Shinhan Financial Group Co Ltd

Good afternoon. I am Kim Ji-ho from the IR group, IR team at Shinhan Financial Group. Thank you for taking the time out of your busy schedule to attend Shinhan Financial Group's Q3 2024 earnings presentation. I will be moderating today's earnings presentation today. We have with us today the Group CFO, Jung Sang-young, Group CFO, Go Seok-hyun, Group CRO, Bang Dong-kwon, Shinhan Bank CFO, Kim Ki-hong, Shinhan Card CFO, Choi Jae-hoon, Shinhan Securities CFO, Lee Hee-dong, I'm from Shinan Life, a CFO, Park Kyung-hwan. We will first start with a presentation on our overall Q3 results, followed by a Q&A session. Now I'd like to turn it over to CFO Chun Sang-yong for a presentation on our business performance. Good afternoon, everyone. Thank you for joining us for our Q3 2024 earnings presentation. Before going through the overall business performance, I would like to discuss the recent losses on derivatives training at Shinhan Securities. As we shared in our disclosures and in a letter last week from the chairman of the Financial Group's Board of Directors and the CEO, a department of Shinhan Securities that provides liquidity to exchange-traded funds and performs hedging operations incurred large losses due to a trade in KOSPI 200 futures unrelated to the LP hedge. We recognize the loss of $135.7 billion in the third quarter financial statements as a result of this incident and do not expect any further losses. In addition to the capital reduction due to the losses, the impact on the group CT1 ratio from this event, including the impact of the increase in operational risk RWA, is minus six basis points. We sincerely regret that this incident occurred while we are working to strengthen our internal control system across the group. Given the seriousness of the situation, the group's board of directors and the management have committed to informing our shareholders as soon as possible of this incident and sharing updates. Currently, Shina Securities is actively cooperating with the regulators' investigation and has launched its own contingency response force to diagnose the root cause. Together with the Sinan Financial Group, they are reviewing the deficiencies in the internal control system and taking steps to improve it. We will examine our internal control system from the ground up and fix it, bearing in mind once again that customer trust and strong internal controls are the essence of our business. We're also committed to ensuring that this incident does not impact the enterprise value enhancement plans that we have been communicating. So from now on, we'll move on to our Q3 results. Please refer to page 5, financial highlights. In Q3 of 2024, despite the removal of one-off factors such as credit costs related to real estate PF, large losses were incurred in the non-interest income segment with net income posting $1,238.6 billion, down 13.1% QOQ. Interest income driven by growth in the bank's loan book, which continues from the first half of the year, increased through efficient ALM up 1.2% QOQ. Non-interest income decreased by 25.6% QOQ due to the aforementioned losses and securities derivative transactions, as well as the conservatively recognized valuation impairments on overseas alternative investments. SG&A expenses were managed fairly. increasing only 1.2% QOQ despite the impact of depreciation. The group's cumulative CIR for the first quarter improved by 1.2% point YY to post 37.9%, driven by higher operating profit before expenses, along with well-managed SG&A expenses. The group's cumulative credit cost ratio for the third quarter decreased by four basis points compared to first half of the year, posting... 44 bids are primarily due to the baseline effect of additional provisions recognized in the prior quarter related to real estate PFs and asset trusts. Next is capital ratio and the shareholder return policies. The CT1 ratio at the end of September 2024 is estimated to come to 13.13%. In addition... The Board of Directors today approved a third quarter dividend of 541 per share and resolved to undertake share buyback and cancellation totaling 400 billion Korean won, which includes the amount for 2025 as well. Let me explain further about the Treasury stock. To accelerate our shareholder return policy, which we announced in July with our Enterprise Value Enhancement Plan, Following share buyback of $250 billion in the fourth quarter of 2024 through buying back another $150 billion of Treasury shares in early 2025, we intend to fulfill a policy of year-round share buyback. We have been engaged in share buyback and cancellation on a regular basis throughout the year, and the amount to be undertaken for the first quarter of 2025 will be announced in our annual earnings release next February, along with a quarterly dividend per share subject to board approval. Going forward, we will strive to flexibly respond to capital-related regulatory changes based on our strong financial stability while efficiently managing our capital ratios so that we can fulfill the shareholder return policy we promised through our corporate value-add plan. On page 6, we present the group's key profit metrics. Please refer to them at your leisure.

Yes, on to page 7 for further detailed performance for the group. In the third quarter, despite overall deterioration in profitability from the decline in market interest rates, the group's interest income was supported by an increase in interest-bearing assets centered around the Bank One loans, recording a total of 2,855,000,000 won, up 1.2% cue on cue. Next, Bank One loans increased by 3.5% during the quarter, or annual growth of 10.2% as the key driver of interest income growth. Household loans increased by 6.3% QonQ, driven by real estate purchasing demand, and increased our policy loans for the vulnerable borrowers. Corporate loans increased by 1.4% in the third quarter, centered around blue-chip corporate borrowers, as we moderated from the rapid pace of growth we saw throughout the first half. We intend to minimize loan growth in the fourth quarter relative to our group RWA budget as we focus on enhancing profitability and asset soundness. In the second quarter, Sinan Bank's NIM despite negative impact from lower market rates recorded 1.56%, down four basis points versus the prior quarter thanks to our NIMBO ALM strategy. We defended the decline in yield on interest-bearing assets to five basis points despite the decline in loan asset yields. through a strategic management of our securities investments. In terms of our liability funding cost, it was improved by one basis point, Q on Q, as we issue long-dated bank debentures as preemptive debt funding, as we expect more intense competition in the funding market in the fourth quarter. We will maintain flexible interest rate policy, as well as effective ALM, to manage our margins proactively. The group's non-interest income recorded 827.8 billion won down 2%. 25.6% Q on Q due to poor earnings from securities and derivatives. Securities and derivatives earnings were down 47.1% Q on Q from 135.7 billion in derivative trading loss by Shenan Securities, as well as 71.2 billion in valuation loss from overseas alternative investments, which we recognized preemptively this quarter. Fee income declined by 3.5% Q on Q due to poor fee income from Shenan Card. despite the increase in IP earnings from the bank and securities business. SG&A is stable, increasing by 1.2% QonQ or 0.9% YOY. Our group CIR improved by 1.2 percentage points year-on-year, as operating profit before expense increased 4.2%. Cumulative credit costs as of the third quarter was 44 basis points, improving by four basis points versus the first half as the impact of additional provisioning against real estate PFN asset trust exposure dissipated and also from asset growth. Cumulative credit costs when normalized to remove the effect of additional provisioning was 32 basis points, similar to end of June levels. In the future, we will continue to consistently implement the government-led measures to normalize real estate PF loans. We will also maintain well-calibrated management of asset quality and enforce tight management of recurring credit costs. On to asset soundness, they are stable as we have been performing write-offs and sales of NPL. Bank delinquencies remain stable after improving by five basis points in the second quarter. Card delinquencies are additional. improvement this quarter as well, while the two-month delinquency migration rate, which is a leading indicator for delinquencies, has remained flat. This stable trend in asset soundness is due in large part to proactive write-downs and sales as part of our artificial management. And despite the one rate policy cut that we have seen recently, interest rates still remain high amid a slow recovery in the real economy. So it's hard to say that asset quality is seeing trend growth or improvement. Consequently, we will stay vigilant and maintain conservative stance in terms of asset quality. Please refer to the slides for a breakdown of net profit by affiliates. And moving on, as of the third quarter, 2024, on a tentative basis, the CET1 ratio was measured at 13.13%, which is an improvement of seven basis points Q on Q. Although risk-weighted assets increased by 4.1 trillion from the bank's asset growth, The effect of reduced FX rates and stable earnings performance resulted in a Q-on-Q increase of 1.8% in common stock equity. In the fourth quarter, similarly, we intend to minimize asset growth while delivering stable financial performance to manage our CTA-1 at 13% or above. And I've already commented on our shareholder return policy, and we will move on. Pages 11 to 12. offer details on our digital and sustainable management initiatives, so please refer to those slides. On page 14, as we promised when we announced our value-up program in July, here are the results from our implementation review across six core indicators up to the third quarter. It is still quite early on, but moving ahead, led by our Board of Directors, we will continue to closely monitor implementation of our value-up plan and proactively communicate our findings with the market to keep you updated. According to our current timeline, we are planning to provide a review of our execution results when we announce our full year performance next year, while also updating you on our implementation plan in greater, more concrete terms. We look forward to your interest as we proceed. This concludes our overall earnings presentation. Thank you very much.

We will now proceed to our Q&A session. For those of you who have questions, please use the raise your hand function on the resume. And for your information, questions in English will be interpreted consecutively. So after the question is posed in English, a Korean interpretation will be provided. Won Jae-ho from HSBC will ask the first question. Can you hear me well? Yes, we can hear you well. In a very difficult environment, thank you very much for the good performance that you have delivered. I have two questions. The first question has to do with the shareholder return rate. So up until 2027, 50% TSR has been announced, but the share buyback, if we base our calculations on those numbers, last year's was a 36 point and it's going to go up 2% from that. So by 2027, if you're going to reach that target of 50%. So this year, it was raised 2%. And going forward, every year, you have to raise it by 4% every year. So Sinan Financial Group, we do believe you will keep your promise, and we do believe you have the capability to keep your promise. But from the 2% point, increase if we are to raise that to 4% going forward every year? What kind of trigger do you need, a CT1 growth or earnings growth? Based on what do you think we can raise the TSR rate increase from 2% to 4% going forward from next year? And my second question has to do with NIM, the NIM outlook. So interest rate has been cut, and so the NIM is also declining. in the fourth quarter and also for next year, what is your outlook for NIM? Thank you, Mr. Wang, for your questions. While we are preparing the answers, please hold. Thank you very much for the question. With regards to the TSR rate, and then the second question was on NIM. So I'll take the first question, and the second question will be answered by the CFO. In the case of the shareholder return rate, based on the share cancellation up until 2027, we announced the 50% target. And, of course, carrying out that promise, as you have mentioned, the image that we have in mind, a gradual increase. That is our basic assumption going forward. So, as you can see from today's plan of share cancellation, this year we have done $700 billion in 2027. The TSR and And we have said that 450 million of share cancellation will be done. So I think based on those announcements, we can anticipate the amount. So this year, 400 billion was announced, and 150 billion for next year, January and February, was included as well. So that means that we will expand the shareholder returns going forward. and also if the share buyback and cancellation amount grows, this can have an impact on the market, and we want to distribute that impact throughout the year. And what your question was, in order to carry out our promise, what kind of trigger is necessary? So we have just started, and what we can say at this point is that confidently, including share buyback and cancellation, the shareholder returns related very specific targets were announced, and the action plans for that has been announced as well. So we do think we can keep that promise. And also, CETU-1 ratio is not going to go up continuously. We're going to manage it at 13%. And the share cancellation and shareholder return, if the current earnings growth is underpinning these plans, I think that promise can be kept going forward. Thank you very much for your good question. I'm the CFO. So NIM in the third quarter, the market declines, and also the benchmark rate impact was reflected as it was 1.56, so down four bids. In the fourth quarter, the interest rate cut impact will continue, and the NIM decline trend will continue with regards to NIM. We will continue to manage the funding rate in order to manage the NIM. And this year, the NIM, as we have continuously announced compared to last year, it will go down slightly. That is how we're going to manage it. And you asked about that for next year. And next year... additional cuts of benchmark rate is expected and LCR related responses necessary. So the NIM decline trend we expect to continue and profitability-based growth advances and also funding rate will continue to be managed in order to defend the NIM. Thank you very much.