our internal stress tests, we consider that even at a 12% level, we would remain sufficiently resilient to any potential economic crisis and would be able to provide financial services confidently. Regarding your question about our dividend policy and percentage payout ratio of 30%, which is lower than our peers, I want to clarify that this is not a rationale but rather our business decision related to retained earnings. When calculated alongside fiscal year dividends and our announced KRW150 billion share buyback, I believe it can be positioned closer to 33.2%. Hence, I don't see our TSR as being lower than that of our peers. Regarding differentiation in TSR policies for Shinhan, we are committed not only to profitability but also to sustainable income generation. Therefore, the CET1 ratio will play a significant role in determining our shareholder returns in contrast to our peers.

Yafei Tian, Analyst

Thank you very much for your answers.

Park Cheol Woo, Head of IR

Now we receive the next question. The next question is from Korea Investment Baek Doosan. Mr. Baek, you’re online.

Baek Doosan, Analyst

Hello. I am Baek Doosan. Can you hear me well?

Lee Taekyung, CFO

Yes. We can hear you well.

Baek Doosan, Analyst

Thank you very much. So I have a question about the digital business. I have two questions, actually. First question: Recently, your affiliate’s consolidated data platform had been created, so regarding this utilization system of the data, what kind of directions are you seeking? For instance, improving internal work processes? Are you emphasizing cost savings or using the data to seek new sources of income? Where is the emphasis, versus the overall data governance and data strategies? That is my first question. And my second question: Recently in the securities affiliate, the Token Securities business will be pursued. That has been a news report that I read. So what kind of underlying assets do you see, and what kind of partnership strategies do you have? If there is anything, can you share that with us?

Park Cheol Woo, Head of IR

Mr. Baek, thank you very much for those questions. While we are preparing our answers, please hold for a few seconds.

Lee Taekyung, CFO

So both questions were digital-related. Our CDO will answer those questions.

Kim Myoung Hee, CDO

Recently, we have announced the Group consolidated data platform. The Bank, Cards, Life and Securities will use a consolidated data platform, which has been created to provide customers with personalized and customized services. As you mentioned, cost savings and new sources of income may result, but our primary purpose is to center on the customer to offer more customized and personalized services. So for our Group, we will use the data effectively to ensure it is well collected, generated, and stored. This data will strengthen the governance structures across all affiliates. In a consolidated manner, these data will be utilized so ultra-personalized services can support our customers. This is the main objective. Secondly, regarding securities and blockchain business, we have been continuously monitoring the regulatory trends. Last year at the Group level, operations for digital assets were initiated. With STO, regulatory laws are being developed, and Shinhan Securities has been preparing for this blockchain business by establishing a new department focusing on it and pursuing an STO infrastructure through collaboration with a FinTech company. This is in line with the trends and developments in regulations to provide new financial services effectively. Thank you very much.

Baek Doosan, Analyst

Thank you very much for your answers.

Park Cheol Woo, Head of IR

We will take the next question. From Daishin Securities, we have Park Hye-jin on the line. You are on the line. Please ask your question.

Park Hye-jin, Analyst

I am Park Hye-jin from Daishin Securities. I have two questions. First is on page 17 of your presentation. In May, it shows a lot that will be converted to common shares. Regarding share buyback and cancellation, you made a resolution today. Will it be done every quarter? Going forward, will share buybacks and cancellations be more predictable? Second question is about digitalization; I think you have paid keen attention to digital using many of your presentation pages. What is your take on Internet banking from Shinhan’s perspective?

Park Cheol Woo, Head of IR

Thank you for your questions. Please hold until we answer your question.

Lee Taekyung, CFO

I believe you asked two questions. You asked about capital policy, and you also asked about the Internet bank. Our CSO will answer that, and then I will address the question about capital policy. On May 1st, we will have about KRW750 billion that will be converted into common shares. Regarding this, we have the existing share amount. We have plans for share buyback and cancellation taking the dilution into consideration with our existing shareholders. You asked about the predictability for each quarter. We have been mentioning that for cash dividends, they will be uniform, as much as possible. Share buyback and cancellation will be contingent on CET1 ratios each quarter. If there is a low share price, it could trigger higher buybacks, so it will depend on circumstances, making it difficult to be predictable. However, we will ensure adequate asset growth and maintain a CET1 target to facilitate active share buyback and cancellation.

Ko Seok-Hon, CSSO

I am CSSO, Ko Seok-Hon. Thank you for your question. Regarding our willingness to enter the Internet-only banking industry, in principle, KB Financial Group has options like KakaoBank, Woori, K Bank, and Hana. While we are not blocking the possibility of entering the Internet bank, our priority is to strengthen our digital and platform competitiveness and connectivity through non-banking entities. Therefore, we will not exclude any opportunities in Internet banking investment or alliances while putting emphasis on enhancing our core strengths in digital services.

Park Cheol Woo, Head of IR

Thank you very much for those answers. At present, there are no incoming questions. We will wait for further questions. If you have any questions, please join the Zoom application and press the hand-up icon. Yes, we have one more question from SRS Securities, Shim Jongmin. Mr. Shim, you are online.

Unidentified Analyst, Analyst

Yes. I am Shim Jongmin. Thank you for giving me this opportunity. I have one simple question on Page 17. On the lower right-hand side, there is the shareholder return policy and the regulator stress testing results need to be agreed upon, as mentioned. The CSSO also said when you provided an answer for a previous question that this is under 100% standard for regulator stress testing. Are you saying that the internal stress testing by the regulators has been introduced, or are you going to agree with the regulators and conduct the stress testing? Depending on which has taken place, what are the additional provisions required by the regulators? I think that can be assessed.

Park Cheol Woo, Head of IR

Thank you very much for those questions. Please hold while we are preparing the answers. Thank you.

Lee Taekyung, CFO

Thank you very much for those questions. Regarding stress testing, I will disclose what was discussed internally. As you are aware, in the U.S., stress testing loss buffer post-2008 financial crisis has been maintained and regulators have recently introduced stress testing in Korea. We need to have more sophisticated scenarios reflecting reality more accurately as we continue monitoring the situation. As of now, we are not at the level of stress loss buffer similar to companies in the U.S. Further consultations with regulators regarding the banking sector will be necessary. Additional provisions relate to expected losses where unexpected losses occur for which stress testing is conducted, presenting two different matters.

Park Cheol Woo, Head of IR

Thank you for your answer. We have the next question from HSBC, we have Won Jae-woong. You are on the line, sir.

Won Jae-woong, Analyst

I have one question. Recently, there is delinquency and DCR that seems to have inched up in your trend. For this year’s trend, what is your outlook for this? Do you have any guidelines? Secondly, for loan growth for the bank and for digital bank, I think your growth estimates or targets are quite different. So, for your loan book growth, what is your guidance for growth this year?

Park Cheol Woo, Head of IR

Thank you very much for your questions. We will soon answer your question. Please hold.

Lee Taekyung, CFO

I believe you asked two questions. First is about delinquency, and the second question is about loan growth. For delinquency, our CRO will answer, and for loan growth, I will provide the answer.

Bang Dong Kwon, CRO

Hello. I am the CRO, Bang Dong Kwon. Thank you very much for the opportunity. For delinquency, it is true that it has been rising as you mentioned. Toward the end of last year, there has been a rising trend. The interest rate rise has impacted payment capabilities, and there have been expectations about government support policies. Real estate prices reflect a time lag on the real economy. When taking all those factors into consideration until Q1 and Q2 of this year, for vulnerable borrowers, we expect deterioration, and we are observing some signs of this. Despite this, from late last year, we took preemptive measures by making preparations. We believe through Q1 to Q2, the results of these preparations will start emerging. Although we are witnessing upward delinquency trends, we believe that by the end of Q2, this upward trend will decline. We have strengthened loss absorption capabilities through our conservative provisioning policy.

Lee Taekyung, CFO

Regarding the credit cost to add to the previous answer. On Page 10, you can see the trend on the left graph. We have preemptively provisioned KRW1 trillion. So, we maintained 0.37% for the previous 3 years. Pre-COVID, in normal conditions, we recorded 0.26% and 0.31%. For delinquency rates, although they can go up, we believe that credit costs will remain limited. Regarding loan growth, you mentioned the target differences between our bank and the digital bank. As I previously mentioned regarding the nominal GDP rate, we do not anticipate growth exceeding that amount. We need to grow with profitability compared to our capital, and considering the uncertain economic environment, growth in loans will likely be lower than in the past for both the bank and credit card sectors.

Park Cheol Woo, Head of IR

Thank you very much for those answers. We will receive further questions. Next question from JPMorgan Securities, Mr. Cho Jihyun. Mr. Cho, you are online.

Cho Jihyun, Analyst

Thank you very much for this opportunity. I have three questions actually. First question: When doing a quarterly dividend, you said that it’s going to be uniform and even. What will be the floor percentage for the dividend? Is there any guidance on the expectations for that? Will additional shareholder returns happen once we achieve a CET1 ratio exceeding 12%, possibly in the form of share buyback and cancellation? On Page 11, regarding valuation losses, was it recognized all at once, or was it done on a real-time basis, hence the reason for this amount being large? Additionally, on Page 11 concerning real estate exposure, what is your view on the capital share appearing larger for the real estate exposure in metropolitan regions? You seem to have managed your provisioning well. How well do you think this exposure will be maintained and managed going forward?

Park Cheol Woo, Head of IR

Please hold while we prepare the answers for these questions. Thank you.

Lee Taekyung, CFO

To summarize, you have three questions. I will address the first two, and the CRO will address the third. Regarding the quarterly dividend, as I have repeatedly mentioned, per-share cash dividends will be slowly maintained or increased. Last year we paid out KRW2055; in 2023 it will not go down, and it could be slightly above that. This is well demonstrated by our KRW2,100 projected total, with KRW525 for quarterly dividends. The surplus amount exceeding 12% will be subject to buybacks and cancellations. Regarding the Principal Protected Trust, yes, it was recognized in a lump-sum due to recent changes in accounting rules which emerged in December last year. The third question will be answered by our CRO.

Bang Dong Kwon, CRO

Good afternoon. I am the CRO, Bang Dong Kwon. Thank you very much for the question. Regarding PF capital exposure, the capital exposure is about 30%. The amount for PF and bridge loans is about KRW8.8 trillion, with capital making up around 30%. The average value is high. This is the current situation. Considering the real estate market, you are aware of emerging risk factors due to permit and progress delays. Additionally, the rise in Forex rates and construction material costs are significantly impacting these products. Bridge loans are converting to principal PF loans, and these issues raise concerns regarding real estate PF. However, among KRW8.8 trillion, below sub-standard is about KRW50 billion, and precautionary is about KRW48 billion, while below precautionary amounts to about KRW480 billion, which we are managing. Despite the increase in delinquency, we believe demand will rise within the first quarter of this year. Internally, we will consult and respond proactively along with government policies, and we aim to support firms facing temporary challenges while contributing positively to the situation moving forward. Regarding the Principal Protected Trust, you queried if this recognition would happen quarterly. We expect some write-backs in this quarter due to maturing marketable securities, although the amounts may be small—these would be gains rather than losses.

Park Cheol Woo, Head of IR

Thank you for your answer. We have another question coming in from Hyundai Motor Securities, we have Hongjae Lee on the line. You are on the line, sir.

Hongjae Lee, Analyst

Thank you for the opportunity. I have one question; it is quite a micro question. On page 16 of your presentation material regarding the shareholder return policy, it says until 2025. Is there a special reason why you have set 2025 as the reason? Will it be updated every 3 years, is that your plan? Also, while it may seem far into the future, when we hear your presentation, the 12% CET1 ratio seems to provide a sufficient buffer. After that year, I thought there would be no reasons for the CET1 ratio of 12% to change. Why have you designated 2025 as the cutoff point?

Park Cheol Woo, Head of IR

Please hold until we answer your question.

Lee Taekyung, CFO

Now I understand your question. The reason why it’s 2025 is because, first of all, when we discussed this last year, this was discussed within our strategic planning towards our mid-term strategy framework until 2025. That is why that year is included. The second reason is related to the targets we have established: ROE and ROTCE at 10.5% and others are challenging figures in the Korean financial markets. Thus, our focus will be on trying to meet those targets for the next three years. We will reassess the situation after that and have further discussions. Even beyond 2025, I believe this CET1 ratio target will still apply.

Park Cheol Woo, Head of IR

Thank you very much for your answer. Due to time constraints, we will wait a few seconds for any further questions, and then we will wrap up. Since we have no further incoming questions, I would like to wrap up the Q&A session. With this, we would like to conclude the 2022 Shinhan Financial Group’s fiscal year earnings presentation. We would like to thank everyone for participating in today’s earnings presentation. The materials for today’s earnings presentation can be viewed again on our website, as well as our YouTube channel. In the case of our YouTube channel, not only last IR events, but also other promotional videos have been uploaded. So, please refer to them at your leisure. Thank you very much for your attendance today.