Earnings Call Transcript - SHG Q3 2024

Operator, Operator

Good afternoon. I am Cheol-Woo from the IR Group at Shinhan Financial Group. Thank you for taking the time out of your busy schedule to attend Shinhan Financial Group’s Q3 2024 Earnings Presentation. I will be moderating today’s earnings presentation. Today we have with us the Group CFO, Sang-Yung Chun, Group CSO, Koh SeogHeon, and Group CRO Bahng Dong Gwon. We will first start with the presentation on our overall Q3 results followed by a Q&A session. Now, I'd like to turn it over to CFO, Sang-Yung Chun for a presentation on our business performance.

Sang-Yung Chun, CFO

Good afternoon, everyone. Thank you for joining us for our Q3 2024 earnings presentation. Before we discuss the overall business performance, I want to address the recent losses from derivatives trading at Shinhan Securities. As shared in our disclosures and the Chairman of the Financial Group's Board of Directors and the CEO of Shinhan Securities' letter last week, this department provides liquidity to exchange-traded funds and engages in hedging operations, which led to significant losses due to trading costs related to 200 Futures that were unrelated to the LP hedge. We reported a loss of KRW135.7 billion in our third quarter financial statements from this incident and do not anticipate any further losses. The capital reduction resulting from these losses, along with the impact from the operational risk RWA increase, has affected the Group's CET 1 ratio by minus 6 basis points. We sincerely regret this incident as we work to enhance our internal control system across the Group. In light of the seriousness of the situation, the Group’s Board of Directors and management are committed to promptly informing our shareholders about this incident and providing updates. Currently, Shinhan Securities is cooperating with regulatory investigations and has initiated its own response to identify the root cause. Along with Shinhan Financial Group, they are reviewing weaknesses in the internal control system and taking measures to improve it. We will thoroughly examine our internal control system and make necessary adjustments, keeping in mind that customer trust and robust internal controls are fundamental to our business. We are also dedicated to ensuring that this incident does not affect our plans for enhancing enterprise value that we have been communicating. Now we will move on to our Q3 results. Please refer to page 5 for financial highlights. During Q3 of 2024, despite the removal of one-off factors such as credit costs related to real estate PF, large losses were incurred in the non-interest income segment, with net income posting KRW1 trillion 238.6 billion, down 10.1% quarter-over-quarter. Interest income driven by growth in the banks and loan book increased to efficient ALM up 1.2% quarter-over-quarter. Non-interest income decreased by 25.6% quarter-over-quarter due to the aforementioned losses on securities derivative transactions, as well as conservatively recognized valuation impairments in overseas alternative investments. SG&A expenses were managed fairly, increasing only 1.2% quarter-over-quarter despite the impact of depreciation. The Group’s cumulative CIR for the third quarter improved by 1.2 percentage points year-on-year to post 37.9%, driven by higher operating profit before expenses, along with well-managed SG&A expenses. The Group's cumulative credit cost ratio for the third quarter decreased by 4 basis points compared to the first half of the year posting 44 BPS, primarily due to the baseline effective additional provisions recognized in the prior quarter related to real estate PFs and asset trust. Next is capital ratio and shareholder return policies. The CET1 ratio at the end of September 2024 is estimated to come to 13.13%. In addition, the Board of Directors today approved a third-quarter dividend of KRW541 per share and resolved to undertake share buyback and cancellation totaling KRW400 billion, which includes the amount for 2025. Let me explain further about the treasury stock. To accelerate our shareholder return policy, which we announced in July with our Enterprise Value enhancement plan, we'll call for a buyback of KRW250 billion in the fourth quarter of 2024 through buying back another KRW150 billion of treasury shares in early 2025. We intend to fulfill our policy of year-round share buyback. We have been engaged in share buyback and cancellation regularly throughout the year, and the amount to be undertaken for the first quarter of 2025 will be announced in our annual earnings release next February along with the quarterly dividend per share, subject to Board approval. Going forward, we will try to flexibly respond to capital-related regulatory changes based on our strong financial stability while efficiently managing our capital ratios so that we can fulfill the shareholder return policy we promised through our corporate value plan. On Page 6, I represent the Group's key profit metrics. Please refer to them at your leisure. But I guess on to Page 7 for further detailed performance for the Group. In the third quarter, despite overall deterioration in profitability from the decline in market interest rates, the Group’s interest income was supported by an increase in interest-bearing assets centered around the Bank's loan recording a total of KRW2 trillion 855 billion, up 1.2% quarter-over-quarter. Next, Bank loans increased by 3.5% during the quarter or an annual growth of 10.2% as the key driver of interest income growth. Household loans increased by 6.3% quarter-over-quarter, driven by real estate purchasing demand and increased policy loans for vulnerable borrowers. Corporate loans increased by 1.4% in the third quarter, centered around Blue Chip corporate borrowers as we moderated from the rapid pace of growth we saw throughout the first half. We intend to minimize loan growth in the fourth quarter relative to our Group RWA budget, as we focus on enhancing profitability and asset soundness. In the second quarter, Shinhan Bank's NIM, despite negative impact from lower market rates, recorded 1.56%, down 4 basis points versus the prior quarter. Thanks to our nimble ALM strategy, we defended the decline in yield on interest-bearing assets to 5 basis points, despite the decline in loan asset yields through strategic management of our securities investments. In terms of our liability funding cost, it improved by 1 basis point quarter-over-quarter, as we issued long-dated bank debentures as preemptive debt funding because we set more intense competition in the funding market in the fourth quarter. We will maintain a flexible interest rate policy, as well as effective ALM to manage our margins proactively. The Group's non-interest income recorded KRW827.8 billion, down 25.6% quarter-over-quarter due to poor earnings from securities and derivatives. Securities and derivatives earnings were down 47.1% quarter-over-quarter from KRW135.7 billion in derivative trading loss by Shinhan Securities, as well as KRW71.2 billion in valuation loss from overseas alternative investments, which we recognized preemptively this quarter. Fee income declined by 3.5% quarter-over-quarter due to poor fee income from Shinhan card, despite the increase in IP earnings from the Bank and Securities business. SG&A is stable, increasing by 1.2% quarter-over-quarter or 0.9% year-on-year. Our Group CIR improved by 1.2 percentage points year-on-year as operating profit before expenses increased by 4.2%. Cumulative credit cards as of the third quarter was 44 basis points improving by 4 basis points versus the first half, as the impact of additional provisioning against real estate PF and asset trust exposure dissipated and also from asset growth. Cumulative credit costs when normalized, removing the effect of additional provisioning were 32 basis points similar to end of June levels. In the future, we will continue to consistently implement the government-led measures to normalize real estate PF loans. We will also maintain well-calibrated management of asset quality and enforce tight management of recurring credit cost. On asset soundness, they are stable as we've been performing write-offs and sales of NPL. Bank delinquencies remain stable after improving by 5 basis points in the second quarter. Card delinquency saw additional improvement this quarter, as well, while the two-month delinquency migration rate, which is a leading indicator for delinquencies, has remained flat. This stable trend in asset soundness is due in large part to attractive write-downs and sales as part of our asset management. Despite the rate policy cut that we have seen recently, interest rates still remain high and made a slow recovery in the real economy. So it's hard to say that asset quality is seeing trend growth or improvement; consequently, we will stay vigilant and maintain a conservative stance in terms of asset quality. Please refer to the slides for a breakdown of net profit by affiliates. As of the third quarter 2024, on a tentative basis, the CET1 ratio was measured at 13.13%, which is an improvement of 7 basis points quarter-over-quarter. Although risk-weighted assets increased by KRW4.1 trillion from the Bank's asset growth, the effect of reduced FX rates and stable earnings performance resulted in a quarter-over-quarter increase of 1.8% in common stock equity. In the fourth quarter, similarly, we intend to minimize asset growth while delivering stable financial performance to manage our CET1 at 13% or above. Let me now move on to Pages 11 to 12, where we have details on our digital and sustainable management initiatives. So please refer to those slides. On Page 14, as we promised when we announced our Value Up program in July, here are the results from our implementation review across six core indicators up to the third quarter. It is still quite early on, but moving ahead led by our Board of Directors we will continue to closely monitor the implementation of our Value Up plan and proactively communicate our findings with the market to keep you updated. According to our current timeline, we are planning to provide a review of our execution results when we announce our full-year performance next year while also updating you on our implementation plan in greater concrete terms. We look forward to your interest as we proceed. This concludes our overall earnings presentation. Thank you very much.

Operator, Operator

We will now move on to the Q&A session. Jaewoong Won from HSBC will ask the first question.

Unidentified Analyst, Analyst

Can you hear me well?

Unidentified Company Representative, Company Representative

Yes, we can hear you well.

Unidentified Analyst, Analyst

You are in a very difficult environment. Thank you very much for the strong performance you have delivered. I have two questions. The first question relates to the shareholder return rate. A 50% total shareholder return has been announced for 2027, but based on those calculations, last year it was at 36%, and it's expected to increase by 2%. So by 2027, to reach that target of 50%, it was only 2% this year. Going forward, you'll need to raise it by 4% each year. At Shinhan Financial Group, we believe you will fulfill your promise and have the capability to do so. However, in order to increase from a 2% point increase to 4% each year, what kind of trigger do you need? Is it CET1 growth or earnings growth that would support raising the total shareholder return rate from 2% to 4% starting next year? My second question is about the net interest margin outlook. Interest rates have decreased, leading to a decline in the net interest margin this fourth quarter and into next year. What is your outlook for the net interest margin?

Bahng Dong Gwon, CRO

Thank you for your questions. While we prepare the answers, please hold. Thank you for the question. Regarding the TSR rate, I'll address the first question, and the CFO will answer the second. For shareholder returns based on share cancellations until 2027, we previously stated a target of 50%, and our plan involves a gradual increase. As indicated by today's announcement, we've completed KRW700 billion in share cancellations this year, and we plan to complete KRW450 million by 2027. Based on our announcements, this year's amounts include KRW400 billion, with additional KRW150 billion planned for January and February next year. This suggests we will enhance shareholder returns moving forward. As for what triggers are necessary, we are just beginning, but we are confident in our commitment to share buybacks and cancellations. Specific targets related to shareholder returns and our action plans have been established. We believe we can fulfill these commitments, and we anticipate managing the CET1 ratio at 13%. If our earnings growth continues to support these plans, I think we can maintain our commitments in the future.

Sang-Yung Chun, CFO

Thank you for your question. In the third quarter, the net interest margin was affected by market declines and changes in benchmark rates, reflecting a decline to 1.56%, down 4 basis points from the previous quarter. We anticipate continued interest rate cuts, which will result in a further decline in net interest margin. We will manage our funding rates to help stabilize the net interest margin. This year, we expect a slight decrease compared to last year. Regarding next year, we foresee additional cuts to benchmark rates and the need for a response related to LCR. The trend of declining net interest margin is likely to persist, and we aim for new profitability driven by asset growth while actively managing funding rates to protect our net interest margin. Thank you.

Operator, Operator

I hope that answered your questions adequately. It appears there are no further questions at this time, so we will move on to the next one. We have a question from Do-Ha Kim from Hanwha Investment Securities. Please go ahead.

Do-Ha Kim, Analyst

Yes, I have a very simple question. What are your targets for loan growth and RWA growth for next year? If you have an assumption regarding RWA, I would appreciate any insights on that.

Unidentified Company Representative, Company Representative

Yes, please. Bear with us for a moment as we prepare to respond. For next year, our focus on asset growth is in line with the Value Up program. Previously, we concentrated on quantitative growth, but we aim to shift towards qualitative growth with an emphasis on capital efficiency, specifically measured by ROE. In alignment with the Value Up program, we will manage our ROC as a key metric on a group-wide level. Regarding asset growth, we are currently drafting our business plan, but we anticipate a target loan growth of about 5% based on RWA, and loan asset growth will follow that. We prefer using ROC as it is more intuitive, and our target ROC will be around 13%. You can calculate the equivalent figure for RWA from this. I can provide more details on the RWA at another time if needed.

Operator, Operator

I hope that answered your question, and we'll move on to the next one. The next question is from NH Securities, Jung Jun-Sup.

Jung Jun-Sup, Analyst

Good afternoon. I have two questions, as well? So, the first question is on the larger than expected share buyback program that is very, very positively viewed. But going forward, can we expect that the size of the share buyback and cancellation every quarter will be continued? I think you are speeding up, given the level of stock price increase. But going forward, if the current stock price level is maintained and then before 2027, the share reduction level that you target can be achieved before 2027. So, going forward PBR one time, would that be the basis or would the priority be reducing the number of shares? Can you provide guidance on this? And my second question is on provisioning outlook.

Unidentified Company Representative, Company Representative

Thank you for your questions. While we prepare the answers, please hold. You asked two questions. Regarding share cancellation, as you mentioned, the target is to reach KRW450 million by 2027. We have specified the number of shares to be reduced. By 2027, we aim to accelerate that process as it is our top priority. This has been outlined in our prepared Value Up program, where we believe that the cancellation rate is lower at a PBR of 0.8. We will prioritize the cancellation of shares, and the pace will gradually increase each year, which is our basic assumption going forward. However, the performance and CET1 ratio may vary each year based on these factors. The second question pertains to the outlook for provisioning. I believe that information should be shared with you. As of the end of September, the credit cost ratio was 44 BPS, and the ordinary credit cost ratio was 32 BPS. In June, we addressed this question, and we anticipate that by year-end, the credit cost ratio will be around 45 BPS.

Operator, Operator

I believe that should have adequately answered your question. There are no further questions in the queue, so we will wait for the next one. Tien Cho from JPMorgan Securities, please go ahead.

Unidentified Analyst, Analyst

Yes, hello. Thank you for the opportunity to ask a question. I would like to inquire further about your PF exposure. I understand that it has decreased and you mentioned that provisioning is lower. As we approach the end of the year, it seems that the PF market restructuring led by government authorities is picking up pace. By the end of this year or into next year, what should we anticipate regarding asset trust or any potential burdens from that side or additional provisioning? Do you believe the situation is improving? Some banks are experiencing reversals in provisioning, and with interest rates being lowered, restructuring is happening. It appears that conditions may be improving more than expected. Could you provide an update on the current status of your PF exposure, particularly regarding provisioning or potential reversals at the affiliate level? What kind of impact do you foresee? Looking ahead to early next year, do you think the situation will be resolved overall? What are your expectations?

Bahng Dong Gwon, CRO

Yes, thank you for the question. Please wait just one moment as we prepare to answer your question. Thank you for the good question. I'm Bahng Dong Gwon, the CRO. As you have said, interest rates are in a downward cycle. The market has some expectations for recovering the PF market. However, as you mentioned, led by the government, their efforts to normalize PF loans, I think it likely will proceed quite speedily until the start of next year. There may be some pricing adjustments across product sites. For the non-banking sector, there might still be ongoing sources of concern for additional NPO or loss. For our Group, regarding the situation for us, I can comment that we have KRW9.4 trillion in overall PF loan exposure, which is about 2.2% of our total loan book. As you know, the regulatory authorities are doing an economics viability assessment every quarter. For all of our assets, we have already completed our viability review and have distinguished all of the assets into four categories. For anything cautious, we are proceeding by setting up restructuring and other plans. For KRW210 billion, we have actually been under plan in the second quarter. In the third quarter, we conducted a full scope review and will submit to the government our plans for further restructuring. Overall, KRW440 billion is the restructuring amount. We have set aside significant provisioning already against that exposure amount. We think any risk of the stress is very limited. That being said, the overall situation up to early next year is quite fluid. There are many moving parts, and it may be very variable. So we do believe that there are still risks that are outstanding. We will respond as we see the developments unfold. Currently, the CRO mentioned that in terms of overall real estate market, our exposure and how we are managing our exposure. Let me elaborate a little more on our provisioning. As we have said, at the end of June regarding capital, asset trust, or real estate financing affiliates, we have done a full scope review already and have set aside provisioning at the end of June. Of course, afterwards in the third quarter, there's been some deteriorations on a recurring basis. Thus, we have been adding on provisioning. As the analyst said, we have been doing refinancing or write-downs and sales of certain NPO, which has resulted in reversal of some of those provisions as well. We think that at the end of this year and past the start of next year, we may see a gradual improvement. However, regarding provisioning, there will be no large-scale provisioning as we did in the first half. But on a recurring normalized basis, smaller provisioning may be required. Relative to fundamentals, it won't be a meaningful scale. Right now, the issue regarding asset trust is about the completion guarantee exposure. By the first half of 2020, that was the peak of those contracts. Because those projects tended to be smaller in scale, the time period was usually 2 to 3 years. For those completion guarantee project sites, I think the peak period will be perhaps the second half of 2024, where we will have to mobilize lending. However, as we go, banking account lending balance should diminish. But then, there can be additional losses leading to increased lending to the banking account. But we do not expect any large provisioning like we saw in the first half of this year. We don't think that is likely as well. For loss absorption purposes, we will continue with incremental provisioning as we go.

Operator, Operator

I hope that provided a sufficient answer to the question. We have another question from Amy Zhang from Citi Securities.

Amy Zhang, Analyst

RWA is influenced by many external factors. To enhance our analysis of RWA moving forward, could you provide more detailed segmented data regarding this? What specific segmented data about RWA can we expect going forward?

Sang-Yung Chun, CFO

Thank you very much for that question. While we prepare to answer, please hold. I'm not in a position to provide many specific details, but in implementing our corporate value program, we have focused on qualitative growth, making the management of RWA even more important. Going forward, we anticipate providing specific targets for RWA, and we will consider penalties for exceeding those targets. We will have more detailed management of RWA in the future. If you would like us to share more data about that, we are willing to do so. Our CRO will provide additional information.

Bahng Dong Gwon, CRO

In the third quarter, let me provide some data. KRW337 trillion of RWA has increased by KRW4.1 trillion, and the credit RWA, the Bank’s asset growth and the card asset growth were large. There wasn't any increase from the credit side. The KRW1.7 trillion increase was from the operation side, related to the ETF belated losses from National Securities. There was an increase of KRW1.5 trillion from that. As the CFO said, going forward we're going to strengthen the RWA budget system and improve data alignment and integrity, which is very important. Also, the simulation function, the analysis function will be strengthened. Based on these, RWA-based portfolio management will be undertaken starting from next year.

Operator, Operator

I hope that provides a sufficient answer to your question. The detailed data of RWA, according to the disclosures made under the financial disclosure act, is included in those documents, and you can direct any further questions to our IR team. Next from Hanwha Investment Securities, please.

Unidentified Analyst, Analyst

I would like to inquire more about asset growth. In the third quarter, you experienced faster growth in household or mortgage loans compared to other companies. Authorities have mentioned that this year, banks with significant increases in household loans have received feedback about limiting that growth rate. If mortgage growth slows down next year compared to this year, what will be the factors driving asset growth in banking? Specifically, what are the main drivers of asset growth, and how will that growth be distributed across different affiliates, not limited to banking?

Bahng Dong Gwon, CRO

Please wait while we prepare to answer that question. You asked about growth. The Bank's CFO will address that. Regarding asset or resource allocation for the upcoming year, I will add my thoughts after he is done.

Sang-Yung Chun, CFO

Yes. For our Bank asset growth, we initially observed growth in the first half of the year due to front-loading. In the second half, our focus shifted toward quality growth. There was significant demand for household mortgage loans in the first half. Therefore, for the full year, we expect to keep total household loan growth within our target range. For next year, even though the current year’s growth has not been substantial, we anticipate that as we tighten our management, the pace of household loan growth will either remain similar to this year or moderate. The CFO mentioned our goal to emphasize RWA-based ROE-driven growth at the Bank. Currently, the allocation of growth is not yet finalized. We are in the process of compiling our financial business plan, and there have been discussions among our Group companies and the holding company. Recently, these discussions have centered on evaluating ROC for each business domain and exploring future potential and areas for improvement. Regarding RWA growth for next year, I estimate it to be around 5%. It will be challenging to achieve any significant growth like we experienced this year. However, the risk rates for household and corporate loans are quite low. Thus, even if household loan growth is subdued, there is considerable potential in corporate lending. We will concentrate on profitability based on ROC or RWA to inform our asset and resource allocation, which will be incorporated into our business plan for next year. Yes, I believe that fully addresses your question. We will proceed as we don’t have any more questions at this time. We will now wait for additional questions. We have a question from Goldman Sachs Securities.

Unidentified Analyst, Analyst

Good afternoon. I have a question. In the last quarter, you mentioned a target return on equity of 10%. To achieve that, it seems necessary to boost earnings from non-banking subsidiaries and non-interest income. Can you provide any guidance or detailed plans regarding this? Thank you.

Unidentified Company Representative, Company Representative

Thank you for the question. While we prepare the answer, please hold. Thank you very much for your inquiries. In our Corporate Value Up program, we focus on two main areas: improving ROE and profitability, and accelerating shareholder returns. Regarding our shareholder returns, we will implement our commitments. There was a question about internal share cancellation and how to increase those returns. We are confident about this. However, enhancing ROE to improve profitability is a priority for us. Let me share several points. First, our starting approach should emphasize non-quantitative growth rather than just quantitative. We need to ensure this awareness is shared across the Group. Additionally, we should set targets for qualitative growth, which must be aligned with our evaluations and resource allocations. When planning for this year and next, the overall Group’s ROE and the ROC of subsidiaries must be aligned and internalized. This will be incorporated into our plans, and we aim to strengthen these areas starting next year. As mentioned, overall capital market performance has been sluggish.

Operator, Operator

I hope this provided a sufficient answer to your question. Yes, nobody is in line just yet. So we will wait for the next question. From Citi Securities, Analyst Amy Zhang.

Amy Zhang, Analyst

May I just add one additional question? Can you share the FX rate sensitivity for your CET1?

Unidentified Company Representative, Company Representative

Yes, please wait while we prepare to answer. For CET1, the sensitivity to foreign exchange is 0.8 basis points for each 10 Korean won. Additionally, there is about 8 billion Korean won sensitivity to the next income from a 10 Korean won increase in the foreign exchange rates.

Operator, Operator

Yes, I think it has been 40 minutes so far, and I believe that has been enough to discuss many topics. Therefore, we will now conclude the third quarter 2024 earnings call for Shinhan Financial Group. Moving forward, we will keep engaging closely with the market to keep you updated. Please visit our homepage or the Shinhan Financial Group YouTube IR channel. We appreciate your interest. Thank you again for attending today's earnings call.