Shinhan Financial Group Co Ltd

Greetings. I am Park Cheol Woo in charge of IR. I would like to thank all participants in our business results presentation and begin the 2020 Q3 earnings release. From Q1 of this year, we have been halving this earnings call with only voice in order to have the minimum number of staff due to COVID-19. We ask for your understanding. We have here with us our CFO Noh Yong-hoon, CSO Park Sung-hyun, CRO, Bang Dong-kwon, Head of Strategy Planning, Kim Ji-wook, and Head of Finance Management, Kim Tae-hyun. We will first hear the 2020 Q3 earnings presentation from CFO, Nu Yong-hoon, and then have a Q&A session. I would like to invite our CFO, Nu Yong-hoon, to walk us through the 2020 Q3 earnings. Greetings. I'm Sinan Financial Group CFO, Nu Yong-hoon. Thank you all for taking part in the 2020 Q3 earnings release. With the weather turning cold, a second wave of COVID-19 pandemic is spreading around the world and the speed of economic recovery is becoming delayed. With still a great amount of uncertainty regarding the economic recovery, while maintaining solid basic fundamentals, It is an important juncture for us to prepare for the future. In particular, utilization of capital, the basis of activities of financial companies, will become an important yardstick that will decide the future competitiveness in an environment like in the current situation. Based on this diagnosis, Shinan Financial Group in Q3 worked hard to continuously create conditions to generate capital and asset profitability even after the post-COVID era. I will briefly cover this from pages 5 to 6 and then explain about the group's Q3 earnings. Let's go to page 5. A characteristic of Q3 activities of Shinhan Financial Group is that we continued efforts to improve capital profitability. In particular, in the investment banking area with high capital and asset profitability, based on operating income, GIB rose 24% YOY and GMS rose as much as 128% YOY, a high growth rate, respectively. Jinan, in order to increase the profitability of investment banking and property asset management, has adopted the matrix operational system, the basis for cooperation between many subsidiaries. The experience of the Matrix Operational System accumulated for many years is showing its effect in a difficult situation like in the current situation. On the other hand, with the continuation of SME funding support in order to overcome the COVID-19 situation, the growth rate of corporate loans has grown 11.2% compared to late last year and is maintaining a high growth rate. From Q4 of this year, we will utilize raised capital so that the growth momentum of the business areas with high profitability can be maintained. As aforementioned, we believe that in a situation like in the current, the utilization of capital is an important yardstick to determine the future competitiveness of a financial company. And when we announce the paid-in capital increase in September, we also forecast our mid-term capital policy target It's not at the level of the detailed guideline, but we set the CET1 ratio target of 12% going forward, and based on this target, we mentioned that we will implement diverse shareholder return measures, including quarterly dividends. As of September, we have reached CET1 ratio of 12%, and based on this, more aggressive profit growth and ultimately shareholder return will be possible. As you can see on the next page, we will communicate with the market regarding the details about our capital utilization. The material that you can see on page 5 shows the CET1 ratio as of September 2020. The current CET ratio as of end September is posting 12%, and this is an 89 BP improvement YTD. You can see that we had an improvement. The capital ratio accumulated through income generated until end September is 108 BP, and the capital allocated for profit generation was 76 BP. With the expansion of other comprehensive income, including GMS, the CET1 ratio improved 18 BP. With the expansion of assets in the new growth areas including IB, the size of allocated capital can get bigger than the current situation. On the other hand, as a part of M&A activities, the change of capital ratio caused by the integration of Orange as a complete subsidiary early this year was neutral. Apart from this, there was a 44BP improvement with paid-in-capital increase which was resolved in September. As you are well aware, as a part of the government's deregulation measures regarding the COVID-19 situation, there was early adoption of Basel III credit risk, which led to a 110 BP nominal improvement in capital ratio. However, taking into consideration the Basel III adoption schedule, capital management will be continued centering on the CT ratio of the past standard. Assuming that the CET1 ratio as of September end is maintained, and if the ordinary income at the end of the year is realized at a similar level to the previous year, we expect to pay out at least the previous year's levels dividend per share. From the next quarter's earnings call, we will show you the capital ratio allocated for shareholder return. Now let's go to page 8, Groups Management of Performance Highlights. The financial performance as of Q3 2020 posted... 2 trillion 950.2 billion won of net income, a level up in recurring fundamentals. On a quarterly basis, it posted 1 trillion 144.7 billion won, the largest quarterly income since we were founded. Despite the COVID-19 situation and the provisioning against investment product issues, You can see that the situation has improved. And as aforementioned, despite the COVID-19 situation and the provisioning against investment product issues, the size of income grew 1.9% YOY, not only on the back of 2% interest income growth following the high loan asset growth rate following COVID-19 support measures, Marge and Guardian, but also because there was a 4.8% YOY increase in highly profitable based non-interest income. On the other hand, in terms of cost, SG&A and provisioning is being managed stably. SG&A increased 2.6%, YOY and the group CIR ratio posted 42.5%, the lowest level in the industry. With acceleration of digital transformation going forward through efficiency improvement of front, middle, and back, We believe that a low level of CIR can be maintained. Despite concerns regarding the COVID situation, the CCR is being maintained stably at 42 BP. Excluding the provisioning related to COVID-19 and investment products which took place in Q2, the recurring credit cost ratio is maintaining a 30 BP range, showing the effect of preemptive risk management considering COVID-19. From page 9, I will cover the details of Q3 financials. 2020 Q3 group interest income posted 6 trillion won, a 2% increase YOY. With the continuation and maintenance of external growth, it seems to have offset the margin decline effect caused by the policy rate cut in May. On the other hand, despite the group quarterly margin drop of 3BP in Q3, We expect more stability from Q4, taking into account the recent market interest rate trend. The bank's loans in won growth rate on a cumulative basis until Q3 posted 7.7%. Looking at the breakdown per annum, household loans grew 4.4% and corporate loans grew 11.2% respectively. In particular, with the maturity extension of the COVID-19 financial programs, SME and SOHO loan assets grew greatly, driving the overall asset growth trend. With high concerns over the situation about the financial support program when it is over, through a loan early warning system utilizing big data and other measures, we will continue preemptive risk management. I will now cover the group non-interest income from page 10.

The group's non-interest income in Q3 rose 4.8% YOY to 2,711.9 billion won. This is attributable to valuation gain on securities due to capital market stabilization in Q2, but what is noteworthy is the increase in fee income. The fee income as of Q3 YTD increased 8.4% YOY to 1,755,000,001 The breakdown of fee income shows growth in many areas, with the exception of retail investment products due to the PE-related incident. Despite concerns of shrinking consumption due to COVID-19, the credit card fee maintained a growth rate of 2.8% on a cumulative basis. With the brokerage fee increase of 121.5% driven by the retail investors' stock trading, the profit base related to retail investors was well defended. In addition, lease financing fees and IB-related fees, except for one-offs, led the fee income increase in Q3. Let me now discuss cost on page 11. The group's SG&A in Q3 YTD grew 2.6% YOY, and the group's CI ratio is maintained stably at 42.5%. We will continue to keep the CI ratio at a low level through efficient management system enabled by digital innovation. The group's loan loss provision increased 40.6% YOY, but if we take out the provisioning related to COVID-19 and DLS in Q2, It is actually a decrease of 0.8% YOY. Considering the recurring credit cost ratio set to be in the latter 30BP according to the 2020 Business Plan, credit cost is still in the stable range. The delinquency ratio, which is considered the leading indicator for future credit cost, has fallen both YOY and QOQ. Not showing signs of deterioration in asset quality due to COVID-19. However, taking into account the uncertainties, including the extension of the COVID-19 relief program up until Q1 next year and economic recovery not taking off, preemptive risk management is vital. We'll be prepared for the uncertainty through many different means, including the early warning system utilizing big data that I mentioned earlier. Page 12. Please refer to the slide for capital adequacy indicators. As of Q3, ROE stood at 10%, recording a two-digit ROE every third quarter for four consecutive years. We will continue to work to enhance ROA and ROE in a sustainable manner. The subsidiary's business performance on the next page. Thanks to the outstanding performance of the non-bank subsidiaries in Q3, non-bank's contribution to net income increased 23.8% YOY and it increased to 41%. With the securities capital and IB arms going strong this quarter, We were reassured of Shinhan's diversified portfolio, able to maintain its fundamentals despite the challenging environment. Across the matrix, due to COVID-19 and DLS, the operating income in wealth management and global business fell. However, wealth management maintains its growth momentum in size and the number of customers, so it is expected to recover when the external conditions improve. Income from global business decreased 16.2% YOY, but this is because they had provisioned in Q2 compliance with Korea's domestic standard. Without that factor, the recurring income is at a similar level or even a 7% increase YOY. We will continue to manage profitability, liquidity, and soundness in each country. Please refer to the next page for more detail on the status of the global business. I will now continue with the explanation about the contribution made by the digital initiative. Please look to page 15. Recently, Shinan Financial Group has stated that it will accelerate its digital transformation by, for example, setting aside a separate budget for digital. Right now, we're in the middle of measuring the financial return on digital activities, and we would like to share some of that with you on this page. Digital transformation is not limited to a strategy based simply on channel expansion. It is a group-wide innovation affecting all front, middle, and back office activities. In that regard, we're measuring the impact by developing both profit and cost indicators. Let us first look at how much digital contributed to operating income. In Q3, its contribution to the group's income was 11.6% growing year on year. And by subsidiaries, we can see that the digital contribution is high in Shinhan Card through digital pay. And let's look at the cost side. Digital's contribution to cost saving is most pronounced in the front office with the expansion of new digital products. We also see some cost-cutting effect in mid-to-back office through paperless branches and robotic process automation. We will continue to develop a number of indicators so that we can communicate the various financial impacts digital activities have. Lastly, ESG on page 16. We believe ESG is not limited to a simple set of strategic initiatives in enabling long-term sustainable growth and creating results. Since they have impact on the long-term financial status, we will keep communicating with the market the ESG activities that we are engaged in. This page shows that up to Q3 2020, the total amount of green finance executed was 1,990,001,000,000 and inclusive financing 22 trillion 722 billion won. Shinhan does not stop at calculating the financial support extended to each ESG scheme. We are getting ready to properly measure the impact of our ESG activities, for example, by introducing the carbon neutral concept based on carbon emission and developing the social value measurement system based on social values. We will share more concrete results with you once we are ready. Detailed information about the Group's ESG activities thus far can be found in the Annual CSR Report. The remaining slides are for your reference, guiding you through major subsidiaries' performance and business indicators. The year 2020 will be remembered as a year facing unprecedented challenges of COVID-19. It is essential to be prepared for the future which we don't know how it will unfold. To make the best possible preparation, we will strengthen our fundamentals as well as keep working hard to create sustainable corporate value. Please show us your kind attention and support so that we may continue on our differentiated Shinhan way This concludes the earnings presentation and now we will have a Q&A. Thank you. Thank you very much. We will begin the Q&A. If you have a question, please press star and 1 on your phone and you'll be given a chance to speak in the order that you press the numbers. And if you wish to cancel, please press star and 2. And if you wish to speak in English, we are providing consecutive interpretation into Korean, so please hold as your question gets interpreted into Korean. And there may be some latency until you are connected, so please hold also. We will get the first question from Hyundai Motor Securities. Mr. Kim Jin-sang, please go ahead.

Congratulations on your great earnings. I have two questions. First question is a simple question. Regarding your CIR, you mentioned it's 40.5%, 42.5%, so it's quite good. And looking into the next three years, I'm sure that you have integrated related costs as well, and digitalization related costs actually, so do you think The numbers of CIR will be affected and do you think the cost will be big in the beginning and then your CIR is going to go down in the mid to long term? So the current level of CIR, do you believe it can be maintained? That is my first question. The second question is related to excluding one-offs on a recurring level. You had about 1 trillion won and in Q2, in Q3 actually, what were the Special factors, outstanding factors, and regarding your recurring fundamentals, do you believe that it's sustainable? Last question, actually, regarding the government programs, the deferral of interest payments or interest holidays seems to be most worrisome, so can you tell us about the situation and What is the amount of interest based on the principal? So can you tell us about what impact this may have on your group? Thank you very much. I am the CFO, Lu Yong-hoon. I think you gave us three questions, and based on that, First, related to digital innovation, we mentioned that for the next three years, about 10% of our group's net income in the past, we didn't have a separate digital budget, and it was included in our ICT budget, but we mentioned that this will be separate. So that we will accelerate digitalization. So we announced that after setting it as our plan going forward. And the 10% that we mentioned, well, it can include the recurring costs, but capital-related costs are included as well. With the digital innovation, regarding one-off expenses and costs, We are still getting material for next year's financial plan, so we cannot give you concrete details. But a sizable amount will be related to capital. So regarding the CIR ratio, even though we do have digitalization efforts, we don't believe that it will deteriorate in the next two to three years. And because of our increase of income regarding our raising of capital, We believe that the CIR-related factors that could push up the CIR a bit will not be that sizable. And in Q3, you mentioned one-offs. In Q3, what they are, the breakdown, and whether we can maintain the recurring level of fundamentals. Regarding the one-offs, there could be many factors, and looking at it conservatively, the biggest one-off is Shinhan Life Insurance's building that we have as a type of profitable security, but we sold this off. So we had the profit of $49 billion won, so that is the biggest one-off factor. And then we accumulated additional provisioning, but if that is not seen as one-off, then the $49 billion will be seen as a one-off factor. Then in a quarterly recurring level, the fundamentals, well, it goes beyond $1 trillion won. for our recurring income. And in Q4 and in next year, we have a goal to push this up. And of course, we do believe that we have possibility of sustainability. And regarding the interest holiday, I am the CRO and I will answer your question about the interest holiday. and the amount of interest is about 6 billion won and principal is about 300 billion won and it is not a sizable amount so we believe that it will not affect our robustness and we believe that as you know for this year well if this becomes reflected into the financials next year then there could be some marginal companies, marginalized companies that will be affected, but we are actively, preemptively preparing for these possibilities. I am Kim Tae-yeon, head of finance management, and just to elaborate on the first and second questions related to digital expenses, we mentioned that we will invest more than 10% of our net income into digital innovation, but it is on a cash basis, so capital expenditure or capital type of Thank you very much. Collaborative efforts with fintech companies, there could be some capital going in, but it could be seen separately. So we believe that it will not have a great impact on CIR. So the depreciation because of capital-related expenses and others will be limited. So we will not have a big impact on CIR. And regarding the quarterly recurring income, whether it can be maintained at the one trillion quarterly level, Looking at last year's earnings, it was about 900 billion won per quarter, and we believe that was realized. And regarding what has changed between last year and this year, you can see that Orange Life, 60% to 100% of the shares was acquired. If they have more than 250 billion won of income this year, then we could have about 100 billion won of plus because of that. And we had the capital increase of 660 billion won for Shinhan Investment Corp and related to those funds for Shinhan Investment Corp. They had Shinhan Investment Corp accumulated 300 billion won of provisioning, but They were able to realize a sizable profit and income. So looking at those two factors, we believe that financially, we already have reached the 1 trillion line and we believe that it is indeed sustainable. Thank you very much.