Shinhan Financial Group Co., Ltd. (SHG) Q4 2020 Earnings Report, Transcript and Summary

Good afternoon. I am IR, Park Cheol Woo, Head of IR. I would like to thank all of you for taking part in today's event, and we'll now commence the 2020 Q4 earnings presentation. We ask for your understanding that only oral presentation is being provided due to the COVID-19 and since Q1 of last year. Once again, we ask for your understanding. With us today is our CFO, Roh Yong-hoon; CMO, [indiscernible]; CSSO, Park Sung-hyun; and CRO, Bang Dong-kwon. We will begin with the presentation of the 2020 Q4 business results by CFO, Roh Yong-hoon; and an explanation on the group's ESG strategy by CSSO, Park Sung-hyun; and afterwards, we'll move on to a Q&A session. We'll now invite CFO, Roh Yong-hoon, to walk us through the business results of Q4 2020.

Good afternoon. I'm Roh Yong-hoon, the CFO of Shinhan Financial Group. I would like to thank all of you for taking part in the 2020 full year's earnings presentation of Shinhan Financial Group. First off on Page 5. In Q4 as well the ordinary income of Shinhan Financial Group continues to be improved. In 2020, there were a number of uncertainties that prevented us from implementing the business plan that we had set up early in the year. As such, we have responded preemptively from a conservative point of view during Q4 to minimize the losses related to the redemption of suspended fund such as Lime and the uncertainties arising from COVID-19. First of all, the response to products in dispute and overseas investment assets. In Q4, as we have already informed during Q3, we have reflected the valuation from the external audit for Lime and other such redemptions suspended funds. Accordingly, the bank has recognized KRW 69.2 billion expected damages and expected damages for customer losses as nonoperating expense. Meanwhile, the investment in core recognized a KRW 115.3 billion expense in Q4 losses related to Lime TRS, our proprietary assets. Including Q4, in relation to financial investment products sold to customers, expenses totaling KRW 472.5 billion was recognized for the full year in 2020. And for the full year, the cumulative is KRW 520 billion that was recognized. In Q4, though a conservative recognition of the losses in the financial investment products sold to customers, we expect to limit the recognition of expenses and future-related losses. In addition, some of the overseas investment assets invested with proprietary assets, the loss in valuation of KRW 69.6 billion assessed by an external audit were recognized as noninterest expense, and expenses that may arise in the future due to COVID-19 was preemptively reflected. Second is the provisioning set aside related to COVID-19. In Q4 as well as in Q2, additional provisioning related to COVID was set aside coming to a total of KRW 187.3 billion. The future economic outlook was reflected conservatively so that additional provisioning of KRW 108.6 billion was set aside. The DCF and stages were reclassified for the loans to companies with short-term default risk, leading to a recognition of KRW 78.7 billion. Through such preemptive and conservative expense recognition, we would like to once again emphasize that we have made the necessary efforts to reduce any uncertainties in improving the ordinary fundamentals in the future. On Page 7, in the group business results highlights, I will provide a detailed explanation of the group's strengthened income fundamentals. The financial results of the year 2020 posted a net income of KRW 3.4146 trillion despite the adverse market conditions, it's up from 2019. In 2020, we saw profitability improvement on the back of increased income from growth in loan assets, increased stock transaction amount and growing income related to marketable securities. However, due to COVID-19 provisioning and write-off of investment product losses, incomes were realized at level similar to last year. However, if COVID-19 provisioning and investment product losses are excluded, net income come close to KRW 4 trillion, showing improving income for 7 straight years. The COVID-19 provisioning and recognition of investment product losses, as has been explained previously, was undertaken from the point of view of minimizing the future uncertainties, and we are closely monitoring the situation. So we don't anticipate any significant expenses arising in relation to this in the future. Including COVID-19-related financial assistance, fair asset growth rate was posted. And despite the fall in interest rates, the margins were successfully defended so that growth of 1.9% was realized. Non-interest income, which is highly profitable, grew 7.9% Y-o-Y. Meanwhile, the Group's cost income ratio posted record-low levels and costs are being managed stably. Also, after securing a sufficient buffer in preparation of the end of the Group's financial assistance program, the credit cost ratio posted 41 bp, managed at a stable level. Starting from Page 8, details of each line will be explained. In 2020, the group's interest income came to KRW 8,155.1 trillion, up 1.9% Y-o-Y. Interest income from both bank and nonbank subsidiaries grew Y-o-Y. As fair growth in size continued, we were able to offset the impact of falling margins, driven by the BOK rate cut in 2020. In Q4, the group's margin now fell by 2 bp, showing the fall to have moderated. Barring a change in BOK rate cut, margins during FY '21 is expected to maintain the same levels as Q4. In 2020, the Korean Won loans of the bank grew 10.6% Y-o-Y, and for the first time since 2015, realized double-digit growth. A breakdown by segment shows retail loans having grown at 9.0% while corporate loans grew 12.3%. The amount includes the COVID -- bank's COVID support program, including maturity rollover and suspension of principal repayment. The amount for interest deferral is [KRW 6.4 billion]. To strengthen asset quality monitoring, after the deferral period is over, we're aiming to minimize the impact of asset quality. And given the executed amount under the relevant programs, we expect that the impact of default won't be anything significant. Next on Page 9, let me talk about the group's noninterest income. In 2020, the group's noninterest income stood at [KRW 3.3778 trillion], up 7.9% Y-o-Y. This is because fee income and income related to marketable securities jumped significantly. In particular, the fee income grew 11.3% Y-o-Y. And because of increasing stock transaction amount, the stock brokerage fees were expanded and the lease fees have surged as well. Next on Page 10, expenses. In 2020, the SG&A posted [KRW 5.1225 trillion], up 1.5% Y-o-Y. The group's cost income ratio posted 45.2%, down 0.9 percent -- percentage point Y-o-Y. For your information, the group's ERP expense posted KRW 92.4 billion, slightly lower than the average year. Going forward, we will endeavor to continue posting a low level of CI ratio through enhancing the efficiency of our operating system, driven by digital innovations. Meanwhile, the group's NPL coverage ratio stood at 46.3%, an increase of KRW 439.8 billion Y-o-Y. From this, the additional provisioning for COVID-19 in 2020 was KRW 394.4 billion. In 2020, the credit cost ratio was 0.41%, up 9 bp from last year. The credit cost ratio, excluding the COVID provisioning, is 0.29%, down 1 bp Y-o-Y. Given that the ordinary credit cost ratio was in the north of 30 bp according to the 2020 business plan that had been drafted before the outbreak of COVID, the credit cost is quite stable. Our expectation is that the changes on the asset quality will become visible after the COVID financial release program comes to a completion. The provisioning and the buffer included in the year's business plan should be more than enough to respond to any changes that may occur. If you look at the delinquency ratio, a leading indicator of the future credit cost, both the bank and the card businesses saw the delinquency ratio drop Y-o-Y as well as Q-o-Q, implying no deterioration in the asset quality due to COVID-19. Next on Page 11, our capital and profitability indicators. CET1 ratio is expected to be 11.7%, up 0.6% percent -- percentage point from the year-end. The figure here does not the early introduction of BASEL III credit risk reforms. SFG will exert efforts to improve asset quality so as to be in line with the midterm goal of obtaining 4% based on solid net profit improvement on the back of its enhanced profit-generating capability. For your reference, the new CET1 ratio is 12.9%, and the impact of early introduction of BASEL III reforms will be 116 bp. As the Board has not yet been convened, a dividend for FY '20 will be disclosed early March, after sufficient discussion with consideration to the various conditions and external environment. CET1 ratio changes from the end of FY '19 will be included in this IR presentation stack and uploaded onto the home page after the dividend decision has been taken by the Board. As was mentioned during the Q3 IR presentation, quarterly dividend will be made available when various shareholder returns are possible with business conditions stabilizing, including the phasing out of COVID-19. Our ROE for 2020 was 8.4%. It will be in the 9% range when largest capital increase is included. As of January 2021, Neoplux changed its name to Shinhan Financial Investment; and Shinhan Asset Management, formerly known as Shinhan BNPP Asset Management, is now a full subsidiary of SFG. SFG will continue to enhance returns to shareholders by expanding capital market-oriented portfolio that improves the group's ROE. Next page covers performance per business line. Thanks to its outstanding performance, the nonbanking business' contribution to net income recorded 41%, up 7% points from last year. Shinhan's diversified portfolio that can withstand high volatility of the capital market has been demonstrated, thanks to positive performance by capital, IB and trading business units. By matrix operating income of WM business dipped due to COVID-19 and the private equity funding incident. However, highly profitable portfolio such as GIB and GMS performed remarkably well. On the next page, detailed explanation of global business is provided for your reference. On Page 14, I will cover the contribution by digital business. In the area of digital, strategic response to the big test will be made at the same time as seeking opportunities for our collaboration. Active support and investment for digital transformation will, of course, be continued. As mentioned during -- on the last earnings call, 10% of the group's net profit for the next 3 years will be set aside to support new businesses and to secure core technologies. Now about financial digital business. In Q4, contribution to the group's revenue via visible activities was 12.7%, growing rapidly every quarter in 2020. Revenue growth in digital business of the Card -- Shinhan Investment Corp., especially a standout. Cost reduction due to digitalization rules compared to the previous quarter and in 2020, cost saved will be as much as by 38.7% compared to the previous year. Since launching the open banking service in October of 2019, the number of clients as well as size of the assets have steadily increased with the number of users for the bank app, SOL, now reaching 12.5 million. New business development continues to be active, as can be seen with its 13 new businesses being chosen as innovative financial services. The group aims to secure superior advantage by actively responding to changes in digital regulations, as can be seen in business license acquisition for MyData business by the bank and the card. Lastly, as for the ESG activities on Page 15, Chief Strategy and Sustainability VP, Park Sung-hyun, will walk us through.

Greetings. I am CSSO, Park Sung-hyun. In November 2020, SFG became the first East Asian financial institution to announce its strategy of zero-carbon drive to respond to climate change. The plan is to achieve zero-carbon emission for the group's asset portfolio by 2030. It is indeed a very ambitious goal for a financial institution with our portfolio to reach carbon-neutral. The reason for such high-reaching goal is that the market environment is changing due to strengthening of regulations related to carbon neutrality by international organizations, nations and financial authorities, including Korea. What this means is that business as usual and traditional role of finance are no longer applicable. Therefore, Shinhan aims to look at this, a change in environment, as the new business opportunity. It plans to do so by proactively trying to achieve zero carbon and entering early on into profit-generating markets, doing continuous research and collaborating with other stakeholders. In order to reduce emissions from its asset portfolio by 38.6% by 2030, quantifiable goal was set to make ecofriendly investment and assistance of worth about KRW 30 trillion. A reduction target was set by applying science-based target initiative guideline, as published in October of 2020, in order to implement Paris accords. The scope of goal for carbon offset will be adjusted based on [case] taxonomy, the green finance standards, to be announced shortly by the Korean government. Shinhan, in particular, will expand its support for renewable energy and development of ecofriendly new technologies and opportunities. This presents -- excuse me, this ends the presentation on ESG.

This is Roh Yong-hoon, the CFO. From Page 17 and onwards contain detailed earnings information of the Group and its major subsidiaries as well as main business indicators for your reference. We -- year 2021, as was the case with 2020, will be a year of complex uncertainties with added confusion and chaos. Vaccination does signal hope. However, in the financial plan for 2021, such factors as how much longer the current pandemic will last, how fast the digital players move into the market and how to restore the trust of WM clients, have been included. To prepare for a future with sustained growth, fundamentals will be made stronger, quality improvement of core businesses will be endeavored and new engines for growth will be explored. This concludes the earnings presentation. In this auspicious year of write-offs, I wish you success in all of your future endeavors. Thank you. End of Q&A: