Shinhan Financial Group Co Ltd

Good afternoon. I am Park Cheol Woo, head of IR. I would like to welcome everyone to the Sinan Financial Group's 2022 fiscal year earnings presentation. Several housekeeping rules before we begin the earnings presentation. We're holding today's earnings presentation via digital platforms, including the Sinan Financial Group IR YouTube channel and the Zoom application. The YouTube live channel is in Korean only and questions cannot be asked. And so if you'd like to view today's IR in English or if you have questions to raise, please join us through the Zoom application. More details on how to join us is explained to you on our website, www.shinangroup.com. We now begin the 2022 Fiscal Year Earnings Presentation. In today's presentation, we have with us the Group CFO, Lee Tae-kyung, the main presenter, and the Group CEO, Kim Myung-hee, the Group CFO, Bang Dong-gon, the Group CSSO, Ko Seok-hyun, Sinan Bank CFO, Kim Ki-hong, Sinan Card CFO, Kim Nam-joon, Sinan Securities CFO, Lee Hee-dong, and finally, from Sinan Life, the CFO, Park Kyung-won. Today's earnings presentation will proceed as follows. CFO Lee Tae-kyung will walk you through the overall business results for 2022, while the achievements in the digital area will be presented by Kim Myung-hee, after which we'll have a Q&A session. I now invite CFO Lee Tae-kyung to present the business results of 2022.

First of all, thank you for participating in our fiscal year 2022 annual business results presentation despite your busy schedules. On page 4 of the business results presentation, I will first go over the highlights. Please go to page 4. 2022 Q4, due to factors such as non-recurring items and recognition of costs to prepare for future uncertainties, net income was lower than the market consensus and recorded 326.9 billion won. Regarding the major non-recurring items which occurred in Q4, I will explain in more detail from the next pages. On an annualized basis, Group's cumulative net income posted 4,642.3 billion won, and despite uncertain economic conditions at home and abroad, we steadily improved net income. Excluding the 321.8 billion won of sales gained from Shinhan Securities HQ Building sale income, It was a 7.5% increase YOY. Group's annual CIR posted 45.5% and despite the digital-related cost increase and inflationary factors, is being managed at a stable level. Group's annual credit cost ratio posted at around 33-bit level, and despite additional provisioning for future uncertainties due to deterioration of the internal and external economic environment, it is being maintained at a stable level. And going forward, Sinan Financial Group will maintain a conservative provisioning policy. Last, I would like to go over the group's capital policy. At the BOD meeting held today, the 2022 year-end dividend per share was decided at 865 Korean won, and if the previous quarterly dividends are included, the annual cash dividend payout ratio is 23.5%. In addition, if we include the two rounds of share buyback and cancellation that took place last year, 2022 TSR is 30%. Going forward, we will strive forward to maintain an appropriate capital ratio and also continuously improve our shareholder return ratio. Let's go to page 5. First, I will go over the main reasons why Q4 performance fell short of the consensus. First item was the 146.4 billion won evaluation loss which was recognized for the principal protected pre-2000 personal pension trust which was newly recognized because of the newly released interpretation by Korea Accounting Institute. However, since this was mostly valuation loss from bond price decline due to interest rate hike, losses will be recovered in full amount when the bond reaches maturity and most of this will be recovered as valuation gains within two to three years. Second is the customer investment product related losses of 180.2 billion won, 130.7 billion won after tax. At the beginning of last year at the 2021 annual business results presentation, I mentioned that the estimated loss related to the sale of investment products could go up at maximum to 200 billion won after tax. Of this, considering the amount recognized in 2022, expected loss of about 70 billion won should have been remained, but when we add about 80 billion won which was unforeseen at the time such as the decision of the Heritage Fund Dispute Mediation Committee, we expect a total of 150 billion won worth of additional losses going forward. Third, valuation loss on non-marketable securities increased by 73.5 billion won YOY and recorded 104.1 billion. Fourth is the ERP expenses of 145 billion won. Lastly, reflecting factors such as conservative future economic outlook, additional provisioning was 197 billion won. On page 6, there is the major business performance of the overall group, so please refer to it if needed. Then starting from page 7, I will go through the detailed performance of the group. First, page 7 is the group's interest income. 2022 annual group interest income went up by 17.9% YOY, recording $10,675.7 billion won, driven by 15BQ group margin increase and interest-bearing assets 4.5% YOY increase. Q4 quarterly bank NIM, on the back of decrease in core deposits continuing from Q3, an increase in funding costs following LCR management, posted 1.67%, a 1-bib decline QOQ. I will now cover bank loans in one. Bank loan growth, despite the continuous decline of household loans, saw solid corporate loan growth and grew 3.8% YOY. Corporate loans driven by increased demand from large and medium-sized companies following the direct funding market crunch grew 11.2% YTD. On the other hand, household loans with sharp rise in interest rate leading to factors such as demand decrease and DSR regulatory effect decreased 3.7% YTD. Please refer to page 31 for more details. Please refer to the next page, page 8, for Shinhan Bank's margin loan and deposits. Next is page 9, group non-interest income. The group's non-interest income following securities-related income decrease due to market interest rate increase and fee income decrease following capital market and real estate market deterioration went down 30.4% YOY. Compared to the previous quarter, due to factors including the aforementioned change in the accounting or principal protected trust and recognition of alternative investment valuation losses went down 89.8%. Fee income decreased by 5.6% YOY. This is mainly due to credit card fees, securities brokerage fees, and fund bank assurance fees. Credit card fees decreased due to factors such as lower merchant fee rates, although credit card purchases increased. It decreased 13.6% QOQ. Credit card fee income decreased due to a reduction in interest-free installment plans leading to lower volume and increase in seasonal marketing promotional expenses. IB commissions decreased due to real estate market slowdown and the capital market downturn. Next on page 10, Group G&A and Provisioning. JDA cost despite the decrease in ERP size due to DT-related marketing expenses and overall increase in general cost levels due to inflation increased by 4.7% YOY. Group CIR recorded 45.5% of 0.2% points YOY and is being managed stably. The Group's annual credit cost posted 1 trillion 305.7 billion won, and driven by items such as 517.9 billion won of additional provisioning to respond to the uncertain economy, increased 31.0%, but a credit cost ratio posted 33 bps increased YOY and is being stably managed. As economic uncertainty is growing, to prepare for potential credit risks, we plan to continue our conservative provisioning stance. In addition, through actively supporting vulnerable borrowers for individuals and companies and through active support for high-quality businesses among real estate PF which are recently becoming problematic, we will work hard continuously to mitigate system risk. Looking at the delinquency ratio, which can be seen as a leading indicator of credit cost, in the case of the bank, it is maintained at 0.22% level of 3BPS QOQ. However, in the case of credit card, with interest rate rise and increase in requests for readjustment of Fresh Start Fund and financial product, Credit Limit Cuts for Preemptive Asset Quality Management. It went up 18 bips QOQ. Please refer to page 11 for a preemptive preparation for future uncertainty plans. And please refer to page 12 for details on the group's asset quality management. Next is page 13, Capital Management and Major Profitability Indicators. As of the end of December, the CET1 ratio increased by 0.1 percentage points QOQ and is tentatively expected to post 12.7%. This is attributable to a sharp decrease in credit RWA due to a decrease in foreign currency loans and currency derivatives as the value of the won rose Despite the factors, that reduced the ratio due to year-end dividends.

Next, on page 14, the Group's subsidiary's income. Despite the negative and non-interest income trends and spike in provisioning, the bank's net income grew YOY owing to the increase in interest income on the back of margin improvement. In the case of non-bank subsidiaries, despite across-the-board increase in operating profit, including credit purchases, loan and lease, rapid rise in funding costs, merchant fee cuts, and provisioning increase led to a slight decline in net income. In the case of securities, operating profit was down owing to the losses and valuation of FF securities and fall in transaction volume, but net income rose YOY due to gains from the sale of the head office. In the case of insurance, despite the fallen income from asset management, due to the base effect of the ERP program of last year, operational profit, the insurance profit increased, resulting in higher net income . In the case of Shinan Capital, Capital saw net income grow YOY due to the solid growth in interest income, but on OQQ basis, net income fell due to increase in real estate PF-related provisioning and valuation loss and equity securities on the back of rising funding rate. In the case of subsidiaries related to the capital market, including asset management, asset trust, and REITs management, the continued downturn of the capital market business led to a decline in net income YOY. The next page is on the Groups of Global Business, and please refer to it at your leisure. Starting from page 16, I will talk about the mid-term capital policy of the company. This is page 16. The shareholder return policy at your left had been reported to the BOD last February and had been communicated through the IR presentations to the market. The mid-term financial targets for 2025 on the right had been resolved at the BOD last August. In the case of the mid-term financial targets, this is a framework that is necessary to enhance corporate value and to achieve sustainable growth for various stakeholders, in short, the shareholders, customers, employees, and society. First of all, from the double-digit ROE, we have changed to our ROE target with more specific numbers, and the ROTCE, which deducts intangible assets from ROE, has been added as a management indicator. Although this is not an easy number to achieve, the 10.5% and 12% respectively are the mid-term goals that have been set. For this end, we intend to pursue growth in size of the capital life business, which is less capital intensive, and for the more capital intensive areas, growth in quality will be pursued to achieve efficient capital allocation. In this process, asset growth will be managed at the nominal GDP growth rate level. This must be achieved on the basis of solid, robust capital stability. For this, our plan is to maintain the C to 1 ratio above 12% at a stable level, and the surplus capital that can be secured as much as possible will be used for the shareholder returns. That is our principle. The reason for setting the C21 ratio above 12% is because we consider the 10.5% regulatory ratio and after going through regular stress testing, we consider the level of C21 ratio that will allow us to continue providing credit and financial services to the customers and the society at wide. Next, on page 17, the results of the 2022 shareholder returns and the 2023 shareholder return policy directions based on the mid-term financial targets. Through the BOD that was held today, our company has resolved to pay out year-end dividends of 865 won per share. Through this resolution, the quarterly cash dividends up until now and the two treasury buyback cancellations included, we have been able to achieve 30% total shareholder return ratio that we have announced back in last February. Let me now explain about the 2023 shareholder return policy discussed in the 2023 business plan that was passed last year at the BOD. First, for the cash dividend, to raise the predictability of dividend, not only the quarterly dividend, but the year-end dividend will be of the same amount. For instance, for a total of 2,100 won, it will be 525 won each. Also, the treasury buyback and cancellation will be reviewed on a quarterly basis. Meanwhile, the distribution of the profit generated this year will be 6 to 4. Ratio in retained earnings is set at 60%, and the remaining 40% can be used for shareholder returns, but depending on whether the economic uncertainties continue and on the results of the regulators' stress testing, we expect total shareholder return ratio of 30 to 40%. As part of the 2023 shareholder return policy, today, our BOD resolved to buy back and cancel $150 billion 1 of February stock. The size of the traded stock buyback and cancellation will depend on the CTO ratio this year, but given the dilution of the shareholder equity, we are taking into consideration the volume that will be converted to common stock as of the 1st of May this year. Next, from page 18, to talk about our digital strategy, our CDO Kim Myung-hee will take over. Good afternoon, I am Kim Myung-hee, the CDO. Let me walk you through the Shinhan Financial Group Digital Division's 2022 business results. In 2022, based on the digital division strategies, we have pursued the creation of six customer values and strengthening of four core capabilities. By each key index of the digital strategy framework at the right, the key highlights will be explained. First, the more friendly financial services. The digital platform of the group has grown into a non-financial platform which is visited by 22.28 million a day, up 30%. The two mega-platforms, the BankSol and CardBusinessesPlay led to growth, while non-financial platforms had 3.62 million visitors, up 92% YOY. The groups of MyDataService users are 6.96 million. BankCard, Securities, and Alive Insurance are opening MyDataServices, and so in all financial areas, customized personal services are now being provided. The second area is more secure. 6.71 million customers use the Shin Han Sign Certificate to safely access not only the group's financial platform but also for public and private sector partner sites safely. The digital innovation branch, which makes use of a range of digital technologies and devices, has grown twice as high and has expanded to 173 branches. Next is the more creative. Through the digital new business, 39.5 billion won in operating income was posted. Data business and non-financial platform sales growth is fast becoming a new source of income for the group. Also, the group as of today has invested 260 billion won in strategic investment to expand the future digital ecosystem. For the four core capabilities, namely data, process, technology, people, and organization, please refer to the presentation materials. On the next page, I will explain about the DTE results posted and the strengthening of the foundation for sustained growth going forward. The Group's digital platform since 2020 has posted a yearly average of 26% growth, continuing a solid growth trend. Key financial platforms such as SoulPlay and Alpha has posted 18.66 million MAU. Successful launching of the new Soul, the accessibility of the card play, and strengthened consulting services, and the US improvement of Alpha, These were the key reasons behind the MAU increase. As you can see from below, the digital new business operating income also showed steady growth. On the right-hand side, the effort to strengthen the basis for the group's sustained growth is described. The license necessary for digital life has been preemptively acquired to pursue the relevant business opportunities. Despite the rapid changes in the digital age to carry on the core values of the financial business and to ensure sustained growth, we are strengthening the data utilization framework and ICT modernization is being pursued. The Shunan Financial Group will continue to place top priority on creating customer value in 2023 and will strengthen our digital core capabilities toward this end. Thank you very much. Thank you, CEO Kim, for that detailed explanation. Starting from page 20, the corporate sustainability and other details about the group and the affiliates are included, so please refer to them at your leisure. Let me conclude the presentation and we'll now move on to Q&A. Thank you.