Shinhan Financial Group Co Ltd

Greetings. I am Park Cha-roo, 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 Group 2021 first-half business results 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, Noh Yong-hoon, Group CFO and Shin Han-tae CEO, Lee Sung-yong, Group CMO, Heo Young-taek, Group C SSO, Park Sung-hyun, and Group CRO, Bang Dong-kwon. First, CFO Roh Yong-hoon will walk us through the 2021 first half business results and then we will engage in a Q&A session with all of you. I would like to invite our CFO Roh Yong-hoon for 2021 first half earnings presentation. Greetings. I am Shinhan Financial Group CFO, Noh Young-hoon. Thank you for taking part in the 2021 First Half Business Results presentation despite your busy schedules. 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 Group's income has a 5 to 5 breakdown between the bank and the non-bank. It is evolving as a differentiated profit model of global financial companies. Non-bank net income rose 20% YOY through margin management and quality asset growth. Non-banking recorded a record high half-year net income, a 68% improved YOY. Looking at the breakdown 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 507.4 billion won, which is 43% of the group's non-banking 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 balanced earnings improvement centering on high ROE business. Secondly, uncertainty is continuously decreasing. 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% YOY and even 9% QOQ. Even excluding the COVID-19 provisioning that was additionally provisioned in the first half of last year and the provisioning for problematic investment products, it had decreased 30% YOY. For the qualitative improvement of loan assets, we strengthened 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. On the other hand, Shinhan Bank's interest deferment principal balance in the COVID-19 support program posted 152.4 billion won And after it increased until end December 2020, as of the first half 2021 now, it decreased below the level of end June in the previous year. In addition, for problematic investment products, through verification from KPMG, an external assessment institution, we are receiving appropriate assessments each quarter. We are actively responding to minimize related uncertainties. Third is capital profitability. ROE posted 11.5%, and on the back of record high half-year net income, we achieved two-digit ROE. Based on efficient growth management, based on RWA, we increased ROE, and through efficient capital allocation, we are generating sustainable profits. The increased amount of RWA in 2021 Q2 was 2.2 trillion won, and it was managed at a level which was less than half that of 4.8 trillion won, which was the increased amount in Q1. I would like to touch on our shareholder return policy. We are reviewing dividend plans based on press reports on the conclusion of the financial authorities' capital management recommendations. First of all, we are reviewing quarterly dividend payouts to shareholders who own shares as of end June. We are considering equal quarterly payouts, taking into account the previous year's CPS, and the details including dividend amount will be decided at the BOD, which will take place in August. Since the COVID-19 situation is still serious, we will closely monitor the market situation and execute our shareholder return policy. From page 5, I will explain in more detail about the 2021 first half financial results. Despite complex uncertainties including prolongation of COVID-19, we were able to record $2,443.8 billion won of net income, which surpassed recurring income fundamentals of $1 trillion won per quarter and $2 trillion won on a quarterly basis that we had been mentioning from last year. Q2 net income posted 1 trillion 251.8 billion won. This is a record high quarterly net income since we were established, as well as at the same time a record high half-year net profit, so we could confirm that our diversified recurring income basis is expanding. In particular, financial support for companies and households is continuing. We acquired early sales growth engine, improved our margin, and the first half interest income posted 4,356,400,001, a 8.3% improvement compared to the previous year. Loans in won increased 4.2% YTD and SME loans increased 7.6% YTD and drove growth. To elaborate on growth from a qualitative management perspective, the SME loans and SOHO loans that we newly handled in the first half of this year increased in the high premium loans of A-minus or higher rate and the proportion of SME loans with higher than BBB plus rating also increased 4.6 percentage points YOY for externally audited companies and more than 5.4% P for non-audited companies. In addition, the collateral ratio of newly handled SME loans increased. Non-audited collateralized loan ratio increased 8.8% P YOY and SOHO also improved 5.5% YOY. If early asset growth was pursued in the first half, in the second half based on RWA, we will control growth speed and focus on qualitative growth.

If Shinhan Financial Group's base scenario under the 2021 business plan becomes a reality in which the BOK freezes its base rate this year, Then the bank NIM is expected to rise 1 BP every quarter in the second half. We'll make efforts to enhance the NIM further by improving the loan yield and managing the low margin unused credit line. Income from the non-bank side increased significantly also. Non-interest income in the first half increased 13% YOY to 2 trillion 14.3 billion won. This is thanks to the increase in the fee income as well as the profit gained by the subsidiary companies in the capital market segment. Strategic cost cutting continues to this day. Along with the offline channels made more efficient, cost cutting is continued thanks to digital initiatives enabling CI ratio of 41.4% in the first half. As part of the effort to continuously improve the cost structure, Shinhan Bank and Shinhan Investment Corp. implemented ERP. The CI ratio excluding the ERP cost in the first half is 40.4%, managed below the interim target. In the first half, about 20 branches were consolidated, and in the second half, we'll continue to downsize the face-to-face channels and realign human resources in the core business lines such as capital markets so as to enhance the operational efficiency. The group's credit cost ratio is being managed stably at 20BP. The bank's credit cost ratio in the first half was 8BP, a 21BP fall YOY, and record low level. This was possible due to the flexible response under COVID-19 and preemptive risk management, effective against market uncertainties. The delinquency rates of Shinhan Bank and Card, which are considered leading indicators for credit costs, both fell YOY, not showing signs of asset quality deteriorating due to the pandemic. Please refer to pages 6 to 9. for detailed financial performance by item. I will now go right to page 10 to talk about the group's profit contribution and performance by matrix. Page 10, the net income contribution in the group is broken down 53% for bank and 47% for non-bank. which clearly shows the diversified profit structure. Even within the non-bank segments, the profit is evenly distributed over retail, insurance, and capital markets. Looking at the operating income by the matrix organization, GIB Global Retirement Pension realized record high half-year profit. and Wealth Management that had contracted due to the problematic financial products is slowly recovering. Customers' assets increased by 4.9 trillion won YOY and the number of high net worths with more than 500 million won increased by 1,700 people YOY and by 1,100 QOQ. Moving on to digital on page 11. In order to actively respond to the competitive digital environment, we are expanding the group platform's coverage for the customers. With the customers' digital needs rising under the pandemic, the group's MAU is increasing rapidly since 2020. The MAU for Shinhan Bank's Seoul app has grown 9% YTD to 7.48 million in that of Shinhan Card, Payfan increased 26% to $5.14 million. Let's talk about the earnings. The digital channel's operating income before expenses recorded $824 billion won in first half, up 52% YOY from $543 billion won. Everything about the bank, including the process, content, space, etc., are being upgraded. to enable customers' digital experience. Shinhan Bank, as part of its upgrade efforts, is opening DigiLog branches, which are a mix of digital and analog, which is expected to allow fun and innovative financial experience for the customers. Please visit our Seo-Seo Moon Southeastern Central and Mok-Dong PWM DigiLog branches and see for yourself what interesting banking experiences are available. We're actively expanding our strategic digital investment. We have created and are managing the group's SI fund of $300 billion won, and in the first half, investment was executed in a digital platform company and others in the areas of mobility and smart city cooperation. Please refer to the slides for further details on earnings creation and cost saving from digital channels and digital coverage. We are highly committed to ESG activities as a Korean financial institution, and the results are shared on page 12 for your reference. Also, check out the website for the 2020 ESG report published in July. Page 13 summarizes the main results of fresh 2020s, which are the group's mid- to long-term business strategies, and the following pages after that list The groups and the subsidiaries' performance and major business indicators for your reference. Up until now, I've gone over our business results. We are headed in a consistent strategic direction and we're producing upgraded recurring profits without one-offs. And we will do our best to show better results in the second half. As for now, we will watch out for and manage the asset quality for the financial support program that is to expire at the end of September. And we'll do our best to maximize the results from collaboration in the digital investment and continue to upgrade capital profitability. This concludes my presentation and we will proceed with Q&A. Thank you. Thank you very much. And now we will take questions. If you have a question, please press star and 1 on your phone, and you'll be given a chance to ask your question in the order that these buttons were pressed. And if you wish to cancel, please press star and 2. And English questions will be interpreted into Korean, so after asking your question in English, please wait as your question is being interpreted into Korean. And there's some latency until the connection is made, so please hold.

The first question is from Hyundai Motor Securities. Mr. Kim Jin-sang, you're on the line, sir. Greetings. 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 Sohos, 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 Thank you very much Mr. Kim Jin Sang for your questions and please hold while we prepare for your answers. Our CRO, Bang Dong-gun, will answer your first question, please. Thank you very much, Kim Jin-sang, for your insightful questions. I am Bang Dong-gun, 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 stability. 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 We have different credit rating models that we're developing. So if that opens in the latter half of the year, we will have differentiation so that we can still maintain stability like we are now. Thank you. For the second question, our CMO Heo Young-taek will answer that question. Actually, our CFO, Noh Yong-hoon, will answer the question. 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 400 billion won 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-taek. I am CMO Heo Young-taek. As of July 1st, successfully we had integration of the two companies and launched our promotion model. I think it's showing the future of Shinhan Life. So we actually think of this as very positive. For both of our subsidiary companies, the goal is about 400 billion won, and it was about 300 billion won 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 a surpassing of the goals we had set forth for the year. Well, maybe I'm being overly confident, but that's the current picture. And for the IFRS, when this becomes adopted, then on the whole, we will have more strengthened transparency, and we believe that we will have an overall level up. It's because looking at our ALM structure, compared to any other life insurance company, we are being very well managed. So IFRS adoption will, we believe, lead to our market differentiation. Thank you. And we will have... Park Sung-yong, who will also answer the question. I'm in charge of strategy, and if it's 300% for the IBC, then it is top class for an 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, it was non-binding, so we had 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 markets and lead to very positive effects on our income. Thank you.