Shinhan Financial Group Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2024

There are 3 speakers on the call.

Operator

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 5 of the slides. In Q1 2024, we achieved KRW1.3215 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 percent y o y, thanks to proactive loan asset growth strategy and efficient margin management.

Operator

Noninterest income for the group grew 0.3% as we defended the decline in securities related income with a diversified portfolio. G and A was kept at 1.2% increase despite the general inflationary factors, thanks to the group's ongoing effort and cost efficiency. With G and A well under control, the costincome ratio stood at 35.9%, improved by 2 percentage points y o y, thanks to sound growth in operating income. Credit cost ratio in Q1 was 38 bp, down by 10 bp y o y. But the recurring CCR, excluding the additional provisioning that was preemptively recognized, was 30 bpyp, up 1 bpyoy.

Operator

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 5.41 per Q1 and further resolved on KRW 300,000,000,000 in share buyback and cancellation for the next 6 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 6 is on the group's major income indicators provided for your information.

Operator

Moving on to Page 7 on the group's income breakdown. The group's interest income in Q1 2024 was KRW2.8159 trillion, up 9.4% QoQ. Interest bearing assets increased 3.6% y o y on the back of growth in the bank's loan in won, and the group's margin also rose by 6 bp. The bank's loan asset in won grew 2.7% in the quarter. Retail loan grew 1.2%, mostly for Chunsei and housing mortgage.

Operator

Corporate loan grew 3.9% in response to demand by large companies and quality SMEs.

Speaker 1

We will

Operator

keep selectively growing our assets by balancing the different factors like efficient RWA management, profitability and market demand. In Q1, banks' NIM was 1.64%, up 2 bpqoq. 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.

Operator

Next, Page 8. The group's noninterest income grew 16.6 percent yoy as fee income saw generally even growth across business areas like credit card, securities, fund, bank insurance 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 percent y o y, we improved operational efficiency, for example, reducing high cost promotions.

Operator

Brokerage fee was up 25.8 percent on the back of stock trading increasing by KRW 4,300,000,000,000,000. Securities related income fell 19.4% y o y despite the growth in recurring income. There was preemptive recognition of loss from overseas real estate, among others. The group's credit cost fell y o y 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 Y o Y, while preemptive provisioning was done in Xinan Capital and Xinan Asset Trust to prepare against real estate market downturn and further worsening of financial soundness.

Operator

Looking ahead, we will actively reinforce loss absorption capabilities through preemptive provisioning for real estate finance in and outside of Korea.

Speaker 2

Now on to Page 9, please. Group wide assets on its 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 Q on Q, recording a tentative 13%.

Speaker 2

When considering adoption of Basel III transitional measures, rising FX rates, increase in operational RWA, Overall, we believe that overall soundness is being managed appropriately. Now on to shareholder return policies 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 JPY 480,000,000,000.

Speaker 2

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 performance as we did in the Q1, we are on track to execute on the shareholder return policies that we committed to you at the beginning of the new year without setbacks. 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 1% Y o Y 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 percent Y o Y decrease in earnings.

Speaker 2

Capital and Asset Trust Business was impacted by preemptive provisioning, which resulted in a Y o Y 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 percent YOY increase in earnings. Our group wide real estate exposure is KRW 8,900,000,000,000, down slightly from end of last year, and we recorded provisioning ratio of 3.61%. The next section from Page 11 to 13 covers issues related to age index, linked ELT products and also our measures to enforcing stronger internal controls and customer protection.

Speaker 2

Also an outline of our digital and sustainability activities are 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 1 benchmark rate cut in the second half of the year.

Speaker 2

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 demands, while focusing on minimizing sensitivity to externalities to achieve greater financial stability. If the outcome of these efforts become materialized, we expect to maintain a sufficient capital buffer, while sustaining stable financial performance. However, until very recently, I understand that regarding stock prices, there were some concerns in the market of overhang with regards to shares held by our major strategic investors.

Speaker 2

For the most part, most of these trades were complete in the Q1, 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, we'll strive to achieve solid performance and financial stability and outstanding shareholder return policies to enhance our corporate value. Thank you very much.

Operator

And now we will take your questions. If you have any questions, then please use the hand up function in Zoom. And for questions in English, please be informed that there will be consecutive interpretation. Thank you. And now we will take your questions.

Operator

And we will receive the first question, Mr. Park Hae Jin from Taishin Securities. Good afternoon. This is Park Kae Jin from Tae Jin Securities. I have two questions.

Operator

Now first is about the ELS compensation. So I wonder how much of that was reflected? And the second is about the refinancing platform. So especially in January, that was expanded for Chunsei 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.

Operator

If yes, how much?

Speaker 2

Yes. Thank you for your questions. I believe there were 2. So please bear with us as we prepare to answer your questions. So regarding ELT recognition and also the refinancing platform, I believe there were 2 questions.

Speaker 2

I think the CFO of the bank can cover both. 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 2,600,000,000,000.

Speaker 2

So as of the end of March, based on H index, about KRW 274 1,000,000,000 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.

Speaker 2

Credit loans, mortgage loans, Chauncey, 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, customer we wanted to build out the customer base, especially in household loans. And it's a consequence of this focused initiative. That is why.

Speaker 2

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 Q1 actually consequently rose and improved by 2 basis points.

Operator

Thank you very much for the response. And we will now take the next question. Next question is by Mr. Chong Joon Suk from NH Securities. Please go ahead with your question.

Operator

Yes. Good afternoon. I am Chong Joon Suk from NH Investment Securities. Thank you very much for taking my question. Now in the Q1, the lending growth was not slow.

Operator

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? And the second question is, it was also mentioned earlier, so about the expected rate hike in 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?

Operator

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

Operator

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 you can see in the first half, as you have focused more on growing the customer base and then now in as we move into the second half, then we will be focusing more on profitability and the asset quality.

Operator

And then now in terms of the overall growth, and 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 Q1, 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.

Operator

Now in the first half, because of the competitiveness, then we believe that compared to the Q1, it is going to fall slightly. But then now in the first half, it is going to be relatively flat Y01. 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.

Speaker 2

Next question from Hanaw Investment Securities, Toa Kim. Please go ahead. Yes. Thank you for the opportunity. I have two questions.

Speaker 2

I think this time, one offs, nonrecurring factors, maybe it's me, but I don't think they were there. I may have missed them. Can you comment? And after the general elections are over, real estate trust companies, a lot of the sites, I think there are some discussions about the arrangements where the developers have to 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?

Speaker 2

So yes, thank you for those two questions. We will also prepare. Just one moment. Thank you. In the Q1, you asked about what one offs actually were affected?

Speaker 2

And also a question about our 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. So that may be one off. And then our real estate and overseas commercial real estate investments, actually, we did about RMB140 1,000,000,000 in preemptive provisioning against that kind of exposure. So I think those are our one offs.

Speaker 2

Now regarding Shinhan Asset Trust,

Speaker 1

there

Speaker 2

was a lot of media reports recently, but regarding the real estate issue, responsible completion of construction. This is a type of real estate trust. And so 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. So starting in the Q1 this year, we started we have started to set aside provisioning preemptively.

Speaker 2

For Shinhan Asset Trust, so the outstanding balance is about KRW 310,000,000,000 and the provisioned amount is about KRW 87,100,000,000. So against balance is about a provisioning rate of 8% against the exposure. So regarding Asset Trust, in the Q1, we have set aside some preemptive provisioning already, but we will continue to do that in the Q2 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.

Operator

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.

Operator

Thank you. From SK Securities, we have Mr. Seo Dong Jin. Please go ahead with your question. Now it is about the global business profitability.

Operator

So compared to so on a Y o Y 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? Yes, thank you very much. Please, I ask for your patience as we prepare our response. Thank you.

Operator

So 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. 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 the provisioning, thanks to some exposed management.

Operator

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% Y o

Speaker 2

I. Yes. So, Doo Hyun Paek from Korea Investment Securities. Please go ahead. Yes, this is Hector san.

Speaker 2

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? 1st quarter results and given your forecast for full year performance, how strong do you think the underlying earnings fundamentals are?

Speaker 2

2nd, you said share buyback will be done in the form of a trust contract over the next 6 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? So yes, we will prepare to answer your questions.

Speaker 2

First on the stock trading business and share buyback. Yes. Thank you for the two questions. Regarding Sinan Investment Securities, you asked about business performance and outlook. And also the second question regarding share buyback, maybe I can address that first.

Speaker 2

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. So as

Operator

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. So through these measures, we announced that we will be continuing to enhance shareholder value. So 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, and that is because we wanted to secure more flexibility in the share buyback. And also, as you have seen in the business results of the Q1, we have strong fundamentals.

Operator

And also in terms of the capital ratios, despite the special circumstances in the Q1, 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 6 months, meaning that it will continue until the Q3 of this year, meaning that the volume is going to be similar to last year's. And then now in the Q4, we will also be looking into additional share buyback. And as you can see from the Q1 results, based on our judgment, the recurring revenue for the company on a quarterly basis would be about KRW1.5 trillion.

Operator

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 4th quarter, we could look into another round of sizable shareholder buyback and cancellation. But then at this in that case, then because this time, it was quarterly then biannual, so in the Q4, 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.

Speaker 2

Now regarding the security side, so in the Q1, prop trading results actually were quite sluggish. So it's actually, I think it can be explained in 3 ways. 1st, it's a reverse base effect second, conservative response and third, preemptive response. So I mentioned the reverse base effect because last year, Q1, 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.

Speaker 2

And so 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 Q1 'twenty four 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.

Speaker 2

S, it is being postponed and deferred. And the number of cuts actually, expectations are changing as well. Oil prices from 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.

Speaker 2

In the Q1, 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 tried 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 off quickly. So it's because of a combination of these three factors that we have lower performance year on year.

Speaker 2

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.

Operator

Thank you very much for the response. We will take the next question. We will wait a while until we take the next question. From Goldman Sachs, Park Shin Young, please go ahead. Good afternoon.

Operator

Now in the past quarter's results then about the capital distribution plan, then there was growth, 6, and then 40, for shareholder return. Then is there any long term target for the shareholder return? And then also for KB, they also mentioned about how they're going to prefer a shareholder buyback. So I wonder for the time being then, I wonder what is the plan for SFG. Thank you very much for the question, and I ask for your patience as we prepare our response.

Operator

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, JPY 60 and then shareholder return, JPY 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.

Operator

But again, overall, it is going to be $60,000,000,000 And then about the valuation and the share buyback and cancellation as well as the shareholder returns, 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, and 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, And let's say, even if our permanent growth rate is 0, 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. And but for the short term, at this time, so we believe that the target should be at least 0.6%. And also, under the PBR1 level, then rather than dividend, yes, share cancellation is going to have a higher benefit in terms of the shareholder return.

Operator

But then again, in principle, at PBR1 level, then yes, it is going to be share cancellation. But if we go near PBR1, 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.

Operator

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

Speaker 2

Yes. Thank you. I think there is one by question from White Talks, Shane Matthews. Please go ahead.

Speaker 1

Thank you for the opportunity and congratulations on the results. Just one question from my end. So this quarter saw a decline y o y and around 30 bps 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 pre emptive provisioning?

Speaker 2

Thank you for the question. Please wait just one moment as we prepare to answer your question. Yes. Thank you. Regarding credit costs, as of the Q1, our nominal credit cost is 38 basis points and mindful of our additional provisioning, our recurring credit cost is about 30 basis points.

Speaker 2

Relative to Q1 last year, there were nonrecurring items last year. So nominal level credit cost was about 29 basis points last year. So this year, Q1 relative to last year, we are slightly higher than last year. In the slides I mentioned, 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.

Speaker 2

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.

Speaker 2

So we will be preemptive in setting aside more provisioning to further bolster our loss absorption capacity.

Operator

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. Thank you. We will take the next question.

Operator

Mr. Shim Jong min from CLF Securities. Please go ahead with your question. Thank you very much for taking my question. This is Sim Jong min from CLF.

Operator

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 Q4, there may be more and larger shareholder buyback and cancellation than in terms of this CET1. And if it goes above a certain threshold, then you mentioned that you would go with the option of shareholder buyback and cancellation.

Operator

So the question is overall about the CET1 relation and also relation with the shareholder return policy. All right. Thank you very much for the questions. So I ask for your patience as we prepare our response. You very much for the question.

Operator

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 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%, etcetera, meaning that there has to be some buffer. But again, in principle, it is 13%.

Operator

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 Q4, I believe that, that would also be the consideration. All right. Thank you very much for the response. So there have been a number of questions asked and responses provided, and we see that there are no further questions in queue.

Operator

But I do believe that there has been sufficient discussion for now. And with that, we will conclude the 2024 Q1 earnings conference call by SFG. We will strive to enhance understanding of investors, shareholders and stakeholders in SFG through our earnings release conferences. And 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.

Operator

Once again, thank you very much for your participation.

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Earnings Conference Call
Shinhan Financial Group Q1 2024
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