Shinhan Financial Group Co Ltd

Good afternoon. I'm IELTS Head of IR. I'd like to thank all of you for taking part in today's event. I will now commence the 2020 Q4 earnings presentation. We ask for your understanding that only oral presentation is being provided due to the COVID-19 since Q1 of last year. Once again, we ask for your understanding. With us today is our CFO, Noh Yong-hoon, CMO, Hwang Young-tae, CSSO, Park Sung-hyun, and Seoro Bang Dong-geun. We will begin with a presentation of the 2020 Q4 business results by CFO Noh Young-hoon and an explanation on the group's ESG strategy by CSSO Park Sung-hyun. And afterwards, we'll move on to a Q&A session. We'll now invite CFO Noh Young-hoon to walk us through the business results of Q4 2020. Good afternoon. I'm Noh Young-Woon, the CFO of Shinhan Financial Group. I'd like to thank all of you for taking part in the 2024 year's earnings presentation of Shinhan Financial Group. We'll start from page 5. In Q4, as well, the ordinary income of Shinhan Financial Group continues to be improved. In 2020, there were a number of uncertainties that prevented us from implementing the business plan that we had set up early in the year. We have responded preemptively from a conservative point of view during Q4 to minimize the losses related to the redemption suspended funds such as LIME and the uncertainties arising from COVID-19. First of all, the response to product and dispute and overseeing the investment assets. In Q4, as we have already informed during Q3, we have reflected evaluation from an external audit for LIME and other such redemption suspended funds. Accordingly, The bank has recognized 69.2 billion won in expected damages for customer losses as non-operating expense. Meanwhile, the investment corps recognized 115.3 billion won expense in Q4 losses related to Lim TRS proprietary assets. Including Q4, in relation to financial investment products sold to customers, expenses totaling 472.5 billion won was recognized for the full year in 2020. And for the full year, the cumulative is 520 billion won that was recognized. In Q4, through a conservative recognition of the losses in financial investment products sold to customers, we expect to limit the recognition of expenses and future related losses. In addition, in some of the overseas investment assets invested with proprietary assets, the losses in valuation of 69.6 billion won assessed by an external audit were recognized as non-interest expense and expenses that may arise in the future due to COVID-19 was preemptively reflected. Second is the provisioning set aside related to COVID-19. In Q4, as well, As in Q2, additional provisioning related to COVID was set aside, coming to a total of 187.3 billion won. The future economic outlook was reflected conservatively, so that additional provisioning of 108.6 billion won was set aside. The DCF and stages were reclassified for the loans to companies with short-term default risk, leading to a recognition of 78.7 billion won. Through such preemptive and conservative expense recognition, We would like to once again emphasize that we have made the necessary efforts to reduce any uncertainties in improving the ordinary fundamentals in the future. On page 7 in the Group Business Results Highlights, I will provide a detailed explanation of the Group's strengthened income fundamentals. The financial results of the year 2020 posted a net income of 3,414.6 billion won despite adverse market conditions. It's up from 2019. In 2020, we saw profitability improve on the back of increased income from growth in loan assets, increased stock transaction amounts, and growing income related to market or securities. However, due to COVID-19 provisioning and write-off of investment product losses, incomes were realized at levels similar to last year. However, if COVID-19 provisioning and investment product losses are excluded, that income comes The COVID-19 provisioning and recognition of investment product losses, as has been explained previously, was undertaken from the point of view of minimizing the future uncertainties. And we are closely monitoring the situation, so we don't anticipate any significant expenses arising in relation to this in the future, including COVID-19-related financial assistance, fair assets, Thank you very much. Thank you. Financial Assistance Program, the credit cost ratio posted 41BP managed at a stable level. Starting from page 8, details of each line will be explained. In 2020, the group's interest income came to 8,155.1 billion won. Up 1.9% YY, interest income from both bank and non-bank subsidiaries grew YY. As fair growth and size continued, we were able to offset the impact from falling margins driven by the BOK rate cuts in 2020. In Q4, the group's margin fell by 2BP, showing the fall to have moderated. Barring a change in BOK rate cut, margins during FY21 is expected to maintain the same levels as Q4. In 2020, the Korean won loans at the bank grew 10.6% YOY. and for the first time since 2015, realized double-digit growth. A breakdown by segment shows retail loans having grown at 9.0% while corporate loans grew 12.3%. The amount includes the bank's COVID support program including maturity rollover and suspension of principal repayment. The amount for interest deferral is 6.4 billion won. To strengthen asset quality monitoring, after the deferred period is over, we're aiming to minimize the impact of asset quality, and given the executed amount under development programs, we expect that the impact of default won't be anything significant. Next on page 9, let me talk about the Group's non-interest income. In 2020, the Group's non-interest income stood at $3,377.8 billion, up 7.9% YOY. This is because fee income and income related to marketable securities jumped significantly. In particular, the fee income grew 11.3% YOY and because of increasing stock transaction amount, the stock brokerage fees were expanded and the lease fees have surged as well. Next on page 10, expenses. In 2020, the SG&A posted $5 trillion 1212.5 billion won, up 1.5% YOY. The group's cost-income ratio posted 45.2% down 0.9% YOY. For your information, the group's ERP expense posted 92.4 billion won, slightly lower than the average year. Going forward, we will endeavor to continue posting a low-level OCI ratio through enhancing the efficiency of our operating system, driven by digital innovations. Meanwhile, the Group's NPL coverage ratios stood at 46.3%, an increase of 439.8 billion won . From this, the additional provisioning for COVID-19 in 2020 was 394.4 billion won . In 2020, the credit cost ratio was 0.41% up 9BP from last year. The credit cost ratio excluding the COVID provisioning is 0.29% down 1BPYY. Given that the ordinary credit cost ratio was in the north of 30BP according to the 2020 business plan that had been drafted before the outbreak of COVID, the credit cost is quite stable.

Our expectation is that the changes on the asset quality will become visible after the COVID financial relief program comes to a completion. The provisioning and the buffer included in the year's business plan should be more than enough to respond to any changes that may occur. If you look at the delinquency ratio, a leading indicator for the future credit cost, both the bank and the card businesses saw the delinquency ratio drop YOY as well as QOQ, implying no deterioration in the asset quality due to COVID-19. Next, on page 11 of Capital and Profitability Indicators. The AT1 ratio is expected to be 11.7% or 0.06% of percentage points from the year end. The figure here does not include a set of early introduction of BESA-3 credit risk reform. SSG will exert efforts to improve asset quality so as to be in line with the mid-term goal of attaining 12% based on solid net profit improvement on the back of its enhanced profit-generated capability. For your reference, the new CET-1 ratio is 12.9% and the impact of early introduction of BESA-3 reforms will be 116 BP. As the Board has not yet been convened, a dividend for FY20 will be disclosed early March after sufficient discussion with consideration to various conditions and external environment. CET-1 ratio changes from the end of FY19 will be included in this IA presentation staff and uploaded onto the homepage after the dividend decision has been taken by the Board. As was mentioned during the Q3 IR presentation, quarterly dividends will be made available when various shareholder returns are possible with business conditions stabilizing, including the phasing out of COVID-19. ROE for 2020 was 8.4%. It would be in the 9% range when largest capital increase is included. As of January 2021, Neoflux changed its name to Shinhan Venture Investment, and Shinhan Asset Management, formerly known as Shinhan BNPT Asset Management, is now a full subsidiary of SSG. SSG will continue to enhance returns to shareholders by expanding capital market-oriented portfolio that improves the group's IOE. Next page covers performance per business line. Thanks to its outstanding performance, the non-banking businesses' contribution to net income recorded 41% of 7% points from last year. Shinhan, a diversified portfolio that can withstand high volatility of the capital market has been demonstrated thanks to positive performance by capital, IB, and trading business units. By matrix, operating income of WN business dipped due to COVID-19 and the private equity fund incident. However, high and profitable portfolios such as GIB and GMX performed remarkably well. On the next page, detailed explanation of global business is provided for your reference. On page 14, I will cover the contribution by digital business. In the area of digital, strategic response to the big tech will be made at the same time as seeking opportunities for collaboration. Active support and investment for digital transformation will of course be continued. As mentioned during the last earnings call, 10% of the group's net profit for the next three years will be set aside to support new businesses and to secure core technologies. Now about financial digital businesses. In Q4, contribution to the group's revenue via digital activities was 12.7%, growing rapidly every quarter in 2020. Revenue growth in digital business of the Card China Investment Corp is especially a standout. Cost reduction due to digitalization rose compared to the previous quarter, and in 2020, cost saved will be as much as 38.7% compared to the previous year. Since launching the open banking service in October of 2019, the number of clients as well as size of the assets have steadily increased, with the number of users for the bank app sold now reaching 12.5 million. New business development continues to be active as can be seen with 13 new businesses being chosen as innovative financial services. The group aims to secure superior advantage by actively responding to changes in digital regulations as can be seen in business license acquisition for MyData business by the bank and the cards. Lastly, as for the ESG activities on page 15, Chief Strategy and Sustainability Officer, VP Park Sung-hyun, will walk us through.

Greetings.

I am CSSO Park Sung-hyun. In November 2020, SSG became the first East Asian financial institution to announce its strategy of zero carbon drive to respond to climate change. The plan is to achieve zero carbon emission for the Group's asset portfolio by 2050. It is indeed a very ambitious goal for a financial institution with a portfolio to reach carbon neutral. The reason for such high reach goal is that the market environment is changing due to strengthening of regulations related to carbon neutrality by international organizations, nations, and financial authorities including Korea. What this means is that business as usual and traditional role of finance are no longer applicable. Therefore, Sinan aims to look at this A changed environment as a new business opportunity. It plans to do so by proactively trying to achieve zero carbon and entering early on into profit-generating markets, doing continuous research, and collaborating with other stakeholders. In order to reduce emissions from its asset portfolio by 38.6% by 2030, a quantifiable goal was set. to make eco-friendly investments and assistance worth about 30 trillion won. Reduction target was set by applying science-based target initiative guidelines as published in October of 2020 in order to implement Paris Accords. The scope of goal for carbon offset will be adjusted based on case taxonomy, the green finance standards to be announced shortly by the Korean government. Shin-an, in particular, will expand its support for renewable energy and development of eco-friendly new technologies and opportunities. This presents the presentation on ESG. This is Noh Young-eun, the CFO, from page 17 and onward, contains detailed earnings information of the group and its major subsidiaries, as well as main business indicators for your reference. Year 2021, as was the case with 2020, will be a year of complex uncertainties with added confusion and chaos. Vaccination does signal hope. However, in the financial plan for 2021, such factors as how much longer the current pandemic will last, how fast digital players move into the market, and how to restore the trust of WM clients have been included. To prepare for a future with sustained growth, Fundamentals will be made stronger, quality improvement of core businesses will be endeavored, and new engines for growth will be explored. That concludes the earnings presentation. In this auspicious year of write-offs, I wish you success in all of your future endeavors.

Thank you.