Shinhan Financial Group - Q1 2024

Transcript

Sang Yung Chun (CFO)

Good afternoon. Let me first thank everyone for participating at our Q1 2024 earnings conference call despite your busy schedule. I will first go through our business highlights from page five of the slides. In Q1 2024, we achieved KRW 1.3215 trillion in net income despite recognition of large non-operating expense, thanks to the company's strong fundamentals based on top-line growth. Interest income grew 9.4% YOY thanks to proactive loan asset growth strategy and efficient margin management. Non-interest income for the group grew 0.3% as we defended the decline in securities-related income with a diversified portfolio. G&A was kept at 1.2% increase despite the general inflationary factors, thanks to the group's ongoing effort at cost efficiency. With G&A well under control, the cost-income ratio stood at 35.9%, improved by 2 percentage points YOY thanks to sound growth in operating income.

Credit cost ratio in Q1 was 38 basis points, down by 10 basis points YOY, but the recurring CCR, excluding the additional provisioning that was preemptively recognized, was 30 basis points, up 1 basis point YOY. Next is capital ratio and shareholder return policy. The provisional CET1 ratio as of the end of March was 13.09%. The BOD today decided on the dividend per share at KRW 541 per Q1, and further resolved on KRW 300 billion in share buyback and cancellation for the next six months. Looking ahead, the company will continue with sustainable profitability management and active shareholder return policy as we try to secure capital adequacy in response to changes in capital-related regulations based on our strong financial soundness. Page six is on the group's major income indicators provided for your information. Moving on to page seven, on the group's income breakdown.

The group's interest income in Q1 2024 was KRW 2.8159 trillion, up 9.4% QOQ. Interest-bearing assets increased 3.6% YOY on the back of growth in the bank's loans in won, and the group's margin also rose by 6 basis points. The bank's loans in won grew 2.7% in the quarter. Retail loan grew 1.2%, mostly for a Jeonse and housing mortgage. Corporate loan grew 3.9% in response to demand by large companies and quality SMEs. We will keep selectively growing our assets by balancing the different factors like efficient RWA management, profitability, and market demand. In Q1, bank's NIM was 1.64%, up 2 basis points QOQ. The funding cost improved significantly, although the growth in loan assets affected yield. There was more inflow of low-expense core deposit linked to loans, and high-interest policy products came to maturity. We will keep actively managing the margins through flexible interest policy and effective ALM management. Next, page eight.

The group's non-interest income grew 16.6% YOY as fee income saw generally even growth across business areas like credit cards, securities, fund, bancassurance, and IB. Insurance income grew 21.4% from the increase in CSM write-offs. Credit card fee rose 28.4%. Although credit card transaction volume rose 3.8% YOY, we improved operational efficiency, for example, reducing high-cost promotions. Brokerage fee was up 25.8% on the back of stock trading increasing by KRW 4.3 trillion YOY. Securities-related income fell 19.4% YOY despite the growth in recurring income. There was preemptive recognition of loss from overseas real estate, among others. The group's credit cost fell YOY in both nominal provisioning and CCR, with reduction in the additional provisions recognized early in 2023.

The bank's recurring provision for credit losses remains flat YOY, while preemptive provisioning was done in Shinhan Capital and Shinhan Asset Trust to prepare against real estate market downturn and further worsening of financial soundness. Looking ahead, we will actively reinforce loss absorption capability through preemptive provisioning for real estate finance in and outside of Korea.

Now onto page nine, please. Group-wide asset soundness indicators have seen a delay in improvement amid protracted high-interest-rate conditions related to pre-COVID levels, and considering our group's loss absorption capacity, we believe they remain within manageable levels. This trend of weakening asset quality is expected to continue for some time, and we, of course, will remain vigilant in maintaining a conservative stance in managing our asset soundness. As at the end of Q1 2024, our CET1 ratio is down 8 basis points quarter-over-quarter, recording a tentative 13%. When considering adoption of Basel III transitional measures, rising FX rates, and increase in operational RWA, overall we believe that overall soundness is being managed appropriately. Now onto shareholder return policy such as cancellation of treasury shares. Let me move on and explain in greater detail.

We have resolved upon a cancellation of treasury shares, as mentioned, reflecting our solid top-line growth, credit costs, and other expenses, as well as our BIS capital adequacy ratio. Based on this resolution, the size of cancellations this year will thereby bring us closer to last year's full-year level of KRW 480 billion. At present, with many risks still outstanding, we will need to continue ongoing control and management. However, as long as we continue to deliver solid financial performance as we did in the first quarter, we are on track to execute on the shareholder return policies that we committed to you at the beginning of the new year with our set path. Next, page 10. Credit card earnings, together with an increase in transaction volume as well as efficiency gains in marketing expense and product pricing, resulted in a 1% YOY increase in earnings.

Securities: as the equity market became active, our brokerage fee income increased. However, our prop trading income went down, resulting in a 36.6% YOY decrease in earnings. Capital and Asset Trust business was impacted by preemptive provisioning, which resulted in a YOY decline in earnings. For global business, alongside strategically driven top-line expansion and our efficient ALM strategy, both contributed to improved operating profits, driven mostly by interest income. Moreover, our efforts to recover on NPL assets allowed us to write back provisioning, resulting in a 35.4% YOY increase in earnings. Our group-wide real estate PF exposure is KRW 8.9 trillion, down slightly from end of last year, and we recorded a provisioning ratio of 3.61%. The next section from page 11 to 13 covers issues related to the H-Index, linked ELT products, and also our measures to enforce stronger internal controls and customer protection.

Also, an outline of our digital and sustainability activities is also attached for your reference. Lastly, let me briefly comment on the recent macro environment and also today's changing business conditions, as well as our response and future outlook. With the start of this year, thanks to the Corporate Value-up Program, we have seen greater interest in Korean financial stocks than ever before. At the same time, with widening geopolitical risk, we're seeing elevated volatility across various macro indicators such as FX rates and inflation. At our last conference in February, we commented on conservative expectations for one benchmark rate cut in the second half of the year. Given the rising inflationary pressure fueled by the risk in the Middle East, it appears that this outlook still remains valid and intact.

Many economic players will likely see delayed improvement in their financial soundness, with continued deterioration of asset quality and a rise in credit costs expected to continue for the time being. We, however, as you have seen in our Q1 results, continue to deliver solid top-line results and, through preemptive efforts to enhance our loss absorption capacity and efficient capital management, have been focusing on proactively addressing new market demand while focusing on minimizing sensitivity to externalities to achieve greater financial stability. If the outcome of these efforts becomes materialized, we expect to maintain a sufficient capital buffer while sustaining stable financial performance. Moreover, until very recently, I understand that regarding stock prices, there were some concerns in the market of an overhang with regards to shares held by our major strategic investors.

For the most part, most of these trades were complete in the first quarter, and we believe that any concern over oversupply will gradually improve. We remain strongly committed to our social responsibilities and, based on our customer support and trust, will strive to achieve solid performance and financial stability and outstanding shareholder return policies to enhance our corporate value. Thank you very much.

Cheol Woo Park (Investor Relations Executive Officer)

Now we will take your questions. If you have any questions, then please use the hand-up function in Zoom. For questions in English, please be informed that there will be consecutive interpretation. Thank you, and now we will take your questions. We will receive the first question, Mr. Park Hye-jin from Daishin Securities.

Hye-jin Park (Analyst)

Good afternoon. This is Park Hye-jin from Daishin Securities. I have two questions. Now, first is about the ELS compensation, so I wonder how much of that was reflected. The second is about the refinancing platform, so especially in January, that was expanded for Jeonse and mortgage, but then now I understand that the volume is larger than other companies. I wonder whether it will have an impact on the margin. If yes, how much?

Cheol Woo Park (Investor Relations Executive Officer)

Yes. Thank you for your questions. I believe there were two, so please bear with us as we prepare to answer your questions.

Sang Yung Chun (CFO)

Regarding ELT recognition and also the refinancing platform, I believe there were two questions. I think the CFO of the bank can cover both.

Ki Heung Kim (CFO)

Yes. Thank you very much for your question. So let me address both. First of all, regarding the ELS loss.

The ELS compensation, well, total sales amount is KRW 2.6 trillion. So as of the end of March, based on H-Index, about KRW 274 billion in non-operating expense was recognized. Considering the level of the current index, we don't think that it will have an impact on our closing balance. Refinancing, the origination amount is larger than peers. What is the impact on our margin? That was the second question. Credit loans, mortgage loans, Jeonse, housing rental loans. Well, in the first half of the year, our origination actually was larger than the others. It happens that in the first half, we wanted to build out the customer base, especially in household loans, and it's a consequence of this focused initiative. That is why. But in terms of the overall loan growth, this as a percentage is not that sizable.

So it was more in the interest of expanding our customer base. So any impact to our margin was not material, and NIM in the first quarter actually consequently rose and improved by two basis points.

Cheol Woo Park (Investor Relations Executive Officer)

Thank you very much for the response. And we will now take the next question. If you have any questions, then please use the hand-up function on Zoom. Next question is by Mr. Jung Jun-seok from NH Securities. Please go ahead with your question.

Jun-seok Jung (Analyst)

Yes. Good afternoon. I am Jung Jun-seok from NH Investment & Securities. Thank you very much for taking my question. Now, in the first quarter, the lending growth was not slow, and then now for the year, then what does the company believe is going to be the loan growth rate? So what is your strategy for the loan growth?

The second question is it was also mentioned earlier so about the expected rate hike in the second half, but then now in the rate cut in the second half. But then now for the NIM, then will there be an impact on the NIM, and what is the expected NIM for the year?

Cheol Woo Park (Investor Relations Executive Officer)

Thank you very much for the two questions. So then I ask for your patience as we prepare our response.

Sang Yung Chun (CFO)

Thank you very much for your questions. Now then for the year, in terms of the loan growth projection and strategy, and then related to that, the annual NIM was the question. So now let us go to the bank CFO to respond to these questions.

Ki Heung Kim (CFO)

Thank you very much for the questions. Now first about the loan growth. Now this year, the loan asset growth strategy.

So under this strategy, then in the first half, as was mentioned earlier, in order to grow the customer base, we have been focusing on increasing the customer base at speed. So we have made some achievements on that target. So as we can see in the first half, as you have focused more on growing the customer base, and then now as we move into the second half, then we will be focusing more on profitability and the asset quality. And then now in terms of the overall growth, then of course this is going to be within the capital management level inside the group. And then the second question about the margin. Now in the first quarter, the NIM rose by 2 basis points. And that is also related to the increase in the core deposit, and then also about the policy high-interest products coming to maturity.

So as a result, there has been improvement in the margin. And then now for the rate projection or the so in relation to the rate projection and also about the NIM. Now in the first half, because of the also in the second quarter, considering the loan competitiveness, then we believe that compared to the first quarter, it is going to fall slightly. But then now in the first half, it is going to be relatively flat YOY. And then now in the second half, now the expected rate cut and also the expected general rate decline in the market, we believe that there is also going to be a slight fall in the second half, but then we will be managing the NIM overall. Thank you very much.

Cheol Woo Park (Investor Relations Executive Officer)

Next question from Hanwha Investment & Securities. Doha Kim, please go ahead.

Doha Kim (Analyst)

Yes. Thank you for the opportunity.

I have two questions. I think this time, one of the non-recurring factors, maybe it's me, but I don't think they were there. I may have missed them, but can you comment? And after the general elections are over, real estate trust companies, a lot of the PF sites, I think there are some discussions about the arrangements where the developers have committed to be responsible. So not direct loans, but for the overall exposure beyond direct loans, what is the total amount and what is the provisioning amount as well?

Cheol Woo Park (Investor Relations Executive Officer)

So yes, thank you for those two questions. We will also prepare. Just one moment.

Sang Yung Chun (CFO)

Thank you. In the first quarter, you asked about what one-offs actually were affected, and also a question about real estate trust business. In terms of the one-offs, it's not about provisioning, but ELT-related costs are on the non-operating expense line under non-interest.

That may be one-off. Then our real estate PF and overseas commercial real estate investments, actually we did about KRW 140 billion in preemptive provisioning against that kind of exposure. I think those are our one-offs. Now regarding Shinhan Asset Trust, there was a lot of media reports recently, but regarding the real estate PF issue, responsible completion of construction, this is a type of real estate trust. For companies with lots of exposure, there is now emphasis on a lot of the risks that are attached. We were actually mindful of this in advance. Starting in the first quarter this year, we started, or we have started to set aside provisioning preemptively. For Shinhan Asset Trust, the outstanding balance is about KRW 310 billion, and the provisioned amount is about KRW 87.1 billion.

So again, balance is about a provisioning rate of 8% against the exposure. So regarding asset trust in the first quarter, we have set aside some preemptive provisioning already, but we will continue to do that in the second quarter through a full-scope survey to identify whether additional provisioning may be required to fully absorb any possible loss. Given our recurring fundamentals, I think any impact to the group will not be sizable. But for any expected loss, we will continue to provision against that kind of prospective loss.

Cheol Woo Park (Investor Relations Executive Officer)

Thank you very much. Thank you very much for the response. We will take the next question. Again, if you have questions, then please use the hand-up function in Zoom. And also please be informed that for English questions, there will be consecutive interpretation. We will wait a while until we take the next question. Thank you.

From SK Securities, we have Mr. Seol Yong-jin. Please go ahead with your question.

Yong-jin Seol (Analyst)

Thank you very much for taking my question. Now it is about the global business profitability. So compared to so on a YOY basis, I can see that the global income has gone up. So specifically from which business areas has the company seen growth in the income from the global business?

Cheol Woo Park (Investor Relations Executive Officer)

Yes. Thank you very much. Please, I ask for your patience as we prepare our response.

Sang Yung Chun (CFO)

Thank you. Now then regarding the global business profitability. Now as you would be aware, now in terms of the global business, Shinhan has long history, and I would say that we are ahead in many ways. Now in terms of our global business, then there has been much growth coming from interest income, then also from our provisioning.

So there has also been reversal in their provisioning thanks to some exposed management. And so for the overseas subsidiaries, then we also have the recurring income, then also especially from London, and then also what we call the NMC branches like Hong Kong and New York, there has been reversal in provisions going up by 35.4% YOY.

Cheol Woo Park (Investor Relations Executive Officer)

Yes. So Doosan Baek from Korea Investment & Securities, please go ahead.

Doosan Baek (Senior Analyst)

Yes. This is Baek Doosan. I also have two questions. Regarding Shinhan Investment Securities, short-term trading results actually appear a little bit disappointing. Is it because of impairment loss from overseas investments, or is there any particular reason behind the poor performance? First quarter results, and given your forecast for full-year performance, how strong do you think the underlying earnings fundamentals are?

Second, you said share buyback will be done in the form of a trust contract over the next six months, I believe. Now going forward on a quarterly basis or maybe on a semi-yearly basis, that could be possible. So in terms of the timing and also the value amount allocated to each timing period, could you provide further details?

Cheol Woo Park (Investor Relations Executive Officer)

So yes, we will prepare to answer your questions. First on the stock trading business and share buyback.

Sang Yung Chun (CFO)

Yes. Thank you for the two questions. Regarding Shinhan Investment Securities, you asked about business performance and outlook. And also the second question regarding share buyback, maybe I can address that first, and I'll pass the mic to the CFO of securities for the first question. Now regarding overall share buyback, let me address the overall detail.

As we were presenting the annual business results and regarding the TSR, then about the quarterly even payout and then also the share buyback and cancellation. Through these measures, we announced that we will be continuing to enhance shareholder value. The shareholder buyback and cancellation that we announced this time, so this is in line with the overall direction. But then in the past, it was done on a quarterly basis, but now this time it is on a biannual basis. That is because we wanted to secure more flexibility in the share buyback. Also as you have seen in the business results of the first quarter, we have strong fundamentals. Also in terms of the capital ratios, despite the special circumstances in the first quarter, we were able to manage the capital ratios quite stably.

So we are confident and we are also committed to improving shareholder value on a continuous basis. So then for the share buyback and cancellation for the next six months, meaning that it will continue until the third quarter of this year, meaning that the volume is going to be similar to last year's. And then now in the fourth quarter, we would also be looking into additional share buyback. And as you can see from the first quarter results, now based on our judgment, the recurring revenue for the company on a quarterly basis would be about KRW 1.5 trillion. So then based on these fundamentals as well as our capital management capabilities, so based on this trend, then I do believe that in the fourth quarter, we could look into another round of sizable shareholder buyback and cancellation.

But then, in that case, then because this time it was quarterly, then biannual. So in the fourth quarter, if we have another share cancellation, then it is likely to be on a quarterly basis. But of course, all of this would have to be determined at the BOD. But then that would be the guidance for now.

Heedong Lee (CFO)

Now regarding the securities side, so in the first quarter, prop trading results actually were quite sluggish. So actually, I think it can be explained in three ways. First, it's a reverse base effect. Second, conservative response. And third, preemptive response. So I mentioned the reverse base effect because last year, first quarter, our prop trading results actually were very good. So if you recall, interest rates at the time had fallen abruptly and the market conditions were quite favorable.

We opened our bond position and actually were quite aggressive moving in. So at the company level, we actually saw a very high record results from prop trading. So if you compare first quarter 2024 against that high base, it does appear that we have seen a significant year-on-year decrease. That's the first reason why. And then in the sense of being conservative in our response, as you know, in terms of the timing of the rate cut from the U.S., it is being postponed and deferred. And the number of cuts actually expectations are changing as well. Oil prices regarding the Middle East and price inflation is also growing in terms of uncertainty. So our trading desk actually is now formulating a very conservative strategy to address the business. And the conservative strategy has had the result of scaling back some of our performance.

And then third, I mentioned preemptive response. In the first quarter, in terms of acquisition financing, we actually were a bit preemptive given the ongoing uncertainty in terms of the business and economic outlook. If we are able to reduce exposure in certain asset categories, we try to do that quickly to recognize loss quickly to scale back exposure. And so that was our view. And so for some of our acquisition advisory assets, we did sell off and dispose of quickly. So it's because of a combination of these three factors that we have lower performance year-on-year. In terms of future outlook, I think there are still remaining uncertainties out there. So rather than focusing on driving profits, we want to focus more on stability in terms of our prop trading business.

Cheol Woo Park (Investor Relations Executive Officer)

Thank you very much for the response. We will take the next question.

We will wait a while until we take the next question. [Foreign language] From Goldman Sachs, Park Sinyoung, please go ahead.

Sinyoung Park (Analyst)

Now in the past quarter's results, then about the capital distribution plan, then there was growth 60 and then 40 for shareholder return. Is there any long-term target for the shareholder return? Also for KB, they also mentioned about how they're going to prefer buyback. So I wonder for the time being, then I wonder what is the plan for SFG.

Sang Yung Chun (CFO)

Thank you very much for the question. I ask for your patience as we prepare our response. Thank you very much for the question. Now regarding the capital allocation and valuation, which were the questions. So now first about the capital allocation, then as was mentioned earlier, yes, growth 60 and then shareholder return 40. So that remains the same.

Now out of the capital allocation, then of course in terms of the Basel III, so there are some special considerations to be made. But again, overall, it is going to be 60/40. And then about the valuation and the share buyback and cancellation as well as the shareholder return, so I would say that ours is also similar. In other words, the company valuation, then in terms of the compared to the peer groups in other countries, then I would say that it is, let's say, on a lower end. So when we think about the appropriate valuation, then the ROE and also our capital ratios, then let's say even if our permanent growth rate is zero, then looking at our recurring ROE, then at least so you talked about KB at 0.8x, but then we believe that it has to be higher for SFG.

But for the short term at this time, so we believe that the target should be at least 0.6. And also under the PBR 1 level, then rather than dividend, yes, share cancellation is going to have a higher benefit in terms of the shareholder return. But then again, in principle, at PBR 1 level, then yes, it is going to be share cancellation. But if we go near PBR 1, then at an appropriate level, we would also be more actively allocating for growth as well as shareholder return. Then also for the shareholder current target, so this also had been reiterated several times, and we believe that for the longer term, we should reach 15%. But then our initial target would be 40%. And whether we will be able to meet that target within this year or not, there are a lot of factors that would affect this.

But then again, our principle is to keep increasing the TSR, and that is going to remain our direction. Thank you.

Cheol Woo Park (Investor Relations Executive Officer)

Yes. Thank you. I think there is one question from WhiteOak's Shane Mathews, please go ahead.

Shane Mathews (Associate)

Thank you for the opportunity and congratulations on the results. Just one question from my end. It's a credit cost. So this quarter saw a decline YOY, and it's around 38 basis points is the credit cost. So is this the recurring credit cost we should see over the coming quarters as well, or do you anticipate further reductions in the additional preemptive provisioning going forward?

Cheol Woo Park (Investor Relations Executive Officer)

[Foreign language] Yes. Thank you for the question.

Please wait just one moment as we prepare to answer your question. [Foreign language]

Sang Yung Chun (CFO)

Yes. Thank you. Regarding credit costs, as of the first quarter, our nominal credit cost is 38 basis points. Mindful of our additional provisioning, our recurring credit cost is about 30 basis points relative to first quarter last year. There were non-recurring items last year. So nominal level credit cost was about 29 basis points last year. So this year, first quarter, relative to last year, we are slightly higher than last year. Now in the slides, I mentioned, but given the various macro factors right now, we may see potential deterioration for the time being in terms of the asset quality. In terms of the percentage or credit cost, we do expect it to perhaps increase some.

But last year, our full-year credit cost was about 57 basis points, and recurring credit cost was about 38 basis points. So given our loss absorption capacity that is currently available, our expectation for full year this year is somewhere around 45 basis points or under. We believe cautiously that we should be able to manage it under that level at a recurring level. So that is our internal expectation and internal target, if you will. Going forward, we will be very vigilant against any further deterioration of credit loss. And so we will be preemptive in setting aside more provisioning to further bolster our loss absorption capacity.

Cheol Woo Park (Investor Relations Executive Officer)

Thank you very much for the response. At this time, we see no further questions. So let us wait until we have the next question. [Foreign language] Thank you. We will take the next question. Mr. Shim Jongmin from CLSA Securities. Please go ahead with your question.

Jongmin Shim (Equity Research Analyst)

[Foreign language] Thank you very much for taking my question. This is Shim Jongmin from CLSA. I have one question. So by the end of the year, the CET1 target, what would be the target for that? And then also how can this be connected to the shareholder return policy? So as the CFO has explained earlier, in the fourth quarter, there may be more and larger shareholder buyback and cancellation than in terms of the CET1. Then if it goes above a certain threshold, then you mentioned that you would go with the option of shareholder buyback and cancellation. So the question is overall about the CET1 relation and also relation with the shareholder return policy.

Cheol Woo Park (Investor Relations Executive Officer)

All right. Thank you very much for the questions. So I ask for your patience as we prepare our response.

Sang Yung Chun (CFO)

Thank you very much for the question. So yes, about the CET1 ratio target and then also how this can be related to our share cancellation. Now, to put it simply, as was mentioned last time, the target CET1 ratio is 13%. So 13% is a threshold. Of course, when we say 13% threshold, then if we consider the various buffers, then it's not just 13%. It could be 13.1%, etc., meaning that there has to be some buffer. But again, in principle, it is 13%. If it goes over, then we will consider shareholder return. So then additional share cancellation or shareholder return, so taking them into consideration, I believe that in the fourth quarter, I believe that that would also be the consideration.

Cheol Woo Park (Investor Relations Executive Officer)

All right. Thank you very much for the response.

There have been a number of questions asked and responses provided, and we see that there are no further questions in queue. But I do believe that there has been sufficient discussion for now. With that, we will conclude the 2024 first quarter earnings conference call by SFG. We will strive to enhance understanding of investors, shareholders, and stakeholders in SFG through our earnings release conferences. The information that was shared today can also be found in our website and the SFG IR YouTube channel. I ask for your interest and attention. Once again, thank you very much for your participation.