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Edited Transcript of 086790.KS earnings conference call or presentation 4-Feb-20 7:00am GMT

Q4 2019 Hana Financial Group Inc Earnings Call

Seoul Feb 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Hana Financial Group Inc earnings conference call or presentation Tuesday, February 4, 2020 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Junghoon Lee

Hana Financial Group Inc. - Head of IR Team

* Seung-Iyul Lee

Hana Financial Group Inc. - CFO & Deputy President

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Conference Call Participants

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* Byung Gun Lee

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

* Do Ha Kim

Cape Investment & Securities Co., Ltd., Research Division - Analyst

* Doosan Baek

Korea Investment & Securities Co., Ltd., Research Division - Research Analyst

* Jihyun Cho

JP Morgan Chase & Co, Research Division - Research Analyst

* Jin-Sang Kim

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

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Presentation

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Junghoon Lee, Hana Financial Group Inc. - Head of IR Team [1]

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Greetings to all participants in the Hana Financial Group business results presentation.

I am Lee Junghoon, the Head of IR at Hana Financial Group. I would like to express my deepest gratitude to all shareholders, analysts and other market participants who are joining us via phone and the Internet despite your busy schedules.

We're now going to begin the 2019 business results presentation. I would like to introduce our group executives who are here with us today. First, from Hana Financial Group, Group CEO and Deputy President Lee Seung-Iyul is here with us. And we also have with us Hwang Hyo-Sang, who is our CRO and Deputy President. Next, from Hana Bank, we have Senior Executive VP of Planning and Management Group [Lee Hoo-seung]. From Hana Financial Investment, Deputy President of Management Planning Group [Lee Sang-hoon] is here with us. Last but not least, from Hana Card, we have Management Strategy Division Head [Kim Tae Hung]. We will first hear from our CFO and Deputy President, Lee Seung-Iyul, regarding the business results presentation; and then have a Q&A session via phone.

I would like to invite our CFO, Deputy President, Lee Seung-Iyul, who will walk us through the Hana Financial Group 2019 annual business results.

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Seung-Iyul Lee, Hana Financial Group Inc. - CFO & Deputy President [2]

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Greetings. I am Lee Seung-Iyul, CFO and Deputy President of Hana Financial Group. I would like to cover the 2019 annual group business results presentation.

First, the major business highlights of the group. Please refer to Page 3 of the material.

Hana Financial Group's 2019 annualized net income grew 7.8% Y-o-Y, posting KRW 2.4084 trillion. Last year, with the continued trade conflict between the U.S. and China, due to concerns about domestic economic downturn, the base rate was cut twice, with sizable one-off expenses including nonmonetary FX losses and ERP expenses. On the back of $1 FX rate increase and ERP costs, domestic and global business environment uncertainty heightened. However, along with the core earnings growth, normalized credit costs and SG&A expenses were managed stably and the group fundamentals improved. The aforementioned one-off expenses were offset by the one-off gains, including gains from sale of the Myeong-dong building. And we were able to achieve the performance target that was established early this year.

In 2020, with the worsening global economic circumstances, difficult economic environment is expected to continue with trade slowdown and expansion of financial market volatility. However, we will do our best to post performance that meets the market expectations by strengthening normalized earnings generation capability.

For your reference. Group's Q4 net income posted KRW 367.2 billion and dropped Q-o-Q following the recognition of various one-off items. However, the normalized quarterly income maintained a solid level of KRW 500 billion, similar to the same period in the previous year.

I would like to go through the major highlights of the 2019 annualized business results presentation. First, as aforementioned, the group's core earnings grew Y-o-Y. The 2 domestic base rate cuts led to a NIM decline, but on the back of solid growth of loan assets, the group's interest income was able to grow Y-o-Y. Fee income also grew Y-o-Y, centering on the M&A and advisory fees and loan and FX-related fees and posted a solid growth rate Y-o-Y. Accordingly, the group's annualized core earnings reached KRW 8.0302 trillion, a record-high level since the holdings group was established, like the high net income which was record high as well.

Moreover, as a result of the continued group-wide active efforts to improve asset quality despite the unfriendly external environment, including the decline of the local and global economic growth rate, the 2019-end group credit cost ratio posted 18 bp, a similar level Y-o-Y. This was caused mainly by the stable management of normalized loan loss provisions as well as the write-back of one-off provisioning related to some large corporate loans. Even excluding these one-off write-back items, the annualized cumulative credit cost ratio posted around 21 bp, a stable level compared to the business plan.

On the other hand, the 2019 group SG&A posted KRW 4.1744 trillion, a 5.8% increase Y-o-Y. The cumulative SG&A until Q3 was managed soundly below KRW 3 trillion, but around KRW 151 billion of expenses was additionally recognized in Q4 due to factors including preemptive salary peak ERP and exceeded KRW 4 trillion which was our annual performance target. However, excluding this expense, the group's annualized SG&A posted around KRW 4.020 trillion and posted a similar level to the annual target even reflecting the KRW 126 billion of salary peak ERP expenses which took place in Q1 of 2019. Normalized SG&A expenses was managed efficiently, thanks to group-wide cost-cutting efforts.

Looking at the bottom left of the page. The group's ROE and ROA at the end of 2019 posted 8.78% and 0.60%, respectively. The group's C/I ratio is slightly exceeding to -- 50% but has improved Y-o-Y and has achieved 4 consecutive years of decline. Excluding the additional salary peak ERP expenses in Q4, the C/I ratio posted 48.9%, which met the goal set forth early in the year, showing improved cost efficiency.

Please refer to Page 4. The group comprised of Hana Bank and Hana Card, in 2019 Q4, NIM posted 1.68%, a 4 bp drop Q-o-Q. Hana Bank's NIM posted 1.41%. And with the impact of the sudden market interest rate drop, which continued until Q4, the loan deposit pricing weakened and dropped 6 bp Q-o-Q. On the other hand, in the case of credit card NIM, on the back of increased credit card transactions, there was a recovery Q-o-Q and partially offset the bank's NIM drop. With the market interest rate slightly rebounding in Q4, downward pressure on NIM slightly lessened. However, since there is additional anticipation for BOK rate -- base rate cut to stimulate the Korean economy, we will continue our efforts to improve our profitability-centric portfolio.

The group's Q4 interest income slightly decreased Q-o-Q with the bank NIM decline but grew 2.4% on annualized cumulative level.

On the other hand, the Q4 fee income, with the sharp increase in M&A advisory fees and increase of credit card transactions leading to credit card fee income improvement, rose 9.6% Q-o-Q and grew 1.5% on an annualized cumulative level. In particular, taking into account the base effects from last year, when around KRW 66 billion of variable pension initiation fee line item changed from other income to other fee income, the normalized fee income increased around 4.6% Y-o-Y.

On the right side of the material. Bank's loans in won, with the balanced growth of household and corporate loans, continued and posted KRW 218.4 trillion, a 1.8% growth Q-o-Q; and 7.8% Y-o-Y growth.

Next, let's go to Page 5. The group's NPL ratio at the end of 2019 posted 0.48% and dropped 11 bps Y-o-Y. In addition, the delinquency rate posted 7% -- actually 0 -- actually was a 7 bp drop, and there was 0.30%. And on the back of the group-wide risk management efforts, the overall group's asset quality indicators' stable downward trend continued. Cumulative credit cost ratio rose 0.18% Y-o-Y, a 1 bp increase Y-o-Y. Despite the preemptive additional recognition of loan loss provisioning in Q4, including provisioning to adjust the risk component, as aforementioned, on the back of stable management of normalized provisioning and some large corporate loan provisioning write-backs, the annualized cumulative credit cost ratio was maintained at a sound level. Since there are possibilities of trade environment worsening with the local and global uncertainties in 2020, we will continue to strengthen asset quality management.

The group CET1 ratio as of end 2018 (sic) [2019] is expected to post 11.95%, a 24 bp decline Q-o-Q. A major reason was the decrease of the CET1 capital with the year-end dividend. And other than this, in Q4 there were various one-off expenses recognized, including salary peak ERP. With the bank subsidiary overseas capital investment equity, fair value evaluation (sic) [valuation] and RWA increase following the asset growth, the capital ratio decreased Q-o-Q. However, taking into account the preemptive expense execution which has been completed in 2019, we expect normalized quarterly earnings to be posted this year and that the overall capital ratio will gradually recover.

Next, I would like to explain in more detail about the group's business results. Please refer to the group's consolidated earnings statement on Page 7.

Interest income among the general operating income in 2019 posted KRW 5.7737 trillion. Despite the decline of the NIM, it grew 2.4% Y-o-Y on the back of solid loan assets. Fee income also posted a solid growth rate Y-o-Y and posted an annualized KRW 2.2565 trillion. The group's IB competitiveness strengthened. And with the efforts to improve positive cyclical cooperation between subsidiaries bearing fruit, M&A advisory fees increased 48.4% Y-o-Y, and loan and FX-related fees grew 10.2% Y-o-Y and maintained a continuous growth trend.

In the case of credit card fees, on an yearly basis there was a slight drop Y-o-Y due to the merchant fee rate decline, but on the back of seasonal credit card transaction increase in Q4, there was a 9.4% increase Q-o-Q, and a partial improvement of earnings took place.

Next, the group's disposal and valuation gains in 2019 posted a sharp increase of 110.8% Y-o-Y and posted KRW 796.4 billion. Due to the $1 FX rate increase, around KRW 76 billion of nonmonetary FX losses took place. However, this was mainly due to around KRW 228 billion of one-off derivative gain recognition caused by factors including the stock price increase of the company that we invested in after signing the Vietnam equity investment contract. Excluding the aforementioned one-off gains, the annualized disposition and valuation gains has reached the level of around 50% increase Y-o-Y. It posted a growth trend on the back of the group's overall improvement of the group's securities management performance and valuation gains following the market interest rate drop.

Lastly, the group's annualized SG&A posted KRW 4.1744 trillion and grew 5.8% Y-o-Y. As aforementioned, the normalized expenses were efficiently managed within the business plan scope, but with the greatly sizable additional execution of salary peak ERP expenses in Q4 following the Q1 execution, the nominal-based SG&A slightly exceeded KRW 4 trillion. However, with the preemptive execution of sizable salary peak ERP, we expect salary expenses to go down. And accordingly, we project 2020 annualized SG&A-related expenses to slightly decrease compared to expectations.

Before I discuss the net income of subsidiaries, I would like to briefly explain about the group's one-offs in Q4. Other than the salary peak ERP and gains from BIDV investments that I just mentioned, there were additional expenses that had been executed to hedge against the uncertain business environment in 2020 and onward. First of all, after revaluation of the book value of Hana Bank's investments in CMIG leasing, we recognized an impairment loss of KRW 136 billion. We also set aside provisions of approximately KRW 35 billion against the company's loans. We had preemptively recognized the expense upfront regardless of whether it's mother company, CMIG, will normalize or not, thereby limiting the possibilities of additional costs incurring regarding CMIG leasing.

At the same time, we have set aside reserves for the DLF compensation up to KRW 160 billion. Amidst a highly volatile financial market, we have set aside the reserve conservatively, factoring in the possibility that the value of the underlying assets may fall further before maturity. Going forward, we expect to relieve the uncertainties by completing the payment of compensation with the reserve we have set aside.

And now on Page 8, net income of subsidiaries.

The group's major subsidiary, Hana Bank, recorded a net income of KRW 2.1565 trillion in 2019, up 3.4% Y-o-Y. One-off gains such as disposal gain of the Myeong-dong building and gains from BIDV investment were offset by the preemptive expenses such as salary peak ERP and reserves for DLF compensation. Still, the largest income in the history of the merged bank was possible on the back of increased core earnings and stable provisioning management.

Hana Financial Investment's net income for the year increased 84.3% Y-o-Y to KRW 280.3 billion. The 2018 capital increase helped boost the recurring fundamentals of the subsidiary. And we are seeing visible improvement in the overall performance, such as the M&A advisory fee increase of 55% Y-o-Y. As a result, the nonbank subsidiaries' contribution to the group's earnings increased from last year's 19.7% to 21.9% in 2019.

Due to the lowered merchant fees, Hana Card's net income in 2019 decreased 47.2% Y-o-Y to KRW 56.3 billion. And that of Hana Capital decreased 10.5% Y-o-Y to KRW 107.8 billion.

Please refer to the slides for other subsidiaries' results. And also please refer to Pages 9 through 11 for the NIM, noninterest income and SG&A details. Moving on to Page 13, group's total assets, liabilities and equity.

As of year-end 2019, the group's total assets stand at KRW 422 trillion or KRW 541 trillion if the group's trust asset of KRW 119 trillion is included. Hana Bank's assets, inclusive of trust assets, stand at KRW 436 trillion.

The group's total liabilities are KRW 393 trillion, and total equity KRW 29 trillion.

Hana Bank's loans in won and deposits, on Page 14. As of year-end 2019, Hana Bank's loans in won is KRW 218.4 trillion, up 1.8% Q-o-Q and up 7.8% Y-o-Y. Breaking down the loan growth by each item: Corporate loans increased to KRW 103.6 trillion, up 7.7% Y-o-Y. Of these, the large corp loans recorded KRW 13.6 trillion, down 6.5% Y-o-Y, continuing the downward trend from Q2. SME loans showed a robust growth, recording KRW 87.9 trillion, up 10.3% Y-o-Y, thanks to the growth strategy focusing on sound SMEs. In the household loans, Jeonse loans continued to increase. And with the improvement in credit loans, thanks to the Hana 1Q credit loans launched in June, household loans increased to KRW 114.8 trillion, up 7.8% Y-o-Y.

Deposits in won in 2019 rose 8.7% Y-o-Y to KRW 230 trillion. Low-cost core deposits and time deposits increased by 13.3% and 11.2%, respectively, Y-o-Y, increasing the share of low-cost deposits in the mix to 33.6%. As can be seen from the graph on the bottom right, the LDR in 2019 is 94.4%.

Please refer to Page 15 for Hana Bank's loan breakdown.

And now Page 17, group's asset quality. The group's total credit grew 8.6% Y-o-Y to KRW 286.5 trillion, and the amount of NPL fell 12.5% Y-o-Y to KRW 1.4 trillion. This brought down the group's NPL ratio to 0.48%, down by 11 bp Y-o-Y. On the top right, you see the group's new NPL formation prior to sale and write-off and debt-equity swap in Q4 was KRW 259.4 billion. In the previous quarter, with the upward adjustment of some of the large corp exposure ratings, they have been taken out of the NPL category. And with the base effect no longer present, new NPL increased to the level of the same period last year.

Bank's asset quality, on the following page, Page 18. The bank's total credit rose 7.5% Y-o-Y to KRW 249.3 trillion, and NPL decreased 19.2% to KRW 1 trillion. This lowered the NPL ratio to 0.39%, a 13 bp decrease Y-o-Y. And the NPL coverage ratio at the end of 2019 was up 2.6 percentage point at 94.1%. The bank's delinquency ratio as of year-end was 0.2%, down 5 bp Y-o-Y, continuing to record the lowest, as the previous quarter, in the history of the financial holding company. Both household and corporate loan delinquency ratios were down by 3 bp and 6 bp each, maintaining a stable delinquency ratio.

Pages 19 and 20. The group's 2019 credit cost ratio was 0.18%, and Hana Bank's credit cost ratio recorded 0.05%.

Lastly, capital adequacy, on Page 21. The group's BIS ratio and Tier 1 ratio are estimated at 13.94% and 12.66%, respectively, in 2019. And as for CET1 ratio, we expect it to be around 11.95%. The capital ratio is lower than the previous quarter due to the shareholder return policy and one-off factors, but we have more than enough to fulfill the capital requirements. And we will do our best to manage capital efficiency by improving the business results.

For your reference. The Hana Financial Group's BOD resolved today that the cash dividend as of the year-end shall be KRW 1,600 per share. If it is passed as is at the General Shareholders' Meeting, the year-end cash dividend per common share is KRW 2,100, adding the interim dividend of KRW 500 already paid out. The annual payout ratio is expected to be 25.6%, and dividend yield ratio to be 5.7%. The total shareholder return ratio, including the KRW 300 billion of treasury buyback in 2019, amounts to 38.1%. We were able to expand shareholder return Y-o-Y, thanks to improved business performance. We will incrementally reinforce our shareholder return policy going forward by managing in a stable manner our business performance and capital adequacy.

This brings me to the end of Hana Financial Group's earnings presentation for the year 2019. Thank you.

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Unidentified Company Representative, [3]

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Thank you very much. And now we will have the Q&A.

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Questions and Answers

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Unidentified Company Representative, [1]

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(Operator Instructions) We will take the first question. We have the first question from Kim Jin-Sang of Hyundai Motor Securities.

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

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I have 2 questions. In Q4, your earnings, it seems that you have many one-offs. Excluding the one-offs, the normalized level of earnings, you mentioned, is in the early KRW 500 billion range. And can you tell us why it actually is normalized at a KRW 500 billion level from the KRW 400 billion level which is not normalized? Next question is about the group's capital ratio. For the CET1 ratio, it has actually gone down quite a bit. And when it was at the 13% level and before, it is different from the less than 12% level it is now, so it seems that the flexibility of the capital policy maybe is not enough. Could you tell us about how you will gradually improve the shareholder returns? And is this really feasible? And how you are going to do this, in more detail.

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Unidentified Company Representative, [3]

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Thank you very much for your questions.

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Seung-Iyul Lee, Hana Financial Group Inc. - CFO & Deputy President [4]

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Thank you very much for your questions. And for Q4 normalized earnings, as I mentioned in the presentation, there have been DLF reserves, which was about KRW 160 billion. And for ERP, there was about KRW 150 billion; and CMIG leasing holdings related to impairment, about KRW 430 billion, which were all one-offs. So those could be reflected. And regarding the shareholder return improvement, regarding our CET1 ratio, well, last year, there was interest rate cut, and interest income fees, it was affected. So this was reflected. So that is why we had the drop in the BIS ratio, but from early in the year, we're going to have very conservative or -- asset policies and capital policies. And in the past, when we were managing BIS ratio, we had very tight management of RWA. And in 2020, we're going to strengthen those efforts. And we believe that through those efforts we can pull up the BIS ratio to the early 12% level. Thank you very much.

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Unidentified Company Representative, [5]

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In addition, to elaborate regarding the Q -- first question. For one-off items, there are many different line items and operational gains and valuation gains as well as the disposition valuation gains, so -- nonoperating gains as well. So if you can call us, we would be happy to answer in more detail. And we have a question from DB Financial Investment.

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Byung Gun Lee, DB Financial Investment Co., Ltd., Research Division - Team Leader [6]

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I am Lee Byung Gun from DB. I'd like to ask about the NIM and asset growth work. I'd like to first ask about the asset. What was expected was you had not much of the transfer of the conversion loans, and there were executions of Bogeumjari loan and these are going to be securitized. So how much of the loans are securitized? And how will that affect the asset growth? And secondly, looking at the NIM, it was in February and March that we expect the loan conversion to be transferred, and that will affect the NIM. So how will that affect the NIM before and after with the transfer of the loan conversion? And how will the base rate cut affect the NIM? Could you give us some guidance?

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Unidentified Company Representative, [7]

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Thank you very much.

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Unidentified Company Representative, [8]

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Yes. As for conversion loan, KRW 1.7 trillion of conversion loan will be additionally transferred in Q1. And the NIM will be cut by 0.8 bp. And as for the base rate cut and how that will affect the NIM, the BOK is watching the market, and the BOK is expected to maintain the rate compared -- similar to the previous year. And if they are conservative and they do another base rate cut, that will affect KRW 50 billion to KRW 60 billion of our interest income. In June to July, if there is a base rate cut, then that will mean half of that amount will be cut from our NIM.

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Unidentified Company Representative, [9]

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We will hold until we have the next question online. We have no questions yet on the queue, but we will hold. Next question, from Cape Investment Securities, we have Mr. Kim Do Ha on the line.

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Do Ha Kim, Cape Investment & Securities Co., Ltd., Research Division - Analyst [10]

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I'm Kim Do Ha from Cape Investment & Securities. I have 2 questions. Last year, you had one-offs, but you had a very large, sizable one-off gain of selling off the HQ building. So it seems that in the market they were expecting some more. So regarding the -- all the one-off gains in 2019, it seems that your dividend payout ratio took all of those into consideration. And in 2020, are you going to put priority on [DBS] or on the dividend payout ratio? So can you tell us about the overall guidance? And there is The-K Non-Life Insurance that you have been thinking about of acquiring. And to my knowledge, it seems that it is autos insurance for teachers, so can you tell us more about what kind of business you want to enter using that as a vehicle?

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Unidentified Company Representative, [11]

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Thank you very much for your questions.

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Unidentified Company Representative, [12]

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In 2020 -- actually, in 2019, compared to 2018, we had KRW 200 increase. So we had interim payout and year-end payout which will go up to KRW 2,100. And in 2020 -- in 2019, 25.6% was our dividend payout ratio. So it was similar to 2018 of 25.6%, but in 2020, we look at both the EPS and dividend payout ratio. And regarding the dividend payout ratio, we will look at our earnings. And we do have some plans or ideas of actually raising it, but we will need to look at our earnings at the end of the year. And regarding acquiring The-K Non-Life Insurance Co., the dialogue is still ongoing, so I cannot answer at this time, so please bear with us until we finish our consultations.

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Unidentified Company Representative, [13]

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We have no other questions on the line yet, so please hold. Yes, we have, from Korea Investment & Securities, Baek Doosan.

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Doosan Baek, Korea Investment & Securities Co., Ltd., Research Division - Research Analyst [14]

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I am Baek Doosan. There was news of Hana Financial Investment's capital increase. And after the capital increase, what are some of the business plans that you can do and enter into with the capital increase with the issue of notes? And as for strengthened government policies in real estate PF, how will that affect your business? Because you seem to be concentrating on this.

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Unidentified Company Representative, [15]

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Thank you.

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Unidentified Company Representative, [16]

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I am [Lee Sang-hoon], Deputy President of Hana Financial Investment. Thank you for paying great interest to the news. The KRW 4 trillion of capital has been achieved, and after that, we are going to concentrate on IB and global and S&T. We are going to invest in these areas. And in the area of IB, as you just mentioned, [NCR] and real estate regulations are in place, but we will comply with the government regulations. And right now in terms of our business, there is excess demand. So we will comply with the demand for excess capital, and we will also comply with the government regulations at the same time. And as for S&T, there is the issue of DLFs and so the volume is decreasing, but we are going to increase PI investment so that we can go ahead with our plans for S&T business. And as for global, we have plans for emerging markets. We want to concentrate more in the east -- southeast Asian countries. And we are planning to make some hub investments. Thank you.

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Unidentified Company Representative, [17]

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Thank you for the detailed answers. We have no questions on queue. Please hold. We will take the next question from JPMorgan. We have Director Cho Jihyun.

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Jihyun Cho, JP Morgan Chase & Co, Research Division - Research Analyst [18]

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Regarding the DLF reserves that you have accumulated, can you tell us about the process? For comparing Q3 and Q4, it seems that you have reversed growth for asset-related fees, asset management related fees. And regarding regulation, can you tell us about your outlook for asset-related fees and your other outlooks?

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Unidentified Company Representative, [19]

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Thank you very much.

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Unidentified Company Representative, [20]

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Regarding the DLF reserves. In 2019, looked -- we looked at the interest rates trend, and we have U.S. dollar and the U.K. interest rate as our yardstick. And we took the lower interest rate. So that was our basis, so we accumulated reserves according to that standard. Regarding the financial products, we were very conservative in our reserves. The asset management related fees: Regarding the different regulation, for ELT and for trusts, it is true that there are different regulations, but we will manage it within last year's scope. So we also have trust and other areas as well. And basically, regarding DLFs, the asset-related fees are not shrinking that much. We have more fee income growing, so in 2020 we believe that asset-related fees will probably increase.

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Unidentified Company Representative, [21]

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To elaborate. Regarding the DLF reserves, we were actually very conservative, and we took the most conservative assumptions so that we can deal with the losses. So in 2020, regarding that item, we believe that we have -- will have very limited impact to our PL.

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Unidentified Company Representative, [22]

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We have no other questions on the line. It seems we have no further questions. We will conclude the 2019 Hana Financial Group's earnings presentation. You can listen to the webcast on our website. And also, we will be uploading the IR data book. If you have any remaining questions, please contact the IR team, and we will do our best to answer your questions.

Thank you.

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