Shinhan Financial Group Co Ltd

Good afternoon, everyone. I am Park Cho-do, head of the IR. I'd like to thank everyone for taking part in today's event and will now begin the 2020 Q1 earnings presentation. We'd like to ask for your understanding that for this particular earnings presentation, as part of our efforts to observe social distancing, we will only be providing audio content with minimum outside attendees. Joining us today are CFO Noh Young-hoon, and CSO Park Sung-hyun, and the Managing Director of Finance Kim Tae-yeon. After a presentation by CFO Noh Young-hoon on the business results of 2020 Q1, we will be holding a Q&A session. We now invite CFO Noh Young-hoon for the earnings presentation for Q1 of 2020. Good afternoon. I am Noh Young-woon, the Group CFO. First of all, I would like to thank the shareholders, investors, analysts, and journalists from home and abroad for taking part in the earnings presentation for the first quarter of 2020. Before going into the Q1 performance of Shinhan Financial Group, let me go over the issues and responses related to COVID-19. This is on page 5 of the presentation deck. The coronavirus is posing a severe threat to both people's livelihoods and the economy. Shinhan is doing its utmost to faithfully undertake its social roles and responsibilities in the broad effort to overcome the economic crisis caused by COVID-19. First and foremost, in step with the government's livelihood financial stability package program, an inclusive financial policy is being pursued proactively to ensure that funds are provided in a speedy and timely manner to the society at large and our customers. As of the 20th of April, the bank has extended 4.9 trillion won in a total of 32,510 loans as financial support to SMEs. New loans to SMEs have been increased from 1 trillion won to 3 trillion won. Not only the bank, but the card, savings bank and the insurance arm of the group are taking part in various financial support programs including assistance to individuals. Secondly, Shin Han is actively involved in the government-led policies to stabilize the financial market through liquidity provision. We have contributed 1 trillion and 770 billion won to the fixed-income market stabilization fund, and another 1 trillion won will be provided for the securities market stabilization fund targeting the stock market. And so contributions are being made at present. Thirdly, we are at the forefront of providing the necessary community-level assistance to most vulnerable groups and health professionals. Going forward, we will continue to spearhead the efforts to actively respond to the COVID-19 crisis as this fits the standing of world-class financial companies such as ours. Next on page 6, let me provide some additional explanation about measures against COVID-19. Along with such support measures for our customers and the society, The Group's subsidiaries have put into action their risk management systems. Against such a backdrop, Shinan had kept a clear focus on our core capabilities, posting 932.4 billion won in Q1 of 2020 as net income, up 1.5% YOY. However, the coronavirus' impact on the real economy has only started to become reflected in the business results since March. and thus uncertainties regarding the performance from Q2 onward is growing. As can be seen in the monthly indicators in March, loans mostly to large companies have grown sharply in anticipation of liquidity tightening and credit purchase sales of the car business also contracted in February and March compared to January. Banking delinquency before write-offs and sales was up in the month of March as well An increase in the core deposit of the bank or cash equivalent increased as part of the effort to manage risk. Thus, we can see that the impact from COVID-19 started to become visible since March. Key subsidiaries, the bank and the card company's asset quality remain stable at present, but we must be prepared for Q2 and beyond when the real economy will deteriorate in earnest. In order to minimize the credit cost volatility, we plan to manage the risk as we go forward in accordance with detailed scenarios for various possible situations. We have summarized the business highlights of Q1 on page 7 for your reference. Next on page 8, let me walk you through the group's financial highlights. In Q1 of 2020, the group managed to maintain sound fundamentals in terms of interest income focused earnings so that net income posted $932.4 billion won. Ordinary income excluding the lower income tax impact from the Treasury stock disposal losses posted to the north of $800 billion, same as last year. However, when excluding the effect of acquiring the remaining orange live equity and the effect of lower write-off expense of intangible assets, ordinary income comes to mid-$800 billion, down YY, partially reflecting the impact from COVID-19. The Korean Won Loans of the bank was up 2.9% YTD, including expansion of assistance to SMEs and households. Due to the increase in size, the interest income of the bank grew 3.8% YOY. Meanwhile, due to the expanding volatility in the financial market, actually more severe than during the 2008 global financial crisis, financial product losses have grown so that the non-interest income of the group fell 10.6% YOY. By engaging in strategic cost management in the midst of the coronavirus crisis, the cost-income ratio of the group posted 43.7% and is being managed within the financial target. By harnessing digital technology from a mid- to long-term point of view, productivity will be enhanced, thus enabling continued cost efficiencies. We're at a point in time when striking the right balance between financial support that fulfills corporate social responsibility and maintaining asset quality is highly critical. To minimize any possible shocks, all subsidiaries within the group are implementing risk management systems and closely monitoring asset quality. On page 9, let me explain in detail about the group's interest income. In Q1 of 2020, the group's interest income maintained sound fundamentals, increasing 5.0% YOY. During Q4 2019, a 25BP cut in the BOK rate was executed, on top of which an additional cut of 50BP was carried out in March 2020, thus raising the downward pressure on the net interest margin. However, low-cost core deposits was up 9.3% YTD, thus partially offsetting the margin decline. Also, solid growth is being realized overseas, thus contributing to higher interest income.

And now, the bank's loan growth. To secure liquidity early on, with the credit spread widening, large corporates have preemptively increased their credit portfolio. And as a result, loans to large corporates increased 15.5% YTD, driving the overall loan growth. With inclusive financial policies in place, SME loans increased 2.3% YTD. Loans to the non-audited SMEs relatively more vulnerable to COVID-19 increased 3.6% YTD. SOHO loans also increased 2.4% YTD. Loans in this segment are on a par with the initial business plan. Next, the group's non-interest income on page 10. The group's non-interest income fell 10.6% YOY to 734.2 billion won. This is because the gain on marketable securities and FX derivatives decreased with higher volatility in the capital market indices. Q1 fee income increased 10.8% YOY to 531.5 billion won. The pandemic froze up consumption. The Group's SG&A in Credit Cost on page 11. The Q1 SG&A increased 2.5% YOY. The group's CI ratio is 43.7% being managed within targets. There will be continuous effort made for cost control by selection and concentration strategy to prepare for the uncertainty in the second half. The group's credit cost ratio recorded 35BP up 1BP YOY and Up 5BP QOQ. Compared to the previous quarter, the banks' and cards' delinquency ratios have increased 5BP and 9BP respectively, showing signs of the COVID-19 effect partially. From the second quarter and onward, when the outbreak impact will be more pronounced, It is possible that the credit cost may go up. Depending on which scenario unfolds, we will implement risk management measures accordingly. Page 12, Capital Adequacy. This quarter, with the completion in the remaining stake purchase in Orange Life, the decline of the common equity ratio pursuant to the acquisition has come to a stop. In January this year, even though we acquired the remaining stake in the insurance company, Due to our preemptive capital management, the effect on our capital ratio was minimal and additional downward pressure on the capital ratio was relieved. Despite the higher volatility in Q1 FX rate and interest rate by maintaining earnings power and stably managing risk-weighted assets, We are able to improve the Group's CET1 ratio by Basel III standards by 23BPQQ to 11.4%. As part of our capital policy in connection to the finalization of the Orange Life deal, the Board decided in March to buy back and cancel 150 billion won of Treasury shares, which will be executed in Q2. Contribution by subsidiaries and by Matrix on the next page. We reinforced non-bank side of the business with Shinhan Card buying lease assets and the finalization of the Orange Life transaction. Wealth management seems to have taken a hit due to the financial market volatility and losses on the investment products, but with the growth in IB and global businesses, we're able to confirm once again Shinhan's diversified business portfolio. Going forward, we will continue to strengthen non-bank business so that we can enhance The fundamentals of the overall group's earnings base. More detailed explanation about the global business on the next page. The group's income from the global business was 89 billion won in Q1, up 13.6% YOY with increased earnings from Japan and Vietnam. We will continue to manage profitability, liquidity, and soundness in each country under the pandemic. Sustainable management activities on page 15. In March 2020, Shinhan Life was the first Korean life insurer to become a signatory to the UNEP Finance Initiative's Principles for Sustainable Insurance. In Q1 this year, eco-friendly renewable energy loans and investments have been newly executed, bringing up Q1's green financing to $449.4 billion won. New technology financing in Q1 amounted to $4,242.1 billion won. and the cumulative, innovative, and inclusive financing as of Q1 amounts to $5,663.9 billion won. At the FY19 General Shareholders Meeting, a female outside director was appointed, enabling diverse representation of the Board. The remaining slides are for your reference, guiding you through the subsidiary's performance and Business Indicators. 2020 will be a year in which group-wide efforts are made to overcome the crisis posed by COVID-19 and to grow our fundamental strength to weather the storm. We will pay heed to the sound advice given us by the clients and shareholders. We will live up to your expectations and perform our duties and roles more proactively. We sincerely hope that the coronavirus will be conquered in the near future. Thank you. Thank you very much. That was the CFO's presentation and now we will take questions. If you have a question, please press star and 1 on your phone. You'll be given a chance to ask your question in the order that you press the buttons. And if you wish to cancel, please press star and 2. And for those of you who wish to ask your question in English, we will be providing consecutive interpretation, so please wait as your question is interpreted into Korean. And there may be some latency until you're connected, so please hold as well. We'll take the first question from Hyundai Motor Securities. Mr. Kim Jin-sang, please go ahead.

Good afternoon. Thank you very much for the excellent results. I have two questions. First of all, the group's ET1 ratio has been enhanced. Despite the growth in assets, Oh, yes, it provides reassurance to all of us. The 12%, however, you're still below 12%. You don't have that much of a leeway. And the government, for its part, the dividend payout ratio, they do have a very cautious approach about this. By the year end, the group's CET1 ratio, what is your outlook for the year end, the CET1 ratio? Do you think it's possible to continue to improve the dividend payout ratio going forward? And my second question. I think the credit cost has been well managed. As you have said, preemptively, because of the growing uncertainties, preemptively setting aside provisions, I do believe that by the year end this will be possible. So for this year, what is the level of credit cost that you expect and do you intend to more proactively set aside provisioning? What can serve as a trigger for this to happen? Do you have any internal scenarios that you have simulated? So can you share that kind of information with us? Thank you very much. I'm Young-Hoon Lee. I'm the Group CFO. With regards to the capital ratio question that you have asked, given the financial plans for 2020, BIS ratio is targeted at 14%, and the CET1 ratio is a later half of 11%. So that is our financial plan going forward. When we set up the financial plan initially, what we didn't take into consideration was that the FSA has now decided to introduce in advance the Bad-Ed-3 components. And so if the regulations are eased somewhat, then compared to what is in the financial plan, the CH-1 ratio and BIS ratio will go up more than 100 BP. Of course, this is a temporary increase only. And using this, us engaging proactively to create leverage effect, that I don't think will be possible. And secondly, with regards to the dividend policy, through our disclosures, we have provided an explanation. The long to mid-term capital policy is being formulated at the moment. The dividend payout ratio will go over 30%, and this is more timing and the size, and the Treasury buyback and cancellation size, and the target VIS ratio and the target CEG-1 ratio are all included. We only have plans, but we have to, I think, postpone communication with the market at the moment In this crisis period, we need to secure more capital, and so we need to wait and see how long this crisis will be protracted. So after the general directions are more clear, I think we will be able to provide you with more details. I'm Kim Tae-yeon from the finance team. I have some additional information. With regard to C to 1 ratio, The dividend and shareholder return policy. Every year, 20BP improvement is being planned. Because of coronavirus, if we set aside more capital than the CG1 improvement rate, it will become even quicker. In a normal situation, we believe that 20 BP improvements annually can be possible. Before coronavirus, the capital policy that we had in place was very much focused on shareholder return. So I would like to emphasize that. With regards to the preemptive provisioning, that was a question that you asked. JP Morgan in China, they recommended preemptive provisioning. But there's a difference in accounting methods. There's a general reserve in other countries. When the economy turns bad, they're not particular borrowers. But general provisioning can be set aside preemptively. For particular borrowers, provisioning can be used. But in the IFR that is being applied to Korea, the borrowers and the provisioning are matched. So the preemptive provisioning, the necessity for that is there, of course. So if... A certain borrower's financial status will turn bad. I think more detailed analysis or anticipation or evaluation is required. About three to six months of very intricate and elaborate evaluation is necessary. And with regards to the 40 BP is the target for us.