Shinhan Financial Group Co Ltd

Good afternoon. This is Cho Do Park, Head of IR at Sinan Financial Group. Thank you very much for joining the 2025 Q1 Earnings Presentation of Sinan Financial Group. Today we have our Group CFO, Sang Young Chun, Group CSO, Seok Hyun Go, Group CRO, Dong Geon Bang, Sinan Bank CFO, Jung Bin Lee, Sinan Car CFO, Hae Chang Park, Sinan Investment Security CFO, Jeong Eun-jung, and Sinan Life CFO, Song Hwan-ju, also attending. We will start with an update on the progress of the value-up plan that we had announced in July and give you some details of what we have in plan this year before taking you through our Q1 business results. After the presentation, we will open the floor and receive your questions. From now, our group CFO, Sangyoung Cheom, will take you through the presentation. Good afternoon. Thank you for joining the Sinan Financial Group 2025 Q1 earnings presentation. Before looking at our Q1 results, I would like to start from page 2 and explain the 2025 value of plan, which was publicly disclosed today. The 2025 value of plan is based on the results of the 2024 implementation assessment led by the BOD, as well as diagnosis of the appropriateness of existing targets and newly established near-term targets and execution plans for 2025. Looking back on 2024 performance, Group ROE fell YOY due to decrease in non-bank affiliate earnings, but CET1 ratio remained above 13% every quarter despite greater market volatility. That said, considering CET1 sensitivity to macro volatility and uncertainty, current management levels were found somewhat tight. In shareholder return, active share buyback last year reduced number of outstanding shares to less than 500 million shares as of end of last year, boosting our shareholder return ratio to 40.2%. Based on such performance review, we decided to maintain the original targets covering until 2027 while establishing the following plans for 2025, which will be the first year of proper implementation of our value-out plan. First, we plan to improve ROE by more than 50 BP YOY through a stable bank earnings and structural improvement of non-bank businesses. Second, we plan to unlock additional capital capacity through efficient asset management. We aim to maintain CET1 ratio at 13.1% or above, which is 10 BP higher than the existing target level and giving us greater flexibility. Third, given the current PBR levels, which are heavily undervalued, buyback and cancellation will be the focus for a faster-paced shareholder return program to increase shareholder return ratio to 42% or above in 2025. To achieve this value-up plan in 2025 with better execution, we will operate key action initiatives including structural improvement of non-bank businesses, efficient asset management, and stronger links between evaluation and compensation. For details, please refer to the publicly disclosed materials. Pages 3 through 5 shows the value of plan progress as of end of Q1 this year, and we plan to keep you updated each quarter using the same format. Now to turn to page 6 for our Q1 business results, starting from the business highlights. 2025 Q1 tentative group CET1 is 13.27%, which is 21 BP improvement YTD. Despite the effects of Basel III, group-wide RWA reduction efforts and solid earnings growth from the banking business contributed to the healthy CET1. And based on this, the BOD today resolved on Q1 cash dividend of 570 Korean won, which is a 30 won increased QOQ. Regarding share buyback, out of the 650 billion Korean won planned for the first half, buyback of 285.7 billion has been completed as of end of March, and among this, 150 billion announced last year is scheduled for cancellation late April, and the rest is scheduled for cancellation by end of June. Q1 group net income was 1,488.3 billion Korean won, which is a 12.6% YOY increase, thanks to absence of non-operating one-offs and solid growth of interest income. Page 7 looks at capital. Despite a larger buyback program than previous year, Group C T1 improved 21BP YTD based on well-managed RWA and stable net income. Despite the RWA increasing effect of 5.4 trillion won YTD due to regulation including Basel III, appropriate Korean won loan growth combined with group level RWA control efforts including portfolio rebalancing limited RWA increase to 3.1 trillion Korean won YTD. We will continue to focus on maintaining stable capital ratio through internal efficiency and strategic management while sufficiently supplying necessary funds to the right places. Page 8 looks at assets and liabilities, and we move on to page 9, which looks at group P&L. Group net income increased 12.6% YOY thanks to absence of non-operating one-offs and growth of interest income. Based on this ROE and ROTCE key metrics of the value of plan increased by one percentage point, YOY, respectively to 11.4% and 12.9% each. And I will break down the details starting from the next page.

On to page 10 for our interest income. Despite falling market interest rates, our group interest income increased by 1.4% year-on-year, driven by the average balance effect from growth in our income-producing assets. Bank loans in Wuhan increased by 0.4% versus end of last year, mostly driven by blue-chip SME loans. Please refer to page 27 for details. For Bank NIMH, Although the yield on interest-bearing assets, including loans in RON, dropped 12 basis points Q on Q, nonetheless we saw alleviated funding pressure amid adequate asset growth under our broad profitability management stance and seasonal deposit inflows, on balance improving NIM by 3 basis points Q on Q. Group NIM was also improved by 5 basis points Q on Q thanks to the increase in bank NIM. Next on to non-interest income. Group non-interest income decreased 6.3% YY from a decline in commission and insurance-related income. Credit card fee income were impacted by an increase in proactive customer acquisition marketing spend, while brokerage commissions were also down YY as brokerage trading volume decreased amid market uncertainties. However, we continue to achieve growth in trust fee income from fund and bank insurance sales centered around our bank business. Also, despite the challenging environment, quite encouragingly, investment banking commissions recorded growth on both a YY and Q&Q basis. In Q4, amid rising external and internal uncertainties, income from marketable securities, FX, and derivatives was very poor, but has since recovered back to more recurring levels, reflecting lower market rates. Although insurance-related income shortly declined YOY, this was due to the high base effect from last year, where insurance sales were quite brisk. Otherwise, it's being managed at a stable level. Next, moving on to SG&A and credit costs. Group SG&A is stable with nothing notable versus last year. Cost-to-income ratio was up 1.4 percentage points, YOY recording 37.3%. For credit costs, even though additional provisioning for real estate PF loans fell, there was an increase in recurring provisioning reflecting the economic cycle, resulting in a 15.4% increase. Why? As a result, group nominal credit costs recorded 41 basis points, up three basis points YOY, while recurring CCR was 38 basis points, up eight basis points YOY. As we move forward, while credit costs related to real estate PF is expected to stabilize gradually, corporates will likely face greater credit risk from delayed economic recovery, and vulnerable customers may become increasingly challenged. So overall credit costs in terms of size may be slightly greater than our initial expectations, while recovery may take longer. However, we have already built up sufficient loss-absorbing capacity and will enforce even closer monitoring and control for soundness and keep credit costs well under control within the limits of our established business plans. Please refer to pages 13 and 14 for details on group asset quality and loss-absorbing capacity. Moving on to our group and overseas business earnings, page 15. For bank, thanks to solid interest income and balanced portfolio, We saw improved fee and marketable security income driving overall performance for the broad group. As profitability was impacted due to regulatory change and still high interest rate environment, both continued sluggish performance with pressure on both the funding and credit cost side. For investment securities, despite increased market uncertainty, we saw gradual recovery in recurring earning power driven by top-line performance in IB fee, income, and marketable securities. Insurance continues to deliver consistent performance. It was austere thanks to a stable KIX ratio. For asset trusts, business which recorded a loss last year from large loan loss provisioning amid completion guarantee real estate trust exposure has turned to profit. Overseas business, we're seeing solid performance trends from Vietnam, Japan this year as well. From pages 16 to 18, we outline the performance on digital and sustainability initiatives. Page 16 provides details on the main digital indicators that we have shared every quarter. Page 17 provides details on the Jeju Bank ERP Banking Initiative, which you may be interested in. Page 18 outlines our efforts in terms of greenhouse gas emissions reductions. Also more on our inclusive and win-win financial initiative as well. From page 19, we list the detailed financials and performance of the respective affiliates, so please refer to the slides. Recently, the Korean economy faces structural issues as well as many internal and external challenges, which represent a complexity of challenging issues, including poor domestic and export demand, contraction in corporate investment, entrenched low growth. Our core role as a financial group is... as a financial intermediary that supports the real economy. Working in coordination with the policy authorities, we want to go beyond just the passive intermediary, and we're looking to be more proactive across many fronts to provide preemptive liquidity to competitive corporates and allocate capital to productive sectors of the economy to support recovery of the real economy and help resolve the issues confronting Korea. Also, as a value-up leader and as a major player in the capital markets, we will faithfully implement our corporate value-up commitments to the market, building on the customer trust and solid underlying fundamentals. Thank you very much for your attention.

Thank you very much for the presentation. Now we will receive your questions. English questions will be consecutively interpreted into Korean, so please wait for a moment for that translation. Now we will receive the first question. Mr. Jae-yong Won from HSBC, please go ahead. Can you hear me? Yes, we can hear you well. You've delivered a good performance, and also you've shown a lot of effort for shareholder value. Thank you very much. I have two questions. First is Group NIM. Your full-year guidance was that NIM may drop by about 7 to 8 BP, but looking at Q1, actually in Q1 your Group NIM went up by 5 BP. So what about the full-year outlook? Do you see the need to change your full-year NIM outlook? Or can you give us your expectations of how NIM would move throughout the year? My second question is about asset quality. We do see signs of asset quality deterioration, not only at Chinam, but across all banks. Your NPL coverage ratio has dropped from 1%. 43 to 129, a large drop. The current MPL coverage ratio, do you think there is additional downside room there, or do you think that current levels you'll be able to keep? I would appreciate your thoughts on that. Thank you very much for those two questions. Please give us a moment to prepare our answer. Well, thank you very much for that question. Regarding the NIM outlook and the second question, it was about asset quality. I think for NIM, it's best for our bank CFO to mention that. And regarding the asset quality, I, myself, and our group CRO will take the question. Yes, this is Chung Bin Lee, the CFO of Sinan Bank. You've asked about our NIM. So I'll answer based on bank NIM. which increased by 3 BP QOQ group, NIM increased by 5 BP QOQ. And the reason why it went up is that on the lending side, market rates did come down, so loan profitability is declining. That said, we also have the growth lever that we can use. So by maintaining loan growth at appropriate level, we are able to somewhat defend or offset the decreasing loan yield. And then in Q1, the funding side, the funding cost decreased because there were some core deposits that increased and overall funding scale was decreased. This decreased our funding cost and that resulted in the increase of our NIM in Q1. Now for the outlook on NIM going forward from Q2 going forward. In Q1, we were able to manage our NIM, but market rates do continue to decline. BOK rate is likely to go down further this year. And so we are expecting that the declining market rates will impact our NIM, and we are expecting our NIM to come down. That said, we still have the asset side, the loan profitability levers that we can use to defend, and also we can try to collect more of the deposit-based low-cost funding to maintain our funding costs to defend our NIM as much as possible. So that was the bank CFO that answered the first question on NIM outlook. And as he mentioned, we are entering a rate declining cycle this year, and we still expect our NIM to decrease throughout the year. Our NIM did improve in Q1, and that is a bit of a seasonality. Usually Q1 has better margins in terms of NIM seasonally. But looking at where the BOK rate is expected to go, our views have not changed. But about credit cost, as we mentioned in the presentation, we're expecting the credit cost to go up a little bit. But NIM, maybe the decline will be flatter than what we had originally expected, but that's very cautiously expected. Your second question is about the MPL coverage ratio. Our current coverage ratio number is probably the lowest in the past year or two. This coverage ratio is explained two ways. One is not only Sinan, but the overall market is in the lower part of the credit cycle. Recovery is being pushed back. And so substandard and below is increasing faster than planned, and that seems to be happening throughout the market. And as you can see on page 14 of our presentation, when we do provisioning at the end of each year, we do sales. But recently, the NPL sales conditions are not favorable. That's why in end of March, Sinan Bank sold less NPL than usual strategically. That was a strategic choice. And that is a reason that decreased the coverage ratio. What we have been emphasizing at Shinan Financial Group level, we always prepare preemptively the loss absorption capacity, and we think that as the coverage ratio at the end of Q1 is most likely our bottom, and so that in Q2 and Q3, our coverage ratio is expected to improve. Okay. This is the group CRO. If I may add on that answer, the coverage ratio, when we calculate the coverage ratio, Usually what we do is, had we done similar level of MPL sales, actually coverage ratio would have been 180%. And so we think that we'll be able to come bring it up to 190 at Q3 and 200% MPL coverage ratio by end of this year. That is our management target, and we will follow that plan. Well, thank you very much for those answers, and we'll take the next question.