Shinhan Financial Group Limited (NYSE:SHG)
Q3 2013 Earnings Call
October 29, 2013 3:00 am ET
Sung Hun Yu
Jung Kee Min - Chief Financial Officer and Deputy President
Seok Kyu Hwang - Kyobo Securities Co., Ltd., Research Division
Sung Hun Yu
Good afternoon, everyone. I am Yu Sung Hun and I'm in charge of IR. I would like to thank all of you for participating in the Q3 earnings conference call. We will now begin the Q3 earnings report. Today we have here with us Vice President Yee Yong Jo who is in charge of Strategy; and our CFO, Min Jung Kee; and Mr. Jang Dong-ki who is in charge of Finance. We will first open up a conference call with the presentation from our CFO Min Jung Kee and after the presentation, we will be taking questions. I will hand the microphone over to CFO Min.
Jung Kee Min
Good afternoon, ladies and gentlemen. My name is Jung Kee Min and I am the CFO of Shinhan Financial Group. First of all, I would like to thank all of you for attending our Third Quarter Earnings Conference Call. All of the investors, analysts and press, both domestic and foreign, thank you very much for your interest.
Now I would like to take you through our presentation that summarizes the key points of our third quarter results.
Please turn to Page 6, which covers the group's income. During the third quarter, the net income of Shinhan Financial Group was at KRW 523.2 billion. Year-to-date, it was KRW 1,559,500,000,000 which is a 5.8% decrease quarter-on-quarter and a 22.5% decrease year-on-year. Compared to the previous year, our credit cost has stabled and SG&A has been maintained in an appropriate level. However, our interest income decreased due to lower NIM as well as a fee income decrease in both on the bank and card side. This has resulted in a decrease on the earnings side. Quarter-on-quarter, we have successfully maintained our credit costs and SG&A on a quarter-on-quarter basis, but there was some interest income one-off factors that did not continue on the third quarter and this resulted in a slight decrease of the net income.
By sector, as you can see, the interest income for the group decreased by 7.2%. Year-on-year, there was a decrease of 19 bp on our NIM resulting from a lower base rate. On a quarter-on-quarter basis, won loans increased by 0.8%, and the group NIM overall increased by 4 bp quarter-on-quarter and this overall contributed to a slight increase in our interest income.
On the noninterest side, there was a decrease year-on-year of 8.6% year-on-year on the noninterest side due to fee income continuously decreasing due to decrease in bank fund sales commissions and bank issuance commissions. On a quarter-on-quarter, our second quarter there was a net interest income decrease of 11.2% due to the sales profit in the second quarter to the National Happiness Fund which was KRW 66.4 billion and the impairment loss on AFS of KRW 43.1 billion during the third quarter.
Our SG&A was maintained at an appropriate level at 4.3%. And also during the second quarter, there was the KRW 35 billion paid into our welfare fund, the employee welfare fund in the second quarter, and if we take -- if we reflect this, there was a decrease of our SG&A by 2.1% during the second quarter. In terms of our credit cost decrease, there was a decrease of 14.7% and 13.4% year-on-year and quarter-on-quarter respectively, thanks to decrease in overall credit cost from the decrease in large restructuring corporate, as well as high risk sectors.
So if you look at overall group, there was a decrease in the squeeze on the NIM, and we have seen a stable interest income. On the noninterest side, the fee income has decreased and some of the one-off income in the second quarter have been removed, this resulting in a decrease on a quarter-on-quarter basis. But the overall costs, such as SG&A and credit costs have been well maintained, and we believe that profitability had on a recurring basis, is on a strong trend.
Next I would like to look at each of the group companies. Under the third quarter, both the banking and nonbanking net income year-to-date on a contribution basis was KRW 1.1 trillion for the banking and KRW 716.9 billion for the nonbanking respectively. And the non-banks profit contribution increased slightly year-to-date to 39.4%.
Next, I would like to look at each of the affiliated companies. Compared to the third quarter of last year, banking profit decreased by 24.4% year-on-year on an accumulative basis due to a decrease in interest income. This is larger than the 16.7% drop of the non-bank side. The non-bank side profit decrease is mainly due to lower merchant fees on the credit card side as well as lower profits on the life insurance due to changes in systems as well as decrease on interest margin gains. On the other side, the Shinhan Investment Corp. and Capital has improved in profitability resulting on year-on-year increases.
Quarter-on-quarter basis, the banking profits increased by 8.5%, thanks to slow down in the interest -- in the NIMs suite [ph] and also on the nonbanking side, the profit decreased 18.9% on a quarter-on-quarter basis, due to the gains on the asset sales to the Happiness Fund during the second quarter being removed, as well as seasonal factors resulting in fee income decreases. Also on the Life Insurance side, there was a premium received decrease.
Next is Page 9, which is the details of the Shinhan Bank's performance. The bank's third quarter net income increased on quarter-on-quarter basis by 8.3% thanks to slow down in the interest income decrease and stable management of cost including SG&A and credit costs. On the interest income side, the interest income decreased only slightly as NIM was held at 1.73%, which is only a 1 bp drop from the second quarter. The noninterest income of the bank increased by 34.3% quarter-on-quarter. Despite an AFS impairment loss of KRW 43.1 billion during the third quarter, thanks to gains on sales of loan assets and the foreign exchange and derivative-related gains from the exchange rate changes.
SG&A of Shinhan Bank decreased by 6.2% quarter-on-quarter, mainly due to the contribution made during the second quarter to the Employee Welfare Fund. The credit costs of the bank has been stable since the second quarter and in the third quarter despite the additional provisioning expense from the downgrade of STX, overall credit cost has been stabilized and the credit cost has decreased by 6.1% quarter-on-quarter, thanks to the overall stabilizing in credit cost. Also, we have reflected the results of the Shinhan Bank's tax audit and have reflected KRW 38 billion additionally to the results of the third quarter in terms of tax expenses.
Next is the Shinhan Cards third quarter performance. The third quarter net income was -- the Shinhan Cards third quarter net income was KRW 106.4 billion, which is a 25% decrease quarter-on-quarter due to the impact of a KRW 55 billion gain to the Happiness Fund and the 1.7% in operating profit explained by seasonal factors.
Shinhan Bank's SG&A. Noninterest income fee decreased by 5.4% quarter-on-quarter, due to fund sales commission decreases and AFS impairment loss contributed to securities-related gains decreased by 32.8%. And so, overall, the Shinhan Bank's overall cost income ratio was at 51.5%, thanks to increase in gross income in third quarter.
Next is Shinhan Cards third quarter performance, Shinhan Cards third quarter net income was at KRW 160.4 billion, which was a 25% decrease quarter-on-quarter due to the impact of KRW 55 billion gain to the Happiness -- the sales to the Happiness Fund and the 1.7% in operating profit explained by seasonal factors. Despite a decrease in operating profit, the interest paid decreased by 24%, thanks to improved funding costs and the credit costs also improved due to the delinquency roll rate and asset quality improvements.
The write-off asset balance was KRW 5.3 trillion at the end of third quarter and the annual recovery rate was 4.8% which show signs of maintaining a sound level.
Please turn to Page 13 for assets and liabilities. Total assets as of the end of Q3 grew by 3.5% to KRW 380 trillion, showing a healthy growth trend. Key contributors are Shinhan Bank's 3.2% annual asset growth and continued increase in the Shinhan Investment Financial product assets and Shinhan Life Insurance operating assets.
If you look at Page 14, you may see that Shinhan Bank's Korean won loans stood at KRW 147.5 trillion as of the end of Q3, an increase of 2.3% compared to year end. Loans recorded a steady growth of 0.8%. Retail loans increased by 1.6% Q-o-Q owing to growth in Jeonse [ph] loans and credit loans. And SOHO loans led the growth in Korean won loans by posting a 2.5% growth.
On the other hand, mortgage loans declined 4.2% annually due to securitization of confirming loans by Korea Housing Finance Corporation; however, long-term mortgages are showing a sound growth. Taking securitization into account, Korean won loans grew by 3.9% and retail loans by 4.4%.
We plan to push for continued growth in sound assets, such as household credit loans and SOHO loans. The Korean won deposits in Q3 2013 also continued on a stable growth path, growing 2.2% to reach KRW 150.5 trillion. On the quarterly basis, savings in particular, time deposits recorded a slight decrease while low cost deposit increased by 1.2%, maintaining a similar level compared to the previous year. LDR also grew to 97.9% as of the end of Q3. We will try to maintain a stable LDR through continued management of low margin loans and high-cost deposits.
Turning to Page 15, let me go over Shinhan Cards transaction and funding activities on Page 15. During Q3, Shinhan Cards credit card transaction volume declined slightly to KRW 34 trillion Q-o-Q. Operating assets also fell 0.9%, mostly due to credit sales and cash advance. This is largely due to less business days compared to Q2 and credit card seasonality, as well as a temporary decline in transaction volume and credit sales.
Now let me move on to Page 17 for asset quality. Shinhan Financial Group's NPL ratio at the end of Q3 2013 dropped 0.06 percentage points to 1.53% Q-o-Q. This is owing to the constant management of bad debt and KRW 396.4 billion in write-offs and sales during Q3, resulting in smaller NPL growth compared to the rate of asset growth.
The group's NPL coverage ratio posted 144%, an increase of 5 percentage points Q-o-Q, stable enough to counter a potential deterioration of assets.
Moving on to Page 18, the NPL ratio for Q3 stands at 1.39%, down by 0.04 percentage points Q-o-Q. NPL coverage ratio increased 5 percentage points to 132%, continuing the trend of asset quality improvement.
Delinquency ratio, as you can see on the bottom left of the chart, remained steady at the 0.6% level, keeping the asset quality at a stable level.
On Page 19, Shinhan Card saw a slight decrease of 0.06% in NPL Q-o-Q, owing to continued sales and write-offs of NPL posting 1.80%.
NPL coverage ratio increased by 7 percentage points to 293% Q-o-Q, allowing the bank to hold sufficient provisions for a potential deterioration of asset quality. Delinquency as of the end of Q3 dropped 7 basis points to 2.05%, maintaining a healthy level.
Page 20 looks at provisions for credit losses and write-offs. As shown in the upper left graph, provision for credit loss decreased from 0.67% to 0.57% year-on-year, showing a stabilizing trend. This is due to the decline in provision for credit loss in Q3 from additional provision required for corporate restructuring and improvement in card delinquency roll rate. We will continue to make efforts in quality management of potentially problematic companies to maintain the stable level of provision for credit loss.
Increase in provision for credit loss for Shinhan Bank is not expected to take place as the number of companies that will undergo restructuring is expected to decrease. In addition, loan growth has been increasing steadily during the past 3 years. In terms of credit costs for Shinhan Cards, the recovery of written-off debt decreased by KRW 6.2 billion from previous year's KRW 65.9 billion to KRW 59.7 billion. However, due to decrease in write-off, improvements in delinquency roll rate and recovery rate, credit cost of KRW 81.6 billion was incurred to result in a decrease of KRW 20.5 billion Q-o-Q. Write-offs and sales for Shinhan Bank during Q3 stood at KRW 95.1 billion and KRW 142.2 billion, respectively, posting a decrease compared to KRW 412.4 billion of Q2. Please turn to 22 for capital adequacy. The group BIS ratio for the Q3 is expected to see an increase of 0.4 percentage points to post 13.1% due to growth in income and slight decline in risk-weighed assets. Tier 1 ratio is also expected to increase slightly by 0.3 percentage points to 10.2%.
Shinhan Bank's BIS ratio for Q3 is likely to drop to an increase of Tier 1 assets, thanks to a stable net profit increase and a decrease of KRW 1 trillion in risk-weighted assets from the application of AMA. As a result, the Tier 1 ratio is expected to increase to 13.1% and the BIS ratio is expected to increase to 16.1%.
Adjusted capital ratio for Shinhan Cards stands at a healthy 29.4%. As the group asset growth is expected to be led by steady asset growth and its profit generating capabilities are expected to continue on a solid path, the capital ratio for the group will see continued improvements. Please refer to the remainder of the presentation for additional details on the subsidiaries' business results, major management indicators and loans to SMEs.
This rounds up the 2013 Q3 Shinhan Financial Group Earnings Report. Thank you.
Now, we will take your questions.
[Operator Instructions] We will take the first question. The first question comes from Mr. Jun Song Kim [ph] of SG Security.
I have a question on Shinhan Card. You said that the roll rate for delinquencies have improved and that the new delinquencies are also stabilizing in the pace of buildup. When I look at other major credit cards, their new delinquencies are decreasing, but their recovery of existing delinquencies are dropping is what I hear from other major credit card companies. Do you see a different trend on your credit card operation and if you do, how can you explain this difference in trend? Because I think some people read a moral hazard effect on the credit card side, also the checks card or the debit card, some people are saying its cannibalizing their credit card side. Do you see any impact of the so-called check cards on your credit card operation ?
Regarding the Shinhan Card business, if I may answer that question, our 2-month roll rate currently is 0.45% and is maintaining a stable level around that range. For 2-month plus delinquency roll rates, actually the delinquency roll that has decreased slightly quarter on quarter. So overall, our recovery rates have not decreased largely. I think we can explain that in twofold. One is that in Shinhan Card, the cash advance, which is relatively higher risk, the cash advance has been decreased based on our strategy. So the cash advance in our total operating asset is around 12%, it's about KRW 2.4 trillion. Since 2008, we have been decreasing the share of cash advances in our asset, because in 2008, it was up to 24%, twofold of the share current. So relatively, I think one way of explaining it is that our relatively high-risk asset share has been decreased. The second way of explaining our situation is the fact that our current credit card growth strategy is not an aggressive strategy for growth, so Shinhan Cards focuses more on the fact that our market share is 22.4% -- 22.3% and maintaining that level and we have not engaged in aggressive marketing. So I think relatively speaking, we have a less increase on the lower credit rating customers, and I think that once again, explains the fact that our recovery rates have not dropped as much. About the impact of check cards. Check cards, yes, has been increasing. In terms of our overall volume turnover, it accounts for about 11%, a bit above 10% of our business is check cards. Whether it will be profitable and if so, how much and whether it will help our overall business was your question. There are various factors we have to consider, because check cards have no credit risk. And so in terms of our soundness or loan or in terms of our credit cost, there is a contributing factor there. Also if you look at the financial group level, one of the reasons why our margins have been stable is because we have been be able to track the merchant settlement accounts and also the credit cardholders' personal accounts and that has been a source of our low-cost deposits, which helps keep our NIM healthy. And so in that sense, there is a plus factor. Maybe it will not help much on the credit cards bottom line, but we believe that check cards may be helpful from the overall group's perspective. Also the check cards, when we look at the pace of growth of check cards, it's not yet a very rapid pace of growth. So overall, their impact on our bottom line, I think, would also be gradual.
[Operator Instructions] We will take the next question. The next question comes from Prudential Investments. Jun Watanabe [ph] is going to ask the question.
Regarding the net NIM, net interest margin, Q2 you mentioned was 73% and -- 7.3%, well what you have mentioned is this, the bottom, do you think this will go back up?
Well, regarding NIM, 1.73% is just the bottom. Yes, the -- whether or not this is the bottom, we cannot be confident. However, we feel that we're very close to hitting the bottom and our basic approach for the growth strategy is the annualized growth rates. Even if it is 3%, if the margin is about 6 bps growth, it will not have an impact. So the NIM has been declining quite quickly, quite rapidly since 2012. However, it is showing a stabilizing trend and this is because -- and this is largely dependent upon what kind of price strategy withstands other banks have. We tried to defend our margin and at the same time, push for our growth strategy. I think this is the bottom or close to the bottom of our NIM margin. And in order for the NIM to increase, the yield curve itself becoming steep is not important, there has to be a parallel increase along with -- there needs to be a shift upwards.
Next question will be from Mr. Hong Tang Yong [ph] of Macquarie Securities.
Well, I have another question about the NIM. You said that the -- actually including merchant's fee NIM decreased by 7 bp quarter-on-quarter. Why is there this huge decrease quarter-on-quarter on the merchant fee included NIM? I don't see any special factors there.
Well, when we prepared the presentation, the merchant fee included NIM is at 3% ranges, but then there will be the change in accounting and we will have to take up the merchant fee. Look at the net bank and Shinhan Card which is around a 2.3% range. As you know the merchant fee were lowered for the smaller merchants but the merchant fee for the larger merchants were slightly increased and that does have a decreasing effect on our NIM. This old NIM, which includes merchant fees of course, will decrease. What we need to look at more is the RS-based NIM, which excludes the merchant fee and only looks at the interest income, which will be around 2.31, which actually, we have defended quarter-on-quarter which, we would like to emphasize more. And additionally, the one-off event in Q3 was that the card fee was reduced by about KRW 50 billion. So with the merchant fee increased, there has been a decline. However, if you look at the fee that does did not include merchant fees and just for the margin for bank and cards, you can see that there is a slight improvement.
We will take the next question. The next question comes from Mr. Hwang Seok Kyu from Kyobo Securities.
Seok Kyu Hwang - Kyobo Securities Co., Ltd., Research Division
I'm Hwang Seok Kyu from Kyobo Securities. I have a question regarding provision for write-offs and also a provision. If you look at refunds in write-off, I would like to know the size. And my second question is well, you did mention the one-off event in terms of the write-offs and the exchange rate, I would like to know the figures. I think, in terms of provision, Tehan [ph] wiring or Tehan Tangsan [ph] will be included in the figures, so I would like to ask you for details? And when you were talking about check cards, you talked about the increase of deposits. There have been a very significant increase. I would like to know if this had an impact on check cards usage and I would like to know if you expect any more increase in the usage of check cards?
Well, you have asked 4 questions. Regarding asset quality, you have talked about the provision which has declined compared to the previous quarter. There has been a 13.4% decrease. Last quarter was KRW 251 billion, now this year is KRW 217 billion, so we did experience a decline. So in terms -- there has been reversal, which came from the loans to construction companies, KRW 32.3 billion have been reversed in our provision. So this resulted in a decrease in provision. And secondly, regarding the second question, regarding the write-off, STX write-off, KRW 35.4 have been added to our provision for loss and regarding the construction companies, there have been KRW 32.3 billion of reversal. And in terms of non-income there have been 2 sales of securities, which amounted to KRW 80.8 billion. First was SK Hynix shares and secondly, we sold Visa card, which resulted in KRW 37.3 billion. So these were the 2 biggest elements. And regarding the bank business, there we also saw the workout funds -- workout sales of KRW 41.3 billion, and regarding shipping companies, KRW 24.6 billion of profit was realized from CVA. And regarding non-income, we have experienced KRW 43.1 billion of loss from Alposco [ph] shares impairment. So that was the second answer. And regarding the provision for Q4, during the first 3 quarters, the current provision size stands at -- recurring basis, it is on the decrease and as our CFO has already mentioned, the overall credit cost has dropped to the 57 basis points level. However, the basis on -- based on the recurring basis, it is remain -- it remains at the KRW 260 billion to KRW 270 billion level. In Q4, we are going to test the provision based on the recurring basis, and in the case of some weak industries such as construction and some of the credits that are still considered problematic, still remains. So there is a possibility that we may have to increase the provision for Q4. And as to the on demand deposits, it can have a positive effect on the margin. As to the on demand deposit, there is a -- there can be 3 reasons why there is an increase. First is the merchant accounts. The number of merchant accounts are increasing and also the payroll accounts are increasing as well. As we are providing credit loans, it is bundled with the payroll account, so the on demand deposits are increasing along with them. So for instance, we have a deal with the National Court, so these are the reasons why the overall procurement cost or the financing cost is increasing and is also having a positive impact on the NIM. And let me add to the answer regarding the provision. The financial authority always requires the banks to have a preemptive provisioning. After the application of IFRS, it was quite normal for banks to increase provision or queue. So there are some potential delinquencies such as personal workouts and et cetera. So individual provisioning can be done on the part of the bank and it has always happened on Q4 each year. So we are currently standing at 57 bp right now, but looking at the past trends, it will be quite inevitable for us to increase the provisioning for Q4. As to the actual amounts, we will have to look at how many companies that we need to consider and what the size of the workout rooms [ph] will be.
We will take the next question. Next question comes from Franklin Templeton, Mr. Tun Muyen[ph].
My name is Tun [ph] from Templeton. I have a question about Shinhan Life. If you turn to Slide 26, we have the profits and you can see that the premium income has decreased compared to last year. I'm looking at other insurance companies and they don't show such a deterioration in their premium income net. Is there a special reason behind this decrease? The second question is on Page 27, on the new premiums. There is a huge drop between the first quarter and the second quarter. Can you explain that drop in new premium income?
I will take that question about Shinhan Life. Of the Shinhan Life's performance, it has been on a decreasing trend. I think I need to take this question from a more compressive approach. There's 3 reasons behind the decline in the performance. One is changes in various systems, which is decreasing of the operational profits, also there is a decrease in terms of the interest gain due to the decrease in the overall interest rate. Also, there is a decrease in terms of asset sales. So if you go into detail one by one, the third quarter accumulated net income is KRW 76.3 billion which is a 25.7% decrease quarter-on-quarter, 59.4% year-on-year decrease. There are various decreases in the operating profits, which is KRW 69.2 billion, also there is a decrease of KRW 52.5 billion in terms of interest gains. And also in terms of trading gains, there is a decrease of KRW 31.5 billion. These all add up, pre-tax wise of a decrease of KRW 153 billion, post tax wise, KRW 160 billion. These decreases due to changes in the system probably will last us another 3 to 4 years. The market rates being so low and that impact on the interest gain -- interest margin gain, probably that will not be improving unless the market rates go up. However, the contribution of Life within the overall group is only 3.9%. So the impact on the overall Shinhan Financial Group will be still limited. Fortunately though, compared to other subsidiaries such as Shinhan Capital, have been improving year-over-year in terms of their results. In terms of Shinhan Capital, there is an increase of KRW 15.7 billion and Shinhan Securities has been increasing in about KRW 700 million. So overall, that is offsetting the decrease in the Shinhan Life decrease in performance. So in a sense, it is a reflection of the diversification as a financial group, and also reflects a team play approach. We plan to increase the share of guarantee or protection-type products and also increase the gains from asset management, and also improve the retention rate and focus more on getting the high-end customers so that the Shinhan Life can get access to a stronger base for long, stable growth.
And it looks like there are no other questions at the queue. So with this, we will like to wrap up the Q3 earnings report for Shinhan Financial Group. Once again, I would like to thank all of the participants for taking time out of their busy schedule to join us. Thank you very much.
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