Shinhan Financial Group Co, Ltd. (SHG) Q1 2021 Earnings Call Transcript

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Shinhan Financial Group Co, Ltd. (SHG)
Q1 2021 Earnings Call
Apr 23, 2021, 3:00 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, in charge of IR. It is now April with beautiful spring weather. Thank you, everyone, for participating in today's earnings release.

And from now on, we will begin the 2021 Q1 business results presentation. From this 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 institutional investors and individual investors for your keen interest.

We have here with us at the earnings presentation our CFO, Roh Yong-Hoon; CMO, Heo Young-Taeg; CSSO, Park Sung-Hyun; and CRO, Bang Dong-Kwon. First, CFO, Roh Yong-Hoon, will walk us through the 2021 Q1 business results and then engage in a Q&A session with you.

I would like to invite CFO, Roh Yong-Hoon, for 2021 Q1 earnings presentation.

Roh Yong-Hoon -- Chief Financial Officer

Greetings. I am Shinhan Financial Group's CFO, Roh Yong-Hoon. Thank you, everyone, for taking part in 2021 Q1 business results presentation.

I will cover the 2021 quarters business highlights from Page 5 to 6 and explain about the details regarding our group's Q1 business results.

Let's go to Page 5. 2021 Q1 nominal net income posted KRW1,191.9 billion, and the size of our recurring income considering one-offs recorded approximately KRW1,230 billion level and recorded the highest level ever since we were first established. What is more meaningful than the highest-ever quarterly earnings is that this was not just due to one-offs, but that our earnings is consistently expanding through our strong fundamentals, which is based on diversified recurring earnings, in particular, keeping in step with our bid to long-term strategic direction pursuing efficient growth, we are seeing even bank and non-bank income improvement.

Non-interest income increased by 40% Y-o-Y and 55% Q-o-Q, respectively. Non-bank net income before reflecting ownership posted KRW620 billion, an 84% increase Y-o-Y, which is also a record-high quarterly income. Core profit also grew. NIM, which declined due to the low interest rate, rebounded in 2.5 years. And along with loan growth, group's interest income grew by 5.7% Y-o-Y.

On the other hand, future uncertainty related to future expenses for LIME in 2020 and COVID-19 provisioning is greatly declining. On April 19, the Dispute Settlement Committee determined the compensation rate regarding the LIME CI Fund sold by Shinhan Bank and, on a pre-tax basis, KRW62.6 billion of compensation expenses related to investment products, including LIME CI Fund was recognized as non-operating expenses. And with this, the ongoing Dispute Settlement Committee has all been concluded, and as mentioned in the previous Q4 conference call, there is a very low possibility that we will need to additionally recognize a large amount of related investment product -- a large amount of expenses related to investment products at once. In addition, through our pre-emptive asset quality management last year, the size of provisioning this year's Shinhan Card decreased by 34% Y-o-Y. COVID-19 Financial Support Program, which has been extended three times due to continuing COVID-19, has been slowing down in 2021.

And last point I want to emphasize is shareholder return. Based on our fundamentals, which has been leveled up, our capital ratio and double leverage ratio is becoming more solid. As we have promised, we will utilize this for qualitative growth and diversified, aggressive shareholder return. In particular, Article of Incorporation amendment was completed at the Ordinary Shareholders' Meeting in March so that we can allow quarterly dividends from this year. And going forward, we have the environment to execute more diverse shareholder return policies.

Let's go to Page 6. From Page 6, I will explain about our mid to long-term, strategic direction. From 2017, centering on four tasks, which are harmonious growth, localization, upgrade to digital Shinhan and creative inheritance of Shinhan culture was set. And we set the strategic direction of the S-M-A-R-T, or SMART, project and have successfully executed them. In 2020, we expanded SMART of 2017 and established F-R-E-S-H, or FRESH 2020s' mid to long-term strategic direction. Financial target is to become the local top in terms of customer investment return. And from a shareholder value improvement perspective, we have the goal of over 10% ROE, expand and continue shareholder return policy and emphasize non-bank and non-interest and matrix-focused growth.

As our four strategic initiatives, we chose pursuit of efficient growth, global connection and expansion, innovation opening for digital transformation, and ESG for sustainable management and performance generation. We have selected core KPIs for each initiative and continuously are managing it. The consistent, strategic direction that we have pursued for the last four years is gaining visibility as Q1 performance.

From Page 8, I will cover Q1 financial performance details. As aforementioned, with consistent, strategic execution, diversified earnings was realized and realized record-high quarterly earnings. From 2013, the profit side has been continuously increasing. NIM has been improving, and corporate and household financial support expansion has been continuously -- continuing, leading to core interest income increase. The group's non-interest income grew 40% Y-o-Y and contributed to the high growth of our income. In particular, what was noteworthy was solid profit growth of card and capital, and securities income also greatly improved.

On the other hand, through digital-based cost-cutting efforts, the group's CIR posted 40.6% and decreased 3.1 percentage points compared to the previous quarter. The group's mid to long-term CIR is also in the low range of management, leading to more investment capability for digital transformation going forward. Credit cost is also being managed very stably. Taking into account COVID-19 financial support and economic situation, we are focusing on credit risk monitoring and management. Q1 credit cost ratio posted 22 BP, and the NPL coverage ratio posted 142%.

Let's go to Page 9. 2021 Q1 group interest income grew 5.7% Y-o-Y and posted KRW2,118.1 billion. Bank loans in won grew 2.5% YTD and is maintaining SME-centered solid growth rate. Bank's net interest margin posted 1.39% and improved 5 BP Q-o-Q. This is the first margin turnaround since Q3 of 2018. With the bank's time deposit repricing taking place in earnest, demand deposits grew 16.6% YTD. And from October of the previous year, the lowest point, our monthly NIM is rebounding with the Q1 margin improvement. Through maintaining and managing appropriate growth, we will make sure to continue solid growth rate of core interest income.

Let's go to Page 10. It's group non-interest income. 2021 Q1 group non-interest income posted KRW1,030.8 billion and grew 40.4% Y-o-Y. There was even income growth for all non-banking subsidiaries and non-banking major subsidiaries, including card and capital greatly contributed to our earnings improvement, in particular, the security sector, where profits decreased last year due to investment products expenses recovered, and the securities net income increased 260% Y-o-Y. Matrix business also witnessed a significant growth, thanks to fixed income increase from collaboration among the group companies in such a business as solar power business in Japan and REITs. Further details will be provided later on Page 14.

On Page 11, group G&A costs and credit costs. In Q1, G&A costs increased 6.8% Y-o-Y. The group CIR at 40.6% was at its lowest in a decade. It was possible to secure investment for digital innovation, thanks to low CIR. We are confident that we would effectively manage the costs thanks to continued operational efficiency. The group's provisioning for credit cost -- excuse me, credit loss declined by 33.6% Y-o-Y. Credit card provisioning declined by KRW59.7 billion due to drop in two-month delinquency roll rate. It was possible to reduce the credit cost to 22 BP as the need for additional provisioning declined, thanks to proactive asset quality management.

Looking at the bank and card delinquency ratios, which serve as a leading indicator for credit cost. Both ratios are lower than the same period last year with no signs of asset quality deterioration due to COVID-19. However, thorough and careful risk management is more important now than ever as COVID-19 support programs are still ongoing, and economic uncertainties persist. We will prepare for uncertainties with an early warning system based on big data and checking COVID-19 recovery speed of each industry.

Now on Page 12. The group's CET1 ratio is 13% and is, however, 11.9% when calculated according to the previous criteria before the introduction of BASEL III credit risk revision in September of 2020. Two-digit ROE of 11.2% was possible, thanks to record-high quarterly profit. Continuous efforts will be made to improve the earning capabilities of the assets and the capital. Capital ratio movement will be explained on the next page.

The group's CET1 ratio as of March 2021 was 11.9% according to the previous criteria and 13% according to the new one. As mentioned before, due to earlier introduction of parts of BASEL III and resulting temporary improvement of 110 BP, CET1 ratio is conservatively managed according to the prior criteria. Compared to the end of 2020, CET1 ratio improved by 10 BP as a result of 46 BP increase from net income and 30 BP decrease from RWA. RWA increased, and others were strictly managed so that the shareholder return policies can be implemented as planned.

Page 14. As for operating income for matrix organizations, GIB saw 19.6%, GMS 61.2%, WM 8.7%, and global business 6.8% growth Y-o-Y, showing continued operating income diversification at the group level. In particular, it was possible to realize profit from sale of Japanese solar PS shares by arranging a tentative loan through collaboration among non-banks, Shinhan Asset Management and SPC on the group collaboration platform.

On the following page, digital transformation and contribution are explained on Page 15. Amidst accelerated digital transformation, in March of 2021, Shinhan has become the first financial institution in Korea to create a KRW300 billion strategic investment fund for digital business with investment from bank card investment and life insurance companies of Shinhan. We will establish a broad portfolio composed of AI, blockchain, cloud data and healthcare start-ups, as well as non-financial content platform companies going beyond the existing industrial boundaries.

We have also launched Shinhan Pay to respond to the fintech trends. We hope to become the leader in the simple, easy-to-use pay business by combining the bank's potential customer pool, its infrastructure and card businesses, 2.7 million merchant network. Thanks to these efforts for innovation, in Q1, contribution by the digital activities to the group's income was 14.2%, which is on a sustained upward trend. Please refer to the presentation material for more details on digital coverage and revenue generation and cost reduction from the digital channels.

Lastly, on Page 16, there are results of our ESG activities, which Shinhan is the leader among the current financial institutions. On this page are indices to measure specific loan, investment and carbon goals included in the zero-carbon drive declaration of last November. In the upcoming earnings release call, we will share the results of our climate change-related activities.

Please take another look at innovative finance and inclusive finance results that have been updated and provided to you. For more detailed information on ESG activities, please refer to the ESG highlights, which includes TCFD and diversity report on the group's home page. For the group and the affiliate company's detailed earnings results and major business indicators, please refer to the following pages.

We are confident that under consistent, strategic direction, we will be able to improve our capabilities to create income on a continuous basis. We ask for your continued support and interest. We are going to be holding earnings presentation calls earlier in the day from this year on. We hope that you will see this as an effort on our part to better communicate with the market.

This concludes the earnings presentation, and we will now begin our Q&A session. Thank you very much.

Questions and Answers:

Operator

[Operator Instructions]

We will take the first question from Hyundai Motor Securities, we have Mr. Kim Jin-Sang on the line. Sir, please.

Kim Jin-Sang -- Hyundai Motor Securities -- Analyst

Hello. Thank you very much for your good earnings. I have two questions. First, regarding your operating income, it was very good, and the CIR is quite formidable. And looking at your G&A expenses, in Q2, I think there was an increase in employee-related costs, labor costs. And were there any bonuses that were seasonal or other one-offs? And can you tell us about what is your forecast for the G&A increase for the year that you have in your plan?

My second question is about your card business, which showed very good performance. Overall, the figures are quite outstanding, and there was a readjustment of merchant fees that will also be taking place. And was there any pressure for you to readjust the merchant fees maybe? So could you tell us about your plans going forward, and give us some guidance related to readjustment of the merchant fees?

Roh Yong-Hoon -- Chief Financial Officer

Thank you very much for your questions. I am the CFO. First, regarding the G&A question, I would like to explain. Regarding the increase of labor cost, it is true, we had two factors that led to the rise. First is for investment. Since we had good market environment, there was some sales-related, performance-linked pay that was given, about KRW20 billion, and there was the PS that went up as well because the stock market improved. So there was some PS-related expenses, which was about KRW35 billion. And those two led to the rise in labor expenses.

For the G&A, according to our financial plan, we believe that there will be a slight rise compared to the previous year. It's because, as you mentioned, our CIR ratio is quite low. And we believe that we don't need to artificially push it down very hard, and we have new businesses related to digital and others. So because we were able to offset the expenses, we believe that the CI ratio would probably slightly increase this year compared to the previous year.

Heo Young-Taeg -- Chief Marketing Officer

I am the CMO, and thank you very much for your questions. Regarding the card, for online and department stores, we are seeing more credit card sales, and you can see that credit card-related transactions have been going on steeply. And Shinhan Card is number one in the market. So I think that was a big influence. Regarding the credit card-related fees, looking at the costs, we are analyzing this, and from next year, we will apply this, and there is the federation. So we will look at the different costs and what is happening in the market, and we will, I believe, determine the fees for credit card. So we believe that for this year, we will not have an impact from our earnings because of the fees. Thank you very much.

Duration: 21 minutes

Call participants:

Park Cheol Woo -- Head of Investor Relations

Roh Yong-Hoon -- Chief Financial Officer

Heo Young-Taeg -- Chief Marketing Officer

Kim Jin-Sang -- Hyundai Motor Securities -- Analyst

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