Shinhan Financial Group Co, Ltd. (NYSE:SHG)
Q4 2019 Earnings Call
Feb. 05, 2020, 2:00 p.m. ET
- Prepared Remarks
- Questions and Answers
- Call Participants
Park Cheol Woo -- Head Of Investor Relations
[Foreign Speech] Greetings, everyone. I am Park Cheol Woo, Head of IR. I would like to thank all the participants in our business results presentation and begin the 2019 Q4 earnings release. We have here with us our CFO, Yu Sung-hun; CSO, Park Woo-hyuk [Phonetic]; and Kim Tae-yeon, Head of Finance.
We will first start the 2019 business results presentation by our CFO, Yu Sung-hun, and then have a Q&A session.
I would like to invite our CFO, Yu Sung-hun, to deliver the 2019 business results presentation.
Yu Sung-hun -- Deputy President and Chief Financial Officer
[Foreign Speech] Greetings. I am CFO, Yu Sung-hun, heading the Group Finance from this year. First, I would like to thank all the shareholders, investors, analysts, and journalists in and out of Korea for participating in our 2019 business results presentation. I would like to walk you through the major highlights of Shinhan Financial Group's 2019 business results.
Please look at Page 3 of our material, and I would like to cover the major highlights. Shinhan Financial Group's 2019 net income posted KRW3.4035 trillion and grew 7.8% Y-o-Y. Excluding the Q4 one-off items, the normalized net income posted around KRW3.46 trillion. The 2020 SMART Project strategy, which was implemented consistently for the last three years, led to fruition and led to the record high full-year earnings. On the other hand, Q4 quarterly net income posted KRW507.5 billion, a 1.1% drop Y-o-Y. This is due to the one-off items, including the main depository bank for city government intangible asset-related expenses and slightly increased Y-o-Y.
I would like to summarize the five major highlights of the 2019 earnings. First, the Bank and non-bank net income all had balanced growth compared to the previous year, and the growth trend has been continuing for six consecutive years from 2014. In particular, through the strengthening of non-bank and global business, Shinhan's differentiated and stable earnings generation base was confirmed once again. As a result of focusing on strengthening our profitability for a long time, the Group's global net income grew 23.3% Y-o-Y and posted KRW397.9 billion. Along with the solid global growth of the Bank, Shinhan Vietnam, a consumer financial company was launched, and with this opportunity, the Group's overseas income contribution grew to around 12%, accelerating our strategy to localize our non-banking business. Also in the case of non-banking business, based on our One Shinhan advancement strategy, it recorded KRW1.2112 trillion, a 15.3% increase Y-o-Y and expanded the income contribution to 34%.
Second, in the case of the Group's interest income, through solid asset growth based on balanced loan portfolio, it grew 4.8% Y-o-Y. In particular, [Indecipherable] through the sales drive continuing from the beginning of the year grew 7.4% Y-o-Y, centering on SMEs and SOHOs. On the other hand, Group and Bank NIM was influenced by the market interest rate drop, which continued from last year and declined by 10 BP and 8 BP respectively. But with the gradual stabilization of the market interest rate, the range of margin fall is being stabilized.
The Group's non-interest income, along with our successful major structure in place and through organizational efficiency improvement and portfolio diversification, grew 33.3% Y-o-Y, and contribution also expanded to 28.3%, which is the third point. In addition, Orange Life and Asia Trust were successfully merged, and our insurance and real estate earnings base became expanded. Going forward, we will create a sustainable successful model through linking and expanding between our channels and Group subsidiaries.
Fourth, to manage human resources based on Group's productivity-centered organization and channels, Shinhan Financial Group has been continuously implementing ERP each year. In Q4 of last year, there were 335 [Phonetic] employees who received ERP packages from the Bank part and investment, and around KRW120 billion of expenses were recognized through our high-cost structure improvement efforts. Cost efficiency and profitability going forward will be additionally improved. And within the Group, an organizational structure and system [Indecipherable] respond to the market environment changes caused by digitalization will firmly be established.
The Group's CI ratio posted 46.1%, the lowest level in the industry, through increasing stable operational profit, work process improvement, including digital customer basis expansion and cost management. Thus, cost efficiency and profitability improvement has been continued for two consecutive years.
Lastly, despite the asset quality deterioration concerns following the economic slowdown, which has been heightened from the previous year on the back of appropriate growth strategy and pre-emptive provisioning policy taking risks into consideration, led to the Group's loan loss ratio and NPL ratio, posting 30 BP and 152%, respectively, continuing systematic risk management.
Looking at the graph on the left, the Group's interest income is explained in more detail. Looking at the graph on the left, the Group's interest income posted around KRW8 trillion, a 4.8% growth Y-o-Y. Bank's loans and bond through balanced growth between household and corporates grew 2% in Q4 and 7.4% Y-o-Y and with the expansion of selective asset expansion, centering on prime SMEs is maintaining a solid growth rate. Bank's net interest margin with the October base rate cut and debt relief conversion loan posted 1.46%, a 7 BP drop Q-o-Q. On the other hand, the Bank's consolidated NIM, including overseas branches, posted 1.52%, still recording high profitability compared to the domestic situation and led to the overseas interest income growth. We will do our best so that solid interest income flow can continue through ALM management, taking profitability into consideration.
Now on to Page 5. The Group's non-interest income rose 33.3% Y-o-Y to KRW3.1517 trillion, showing growth in all of fee income as well as securities and insurance-related income. Despite the lowered merchant fees and decreased trading value on the stock market, the Group's fee income grew 10.5% Y-o-Y, due to an increase in investment finance and lease assets. In the securities-related category, due to an increased gain from IP investment and bonds, there was a Y-o-Y increase of 29.7%, driving the Group's growth momentum in the non-interest income. As for this year's insurance-related income with the acquisition of Orange Life's remaining stake completed, we are expecting additional growth.
Moving on to SG&A. The Group's SG&A increased 8.3% Y-o-Y, driven by an increase in salary and employee benefits with Orange Life and Asia Trust coming onboard. But if we exclude that factor, the annual SG&A growth rate is around 3.4%. Going forward, we'll be actively managing the cost through efficient channel strategies and digital process improvement. The Group's and the Bank's CI ratios are 46.1% and 46.5% respectively, each showing an improvement of 1.4 percentage points and 0.8 percentage points Y-o-Y, which is a great achievement. This is the lowest CI ratio recorded in history.
And now the Group's credit cost. The Group's credit cost ratio was 30 BP, 9 BP improvement over the last five years' average, but an increase of 4 BP Y-o-Y. This is because of the steady growth in the Bank's loans and one card loans, installments and lease assets. It is also due to our pre-emptive provisioning in light of market uncertainties at home and abroad. Going forward, in order to minimize risk volatility, we'll continue our efforts for credit risk management and asset rebalancing.
Page 6, Group's asset quality. As of December-end last year, the Group's NPL ratio had improved 0.01 percentage point Y-o-Y, recording a historical low of 0.52%. This was possible because the qualitative growth strategy focusing on sound assets continued. Shinhan Bank's delinquency ratio went up by 1 BP Y-o-Y to 0.26%, but is being maintained at a stable level, considering the steady asset growth. As for Shinhan Card, the delinquency ratios of card loans and cash advance have stabilized since the second half of last year and the Card's delinquency ratio was a record low of 1.26%.
As of year-end, the Group's and the Bank's BIS ratios were estimated to be 14% and 16%, respectively and the CET1 ratios 11.2% and 13.4% each. The Group's CET1 ratio had gone down by 1.4 percentage points due to the acquisition of Orange Life, Asia Trust and treasury buyback. However, starting from this year, CET1 ratio will steadily recover based on stable earnings power without any further dips. Orange Life now being fully owned subsidiary, the Group's BIS ratio will be affected to a minimum as the treasury stocks have been disposed off and new shares have been issued.
The POD had proposed the dividend for 2019 of KRW1,850 per share, and if it is passed at the Annual General Meeting, we could expect the dividend payout ratio of 25% and dividend yield of 4.1%. There have been consistent efforts made to enhance shareholder value by implementing various capital policies such as M&A and treasury policies. We will continue to enhance shareholder value further through flexible and proactive capital policies.
Now, lastly on Page 7, I'd like to share with you what has been achieved so far regarding the 2020 SMART Project. First, in terms of the Group's balanced growth strategy, the 2020 strategic platform bore fruit. In so doing, there was harmonized growth improvement between Bank and non-bank, driving sound growth momentum. Compared to the previous year, the Bank's net income increased by 2% and the non-bank's by 15%, accelerating the earnings growth pace.
Interest income, non-interest income also grew by 5% and 33% each. With the acquisition of Orange Life's remaining equities, the earnings base of non-bank and non-interest income will continue to expand further. Second, the global business achieved the highest income quarter-after-quarter, accounting for 12% of income contribution. We're continuing to see stable results in the core ASEAN markets. In addition, Global Card and Investment Corp are accelerating their localization strategies in Vietnam and Hong Kong. And the 2019 net income increased by KRW24.4 billion Y-o-Y. Going forward, we will continue to create differentiated results from the non-bank side.
Lastly, concerning the upgrade to Digital Shinhan. During 2019, the Group expanded into new businesses such as innovative financial services and created a digital ecosystem through alliance with many ICT companies. Digital's contribution to income steadily increased, marking KRW1.380 trillion, up KRW184.1 billion Y-o-Y. Going forward, we'll respond proactively to the changes brought on by the fourth industrial revolution such as open banking and revision of Personal Information Protection Act and other acts. We'll focus on building Shinhan's unique innovation ecosystem to secure a new growth engine. This year, we'll be completing the 2020 SMART Project successfully and we will produce more visible results to get us closer to world-class Shinhan.
Please refer to the remaining slides for detailed information on key financial indices of the Group and the subsidiaries. Thank you very much.
Duration: 14 minutes
Park Cheol Woo -- Head Of Investor Relations
Yu Sung-hun -- Deputy President and Chief Financial Officer
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