Shinhan Financial Group Co Ltd

KRX:055550

Earnings Call Transcript 2023-Q3

[Cheol Woo Park, executive]

Good afternoon, everyone. This is Park Cheol Woo, in charge of IR. And thanks, everyone, for joining us at this SFG 2023 Q3 earnings presentation.

Today, I'm joined by Group CFO, Lee Taekyung, the main presenter; Group CDO, Kim Myoung Hee; Group's CSSO, [Ko Seok hon]; Group CRO, Bang Dong Kwon; Shinhan Bank CFO, Kim Ki Heung; Shinhan Card CFO, Kim Nam-Jun; Shinhan Investment Securities CFO, Lee Heedong; and Shinhan Life CFO, Park Kyoung Won. We will first present the group's business results in Q3 2023, followed by the Q&A. And now I invite the CFO, Lee Taekyung to present the group's business results in Q3 2023.

[Taekyung Lee, executive]

Good afternoon. This is CFO, Lee Taekyung of Shinhan Financial Group. Let me thank everyone for participating at our Q3 2023 earnings conference call despite your busy schedule. I will first go through our business highlights from Page 5 of the slide. Page 5.

We have maintained steady operating income through Q3 2023. Net income was KRW 1.1921 trillion, down KRW 46.2 billion Q-o-Q. There was recognition of one-off costs such as investment-related provisioning in Shinhan Securities. Noninterest income fell from Q2, owing to decrease in securities-related income resulting from market volatility but the fee income is growing evenly across the different items. The group's cost income ratio was 39.2%, slightly up Y-o-Y but excluding ERP cost, it fell slightly.

Provision for credit loss fell Q-o-Q by KRW 81 billion. Credit cost ratio was 50 bp, increasing Y-o-Y, but falling Q-o-Q. Last, the group's Board resolved on the 25th on KRW 525 in dividend per share in Q3 and KRW 100 billion in share buyback and cancellation in Q4. It brings the group's total resolution on share buyback and cancellation to KRW 500 billion in 2023. Looking ahead, we will continue with sustainable capital and shareholder return policy as we try to secure capital adequacy and in response to changes in capital regulated -- capital regulations.

Page 6 is on the group's major business highlights and Page 7 shows the group's net income and income indicators provided for your information.

Moving on to Page 8 on the group's income breakdown. Page 8 on the group's interest income. Interest income in Q3 2023 was KRW 2.7633 trillion, up 2.6% Q-o-Q. It is attributable to growth in interest-bearing assets and business days despite the fall in the group's margin by 1 bp.

In Q3, the bank's NIM was 1.63%, down 1 bp Q-o-Q due to loan growth, primarily in high-quality assets and preemptive funding.

The bank's loan assets grew 1.1% in Q3 following the 0.7% in the first half. Retail loans fell 2.5% from the end of last year, owing to slowing demand for credit loan from tightening rates and DSR regulations as well as securitization of mortgages. Corporate loans grew 5.5% from the end of last year on the back of continued demand from large companies and quality SMEs. Please refer to Page 33 for more details.

Page 9 is on Shinhan Bank's loan asset growth, funding and margin provided for your reference.

Next, Page 10, on noninterest income. The group's noninterest income fell 11.6% Q-o-Q despite growth in fee income and insurance income due to lower securities related income. Insurance income grew 4.2% Q-on-Q, resulting from the increase in CSM amortization from improvement in insurance sales.

Next is on fee income breakdown. Credit card fee was up 52.8% Q-o-Q, driven by growth in credit card purchases and other fees. Brokerage fee was 8.3% on the back of increased stock trading but IB fee fell 36.6% Q-o-Q despite the growth in underwriting fee, resulting from more risk [ PCM ] sales due to reduced real estate PF and financing arrangement fee.

Page 11includes additional information on the group's noninterest income trend and details are available for your reference purposes.

Page 12 is for group's provision for credit losses. G&A costs increased 4.3% [indiscernible] reclassification of service accounting [indiscernible] Q-o-Q. Group's CIR on an accumulated basis edged up slightly to 39.2% Q-o-Q. But when excluding ERP costs, group's CIR was 38.2%, down 0.3% points.

Group's Q3 provision for credit losses due to declining additional countercyclical provisioning fell 14.7% Q-o-Q. Group's recurring provision decreased KRW 8.1 billion Q-on-Q.

Shinhan Bank, with the end of corporate credit rating season, its recurring provision fell by [ KRW 71.1 billion ]. Shinhan Card with long and the September holidays shortening payment cycle, it's recurring provision increased by KRW 79.7 billion. As for the leading indicator of credit cost ratio, that is delinquency rate, the bank's delinquency rate affected by higher interest rates and unfavorable economic conditions, continues an upward trend yet compared to pre-COVID levels in Q3 2019, the absolute delinquency rates still remains low. Through write-offs, delinquency rate remains flat Q-on-Q at 0.27%.

As with Shinhan Card, due to write-offs, the delinquency rate dropped 8 bp to 1.35% Q-o-Q. But the leading indicator of delinquency, 2 months delinquency migration rate went up [ 2 bp ] Q-o-Q.

On Page 13 to 15. Information on group's G&A expenses, credit cost ratio, asset quality and real estate PF has been included with further details for your reference.

From Page 16, SFG income by subsidiary will be explained. As for [ SHB ], higher interest rates and FX rate lowered noninterest income, while ERP raised G&A expenses. Nevertheless, interest income rose and provisions declined, resulting in an overall increase in net income Q-o-Q. As for nonbank subsidiaries, Shinhan Card, despite increase in provisioning were boosted by operating income growth, kept its net income flat Q-o-Q.

For Shinhan Securities, rising interest rates and falling stock prices resulted in sluggish stock trading and trading income and reflecting recognition of provisioning for investment products related costs. Its net income dropped significantly Q-o-Q.

As for Shinhan Life, improved insurance sales led to increase in CSM amortization, which led to increase in insurance service income, but due to higher interest rates, insurance finance income decreased thereby reducing net income Q-o-Q.

As for Shinhan Capital, interest expenses increased but with decrease in provisioning, its net income grew Q-o-Q.

Page 17 shows SFG income by subsidiaries and Page 18 shows SFG overseas business for your information.

Page 19, capital management and key profitability indicators. At the end of September, CET1 ratio is expected to decrease 9 bp to 12.90% provisionally. This is due to higher FX rates and loan growth resulting in the growth of RWA. As for our digital strategy outlined on Page 21, CDO Kim Myoung Hee will take the floor.

[Myoung Hee Kim, executive]

Good afternoon. I am CDO, Kim Myoung Hee. Regarding Q3 2023, I will address you on how the group aims to strengthen its fundamentals for its digital transformation. To begin, group's digital strategy framework with 6 key customer-centric priorities and their key performance has been described on the left.

As for SFG's financial and nonfinancial platform, its gross MAU is 24.42 million, up 16% year-on-year. Financial platform, DAU is 5.13 million, indicating the platform evolving into a high-traffic sites. As for new digital business expansion, data sales business generated KRW 15.5 billion of revenue, which is a 28% growth year-on-year. Such results and customer value creation are enabled by 4 key core competencies, which I will explain.

First, strengthening data competencies. The group is working to understand its customers' financial life thoroughly and extensively by scaling up data collaboration with various industries, which is leading to growth in data business. In addition, data contest for university students and other data-driven CSR initiatives are also taking place continuously.

Next is technology. Group is strategically tapping into cloud to drive infrastructure improvement, open development environment and open source software usage. This will enhance access to new digital technologies and improve service [ development ] as well as operational efficiency.

Next, process innovation. Enabled by digital technology, we're optimizing operational processes and enhancing employee productivity across the entire group. We're expanding no code into business units while renewing our group [ work ] to innovate the way we work.

Last part is the people domain, talent development. Group in order to qualitatively expand and qualitatively grow digital talent has established a common group-wide competency system, based on which a customized HRD program for employees is operated. SFG will continue to strengthen its fundamentals to enhance customer value. Thank you.

[Taekyung Lee, executive]

Thank you, CDO Kim for your presentation. Starting with Page 22 onwards, information on the group's ESG initiatives, detailed data by group and key subsidiaries as well as key management indicators have been explained for your reference. This concludes the presentation. We will now start the Q&A. Thank you.

[Cheol Woo Park, executive]

[Operator Instructions] And for your information, if you ask the question in English, then it will be interpreted consecutively. So please, I ask for your patience while the consecutive interpretation is underway. And now let us wait for questions. [Operator Instructions] First question is by Mr. Seol Yong Jin from SK Securities.

[Yong Jin Seol, analyst]

This is about provision. Now regarding the credit loan, I understand that there were some talks about adjusting LGD value and then also in the fourth quarter, also for the collateralized loan and I understand that there are talks about adjusting the LGD value. So if you could explain a bit further.

[Unknown Executive]

So this was about provisioning. Yes, in third quarter, about the credit LGD, what we provision for credit LGD, then there is KRW 26 billion for the bank and then also smaller amounts for other subsidiaries. So that was the impact. And then also for the nonrecurring, then not only the -- not for the credit LGD, but then for retail, and also for the [ SOHO ] model, then that was about KRW 21.8 billion. So then that was also included. So in total, it was KRW 55.1 billion.

And therefore, the fourth quarter, the collateral loan, LGD, we would have to do some more calculation, but the expectation now is that it will be around KRW 100 billion.

[Cheol Woo Park, executive]

I will take the next question from [ Hanguk ] Investment Securities, [ Baek Doosan ]. Please go ahead, sir.

[Doosan Baek, analyst]

I'm from Korea Investment & Securities, Baek Doosan. A question regarding capital ratio and also to related the capital growth -- asset growth, especially if you look at the bank loans, there is a lot of demand for lending, but our capital ratio due to higher interest rates is in a very high position. However, we still need to increase TSR in terms of the capital ratio and also considering the TSR in Q4 or maybe next year, what are your growth targets? Or in order to achieve the growth targets, what are the current plans that you have in place?

[Taekyung Lee, executive]

Yes, for the capital ratio and also for the asset growth in TSR, shareholder returns, so the question was dealing with all 3 different elements here. So at the end of -- at the beginning of the year, CET1 target was 12%, and we raised that to 13%. And we're going to achieve that by the end of the year, to 13%, and the effort is underway. So currently, it's 12.9%. And in order to achieve 13%, of course, we have to grow our assets. So we have to look at actual demand. At the same time, because there are economic uncertainties, we have to focus on high-quality on corporate loans that has been increasing. And in order to maintain [ 30% ], RWA has continued to increase and [indiscernible] as well, the [ 30% ] target is going to be maintained. And if you go with that as planned, next year's net income -- we will have to allocate, for example, organically to RWA, and we will also have to think about how we go about doing the TSR.

Beginning of the year, we said the TSR is within the 30% to 40%. We have to take into account, of course, economic uncertainty and volatile environment. And that continues still, the [ spend ] maintained and the [ spends ] will continue on into next year, and that is how we're going to allocate. But even for the RWA, because we don't want to erode into the capital, we want to look at profitability, not only the short term, but over the long term, we'll focus a lot on profitability, so we can sustain our growth, and we'll try to allocate more into those industries and areas in business that could bring us more profitability so that we continue to keep our commitment.

[Cheol Woo Park, executive]

And now yes, we'll take the next question from Daishin Securities, it is Park Hye-jin. Please go ahead with your question.

[Hye-jin Park, analyst]

I am park Hye-Jin from Daishin Securities. I have 2 questions. The first is about the funding costs, it seems as if the funding cost pressure continues. So in Q4 and then also in 2024, what is the company's outlook for NIM?

The second question is -- I'm asking this because I'm ignorant about this, and that's about the securities and also the provision and then also the one-off costs, if you could also expand a bit further. Then in Q4, so there is also going to be valuation on the market assets. And now because of the overseas situation, then what is the company's projection for like losses? Or what is the overall projection?

[Cheol Woo Park, executive]

So there were 3 questions. First will be answered by the bank's CFO, followed by the Securities CFO. And then the third question will be answered by the CRO. First from Shinhan Bank.

[Kim Ki Heung, executive]

This is Kim Ki Heung from Shinhan Bank. So now then for Q4 and 2024 NIM outlook. Now in Q3, looking at the NIM band, then you can see that it fell by 1 bp Q-o-Q. So looking at just Q3 then. Now in Q4, then we see that the funding would be [ concentrated ] by the commercial banks in Q4. So that is why we went into preemptive funding in Q3. So then looking at the funding cost rate, then that was also affected by that. And then also in terms of the loan, then now because of the competition in the interest, now we are thinking that we would be able to [ maintain this ] this, but then now we ended up with 1 bp lower in Q3.

Now looking ahead to Q4, then now some of the high interest deposit that we had acquired in the past, now they are nearing the maturity. So then we believe that afterwards, then the funding rate is going to improve. So then there is going to be improvement in the NIM. With the projection of -- I'm very cautious at 1 bp to 2 bp, then looking ahead to next year.

Now in Q4, the NIM this year was the highest in Q4. Then looking at the interest rate next year, then we believe that the benchmark rate is going to remain frozen for some time. And so looking at the overall situation, then the NIM next year is likely to be largely flat from this year. Again, that is our cautious outlook for next year.

[Heedong Lee, executive]

This is the Shinhan Securities CFO, Lee Heedong. Now your question about the one-off cost, well, were reflected in this quarter, one-off cost. Now that is from the August decision about the Gen 2 Fund. And now what we had decided on the private cancellation was [ line ]. And then so -- so that was about [ KRW 1,400 billion ]. And then for this time, the provision this time was for Gen 2 and that's a pretax KRW 119 billion. So now regarding this provisioning -- now in the past, the Financial Supervisory Commission Disputes Settlement Committee, now they have come out with the ratio of settlement, and we have also applied that this time. And of course, in the process of settlement, then whether it is going to -- so it will be determined throughout the negotiation, but then there is the projected numbers and then also the percentage that is expected for Gen 2. So we combine them as the one-off costs in the past quarter.

So now to the future, then in the course of settlement, then we are going to compare between these 2 assets and book them accordingly. And then also for your further information, now in early part of the year in January -- in February, I have also explained about the investor-related products and then also about the Gen 2 and also the other small value funds. And then remaining is about [ KRW 1,500 ]. So you could take it as a part of what we had already explained in the early part of the year.

[Dong-kwon Bang, executive]

And now this is the group CRO, Bang Dong-kwon. And about the -- so I would take it that this question is about the overseas real estate. Now first of all, about the status, now for the group, then our overseas real estate is about KRW 4 trillion in holding and to be more specific, about 60% is in North America and also by purposes then office or residential, that's about 65%.

[indiscernible] substandard is about KRW 160 billion, so about 4%. So slightly higher than the other invested assets in Korea. So having said that, now we have done on all counts in the second half of the year. And since the insurance company has the highest holding, they have conducted inspection of the potentially distressed assets. And then now next week, so we believe that we need to take a look into the bottom 10% assets. So then next month, then we would be, again, conducting on-site inspections across 2 geographies next month. So then in preparation against potential losses, we will continue to closely monitor the overall situation.

And for your information, yes, of course, we would be working together with outside organizations to conduct additional valuation. And it is too early for us to tell you about the total size, but then we are going to update them in terms of the valuation, and that would be reflected into our fourth quarter.

[Cheol Woo Park, executive]

From HSBC, Won Jaewoong will ask a question.

[Jaewoong Won, analyst]

I have 2 questions. First is that [indiscernible]. In terms of the corporate lending increase, I think, CET1, you were able to defend quite effectively. So the movements -- can you explain about the movements between the previous quarter and this quarter in relation to the CET1? Second -- and I think the [indiscernible] method was used for insurance, does that lead to any changes in terms of the P&L?

[Taekyung Lee, executive]

Yes. First question was related to CET1 movement. And the second is related to the insurance calculation method. As for the CET1, on a Q-o-Q basis, you can refer to the slide outlined on Page 19, RWA increased [ KRW 7.7 trillion ], credit of [ KRW 7.3 billion ] and market KRW 0.4 trillion down. And in terms of the operation, RWA increased by KRW 0.8 trillion and as for the declines over here for the market RWAs, I'll just read this for you. ELS volatility increased and the bond positioning going up but [ bond-related ] duration went down, which led to the current results. And not only for the RWA, but for the CET1 has been a drop in [ CET2 ]. As you can see from the graph, this is because 39 bp due to the net income and 12 bp came down due to the [ TSP ]. Now, RWA 32 bp down and [ TSP ] 12 bp and OCI changes 4 bp change -- reduction was made.

Our CFO from insurance side will answer.

[Unknown Executive]

I'm Shinhan Life, [ Park Kyoung Won ]. IFRS 17 guideline, this is related to the actual loss, medical cost, which has been reflected in Q3 performance. As for the overall guidelines, that really does not have a lot of implications on our insurance. The reason we decided to reflect the [ use fee ] because the total KRW 100 billion, an improvement was achieved. And also in terms of the P&L, maybe KRW 3 billion in terms of the losses, which is quite minimal. We really haven't had a lot of changes in terms of the P&L as a result of the progressive [indiscernible].

[Cheol Woo Park, executive]

We don't have any more questions. So we will wait until more questions come through. [Operator Instructions] Those of you who are doing the questions in English, there will be consecutive interpretation provided afterwards. So while the interpreter takes the floor, please wait until the interpretation is finished. We'll wait for more questions.

Now it is Mr. Jeong Tae Joon from Yuanta Securities.

[Tae Joon Jeong, analyst]

I am Jeong Tae Joon from Yuanta Securities. My question is on dividend. Now recently -- now actually this year, early this year, you have also revised the articles and now then -- what is your guidance about the shareholder return policy?

[Dong-kwon Bang, executive]

So that is about the closing of the shareholder register and we were preparing to communicate about this even if there were no questions about this. So as you have mentioned earlier, so we have changed the AOI in the early part of the year. And so now the dividend is not going to be at the year-end, but that should be resolved at the Board. And not just for the group, but then for the subsidiaries and also by the other listed companies as well. So then it is going to be determined at the general shareholders' meeting.

And then so we revised the AOI in accordance to that. So then afterwards, we will be paying off the dividend, not always at the end of the year, but then determined by the BoD. And so the direction now is that perhaps after the general shareholders meeting, not right after the GSM, but then perhaps 1 or 2 days afterwards, so that is our direction as we have discussed so far, but it has not been finalized yet. So that is direction of discussion. And once we make the decisions, then we will make sure that they are duly communicated and disclosed at the end of the year.

[Jihyun Cho, analyst]

Cho Jihyun from JPMorgan. This was included in the slide, you didn't mention this. This is really related to real estate PF. The slide clearly shows no information. But on the news, it seems that a lot of media coverage is actually focused on any companies that are in distress. So what's the current situation right now, especially the creditors group, they're quite strong. And also there is an influence coming from the government policies as well. So what's the current level right now? And especially between this year and next year, do you see any difficulties going forward? And how do you plan on responding to them? So if you could talk about your future risk management, I would appreciate that.

And we know that you had a lot of provisioning for credit losses this year. What is the target for provisioning this year, year-end? And since we had a provisioning in place and also considering the risk factors next year, is that going to continue to go up? Or is it going to come down? So in terms of the credit loss provisioning, if you could provide us with a yearly guidance.

The last question is that among the top banking groups, you did quarterly dividend payout continuously. So can we expect that as well next year? Is that going to continue for the part of the dividend.

[Cheol Woo Park, executive]

So a few questions here. First is the real estate [ PF ]. Our CFO will answer. And for the last remaining 2 questions, I will try to address them. CRO, please take the floor.

[Unknown Executive]

I'm [ Lee Tae Kyung ], the CRO. So as I mentioned in the slide, the [ PF ] included bridge loan is [ KRW 9.1 trillion ]. In terms of the delinquency, that's about 1.4%, substandard and below is about 2%. However, if you look at the characteristics of the assets, most of them -- [ 73% ] are concentrated in the metropolitan area, for residential, that's about 60% concentrated. So across the board, this is -- well, internally, we are confident about our asset quality like what the market sees us. But of course, the market will take precedence over our internal situation. So we're remaining very cautious.

As for the major creditor group, lenders group, I think, operation is quite effective. There are about 40 different sites and about KRW 36 billion -- KRW 360 billion have been incurred. And all the assets that are flying to the lenders group and some of them are in delinquent state and some of them may go delinquent going forward but we'll have to be cautious as to how to distinguish between the 2.

So of course, a lot of interest is focused on real estate. So we're doing this on a weekly basis. We try to monitor the developments on a weekly basis for the PF, we also do a monthly review for the assets. And we also try to readjust our [indiscernible] as well and in the second half of the year, we'll do full enumeration survey, and we have also come up with response strategies by each company. But for the time being, for the real estate business, this is where everyone is interested in, and we're not exactly sure, we can say whether it's going to get better or it's going to become worse, but we'll just have to remain vigilant.

Second question is related to provision for credit losses. [ 50 bp ] until 3Q and during the Q4, it's about 40 bp [ remunerated ]. As for the 4Q prediction, [ 89 to 89 ]-- 48 bp to 49 bp is being planned. As for additional provisioning, [indiscernible] real estate, yes, will have to review that on case by case basis, and we'll have to add more provision for that.

Our support on a year basis, are probably in the later [ 40 bp ], but it may go up as high as with [ 50 bp ]. As for next year, we have a recurring provisioning and additional provisioning. As for additional provisioning, due to [ EAD ] changes, there could be additional provisioning required. And of course, individual overlay and [ BCF ] may be required, but starting last year, the year before and next year, we really don't have much room for additional provisioning. So that is really not going to be that sizable. In terms of the recurring provisioning, it's [indiscernible] now, as was mentioned by our CRO, the [indiscernible] and the loan loss provision or credit loss ratio is going to decrease next year.

For the dividend, quarterly dividend this year as well as next year. That is a regular practice. That's part of our policy to do our quarterly dividend. The quarterly dividend policy is going to be maintained.

[Cheol Woo Park, executive]

And now let us wait for further questions. [Operator Instructions] From JPMorgan, Cho Jihyun, I believe that she has a follow-up question. So please go ahead.

[Jihyun Cho, analyst]

So what I had asked about was also whether for next year, the share buyback and cancellation, will that also occur on a quarterly basis? And I believe that I perhaps have phrased my question wrong, asking only about the dividend, but then also about the share buyback and cancellation.

[Taekyung Lee, executive]

Yes, then let me directly answer the question. So yes, dividend on a quarterly basis and then also the share buyback and cancellation, we have also tried that this time. Now the overall shareholder return policy remains unchanged from the previous guidance and then now, for next year, whether it will also take place on a quarterly basis or not, that is also up to the BoD decision as well. So the overall direction, it remains unchanged. But then now regarding the share buyback and cancellation, I would have to come back to you after we make the decisions at the BoD.

[Cheol Woo Park, executive]

[ White Oak ] Capital, [ Tejkiran Kannaluri Magesh ].

[Unknown Analyst]

I wanted to understand how the retail business credit scores are being used in our risk management practices. So what -- how the internal scorecards have used? What kind of [ bureau ] data do we use? And whether alternate credit scores that with new technology like machine learning and AI, are they replacing [ bureau ] data that you're using? How is this risk management at the time of underwriting evolving from a credit risk perspective.

[Cheol Woo Park, executive]

Yes, the CRO will take your question.

[Dong-kwon Bang, executive]

Yes, this is the CRO, Bang Dong-kwon. So I see that it's quite a technical question. So now, yes, for the retail loan, then we have the rating agency system. So we don't use the outside system. So then in our case, for the [ BIS ] ratio, when we calculate the BIS ratio, then we use the internal rating method. So then now we are using this with approval from the FSC. So yes, this is the internal model. And then there's also what we call the alternative model. So in a top deregulated model, then there's also what we use for our business purpose and that is the alternative model. Now for this alternative model, then what you have mentioned, for example, machine learning and other new technology. So yes, we are obviously seeing -- using them. Now for the data, then we try to use as much data as possible from both inside and outside to input them into the model to run the model. So now let me sum up.

We have the regulated model, then the alternative model. Regulated model has been approved by the FSC, it is in usage, therefore, the alternative model, this is for our internal usage, and we are also applying machine learning technologies as well.

[Cheol Woo Park, executive]

We don't have any questions in the queue, so we'll try to wait a little longer. Yes, I am aware of the time. And yes, this concludes 2023 Q3 earnings presentation. So we would like to thank the participants once again for our earnings presentation. Our presentation materials will be posted on homepage as well as SFG IR YouTube channel. We ask for continued interest and we will see you again at the next quarter. Thank you very much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]