Earnings Transcript for 055550.KS - Q2 Fiscal Year 2021

Company Representatives: Yonghak Huh - Group CFDO and Shinhan CEO Roh Yong-hoon - Group Chief Financial Officer Heo Young-taeg - Group CMO Park Sung-hyun - Group CSSO Dong-kwon Bang - Group CRO Park Cheol Woo - IRO

Operator:

Park Cheol Woo: Greetings! I am Park Cheol Woo, the IRO. With the resurgence of COVID-19, we have been conducting our business results presentations in audio for more than one year, although we had planned to go back to video. We wish to see you via video in the near future and from now on we will begin the Shinhan Financial Group2021 first half business relations presentation. We have here with us at the earnings presentation our Executives and from the previous quarter’s earnings release – we are holding it earlier in the day, so that the market can analyze our performance in more detail. We would like to ask not only institutional investors, but also individual investors for your keen interest. As I had mentioned, we have here with us our group CFO, Roh Yong-hoon; group CFDO and Shinhan CEO, Yonghak Huh; group CMO, Heo Young-taeg; Group CSSO, Park Sung-hyun and Group CRO, Dong-kwon Bang.

Roh Yong-hoon: Greetings! I am Shinhan Financial Group's CFO, Roh Yong-hoon. Thank you for taking part in 2021 first half business results presentation despite your busy schedule. On page four of the earnings release presentation material there are three major highlights that I would like to cover. First, we were able to achieve a record high, half year net income with improvement in our fundamentals. With asset growth in our traditional bank business and improvement in our non-banking, including capital markets, our basic fundamentals are continually leveling up. 2021 first half groups income have a 5-to-5 break down between the bank and the non-bank. It is evolving as a differentiated profit model of global financial companies. Bank net income rose 20% Y-O-Y through margin management and quality asset growth. Non-banking recorded a record high half year net income, a 68% improved Y-O-Y. Looking at the break down for non-banking, the earnings for capital market including securities, capital and asset management, as well as the retail finance including card and savings bank and insurance are all evenly growing. In particular, net income for the capital market subsidiaries with high ROE posted KRW507.4 billion, which is 43% of the group nonbanking income. This is a level up from the 29% yearly average contribution between 2017 to 2020. Going forward through efficient capital allocation, synergy expansion between subsidiaries and through securing inorganic growth opportunities, we will continue to balance earnings improvements centering on high ROE business. Secondly, uncertainty is continuously decreased. With the additional financial support on the back of COVID-19, we have been continuing high loan growth from last year, but asset quality trend is sound. Group’s first half provision for credit losses decreased 56% Y-O-Y and even 9% Q-O-Q. Even excluding the COVID-19 provisioning that with additionally provisioned in the first half of last year, and the provision for problematic investment products, it has decreased 30% Y-O-Y. For the qualitative improvement of loan assets, we strengthen our corporate SOHO retail CSS approval strategy and we are closely monitoring new asset inflows. In addition, we have expanded and revised preemptive management selection standards and criteria, and we are doing our best for risk management, so that we can effectively respond to future economic downturns.

A - Park Cheol Woo: Thank you, very much and now we will take questions. The first question is from Hyundai Motor Securities, Mr. Kim Jin-Sang; you’re on the line sir.

Kim Jin-Sang: Greeting! Thank you for your good earnings. I have two questions. First, regarding your performance, it is very good. Your asset quality seems to be very good too, but with the resurgence of COVID-19 for the SOHO, it seems that there are more difficulties which can lead to some deterioration going forward, and for Shinhan Financial Group. Can you tell us your outlook and what will be your response going forward. And for the integration of life-insurance, I know some time has passed and I believe that there will be some results and your yearly earnings. I’m curious about for the profit and with the IFRS 17 adoption, can you give us any simulation you have attesting to what will happen going forward.

Park Cheol Woo: Thank you very much Mr. Kim Jin-Sang for your questions and please hold while we prepare for your answers. Our CRO, Dong-kwon Bang will answer your first question, please.

Dong-kwon Bang : Thank you very much Kim Jin-Sang for your insightful questions. I'm Dong-kwon Bang, the CRO. In the first half, for the SOHO loans as was mentioned by our CFO, we have portfolios for different credit ratings and for different collateralized ratings. So we are seeing a market improvement actually in both. And looking at the delinquency as well, you can see for the SOHO loans, they are actually showing most ability. However, as you had voiced your concerns, because of the COVID-19 resurgence, there are of course potential risk factors going forward. In our case, if the current trend continues, we believe that a favorable flow will continue. However, for the interest deferment and others, we are able to withstand the burden and additionally for SOHO loans for our members, merchant members and for different cases, we have different credit rating models that we are developing. So if that opens in the latter half of the year, we will have differentiation, so that we can still meet stability like we are now. Thank you.

Park Cheol Woo: For the second question, our CMO, Heo Young-taeg will answer that question. Actually, our CFO, Roh Yong-hoon will answer the question.

Roh Yong-hoon: Well, let me give you the bigger picture first. You asked about the integrated life insurance company Kim Jin-Sang and our net income goal is about KRW400 billion or so and with the adoption of IFRS 17, we believe that it will go up from that amount. For details I will give the microphone to our CMO, Heo Young-taeg.

Heo Young-taeg : I am CMO, Heo Young-taeg. As of July 1, successfully we had the integration of the two companies and launch our promotion model. I think it's showing the future option on life. So we actually think of this as very positive. For both of our subsidiary companies, the goal it about KRW400 billion and it was about KRW300 billion in the first half and we had some successful investments that were reflected, but on the whole you can see that the P&L is very stable. So I think that we will have surpassing of the goals we had set froth for year. Well, maybe I'm being overly confident, but that’s the current picture. And for the IFRS, when this becomes adopted, that on the whole we will have more strength in the transparency and we believe that we will have a overall level-up. It’s because looking at our ALM structure, compared to any other life insurance, the company, we are being very well managed. So IFRS adoption will, well we believe lead to our market differentiation. Thank you. And we will have Yonghak Huh who will also answer the question.

Yonghak Huh: I’m in charge of strategy, and its 300% for the IBC then it is top class for insurance company and for the life insurance firm, there were some difficulties in sales and it’s because there were some aggressive life insurers that had very aggressive sales leading to lower margins in the industry. But for the IBC ratio there was – it was non-binding, so we have that, but with the IFRS adoption we believe that in the insurance industry there will be a market of quality that will take root and our integrated insurance company will actually have a hold over the market and lead to very positive effect on our income. Thank you. Yes, next question is from Seo Young-Soo, Kiwoom Securities. Please go ahead sir.

Seo Young-Soo : Congratulations on wonderful first class. This is a minor question. As for the Shinhan card, relatively speaking it had good performance and I think it contributed to good income coming from the non-bank side. The Shinhan card, if you look at the details, the fee income and other incomes, operating income – the operating expenses seem to have gone down and I think that has led to improved results for the Shinhan card in Q2. So could you tell us, is this trend, was it a one-off, could you explain the reason? And looking at Shinhan Financial Corp., I think this is integration cost. As for Orange Life compared to Q1, it seems that the net income increased in Q2, but for Shinhan Life compared to Q1, the net income decreased significantly, so what happened? Thank you.

Operator: Thank you for your questions. Please hold as we get ready for the answer. Yes, Mr. Heo Young-taeg will answer.

Heo Young-taeg : Yes, I'm the CMO. As for Shinhan card, the cost for acquiring customers had decreased and we were able to save on the expenses. In looking at the revenue source of Shinhan card, we had the – we can divide into new sales and credit sales and we’re able to implement the cost control for new sales. And there is the decrease in merchant fees, and so through cost control efforts, we are continuing with the growth and I think that strategy has worked well and we have positive outlook going forward. And there's auto loans and overseas assets and there is the new growth and if we include the C.B. business, if we look at the growth trend in the new sector, we're seeing continuous growth, and of the industry peers, qualitatively and quantitatively Shinhan has the most diversified portfolio and so I think these factors will be maintaining a steady income flow going forward. And Shinhan card, it’s not going to happen, that we're going to see overnight increase in income, but we will see a steady income increase going forward, and at the difference between Shinhan Life and Orange Life, the income growth, well it has been mostly strategic. We have sold along maturity bonds and we have implemented the strategy with the integrated life insurance as a whole, and this came from our strategy of selling the bonds. So it's not a matter of difference between Shinhan Life and Orange Life. I think you should look at the entity as a whole.

Roh Yong-hoon : I am Roh Yong-hoon, the CFO. I'd like to add, if you just look at Shinhan Life in Q2 compared to Q1, yes, the numbers look smaller, that is correct. In Q1 we had a one-off. We had sold off the acquisition finance, but net income is KRW92 billion and compared to the target the progress looks quite good.

Operator: We will wait for more questions. We have no questions in the queue and we will wait while we have more questions coming in. We will take the next question from Hanwha Investment Securities, analyst Kim Do Ha ; you’re on the line.

Unidentified Participant: I am Kim Do Ha and I have a question about digital. There is a KakaoBank and online bank and they are saying that they are going to have new loans on non-face-to-face manner or digital loans and for your side, do you have any new line-up’s for loans that you have in-store in the case of non-face-to-face loans. Thank you.

Operator: Thank you very much analyst Kim Do Ha . We will soon answer your question. Please hold. Our CDO, Seong-Yong will answer your question.

Seong-Yong Lee: I am Seong-Yong, the CDO. In the latter half of this year we will start and break down . We have a plan to have contract with the First American and we have plans, other plans as well for a non-face-to-face and we think that it will be a great help.

Heo Young-taeg : I am CMO, Heo Young-taeg. For the bank non-face-to-bank collateralized loans, we plan to launch it sometime in August and for the bank’s retail products, ultimately we believe that they will all turn digital or non-face-to-face. Thank you.

Operator: We’ll take the next question from JP Morgan Securities, Josie Hung. Please go ahead.

Josie Hung: Hello! I am Josie Hung from JP Morgan. Thank you. I have three questions. In the beginning you talked about quarterly dividend and you will be paying that out after the BOD meeting in August, and is that half year or quarterly and will there be share buyback plans going forward? And in the beginning you talked about the scenario of the base rate being frozen and then will be improving by 1 BP per quarter. Is it only coming from the low cost deposits? What is the detail of the scenario? And the rates hike will be steeper, so at the end of the year and maybe next year there could be a rate increase once or twice and what will be the track for the NIM improvement wide as your guidance. And you said that mostly the banks, retail products will turn non-face-to-face, but collateralized loans, if they are handled online like credit loans, is it technically feasible. That is what I'm curious about, maybe you could make the loan application online, but as for the underwriting is it done at the screening department. So what makes these products transition from offline to online?

Park Cheol Woo : Thank you very much for your questions. We will hold while we get ready for the answers. Mr. Roh Yong-hoon, the CFO will answer the questions.

Roh Yong-hoon: Hello! As for the quarterly dividend, it's not an interim dividend, but we are thinking of quarterly. So we are going to pay out the quarterly dividends to the shareholders who own the shares as of June end, but because of COVID-19 we will be monitoring the market very closely, and every quarter at the BOD meeting we’ll come up with prudent decisions. And as for share buyback, that was the part of your question. If the COVID-19 situation relaxes and if there are no macroeconomic and business problems, we will look into share buyback more actively, but even before that, if we look at the group, the shares, the treasury, after acquiring Orange Life, we have all used them up. And so if there are further M&A opportunities and if there is a need for equity swap, then we will need a treasury shares. But as for the amount and timing we have not decided on anything at that tend. As for the second question about the NIM, if you look at the bank, the NIM has increased 1 BP to 1.4% Q2 and this is due to, and if we take into the factor of your point 7 BP reduction, due to deposit insurance rate changes, then it has increased by 1.7 BP, and we expect it to increase by 1 BP every quarter when the base rate is frozen. But as of October, if the base rate is increased by 1x then the bank margin is expected to go up 1 BP in Q3 and by Q2 3 BP in Q4. And other than that, we will work on improving the NIM by improving the loan yield and by managing the low margin – in using the low margin unused credit line to improve the NIM by 1 to 2 BP additionally in the second half, yes. And as for the online loan handling, ultimately what we are thinking is the retail loans, we want to handle it non-face-to-face for customer convenience. That is the overall direction, 100% non-face-to-face. It includes technological issues and regulatory issues and as for the technological issues, I think time will resolve the issues and as for the regulations for our customer benefit, I think the regulatory authorities will relax the regulations and so we are counting on deregulation. So the strategic direction that our group has is we want to put customer convenience first. So for retail loans, we want to go non-face-to-face. Ultimately that is the big picture, and as for this I don't think it's just our financial group. Most of the other financial groups have that picture in mind. Non-face-to-face mortgage loans, ultimately the customers would want that because they don't want to visit the banks anymore, that's good for their convenience and so that will be the ultimate direction. But for the time being, all the processes may not be handled online, and some of the parts, because of regulations, they cannot be transitioned online, and so some of the processes may be handled manually, but ultimately non-face-to-face, that is our objective. Thank you.

Yonghak Huh: Yes, I am Yonghak Huh, the CTO. Technologically, it's not difficult to handle the collateralized loans digitally. Applications, scale paying, submitting photos, submitting electronic documents, they can be done online, but the legal and regulatory issues as for the transition of ownership that requires some legal issues. So we will work through our legal proxy, we will work with the attorneys and then we'll be able to turn this into a non-face-to-face transaction.

Park Cheol Woo : We have no questions in the queue currently, we will wait until we have further questions. . We have the next question from Goldman Sachs Park Sinyoung.

Park Sinyoung: Hello! I am Park Sinyoung. I have only one question. You mentioned shareholder return policy previously and for the cash dividends, I think it was 30% and I think you have mentioned that you're going to make it more regular, and for optimal CET1 ratio for those over 12.5%, I think you mentioned that additional returns will take place and can you tell us about the ratio of total shareholder returns if you have a target standards, then can you brief us on it. Thank you.

Park Cheol Woo : Thank you, thank you for your question Park Sinyoung, please hold. CFO, Roh Yong-hoon will answer your question.

Roh Yong-hoon: Thank you for your question. As you had mentioned, for the CET1 ratio of 12%, that standard still stands, and we're not saying that we're going to achieve it right now, but spoke about it based on the previous standard, because we have already accomplished it, but we believe that it might not go there or surpass that, but in the mid to long term, we want to stably maintain 12%, so that plan still stands. And for the total shareholder return ratio, we are going to manage it based on this, and regarding the target we are still reviewing this. So, we need to consider a more comprehensive capital policy. So we will communicate it to you in the appropriate – at the appropriate timing. Thank you very much.

Park Cheol Woo : Yes, next question is from Won Jaewoong from HSBC. Please go ahead.

Won Jaewoong: Congratulations on a good half year. I have a question on the Fintech site. As for KakaoBank, it is targeting the mid-interest rate market aggressively and the credit rating model seems to be more detailed. They are setting it up and they are working in a different mood, I think that is their strategy. And as far as Shinhan, you are not going to go there or is it going to pose a threat? Is that going to be KakaoBank’s own initiative only. So what is your take on that competitor?

Park Cheol Woo : Thank you for the question. Please hold as we get ready for the answer. Our CRO, Dong-kwon Bang will answer your question.

Dong-kwon Bang: Thank you for the question. As you rightly mentioned, the Fintechs are going to expand in the mid-interest rate market and I'm sure you've heard of the alternative rating model and I think the Fintechs are working on that. I mentioned in the beginning Shinhan Financial Group, as for the alternatives data, it's not just the traditional financial data. There’s other types of market data and they are used as input factors to build the model. We are getting data from NPS, from affiliates and internal data and we are creating big data and for each segment we are creating alternative models. And starting in August, we are going to roll them out consecutively and for KakaoBank and other Fintech players, we will be able to compete with them head-to-head in the mid-interest loan market. Thank you.

Park Cheol Woo : The CTO Mr., Yonghak Huh, will add some comment.

Yonghak Huh: As for card companies, the first CP license was acquired and this is quite an achievement for alternative modeling and so Shinhan card is getting ready for this segment of the market.

Park Cheol Woo : There are no questions in the queue currently. We will wait until further questions come in.

Roh Yong-hoon: With this we will conclude Shinhan’s Financial Group 2021 first half earnings release presentation and Q&A session. We will look forward to seeing you in the next quarter with more improved earnings. Thank you very much for your participation, and please have good health during the COVID.