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Edited Transcript of 055550.KS earnings conference call or presentation 5-Feb-20 7:00am GMT

Q4 2019 Shinhan Financial Group Co Ltd Earnings Call

Seoul Feb 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Shinhan Financial Group Co Ltd earnings conference call or presentation Wednesday, February 5, 2020 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Cheol Woo Park

Shinhan Financial Group Co., Ltd. - Deputy Head of IR

* Sunghun Yu

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

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Conference Call Participants

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* Byung Gun Lee

DB Financial Investment Co., Ltd., Research Division - Team Leader

* Jin-Sang Kim

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

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Presentation

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Cheol Woo Park, Shinhan Financial Group Co., Ltd. - Deputy Head of IR [1]

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Greetings, everyone. I am Park Cheol Woo, Head of IR. I would like to thank all the participants in our business results presentation and begin the 2019 Q4 earnings release. We have here with us our CFO, Yu Sunghun; CSO, Park Sunghun (sic) [Woo Hyuk]; and Kim Tae-yeon , Head of Finance. We will first start the 2019 business results presentation by our CFO, Yu Sunghun, and then have a Q&A session.

I would like to invite our CFO, Yu Sunghun, to deliver the 2019 business results presentation.

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Sunghun Yu, Shinhan Financial Group Co., Ltd. - Deputy President & CFO [2]

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Greetings. I am CFO, Yu Sunghung, heading the group finance from this year. First, I would like to thank all the shareholders, investors, analysts, and journalists in and out of Korea for participating in our 2019 business results presentation. I would like to walk you through the major highlights of Shinhan Financial Group's 2019 business results.

Please look at Page 3 of our material, and I would like to cover the major highlights. Shinhan Financial Group's 2019 net income posted KRW 3,403.5 billion and grew 7.8% Y-o-Y. Excluding the Q4 one-off items, the normal life net income posted around KRW 3.46 trillion. The 2020 SMART Project strategy, which was implemented consistently for the last 3 years, led to fruition and led to the record high full year earnings. On the other hand, Q4 quarterly net income posted KRW 507.5 billion, a 1.1% drop Y-o-Y. This is due to the one-off items, including the main depository bank for city government intangible asset-related expenses and slightly increased Y-o-Y.

I would like to summarize the 5 major highlights of the 2019 earnings. First, the bank and nonbank net income all had balanced growth compared to the previous year, and the growth trend has been continuing for 6 consecutive years from 2014. In particular, through the strengthening of nonbank and global business, Shinhan's differentiated and stable earnings generation base was confirmed once again. As a result of focusing on strengthening our profitability for a long time, the group's global net income grew 23.3% Y-o-Y and posted KRW 397.9 billion. Along with the solid global growth of the bank, Shinhan Vietnam, a consumer financial company, was launched, and with this opportunity, the group's overseas income contribution grew to around 12%, accelerating our strategy to localize our nonbanking business. Also in the case of nonbanking business, based on our One Shinhan advancement strategy, it recorded KRW 1,211.2 billion, a 15.3% increase Y-o-Y and expanded the income contribution to 34%.

Second, in the case of the group's interest income, the group saw solid asset growth based on balanced loan portfolio, it grew 4.8% Y-o-Y. In particular, loans in 1 asset through the sales drive continuing from the beginning of the year grew 7.4% Y-o-Y, centering on SMEs and SOHO. On the other hand, group and bank NIM was influenced by the market interest rate drop, which continued from last year and declined by 10 bp and 8 bp, respectively. But with the gradual stabilization of the market interest rates, the range of margin's fall is being stabilized. The group's noninterest income, along with our successful major structure in place and through organizational efficiency, improvement and portfolio diversification, grew 33.3% Y-o-Y. And contribution also expanded to 28.3%, which is the third point. In addition, Orange Life and as Asia Trust were successfully merged, and our insurance and real estate earnings base became expanded. Going forward, we will create a sustainable, successful model through linking and expanding between our channels and group subsidiaries. Fourth, to manage human resources based on group's productivity-centered organization and channels, Shinhan Financial Group has been continuously implementing ERP each year. In Q4 of last year, there were 335 employees who received the ERP packages from the bank part and investment, and around KRW 120 billion one-off expenses were recognized through our high-cost structure improvement efforts. Cost efficiency and profitability going forward will be additionally improved. And within the group, a organizational structure and system which can immediately respond to the market environment changes caused by digitalization will firmly be established.

The group's CI ratio posted 46.1%, the lowest level in the industry, through increasing stable operational profit, work process improvement, including digital customer bases expansion and cost management. Thus, cost efficiency and profitability improvement has been continued for 2 consecutive years. Lastly, despite the asset quality deterioration concerns following the economic slowdown, which has been heightened from the previous year on the back of appropriate group strategy and preemptive provisioning policy taking risk into consideration, led to the group loan loss ratio and NPL ratio, posting 30 bp and 152%, respectively, continuing systematic risk management.

Looking at the graph on the left, the group's interest income is explained in more detail. Looking at the graph on the left, the group's interest income posted around KRW 8 trillion, a 4.8% growth Y-o-Y. Bank loans and bond through balanced growth between household and corporate grew 2.0% in Q4 and 7.4% Y-o-Y, and with the expansion of selected asset expansion, centering on prime SME is maintaining a solid growth rate. Bank's net interest with the October base rate cut and debt relief conversion zone posted 1.46%, a 7 bp drop Q-o-Q. On the other hand, the bank consolidated NIM, including overseas branches, posted 1.52%, still recording high profitability compared to the domestic situation and led to the overseas interest income growth. We will do our best so that solid interest income flow can continue through ALM management, taking profitability into consideration.

Now on to Page 5. The group's noninterest income rose 33.3% Y-o-Y to KRW 3,151.7 billion, showing growth in all of fee income as well as securities and insurance-related income. Despite the lowered merchant fees and decreased trading value on the stock market, the group's fee income grew 10.5% Y-o-Y due to an increase in investment finance and lease assets. In the securities-related category, due to an increased gain from IB investment and bonds, there was a Y-o-Y increase of 29.7%, driving the group's growth momentum in the noninterest income. As for this year's insurance-related income with the acquisition of Orange Life's remaining stake completed, we are expecting additional growth.

Moving on to SG&A. The group's SG&A increased 8.3% Y-o-Y, driven by an increase in salary and employee benefits with Orange Life and Asia Trust coming onboard. But if we exclude that factor, the annual SG&A growth rate is around 3.4%. Going forward, we'll be actively managing the cost through efficient channel strategies and digital process improvement. The group's and the bank's CI ratios are 46.1% and 46.5%, respectively, each showing an improvement of 1.4 percentage point and 0.8 percentage point Y-o-Y, which is a great achievement. This is the lowest CI ratio recorded in history.

And now the group's credit cost. The group's credit cost ratio was 30 bp, 9 bps improvement over the last 5 years average, but an increase of 4 bps Y-o-Y. This is because of the steady growth in the bank's loans and 1 card loans, installments and lease assets. It is also due to our preemptive provisioning in light of market uncertainties at home and abroad. Going forward, in order to minimize risk volatility, we'll continue our efforts for credit risk management and asset rebalancing.

Page 6, group's asset quality. As of December end last year, the group's NPL ratio had improved 0.01 percentage point Y-o-Y, recording a historical low of 0.52%. This was possible because the qualitative growth strategy focusing on sound assets continued.

Shinhan Bank's delinquency ratio went up by 1 bp Y-o-Y to 0.26% but is being maintained at a stable level, considering their steady asset growth.

As for Shinhan Card, the delinquency ratios of card loans and cash advance have stabilized since the second half of last year. And the card's delinquency ratio was a record low of 1.26%. As of year-end, the group's and the bank's BIS ratios were estimated to be 14% and 16%, respectively; and the CET1 ratios, 11.2% and 13.4% each. The group's CET1 ratio had gone down by 1.4 percentage point due to the acquisition of Orange Life, Asia Trust and treasury buyback. However, starting from this year, CET1 ratio will steadily recover based on stable earnings power without any further dips.

Orange Life, now being a fully owned subsidiary, the group's BIS ratio will be affected to a minimum as the treasury stocks has been disposed of and new shares have been issued.

The BOD had proposed a dividend for 2019 of KRW 18.50 per share, and if it is passed at the Annual General Meeting, we could expect the dividend payout ratio of 25% and dividend yield of 4.1%. There have been consistent efforts made to enhance shareholder value by implementing various capital policies such as M&A and treasury policies. We will continue to enhance shareholder value further through flexible and proactive capital policies.

Now lastly, on Page 7, I'd like to share with you what has been achieved so far regarding the 2020 SMART Project. First, in terms of the group's balanced growth strategy, the 2020 strategic platform bore fruit. In so doing, there was harmonized growth improvement between bank and nonbank, driving sound growth momentum. Compared to the previous year, the bank's net income increased by 2% and the nonbanks by 15%, accelerating the earnings growth pace.

Interest income, noninterest income also grew by 5% and 33% each. With the acquisition of Orange Life's remaining equities, the earnings base of nonbank and noninterest income will continue to expand further.

Second, the global business achieved the highest income quarter-after-quarter, accounting for 12% of income contribution. We're continuing to see stable results in the core Asian markets. In addition, global card and investment corp. are accelerating their globalization strategies in Vietnam and Hong Kong, and the 2019 net income increased by KRW 24.4 billion Y-o-Y. Going forward, we will continue to create differentiated results from the nonbank side.

Lastly, concerning the upgrade to Digital Shinhan. During 2019, the group expanded into new businesses such as innovative financial services and created a digital ecosystem through alliance with many ICT companies. Digital's contribution to income steadily increased, marking KRW 1,380 billion, up KRW 184.1 billion Y-o-Y. Going forward, we'll respond proactively to the changes brought on by the Fourth Industrial Revolution such as open banking and revision of Personal Information Protection Act and other acts. We'll focus on building Shinhan's unique innovation ecosystem to secure our new growth engine. This year, we'll be completing the 2020 SMART Project successfully, and we will produce more visible results to get us closer to a world-class Shinhan.

Please refer to the remaining slides for detailed information on key financial indices of the group and the subsidiaries. Thank you very much.

And now we'll be taking your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And for your reference, the IR material can be accessed through IR-dedicated apps either on your tablet, PCs or smartphones. Android app users, please search Shinhan Financial Group IR or SFGIR, and you may download the IR app. And Apple iOS users, please enter in m.shinhangroup.co.kr and you may download the IR app. Please make use of these apps. (Operator Instructions) We'll take the first question from DB Securities. We have team leader, Lee Byung Gun, on the line.

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Byung Gun Lee, DB Financial Investment Co., Ltd., Research Division - Team Leader [2]

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I'm from DB Securities. My name Byung Gun Lee. In a difficult environment, thank you for showing good earnings. I would like to ask you 2 questions. The first question is regarding the previous year. And on the 14th of November, you retired your shares -- treasury shares. And actually, you mentioned plans to retire them. And regarding the acquisition of Orange Life, there was 100% completion into a subsidiary. So can you tell us about your future schedule for retirement of treasury shares? And there is bound to be some ratio changes. And can you tell us about the consolidated amount of the treasury shares because there will be an influence? And regarding the retirement of treasury shares or cancellation of them, can you tell us about how it will impact your CET1 ratio so that it will be pulled up?

Second question is related to NIM, N-I-M. To our knowledge, in Q4, well, it seems that there were not many executions, and it seems that there was not a big influence. But in the case of the conversion loans for that relief, and there are plans to actually securitize them in February and March by a housing fund. So can you tell us about what type of impact you will receive? It seems that the impact hasn't been reflected yet. And there is a possibility that the BOK can actually cut the base rate. If we take into consideration whether the BOK raises or remains the current interest rate, can you tell us about how you will be impacted? And how you will respond to -- if the rates are cut or not?

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Unidentified Company Representative, [3]

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Regarding the treasury shares, I would like to answer them. On the 28th of January, there was a treasury swap, and we are planning to relist them. And according to the capital market law, regarding the treasury shares that we own, we had the shares swapped with those shares. So that it means that we retire or cancel the shares that Shinhan has, and we need to have at least 3 months that taxes. After that, we'll also acquire new treasury shares. This means that January 28, will be 3 months. So it means that from April 28, we can acquire additional treasury stock. This means that the amount of retirement of the treasury shares will be discussed at our BOD, so that within 3 months' time, we plan to have some of the cancellations or retirements.

Regarding the consolidated CET1 Orange Life influence, the acquisition of the 40% shares that is remaining, well, there is the treasury shares that we have, and we had the new type of capital of -- rights offering that was the method. So there is no visible impact to the capital adequacy rate -- capital rate.

So regarding the sale of treasury shares, it means that our shareholders' equity has increased accordingly, so it means that there will be no CET1 changes even if it becomes fully incorporated -- fully owned company. And in the -- in Q3 of the previous year, during the earnings release, there was a question, and we mentioned that on a recurring basis, Q3 would be the lowest level. It means that in Q4, the shareholder -- the rate fell because -- KRW 850 billion fell because of dividends. So it was just a temporary happening. So on an annual basis, for the CET1 basis, 30 to 40 bps is expected to grow annually. I believe that I have covered the treasury share question with this answer.

And regarding the BOK rate cut possibility, in our financial plan, we also have assumed that there will be additional 25 bp cuts, and if 25 bp is cut, then we believe that in our financial plan, we will have 3 bp NIM drop.

In addition, in the case of debt relief conversion loan, I would like to elaborate. Until Q4 of 2019, KRW 1.2 trillion was dealt with by us, handled by us. And we have KRW 3.7 trillion that is with us. And we have KRW 2.5 trillion that hasn't been transferred and is remaining, and we will have execution in Q1 or Q2 that will be transferred. And we believe that the margin impact is minimal, and about 4 bps is what we are expecting. And regarding the conversion of the debt relief conversion loans, we believe that we can have more growth because Jeonse-related loans or other loans have higher profitability -- possibilities. So we will actually have growth based on further market demand. So it was actually 0.47 bp.

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Operator [4]

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Next question will be from Mr. Kim Jin-Sang from Hyundai Motor Securities.

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Jin-Sang Kim, HMC Investment Securities Co., Ltd., Research Division - Analyst [5]

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I have 2 questions. In Q4, there was the impairment loss on the main depository banks for city government and ERP. And considering those KRW 150 billion and KRW 120 billion in investment corp. Recurring income considered, of course, there is the seasonal factor in Q4, but it seems that the numbers are lower. And what are some of the one-offs that we need to take note of? What about line and exposure to other schemes? So because of the risky assets, are there more provisionings? Or any more possibilities of provisioning against such risky assets? And will that impact the fee income? And have you had a chance to look into these matters?

And my second question is about the CI ratio. It is maintained at a very low level. So this year, next year, in the mid-term, is the 46 a defendable number? And to keep that CI ratio, what are your efforts going to be? And how much do you think the SG&A will increase this year?

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Unidentified Company Representative, [6]

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Thank you for the questions. What were the Q4 one-offs? Even if we consider the one-offs, on a recurring basis, the numbers seem to be low. That was the question. So other than the one-offs on a recurring basis, we had KRW 100 billion one-off loan conversion and KRW 150 billion of main depository bank for city government's amortization. And other than that, there was the disposition of assets, that's a one-off and a write-back. So on a recurring basis, the recurring income was about KRW 690 billion. So our quarter is not unusually low compared to the other quarters.

We did not categorize this as a one-off, but you did mention Line. And Shinhan Corp. had provisioned KRW 56 billion against Line. And this is related to the valuation amount of the securities, and we didn't consider it as a one-off. As for the exposure that we have against Line, I'm sure you saw it in the media, there is due diligence by the accounting companies, from LPWC. But we wanted to be more conservative. We wanted to be on the conservative side. So we had provisioned preemptively a high amount of KRW 56.6 billion. That was the maximum provision that we could set aside. So we don't know if t here's going to be additional provisioning or if there's going to be write-back, but we were on that preemptive and conservative side. And so yes, that is the situation with the provisioning.

I'd like to now handle the question about the fee income and how sustainable the CI ratio is. We have our financial plan. And it says that this year's CI ratio will be in the mid-40 range. And in the noninterest income, 5% will be the contribution level, and there will be cost-cutting efforts through digitalization. So we want to achieve and maintain the CI ratio of mid-40 this year.

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Operator [7]

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We don't have any questions on queue. (Operator Instructions) The next question from KB Investment Securities, we have Kim [Doo-Ha] on the line.

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Unidentified Analyst, [8]

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And regarding your plan for 2020, I believe that you have a business plan, bank cards, life insurance and securities. Can you tell us about your annual income target -- earnings target? And can you tell us about the assumption you had to make this scenario?

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Unidentified Company Representative, [9]

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For 2020, regarding our finance or business plan, I would like to answer your question. As you are well aware, uncertainty is expected to grow this year. And we have very conservative plans for asset growth. In the case of that bank, the loans in Won growth, we expect to be about 3%. However, in the case of card, there is lease financing. So we believe that there will be more than 6% of asset growth centering on lease financing. In the case of interest income because we expect interest rate to go down, and we will try to safeguard the NIM, but we believe there will be downward pressure. However, for nonbanking subsidiary income -- interest income, we believe that it will be expanded. And for noninterest business, we believe that this year, we will have 5% growth. As I mentioned before, for SG&A, the CI ratio, we believe, to be around the mid-40% level.

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Operator [10]

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(Operator Instructions) We seem to have no further questions. We will conclude Shinhan Financial Group's 2019 Earnings Release. Thank you for participating in the earnings call despite your busy schedule. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]