Shinhan Financial Group Co., Ltd. (NYSE:SHG) Q2 2023 Earnings Call Transcript

Shinhan Financial Group Co., Ltd. (NYSE:SHG) Q2 2023 Earnings Call Transcript July 29, 2023

Park Cheol Woo: Good afternoon. I am Park Cheol Woo, Head of IR. Thank you or participating to the Shinhan Financial Group’s Earnings Presentation for Q2, 2023. Before moving on to their earnings presentation, allow me to make some housekeeping announcements. The earnings presentation of Shinhan Financial Group is taking place through the Group’s digital platform namely the Shinhan Financial Group IR YouTube channel and Zoom App. The YouTube live channel is only available in Korean and Q&A is not available. Therefore, if you wish to have an English view or participate in the Q&A, please join via Zoom. Please refer to our website, www.shinhangroup.com for detailed information on access.

Dong Lee; and Shinhan Life CFO, Kyoung Won Park.: In today’s earnings release there will first be a presentation on the overall business results for Q2 2023, followed by a Q&A session. Now I will hand it over to the Group CFO Taekyung Lee for the presentation on business results for Q2, 2023.

Lee Taekyung: Hello. As introduced I am Taekyung Lee, CFO of the Shinhan Financial Group. First I would like to extend my sincere appreciation to you for taking part in today’s earnings conference call for Q2, 2023 despite your busy schedules. Now I will walk you through the key highlights from Page 5 of the IR presentation. Please refer to Page 5. In Q2 of 2023, despite an increase in operating income, net income declined due to conservative provisioning, realizing a net income of KRW1.2383 trillion. Non-interest income recorded KRW1.33 trillion, up again after increase in Q1. This was due to balance growth, a fee income deposit despite the decline in securities related income. The Group’s cost income ratio in the first half of the year stood at 38.3%, maintaining a stable level despite the upward inflationary pressure and increase in digital and ICT related expenses through a solid trend of operating profit.

The Group’s credit cost ratio recorded 53 bps increased by 22 bps Y-o-Y, due to the increased and counter-cyclical provisions in light of the bank’s credit review season and conservative accumulation of additional provisions with master scale PD adjustments. Lastly, at today’s BoD meeting, we passed a resolution to set the quarterly dividend payout for Q2 at KRW 525 and execute an additional round of share buyback and cancellation amounting to KRW100 billion in Q3. Moving forward, we will continue to implement a sustainable capital policy by securing sufficient capital capacity. Next, on Page 6, you can find the main highlights of the Group Q2 financials and on Page 7, the Group’s net income and other profitability indicators are available.

Now turning to Page 8, I will provide an explanation on the detail earnings of the Group. Page 8 shows the Group’s interest income. In Q2 of 2023 the Group’s interest income stood at KRW2.69 trillion a 4.7% Q-o-Q. This is attributable to an increase in interest bearing assets, an increase in bank margins, and a decrease in funding costs of non-bank subsidiaries. During Q2 there was an increase in the interest rate for loans and securities following the rise in market interest rates and the high interest term deposits funded in Q4 of last year reached maturity. As a result, the bank’s NIM recorded 1.64%, up 5 bps Q-o-Q. Growth of bank loans, which slowed down to 0.1% in the first quarter, recovered in Q2, increasing by 0.6%. Due to weaker demand following higher interest rates and tighter DSR regulations and the asset securitization on mortgage loans, retail lending decreased by 1.8% Y-t-D.

However, backed by continued demand from large corporations and well-established SMEs, corporate lending grew by 2.8% Y-t-D. Please refer to Page 34 of the presentation for more detailed information. Next on Page 9, detailed information on Shinhan Bank’s loan growth, deposit and margin trends are available for your reference. Next on Page 10, the Group’s non-interest income. Despite the drop in securities related income, fee income and insurance related income, which are the core sources of non-interest income recovered, resulting in 3.4% increase of the Group’s non-interest income Q-o-Q. On a Y-o-Y basis due to the base effect of the low trading gains due to the sharp rise in interest rates in the previous year and higher securities related income reflecting market rate decrease in the first half of this year, non-interest income improved by 21.5%.

Due to an increased decrease in accident insurance payments with a drop in insurance claim flying links [ph], insurance related income increase by 10.1% Q-o-Q. Now I will move on to fee income. With balanced growth in all sectors covering credit card fees, brokerage fees, and IB commissions, fee income increase by 7.6% Q-o-Q. With increased volume in credit card purchases, credit card fee income increased by 26.9% Q-o-Q and brokerage fees also increased by 17.9% Q-o-Q reflecting increased trading volume. IB commissions recorded an increase due to commissions from acquisition financing recording an increase of 29.3% Q-o-Q. Nonetheless, fee income overall decrease by 8.1% Y-o-Y due to a decline in credit card fees. On Page 11, additional information on the group’s non-interest income trend and details are available for your reference.

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Next on Page 12, I’ll walk you through the group’s G&A expenses and credit costs. Despite the one-offs of Shinhan Life’s ERP costs fully absorbed in the previous quarter due to tax deductions and higher advertising and service expenses, G&A costs increased by 6.4% Q-o-Q. On a Y-o-Y basis due to bigger depreciation following increased investments in digital and ICT and an increase in general cost levels due to inflation G&A cost increased 9.0%. However, if the ERP cost of Shinhan Life from Q1 is excluded, the rate of increase stands at 7.6%.

CIR: Looking at the delinquency rate, which is a leading indicator of credit costs in the case of banks following the rate hikes and economic slowdown, it is trending upward. However, when compared against the pre-COVID levels, the absolute level is still low. Through active write-offs Shinhan Bank’s delinquency rate remains flat Q-o-Q at 0.27%. Delinquency rate for Shinhan Card recorded 1.43%, up 6 bps Q-o-Q. However, the two months delinquency roll rate, which is a leading indicator of the delinquency rate, has been stabilizing downward since February. To be prepared for internal and external uncertainties the group is making efforts to secure sufficient loss absorption capacity through front loading provisioning, and is continuously striving to mitigate systemic risk by expanding support for vulnerable borrowers through exports to include and expand more win-win finance.

On Page 13, additional information on the group’s G&A expenses and provisioning are available for your reference. From Page 14, I will hand it over to the Group CRO, Dong-Kwon Bang to explain the Group’s outlook on asset quality and provisioning.

Bang Dong Kwon: Good afternoon, I am Dong Kwon Bang, CRO of SFG. I will go over the asset quality and loss absorption capacity of the Group. High interest rates and real estate issues have led to concerns on asset quality. So today I would like to provide an overview on the Group’s asset quality, real estate financing management and loss absorption of capacity. First, in terms of asset quality, for vulnerable segments that are being managed as potential risk factors since latter half of last year, the credit card company has led efforts to preemptively strengthen credit management. In result, the portion of exposure to vulnerable segments has remained stable. Fortunately, the Group’s non-bank delinquency ratio has been showing somewhat stabilizing trends since Q1.

In order to manage asset quality, each affiliate is newly establishing or strengthening the related teams and the Group is operating a joint asset quality management system. We will continue to rigorously manage asset quality with our preemptive management system to prepare for any additional market deterioration. Next is real estate. Including bridge loans total PF exposure amounted KRW8.9 trillion as of June, which is approximately 2% of the Group’s total loans. By region and by underlying assets, Seoul and greater metropolitan area takes up 73%, residential 61, and senior loans 73%. It is largely comprised of high quality assets. Given the concerns on real estate financing from both home and abroad, the Group internally conducted a stress test, assuming the level of unsold presale apartments during the 2008 financial crisis, which concluded that additional credit cost of KRW200 billion may be necessary.

We will stably manage risk assets with close monitoring and increasing the frequency of reviewing countermeasures, while also actively discussing normalization of projects with other lenders. Last is the strengthening of loss absorption. Since latter half of last year, high interest rates and a sluggish real estate market led to deterioration of market environment. Against this backdrop, the Group has consistently implemented preemptive and conservative provisioning policies. Consequently, the Group’s provisioning rate against total loans and total assets is 0.96% and 0.55% respectively, showing steady upward trend. SFG has one of the highest loss absorption capacity in the Korean financial sector. We will continue the conservative provisioning and make effort to ensure sufficient loss absorption capacity.

Lee Taekyung: Thank you, Mr. Bang. Next we will move on to Page 17 to look at the P&L of each affiliate. The Bank’s interest income increased thanks to margin improvement, but conservative provisioning, higher G&A and base effect from marketable securities profits led to a decline in net income Q-o-Q. For non-bank subsidiaries credit card showed even growth of operating income across credit sales and loans. However, net income decreased Q-o-Q as gains generated by sale of securities in the previous quarter was removed. For securities, despite higher provisioning against CFD receivables, increase in brokerage fees supported by high transaction volume and growth of underwriting and arrangement fees from the IB business led to slightly higher income Q-o-Q.

For Life ERP was fully expensed in the previous quarter. Also, insurance and financial income grew evenly to post higher net income Q-o-Q. For capital, despite reduction of securities related income, the effect of real estate provisioning of the previous quarter was removed, leading to higher net income than the previous quarter. On Page 18, we have the P&L affiliates and Page 19 shows the Group’s global business. Now let’s move on to Page 20, capital management and profitability. As of June, CET 1 ratio is expected to improve by 27 bps Q-o-Q to 12.95%. This was mainly driven by a robust growth of net income, the conversion of CPS to common shares in May, and an appropriate level of RWA growth. In February we mentioned that the Group’s mid and long-term target was CET 1 ratio 12%.

However, since the authorities have announced that they will levy the countercyclical buffer and introduce the stress capital buffer. We don’t know the exact amount yet, but we feel that an additional one percentage point of CET 1 ratio is appropriate. Given the sustained economic uncertainty at both home and abroad, we plan to raise the CET 1 ratio by 1% to 13% earlier than originally planned. Meanwhile, the capital policies that we announced earlier this year are being consistently implemented. On the next page, we have provided information on our shareholder return efforts and policies for your reference. The digital strategy on Page 22 will be presented by the CDO of Ms. Kim Myoung Hee.

Kim Myoung Hee: Good afternoon. I am Myoung Hee Kim, CDO of SFG. SFG is working to leverage digital capabilities to strengthen Shinhan’s fundamental financial competitiveness and boost social value in line with the Group’s vision, which is we believe finance should be more friendly, more secure, and more creative. I will go over the achievements of our digital efforts in three segments; platform innovation, social responsibility, and financial contribution. First are the achievements in more friendly, driven by platform innovation. The Group’s platform is pursuing both volume and quality growth, so that more customers can use our digital services more frequently. The gross MAU across finance and non-finance platforms reached 24.57 million, which is a 24% growth Y-o-Y.

Also user-friendly UI/UX improvements and a stronger financial product and service portfolio drove the monthly visitors on our finance platform to surpass 20 million. The non-finance platform is increasing contact points in the daily lives of customers and recorded a MAU of over 4 million, which is a 59% growth Y-o-Y. In terms of quality growth, data-based activities to enhance customer engagement generated a DAU of over 5 million on our finance platform, leading to the growth of quality users. Next is the Group’s social responsibility under more secure. Early this year we installed UAD equipped ATMs nationwide to prevent more than 9,200 financial accidents. The AI detection function that analyzes unusual activities and patterns is being continuously upgraded to provide stronger security for our customer’s financial transactions.

We have also been developing services and content for senior customers. The senior MAU on our finance platform increased by 15% YTT [ph] as a result. AI will be more widely applied to protect customers, enhance accessibility to digital finance and boost literacy so that we can fulfill our social responsibility. Last is the financial contribution under more creative. The Group has been leveraging digital technology to strengthen business innovation and has been implementing company-wide process innovation to boost cost efficiency. As of first half of this year, we have been using AICC and RPA to save KRW200 billion in costs, which is a 10% improvement Y-o-Y. We are also expanding the business scope of the Life platform while the new digital businesses based on data-based growth is continuously generating operating profit.

The first time of this year, operating profit recorded more than KRW200 billion. So the growth of the data business, 28% Y-o-Y is particularly notable. SFG will make the most effort to strengthen digital capabilities to boost fundamental financial competitiveness and create value for customers to fulfill our social responsibility. Thank you.

Lee Taekyung: Thank you, Ms. Kim. On Page 23, the Group’s ESG initiatives, detailed information of subsidiaries and major business performance indicators are provided for your reference. This will conclude the presentation for the 2023 Q2 earnings. We now move on to Q&A. Thank you.

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Q&A Session

Operator: From now on we will be taking questions. [Operator Instructions] The first question we have White Oak Capital, Shane Mathews. Please ask your question.

Shane Mathews: Thank you for the opportunity and congrats on the results. I want to, I have three questions from my end. The first question is on the OCI trajectory. So if you look on a tenure basis from maybe a 512 to 522, you can see that OCI has actually been negative for the bank over the past 10 years. So wanted to understand the OCI trajectory, which you’re seeing both the — and largely the losses which are coming through OCI is from the securities book. So the duration of this book, how you are actually thinking about this component of the OCI part? That’s the first question. Second is on your CET 1 and buyback plans. So you raised the CET 1, let’s say target to 13%. So do you think this is going to affect the buyback plans you have proposed?

The third question is on the credit card delinquency falling down. So just wanted to get a better sense of how you’re seeing the overall environment and how your business is operating in the current macro scenario? Thank you

Park Cheol Woo: Thank you for your question. Please allow us some time to prepare answers to your question. There were three questions in total. So the first was the OCI securities projections and the CET 1 and buyback and the card delinquency rate. The card delinquency rate, we will first have the answer provided to you by CFO, Nam-Jun Kim.

Kim Nam-Jun: Thank you for the good question. So if we take a look at the delinquency rate for a credit card, the delinquency two-month rule rate reached its peak in February and it has been trending downward since in Korea compared to pre-COVID levels. We think that we will be able to return to that level near the year end. So the delinquency rate that increased dramatically in Q1 that led us to additional provisioning will stabilize in the second half. If we look at the delinquency role rate, we think that it’s also at a manageable level at 0.33%. So in terms of delinquency rate, we will be very active in taking a management stance.

Park Cheol Woo: And then regarding the profit outlook on our securities book, so as you know this can be quite volatile depending on interest rates and I think interest rate is the biggest contributor to the volatility. Recently interest rate has been going up and it has booked as valuation loss and the trend is changing from first half and the second half. In the second half we believe that the overall, I think the amount that I can give you is that interest rate outlook. It can change as the market conditions change, but Fed raised it once and be okay. We’re not sure whether they’re going to raise it or not, probably not. So I think high interest rates will be maintained for the time being and from next year onwards the interest rates I think will start to come down.

Based on this assumption, the overall securities book and valuations and OCI, the valuation loss should reduce and valuation gate should increase and there will be repricing of the securities and the return has been on uptrend. And this can have impact on NIM, a positive impact on NIM. Regarding the CET 1 ratio and the buyback plans and cancellation plans, so like you mentioned, we raised our outlook from 12% to 13%, so as of June it was already 12.95%. So it’s just 5 bps more that we need. It’s not very difficult. And as for the buyback plans, we will be reviewing them on a quarterly basis. So we have been canceling shares on a quarterly basis as well. The TSR I think will be around 30% to 40%, but we have to consider the authorities regulations, market conditions and the needs of the Group.