Shinhan Financial Group Co., Ltd. (A055550) Earnings Call Transcript & Summary

Greetings. I am Park Cheol Woo, the IRO. With the resurgence of COVID-19, we have been conducting our business results presentations in audio for more than 1 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, Roh Yong-hoon; Group CDO and Shinhan DS CEO, Yi Sunny; Group CMO, Heo Yong-taeg; Group CSSO, 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, Roh Yong-hoon. Thank you for taking part in the 2021 first half business results presentation despite your busy schedules. On Page 4 of the earnings release presentation material, there are 3 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 nonbanking, including capital markets, our basic fundamentals are continually leveling up. 2021 first half group's income has a 5:5 breakdown between the bank and the nonbank. It is evolving as a differentiated profit model of global financial companies. Bank net income rose 20% Y-o-Y through margin management and quality asset growth. Nonbanking recorded a record high half year net income, a 68% improved Y-o-Y. Looking at the breakdown for nonbanking, 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 KRW 507.4 billion, which is 43% of the group's nonbanking 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 balance 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% Y-o-Y and even 9% Q-o-Q. 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% Y-o-Y. 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 KRW 152.4 billion. 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 and 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 2-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 KRW 2.2 trillion and it was managed at a level which was less than half that of KRW 4.8 trillion, 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 EPS 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 KRW 2,443.8 billion of net income, which surpassed recurring income fundamentals of KRW 1 trillion per quarter and KRW 2 trillion on a quarterly basis that we had been mentioning from last year. Q2 net income posted KRW 1,251.8 billion. 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 KRW 4,356.4 billion, a 8.3% improvement compared to the previous year. Loans in one 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 rates and the proportion of SME loans with higher than BBB+ rating also increased 4.6 percentage points Y-o-Y for externally audited companies and more than 5.4%p for nonaudited companies. In addition, the collateral ratio of newly handled SME loans increased. Nonaudited collateralized loan ratio increased 8.8% Y-o-Y and SOHO also improved 5.5% Y-o-Y. 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 will make efforts to enhance the NIM further by improving the loan yield and managing the low-margin unused credit line. Income from the nonbank side increased significantly also. Noninterest income in the first half increased 13% Y-o-Y to KRW 2,143 billion. This is thanks to the increase in the fee income as well as the profit gained by the subsidiary companies and the capital markets 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. And 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 of 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 20 bp. The bank's credit cost ratio in the first half was 8 bp, a 21 bp for Y-o-Y 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 cost, both fell Y-o-Y, not showing signs of asset quality deteriorating due to the pandemic. Please refer to Pages 6-9 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 nonbank, which clearly shows the diversified profit structure. Even within the nonbank segment, 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 KRW 4.9 trillion Y-o-Y and the number of high net worths with more than $500 million increased by 1,700 people Y-o-Y and by 1,100 Q-o-Q. Moving on to digital on Page 11. In order to actively respond to the competitive digital environment, we are expanding our group platform's coverage for the customers. With the customers' digital needs rising under the pandemic, the group's MAU is increasingly rapid -- increasing rapidly since 2020. The MAU for Shinhan Bank, SOL app has grown 9% YTD to 7.48 million and that of Shinhan Card, PayFAN increased 26% to 5.14 million. Let's talk about the earnings. The digital channels operating income before expenses recorded KRW 824 billion in first half, up 52% Y-o-Y from KRW 543 billion. Everything about the bank, including the process, content, space, et cetera, 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 Seosomun, South Eastern Central and Muk-dong PWM Digilog and see for yourself what interesting banking experiences are available. We are actively expanding our strategic digital investment we have created and are managing the group's SI fund of KRW 300 billion. 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 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.