Shinhan Financial Group Co., Ltd. (NYSE:SHG) Q1 2024 Earnings Call Transcript

Shinhan Financial Group Co., Ltd. (NYSE:SHG) Q1 2024 Earnings Call Transcript April 26, 2024

Shinhan Financial Group Co., Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Sang-Hyuk Jung: 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 nonoperating expense, thanks to the company’s strong fundamentals based on top line growth. Interest income grew 9.4% Y-o-Y, thanks to proactive loan asset growth strategy and efficient margin management. Noninterest income for the group grew 0.3% as we defended the decline in securities-related income with a diversified portfolio. G&A was kept at 1.2% increase, despite the general inflationary factors, thanks to the group’s ongoing effort and cost efficiency.

With G&A well under control, the cost to income 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 bp, up 1 bp Y-o-Y. 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 KRW540 per Q1 and further resolved on KRW300 billion 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. 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% Q-o-Q. Interest-bearing assets increased 3.6% Y-on-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 Jeonse and housing mortgage. Corporate loan grew 3.9% in response to demand by large companies and quality SMEs. We will keep selectively growing our assets by balancing the different factors like efficient RWA management, profitability and market demand. In Q1, bank’s NIM was 1.64%, up 2 bp Q-o-Q. The funding cost improved significantly, although the growth in loan assets affected yield.

There was more inflow of low expense core deposits 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. Next, Page 8. The Group’s noninterest income grew 16.6% Y-o-Y as fee income saw generally even growth across business areas like credit card securities, fund, Bancassurance 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% Y-o-Y, we improved operational efficiency, for example, reducing high-cost promotions. Brokerage fee was up 25.8% on the back of stock trading increasing by KRW4.3 trillion Y-o-Y. Securities-related income fell 19.4% Y-o-Y despite the growth in recurring income.

There was a 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 Shinhan Capital and Shinhan Asset Trust to prepare against real estate market downturn and further worsening of financial soundness. Looking ahead, we will actively reinforce loss absorption capabilities through preemptive provisioning for real estate finance in and outside of Korea. Now on to Page 9, please. Group-wide asset soundness indicators have seen a delay in improvement in a protracted high interest rate conditions.

Related to pre-COVID levels and considering our improved 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 of the end of Q1 2024, our CET1 ratio is down 8 basis points Q-on-Q, recording a tentative 13%. When considering adoption of Basel III transitional measures, rising FX rates, an increase in operational RWA, overall, we believe that overall soundness is being managed appropriately. Now on to shareholder return policy such as cancellation of treasury shares, let me move on and explain in greater detail. We have [indiscernible] upon the 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 KRW480 billion. 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 first quarter, we are on track to execute on the shareholder return policies that we committed to you at the beginning of the new year without set back. 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 increase.

However, our prop trading income went down, resulting in a 36.6% Y-o-Y decrease in earnings. Capital and Asset Trust business was impacted by preemptive provisioning which resulted in a Y-o-Y decline in earnings. For our global business, alongside, strategically driven to top line expansion and our efficient ALM strategy, both contributed to improved operating; profit, driven mostly by interest income. More of our efforts to recover on NPL assets allowed us to write back provisioning, resulting in a 35.4% Y-o-Y increase in earnings. Our group-wide real estate PS exposure is KRW8.9 trillion, down slightly from end of last year and we recorded a provisioning ration of 3.61%. The next section from Page 11 to 13, covers issues related to an index-linked ELT products and also our measures to enforce stronger internal controls and customer protection.

Also, net line 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 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 one benchmark rate-cut in the second half of the year. 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 demand, while focusing on minimizing sensitivity 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, we, until very recently, understand that regarding stock prices, there were some concerns in the market with regards to shares held by our major strategic investors.

Further most, most of these trades were completed in the first quarter 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.

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Q&A Session

Operator: And now we will take your questions. [Operator Instructions] And for questions in English, please be informed that there will be a consecutive interpretation. Thank you. And now we will take your questions. And we will receive the first question, Mr. Park Hye-jin from Daishin Securities.

Park Hye-jin: This is Mr. Park Hye-jin from Daishin Securities. I have 2 questions. 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 Jeonse and mortgage but then I understand that the volume is larger than other companies. I wonder whether it will have an impact on the margin? If yes, how much?

Unidentified Company Representative: 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. I think the CFO of the bank can cover both.

Sang-Hyuk Jung: 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 KRW2.6 trillion. So as of the end of March, based on [indiscernible], about KRW274 billion in nonoperating 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. Credit loans, mortgage loans, Jeonse, 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.

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 first quarter, actually consequently rose and improved by 2 basis points.

Operator: [Operator Instructions] Next question is by Mr. Jung Jun-Sup from NH Securities.

Jung Jun-Sup: Yes. I am Jung Jun-Sup from NH Investment Securities. Now in the first quarter, the lending growth was not slow. 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 expected NIM for the year?

Unidentified Company Representative: Thank you very much for the 2 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.

Sang-Hyuk Jung: 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 we can see in the first half, as you have focused more on growing the customer base and then now as we move into the second half, then we will be focusing more on profitability and the asset quality. And then in terms of the overall growth, then, 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 first quarter, 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. Now in the first half, because of the — also in the second quarter, considering the loan competitiveness, then we believe that compared to the first quarter, it is going to fall slightly. But then now in the first half, it is going to be relatively flat Y-o-Y. And then now in the second half, now at 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.

Operator: Next question from Hanwha Investment Securities, Do Ha Kim [ph].

Unidentified Analyst: I have 2 questions. 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. But can you comment? And after the general elections are over, real estate trust companies, a lot of the PF sites, I think there are some discussions about the arrangements where the developers actually 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?

Unidentified Company Representative: So yes, thank you for those 2 questions. We will also prepare. Just one moment.

Sang-Hyuk Jung: Thank you. In the first quarter, you asked about what one-offs actually were affected and also a question about real estate trust business. In terms of the one-offs, it’s not about provisioning but ELT-related costs are on the nonoperating expense line under noninterest, so that may be one-off. And then our real estate PF and overseas commercial real estate investments, actually, we did about KRW140 billion [ph] in preemptive provisioning against that kind of exposure. So I think those are our one-offs. Now regarding Shinhan Asset Trust, there was a lot of media reports recently regarding the real estate PF 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.