Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Shinhan Financial Group Co, Ltd. (NYSE:SHG)
Q2 2020 Earnings Call
Jul 27, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Park Cheol Woo -- Head of Investor Relations

Greetings. I am Park Cheol Woo, Head of IR. I would like to thank all the participants in our business results presentation and begin the Shinhan Financial Group 2020 First Half Earnings Release.

From Q1, we have been holding this website with only voice and without video to minimize the number of participants amid the COVID situation. We ask for your understanding. We have here with us our CFO, Roh Yong-hoon; CSO, Park Sung-hyun; CRO, Bang Dong-kwon; and Head of the Finance Management Team, Kim Hee Geon. We will first hear the 2020 first half business results presentation by CFO, Roh Yong-hoon, and then engage in a Q&A session.

I will now invite CFO, Roh Yong-hoon, to deliver the 2020 first half business results presentation.

Roh Yong-hoon -- Chief Financial Officer

Greetings. I am Roh Yong-hoon, CFO of Shinhan Financial Group. Thank you for participating in the 2020 first half business results presentation. Amidst concerns over spread of COVID-19, it is still cautious to have confidence in economic recovery. Since it is hard to look into the future at this time in this situation, it is important to make efforts to minimize future uncertainties. Shinhan Financial Group in Q2 continued financial support to customers to overcome COVID-19 and actively responded to the economic downturn cycle through additional provisioning.

In addition, we have been working hard to recover trust by taking pre-emptive actions regarding customer losses related to financial investment products, including Lime and Heritage. It is evident that this is the most opaque business environment with many unusual factors. However, compared to Q1, with the stabilization effect of the financial market in Q2, recurring financial performance and business indicators improved. I will walk you through the related content from page 5 to page 8 and then elaborate on the Group's first half performance.

Let's go to page 5. I will explain about our response to the COVID-19 crisis. Keeping in step with the government's financial release package for corporate and retail clients, we have been continuing our inclusive compassionate financial policy so that prompt funding can be provided to our society and customers. Until July 3, we provided a cumulative KRW16.7 trillion of support for SMEs. We not only extended new loans, but have programs to extend maturity and defer principal repayments. Shinhan Bank supported around 135,000 cases. On the other hand, bank and card additionally provisioned KRW180.6 billion against COVID-19 to pre-emptively respond to the uncertainty in the COVID-19 crisis.

With the change in the RC value adjusting future outlook data, including economic growth slowdown, bank and card additionally provisioned KRW115.5 billion. In addition, there was KRW65.1 billion of additional provisioning through identification and application of DCF valuation for vulnerable loans. Including KRW4.1 billion of COVID provisioning from capital and other subsidiaries, a total of KRW184.7 billion of provisioning from the group is reflected in Q2 performance.

In the second half, we will also comprehensively monitor the financial market, real economy and group assets and continued efforts to minimize future uncertainty. We will protect our proprietary assets and customer assets and also improve our capital efficiency through RWA management leading to optimal growth.

From page 6, I would like to explain about our digital platform sales expansion responding to COVID-19 crisis. After the COVID outbreak, the numbers of non-face-to-face channel customers wanting to utilize Shinhan's trusted and solid digital platform increased. In particular, the numbers of MyAsset users, our comprehensive asset management service, increased from 1.95 million in 2019 end to 4.17 million as of end June 2020.

It was not only a simple lock-in effect, but we had been closely watching and monitoring user behavior, so that we can expand the high value-added WM sales base. The operating profit through non-face-to-face channels compared to the previous year rose 26.6%, posting KRW830.6 billion.

Let's go to page 7. I will elaborate on the response to the financial investment products. Shinhan, regarding the financial investment products that were recently an issue, has considered the possibility of losses through sold products as well as reconciliation recommendations, and we are pushing for pre-emptively compensation and liquidity supply to customers. The financial dispute resolution committee has not decided whether to accept the financial investment sales, Lime fund recommendation, but we included this and posted it conservatively in the non-operating costs. For Heritage trust, we also considered the expected collateral recovery amount and liquidity supply amount and provisioned accordingly.

Accordingly, we reflected pre-tax KRW201.6 billion in our financial statement to respond to the financial investment products in the first half of the year. We improved our product sales process so these types of incidents won't occur again, changed our KPI, so that it is customer-centered and have made so-called happy calls or follow-up calls after selling all products and have implemented early subscription rights. From page 8, there is a summary of first half and Q2 major financial overview for your reference.

Next, I will cover Group's financial highlights from page 9. We maintained our strong recurring fundamentals in the first half of this year of 2020. Even after our active response system was implemented, including COVID-19 provisioning to resolve market uncertainties, we posted KRW1,805.5 billion of net income. We had realized recurring income of around KRW1 trillion through efforts to strengthen fundamental profitability. On the other hand, with expansion of COVID financial support, bank loans in won grew 5.5% YTD. Even under an interest rate cut regime, we guarded our margin from falling through active ALM management.

In Q1, with the expansion of financial market volatility surpassing the volatility of the 2008 financial crisis, financial product losses increased. But in Q2, it greatly stabilized and the Group's non-interest income went up 1.8% Y-o-Y. In the COVID crisis, through strategic cost management, SG&A increased 2.7% Y-o-Y. Group CIR posted 42.5%, a 0.1% point drop Y-o-Y and is being managed within our financial business plan.

As aforementioned, we provisioned to be prepared for the possibility of credit risk expansion following future economic downturn, leading to a 50 bp credit cost ratio in the first half of the year. However, excluding COVID provisioning as well as investment product-related one-offs, it stands at 32 bp, a 3 bp drop Y-o-Y.

All the subsidiaries in the group are closely monitoring asset quality. From page 10, I will explain about Group's interest income in more detail. In the first half, the Group's interest income grew 3.1% Y-o-Y through both asset growth and proactive margin management. In the first half, the base rate was cut 75 bps, increasing the downward pressure on the NIM. However, due to proactive ALM measures amid the low interest rate trend, we were able to contain the fall within 2 bps over the quarter.

The bank's loans in won grew 5.5% YTD. By segment, household loans increased 3.1% and corporate loans, 8.2%, on an annualized basis. Loans for SMEs and self-employed in need of COVID-19 credit support increased, driving the overall loan growth. Large corporate loans had exceptionally grown because the companies were in need of liquidity. However, the monthly growth is trending downward as the market stabilized. In the second half, the group will do its best to maintain its fundamentals through risk-sensitive, adequate growth and ALM measures.

Next, the Group's non-interest income on page 11. The Group's non-interest income in the first half rose 1.8% Y-o-Y to KRW1.780 trillion. This is due to valuation gain on securities due to capital market stabilization and also due to increase in fee income. In the first half, the fee income increased 3.7% Y-o-Y to KRW1,129.3 billion. With a significant increase in stock trading, brokerage fee income increased 86.7% Y-o-Y. In Q2, consumption partially picked up, showing signs of recovery in the credit card fee income.

The Group's SG&A and credit costs on page 12. The first half SG&A is up 2.7% Y-o-Y. The group's CI ratio fell 0.1 percentage point Y-o-Y to 42.5%. There will be continuous effort made for strategic cost saving to prepare for the uncertainty in the second half. The Group's credit cost ratio increased to 50 bps, which is inclusive of the one-offs, 11 bps for the COVID-19 provisioning and 8 bps for the Heritage issue. If we were to take these out, the credit cost ratio would be 32 bps, a 3 bp decline Y-o-Y. The bank's and card's delinquency ratios are being maintained at a stable level despite the pandemic. In case credit risk goes up when the COVID-19 support programs expire, we will implement continuous risk management.

Next, on page 13, capital adequacy. Thanks to strong fundamentals and stable management of the cap on RWA, the group's CET1 ratio under Basel III posted 11.4%, 30 bps improvement from the end of last year. In May, with the completion of KRW150 billion worth of share buyback and cancellation, there was a 6 bps impact on the group's BIS ratio, but capital adequacy is being improved with stable recurring earnings power. In the first half, ROE and ROA each recorded 9.6% and 0.65%. Normalized ROE and ROA without the one-offs are at a similar level Y-o-Y.

The subsidiaries' income and business performance on the next page. In the first half, asset prices fell due to volatile capital market, and the Group had to set aside conservative provisioning against COVID-19, which impacted earnings in WM and global. However, thanks to card insurance capital and IB's performance and Shinhan's diversified business portfolio, non-bank's net income weight increased to 38%. Going forward, we will continue to strengthen non-bank business so that we can enhance the fundamentals of the overall Group's earnings base.

More detailed explanation about the global business on the next page. The Group's income from the global business was KRW152.7 billion in the first half, down 14.7% Y-o-Y. Although income from major overseas network, both interest and non-interest, were resilient and recurring profits remained at a similar level Y-o-Y, we provisioned against COVID-19 conservatively for the global segment, complying now with the local standards. But according to the domestic standard, We will continue to manage profitability, liquidity and soundness in each country under the pandemic.

Next, ESG on page 16. ESG has become a relevant topic due to COVID-19. Under the challenging business environment, we are continuing with investment in and execution of eco-friendly, inclusive and innovative finance. In the first half, total amount of green finance was KRW1,129.6 billion. New technology financing in the first half amounted to KRW10,838.5 billion. And the cumulative, innovative and inclusive financing in the first half amounts to KRW14,787.3 billion. The remaining slides are for your reference, guiding you through major subsidiaries' performance and business indicators. So please read them for your reference.

In the second half, we continue to face headwinds and we will not be expecting too much of the high results, but we will do our best to minimize the uncertainties in the second half. We will work hard to building the fundamentals. And based on the future growth engine, we will ride over the crisis, and we will continue hard to enhance the value for the shareholders and for the society.

With this, I'd like to conclude my presentation, and we will be taking questions. Thank you.

Questions and Answers:

Duration: 15 minutes

Call participants:

Park Cheol Woo -- Head of Investor Relations

Roh Yong-hoon -- Chief Financial Officer

More SHG analysis

All earnings call transcripts

AlphaStreet Logo