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Edited Transcript of 055550.KS earnings conference call or presentation 20-Apr-17 7:30am GMT

Thomson Reuters StreetEvents

Q1 2017 Shinhan Financial Group Co Ltd Earnings Call

Seoul Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Shinhan Financial Group Co Ltd earnings conference call or presentation Thursday, April 20, 2017 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bo-Hyuk Yim

Shinhan Financial Group Co., Ltd. - Deputy President and CFO

* Sung Hun Yu

* Woo Young-woong

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Conference Call Participants

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* Byung Gun Lee

Dongbu Securities Co., Ltd., Research Division - Team Leader

* Chan Young Hwang

Macquarie Research - Head of Korea Research

* Jinsang Kim

HMC Investment Securities Co., Ltd., Research Division - Analyst

* Will Chong

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Presentation

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Sung Hun Yu, [1]

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Good afternoon. I am Yu Sung Hun, the head of the IR team. I would like to thank everyone for taking the time out to come to today's earnings presentation. We will now begin the Q1 2017 earnings presentation.

Together with us today is Vice President and head of Strategy, Woo Young-woong; Vice President and CFO, Yim Bo-Hyuk; and financing head and Managing Director, Jeon Young Kyo. For today's earnings presentation, our CFO, Yim Bo-Hyuk, will walk you through the business results for Q1 2017, and this will be followed by a Q&A session.

Now let me invite Vice President and CFO, Yim Bo-Hyuk, to deliver the Q1 2017 earnings results.

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Bo-Hyuk Yim, Shinhan Financial Group Co., Ltd. - Deputy President and CFO [2]

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Good afternoon. I am Vice President and CFO, Yim Bo-Hyuk. I would like to thank investors, analysts and journalists from Korea and abroad for taking part in Shinhan Financial Group's earnings call today.

Now let me walk you through the Shinhan Financial Group's Q1 2017 earnings highlights. Let us begin with the group's income on Page 3. In the first quarter 2017, Shinhan Financial Group's net income is up 29.3% Y-o-Y and by 62.9% Q-o-Q, recording KRW 997.1 billion. Points to note about this quarter's earnings are as follow: first, banking and nonbanking operations both posted balanced growth and recurring profit; second, continued SME growth and margin expansion helped maintain interest income at a solid level; third, our persistent cost control drive led to SG&A reduction; and lastly, a substantial drop in recurring loan-loss provisions reaffirm Shinhan's unique strength in preemptive risk management.

Now let us turn to Page 4 on income in greater detail. As you see in the left column, the group's interest income reached some 1.7 -- KRW 1.87 trillion, up 9% on a Y-o-Y basis. Despite SME loan growth, due to a drop in retail loans, Korean won loan balance in banking operations is down by 0.5%. However, the bank's NIM rose 5 bps Y-o-Y and by 4 bps Q-on-Q, playing a part in boosting the group's interest income.

Now moving on to Page 5. In Q1, the group's noninterest income recorded some KRW 300 billion, down by 9.2% from Q1 last year. The largest contributor to this drop was the disappearance of large nonrecurring profits this quarter like the ones that we enjoyed in Q1 last year such as the KRW 44.3 billion gain on Ssangyong Cement [ step-forward ] transactions. On the other hand, on the back of stronger trust funds and bancassurance product sales, the group's fee income rose 3.5% Y-o-Y, which helped bringing up ordinary noninterest income.

Next regarding the SG&A expenses. In Q1, the group's SG&A was about KRW 1.06 trillion, down by 0.7% Y-o-Y. While the employee-related expenses due to a wage hike, among others, edged up 0.9%, other general SG&A, including A&P expenses, dropped 3.5%. For your reference, the group's cost-income ratio fell to 49.1%, down 3.4 percentage points from a year ago.

Next, the right column shows our credit cost. During Q1, the group's credit cost was written back in the amount of KRW 196.5 billion playing a crucial part in driving up net income. There was a one-off event regarding credit cost this quarter. As of year-end last year, the use of IRB approach related to group's credit risk, including that of Shinhan Card, was approved. In order to have more consistent management of group's provisioning, Shinhan Card began to use the internal rating method in calculating the loan-loss provisions starting this year. For a while, a rather conservative rule rate method has been used to calculate the amount of provision. With the new model applied, Shinhan Card was able to write back loan-loss provisions amounting to KRW 360 billion, which was a one-off.

Even when Shinhan Card's one-off factor is excluded, the group's credit cost amounted to KRW 170 billion, which is more than 40% decrease Y-o-Y and Q-o-Q, and Shinhan Bank's credit cost ratio hugely improved from 33 bps to 12 bps, bringing the group's recurring credit cost ratio down to 20 bp level.

The group's consistent risk management efforts paid off, stabilizing the credit cost at record low level contributing to the group's higher income. In Q1, the non-bank subsidiaries accounted for 48% of the profit, up from 35% last year. By each subsidiary, Shinhan Bank's interest income went up 10%, credit cost went down 73% and before tax earnings went up more than 50%. However, with the corporate tax write-back factor gone, which had taken place in Q1 last year, the bank's net income decreased by 7%.

Shinhan Card's transaction volume increased 7.6% Y-o-Y, increasing operating income. But because of the increase in marketing expenses, pre-provision income remained at a similar level Y-o-Y. Because of the huge write-back of credit cost due to a new internal risk rating system, Shinhan Card's net income for the quarter increased by 170%.

Shinhan Investment, Wealth Management and Capital all showed recovery in sales with their profits increasing 111%, 12% and 621%, respectively, Y-o-Y. Shinhan Life's earnings reduced with the disappearance of last year's one-off regarding corporate tax but before tax income improved 17% due to sales increase and gains from asset management.

Group's asset quality on Page 6. As of Q1, the group's NPL ratio stood at 0.76% and the bank's and the card's delinquency ratios are fairly managed at 0.33% and 1.4%, respectively. The reason why the bank's delinquency ratio went up 5 bps Q-o-Q was because the bank's write-off and sales amounts decreased by KRW 80 billion Y-o-Y and by KRW 240 billion Q-o-Q. The actual delinquency ratio is at a stable level. The group's and bank's BIS ratios in Q1 were estimated at 15% and 15.8%; and Common Equity Tier 1 ratios, 13.2% and 13.1%, respectively, increasing 0.5 percentage point and 0.3 percentage point Q-o-Q. Shinhan Card's adjusted capital ratio is 24.5% showing good capital adequacy.

Please refer to group's and subsidiaries' business earnings and indicators in more details from Page 7 and onward.

With this, I'd like to conclude -- this concludes the earnings presentation of Shinhan Financial Group for Q1 2017. Thank you.

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Unidentified Company Representative [3]

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Thank you very much. And now, we will take questions. (Operator Instructions) For those of you who wish to look at the IR presentation material at your leisure, you can download the material by using the dedicated app onto your phone or your tablet. Please search the apps in your store and download it and make full use of it, and we will be revising the app shortly to make it more convenient for your use. And so we would like to ask for your support and attention. We will stand by as we wait for the questions to come. Please wait a moment.

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Questions and Answers

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Unidentified Company Representative [1]

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Yes, we are ready to take the first question which comes from Mr. Kim Jinsang from HMC Securities.

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Jinsang Kim, HMC Investment Securities Co., Ltd., Research Division - Analyst [2]

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I have 2 questions. First, regarding credit card business. There is provision write-back. And you mentioned the KRW 250 billion previously. Excluding such extraordinary factors, how is the provisioning trend on a quarterly basis quarter-by-quarter? For retail sectors, where there are some witnesses, I believe that there could be an interest rate hike and what will be the impact? And what is your judgment on that aspect from the company's perspective? And secondly, concerning margins, I believe that other institutions have seen improvement as well. But if I see a monthly trend, I believe that it is an upward trend. Is my understanding correct? And what is your outlook for the next quarter and for the remainder of the year? Do you believe that there will be an upward trend? What is your view from your perspective on the part of the company?

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Unidentified Company Representative [3]

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Regarding the first question concerning the cards business's provisioning level and asset quality, I will provide the answers myself. This quarter, there was KRW 360 billion or so amount of provisioning write-back. But excluding the factor, if you look at the credit cost, it was 1.69%, 169 bps. If I -- if you look at the trend from the previous year, it's not that the provisioning is going up. And if you look at the delinquency rate, it's 1.4% which has fairly edged down from the previous quarter. And in the case of the business operations in credit card, one of the most important measures is as the second month, the delinquency roll rate is about 0.33% level that we are maintaining over the past month, so as of today, I do not believe that in our credit operations, asset quality is deteriorating. I don't believe that there is a big possibility of our provisioning level going up in the future. We do not have a concern in that aspect as of today. Regarding the credit cost rate, for the past 5 years, the average rate was 53 bps. And for the bank, it was 37 bps. During the first quarter of this year, of course, there were some extraordinary factors. But on an ordinary -- on a recurring basis, if we project until the end of this year, I believe that our credit cost rate would be much lower than the average rate of past 5 years. Next, moving on to the interest rate margin. As you stated, in June of last year, BOK rate was cut. And ever since, there was a declining trend, but we're able to defend it quite well in the third quarter. And starting from the fourth quarter, it started to go up. And in the first quarter of this year, we're able to achieve growth. If you look at the loan structure of Shinhan Bank, in the past, there was a little bit more balance between the floating-rate versus fixed-rate loans. So interest rate sensitivity, we are trying to push down. And I believe that the NIM is likely to improve given the overall market trends. When it comes to loans, unlike in the past, we are not going to pursue aggressive pricing. That's not what we are trying to do as of today. So we are going to be more reasonable in pricing our loans. And in terms of the margin, that is why we believe that there will be a further improvement at the [ sounder ] level. And globally, the share of net income is approaching 12% level. That is the share of global businesses in our total net income. And I believe that their contribution rate is going to go up to 1.57%. If you consolidate those overseas affiliates subsidiaries, therefore, our global business is going to be a positive factor for our performance going forward. Thank you.

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Unidentified Company Representative [4]

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We are waiting for the next question to come in, so please wait a moment. Yes, we'll take the next question. It's from Macquarie, Mr. Hwang Chan Young.

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Chan Young Hwang, Macquarie Research - Head of Korea Research [5]

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I am Hwang Chan Yung from Macquarie. I have 2 questions. One is on Page 6, Tier 1 capital, it increased significantly. But BIS did not go up. As for Tier 2 capital, I guess there was a bit of a decrease. So could you explain that more? And SFG has been making efforts to reduce the cost. And going forward, what are your additional plans to reduce the cost even further, or how will the past implementations affect your cost going forward?

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Unidentified Company Representative [6]

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Thank you. As for the capital adequacy, as of last year, provisions went into common equity and the -- so there was a trend of Tier 2 going down -- going up. And as for Tier 2, so there was -- it went down relatively. But as for the bank, we expanded the global business. So for twice, the Tier 2 mezzanine bonds have been converted to U.S. dollars. Subordinate bonds have been converted to the U.S. dollar. And as for the cost-income ratio, we do not have a lot of people signing up for ERP. We have a steady trend of people signing up for ERP. So looking at the ordinary business and looking at the organizational structure and stability, I don't think it's desirable to have too many people sign up for ERP. So I think that's a good sign. And the bank is carrying a hub-and-spoke type of channel community. And so the branches, the resource allocation can be made in a flexible manner. So the bank is going to benefit from a better cost-income ratio from such community structure. And as for the nonbanks, there is the digital transformation. And if this goes well, I think the non-bank subsidiaries will be able to reduce the SG&A further.

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Unidentified Company Representative [7]

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And I would like to add to that. Within our financial group, for 3 years now, we have been taking up the agenda of strategic cost reduction. And as you're pretty well aware, in Korea, well, looking at the unique labor market of Korea, it's very difficult to cut cost dramatically. But we have taken this up as a strategic agenda for 3 years, and we are maintaining this effort steadily. So every year, the CI ratio, not dramatically, but steadily, is being improved. And in this quarter, we have been able to reduce the SG&A in absolute figures. And I believe that going forward, as was mentioned by Mr. Jang Dong-ki, we will take every measure possible to steadily reduce the cost, if not dramatically, at once. And if our efforts pay off, the CI ratio will be steadily improved. Thank you.

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Unidentified Company Representative [8]

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We are ready to take the third question from Mr. Chong from Templeton.

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Will Chong, [9]

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My name is Chong, Will from Templeton. I would like to ask a question regarding your strategy. As you're well aware, the history of Korea's financial industry is the history of M&As. And you also did a lot of M&As in the past. But recently, there has been no major M&A deal that you closed. And in the past several years, I am sure that you must have accumulated a lot of capital, cash on hand. And I wonder whether in the future, if you plan to pursue such opportunities?

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Woo Young-woong, [10]

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Before I provide my answer, let me introduce myself. From this March, I was appointed to the VP of the group in charge of strategy. My name is Woo Young-woong. Now, after we acquired LG Card, the Shinhan Financial Group has not closed any major M&A deal. We acquired CHB, Chohung Bank and then LG Card. And we had to make repayment of -- for the convertible stocks that were incurred. With the new CEO appointed for the group, our strategic continuity or consistency will be maintained. But when it comes to growth strategy, I believe that we'll be adding more speed and the approach to growth and market will be slightly adjusted. Based on our accumulated capabilities, we will attempt to pursue inorganic growth opportunities, especially such opportunities that exist in the global market. Thank you.

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Unidentified Company Representative [11]

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Yes, we'll take the next question. It's from Dongbu Securities, Mr. Lee Byung Gun.

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Byung Gun Lee, Dongbu Securities Co., Ltd., Research Division - Team Leader [12]

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I am Lee Byung Gun from Dongbu Securities. Two questions. I want to ask a follow-up question to the question that was previously asked. Shinhan is restructuring itself, and it has not been [ hurt ] by any event and you have been managing well. But looking at the past history, for about 4 to 5 years or 3 to 4 years, when the personnel reach a certain age in 1 or 2 years' time, I think there is a possibility of a change in the cost structure. So how well do you communicate this internally? And do you present -- so you must be presenting some target figures. And so the CI ratio, the SG&A, if you could provide us with the guidance, I think it would help us in coming up with a forecast. And I have another question about Shinhan Life. Relatively speaking, Shinhan Life is a very good company and has considerable size. And IFRS 9 will be applied starting next year. And the industry confirms that the company's RBC, for example, it seems that the response from the insurance companies are differing from others. RBC regulations will be reinforced and they're reducing longer-term bonds. And it seems that the non-bank subsidiaries are lagging behind and Shinhan Life is no exception. So from the overall risk management of the SFG, what are your plans for asset management of Shinhan Life? And what is the capital ratio for Shinhan Life going forward?

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Unidentified Company Representative [13]

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Thank you for the questions. I'd like to explain the CI ratio in more detail. Looking at the group's history, on a yearly basis, it's at the 50% level. And as in charge of finance, my target for the CI ratio is in the midterm, I want to bring it down to 40% level. And looking at the past history, it used to be 56.4%, and it's down to 50. -- 52.2%, and now we even have a better figure. And as for the remainder of the year, we will have to make efforts to maintain a good CI ratio. So our target is less than 50% level. And as for the other companies, well, I don't think it's really an apple-to-apple comparison. We have been able to convert the cost structure to a low-cost system, and we have been managing this steadily. And so we have the experience and the know-how, and the group has been making strategic decisions to cut down cost. And so with that, we will work steadily to meet our CI ratio target. And moving on to Shinhan Life, the insurance market in Korea is up against many challenges going forward. As for Shinhan Life, in Q4 last year, because of the interest rate hike, there was a lot of concern regarding RBC. But as for Shinhan Life, there were -- there was a balance of loans held to maturity and others, so we were able to tide over the challenges in Q4. And Shinhan Life did not really pursue market share or size, but was very diligent in making its business more sound, so it was able to overcome the challenge in Q4. But going forward, the interest rate going up will be a good sign for the industry. But as for the large insurance companies, they could suffer from the regulations of lowering the discount rate, and it could be -- there could be some market changers. But from the group's perspective, Shinhan Life does not have a large asset portfolio. So that, ironically, is good news. Before we -- IFRS 17 is adopted, we will continue with the management of the insurance company to make the business more sound. And if we keep at it, I believe that we could come across a good opportunity to grow our insurance business further. Thank you.

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Unidentified Company Representative [14]

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Yes, so we'll stand by for the next question. Yes, next question comes from Mr. [ Jeong-Hyun ] from Hanwha Securities.

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Unidentified Analyst [15]

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My name is [ Jeong-Hyun ] from Hanwha Securities. There was a question earlier about your strategy and I do have a follow-up. Actually, I have 2 questions in that regard. First, concerning Internet-only banks. Usually, of the financial holding companies, the Shinhan Financial Group has been moving the fastest in responding to these types of changes. So what is your view on Internet banks, and what is your response to the emergence of these Internet banks? Can you share your thoughts on this? Secondly, concerning your growth strategy. If you look at the overall banking industry after establishing a holding company and you have been working to strengthen nonbanking business, and instead of insurance and others, the focus has been placed more on moneylending businesses. The growth of that business, I believe, seems to be rather stagnant. And if we look at banking, there has been a focus on SOHO business. But recently, there is a lesser focus on that business. Just looking at the Korean market, where do you expect to find future growth engines?

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Unidentified Company Representative [16]

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Thank you for your questions. Concerning Internet-only banks, it's just been about 3 weeks since the start of their operation. And we are keeping a close eye ourselves. Every day, we are watching the flow of our customers' money in and out. So far, according to our understanding, initially, customers, out of strong curiosity, showed a great level of interest in Internet banks by opening up accounts there. And every day, the money in the amount of KRW 1 billion or so was -- has been moving. However, in the third week, actually, we are gaining more money than losing the money. So at this point, it's extremely difficult for us to make any judgment call. So far, about 30,000 Shinhan customers have opened accounts with this Internet bank. It doesn't mean that they have left us because they are still maintaining their relationship with us. And about KRW 9 billion of money is estimated to have moved to the Internet bank. In terms of the service level, at this point, if you look at the types of services that are available from the Internet bank, there are not so many, so it's difficult for us to judge. Our plan is to keep a close eye on alternative products that they can offer. Concerning more strategic response, of course, we have been responding to these types of moves in the past month and years. But regarding a more fine-tuned strategic response, I believe that we need to wait and see a little more before making any final decisions. And next, regarding the future growth engines. As you must be well aware, we are living in an environment that's characterized by low interest rates, low growth and so forth. So our new CEO of the group is spending a lot of time thinking about the future growth engines. I believe that there are 3 main pillars. First, is as follows. In the case of banking and credit card business, we have -- we are an unrivaled #1 player in the market. But when it comes to the capital market, Shinhan's competitiveness is not at the highest level yet. And because we are living in a low-interest rate environment, I believe that there will be more opportunities in the capital market, which is the reason that we are thinking of growing and enhancing our capabilities in that sector. Secondly, concerning the management of our own money, our proprietary assets, we plan to boost the return on the management of our prop assets. And at the same time, there was explanation regarding the inorganic growth opportunities. We plan to look for those opportunities in the global market. As was mentioned before, the global businesses, our income share is about 12%. But through inorganic growth in global markets, our plan is to drastically increase the global businesses' income contribution rate. Thank you.

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Unidentified Company Representative [17]

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Thank you. It seems that there are no further questions. With this, we would like to conclude the first quarter earnings presentation of Shinhan Financial Group for the year. Once again, thank you for your participation.