Shinhan Financial Group Q1 2025 Earnings Call Transcript

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April 24, 2025
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Moderator

Good afternoon. This is Chodo Park, Head of IR at Shinan Financial Group. Thank you very much for joining the twenty twenty five Q1 earnings presentation of Shinam Financial Group. Today, we have our Group CFO, Sang Young Cheon Group CSO, Seok Kyung Go Group CRO, Dong Kwon Bang Shinam Bank CFO, Chong Bin Lee Shinam Card CFO, Hye Chang Park Shinang Investment Securities CFO, Chung Eun Jang and Shinang Life CFO, Song Hwan Ju, also attending. We will start with an update on the progress of the value of plan that we had announced in July and give you some details of what we have in plan this year before taking you through our Q1 business results.

Moderator

After the presentation, we will open the floor and receive your questions. And now our Group CFO, Sang Young Cheong, will take you through the presentation. Good afternoon. Thank you for joining Vishinan Financial Group twenty twenty five Q1 earnings presentation. Before looking at our Q1 results, I would like to start from Page two and explain the 2025 value of plan, which was publicly disclosed today.

Moderator

The 2025 value of plan is based on the results of the '24 implementation assessment led by the BOD as well as diagnosis of the appropriateness of existing targets and newly established near term targets and execution plans for 2025. Looking back on 2024 performance, group ROE fell Y o Y due to decrease in nonbank affiliate earnings, but CET1 ratio remained above 13% every quarter despite greater market volatility. That said, considering CET1 sensitivity to macro volatility and uncertainty, current management levels were found somewhat tight. In shareholder return, active share buyback last year reduced number of outstanding shares to less than 500,000,000 shares as of end of last year, boosting our shareholder return ratio to 40.2%. Based on such performance review, we decided to maintain the original targets covering until 2027 while establishing the following plans for 2025, which will be the first year of proper implementation of our value add plan.

Moderator

First, we plan to improve ROE by more than 50 bp Y o Y through a stable bank earnings and structural improvement of nonbank businesses. Second, we plan to unlock additional capital capacity through efficient asset management. We aim to maintain CET1 ratio at 13.1% or above, which is 10 bp higher than the existing target level and giving us greater flexibility. Third, given the current PBR levels, which are heavily undervalued, buyback and cancellation will be the focus for a faster pace shareholder return program to increase shareholder return ratio to 42% or above in 2025. To achieve this value up plan in 2025 with better execution, we will operate key action initiatives, including structural improvement of non bank businesses, efficient asset management and stronger links between evaluation and compensation.

Moderator

For details, please refer to the publicly disclosed materials. Pages three through five shows the value of plan progress as of end of Q1 this year, and we plan to keep you updated each quarter using the same format. Now to turn to Page six for our Q1 business results, starting from the business highlights. Twenty twenty five Q1 tentative group CET1 is 13.27%, which is 21 bp improvement YTD. Despite the effects of Basel III, group wide RWA reduction efforts and solid earnings growth from the banking business contributed to the healthy CET1.

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And based on this, the BOD today resolved on Q1 cash dividend of KRW570, which is a KRW 31 increase Q o Q. Regarding share buyback, out of the KRW650 billion planned for the first half, buyback of KRW285.7 billion has been completed as of March. March. And among this, 150,000,000,000 announced last year is scheduled for cancellation late April and the rest is scheduled for cancellation by June. Q1 group net income was 1,488,300,000,000.0, which is a 12.6% Y o Y increase, thanks to absence of non operating one offs and solid growth of interest income.

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Page seven looks at capital. Despite a larger buyback program than previous year, Group CET1 improved 21bp YTD based on well managed RWA and stable net income. Despite the RWA increasing effect of KRW 5,400,000,000,000.0 due to regulation including Basel III, appropriate KRW loan growth combined with group level RWA control efforts, including portfolio rebalancing, limited RWA increase to KRW3.1 trillion. We will continue to focus on maintaining stable capital ratio through internal efficiency and strategic management while sufficiently supplying necessary funds to the right places. Page eight looks at assets and liabilities, and we move on to Page nine, which looks at group P and L.

Moderator

Group net income increased 12.6% Y o Y, thanks to absence of non operating one offs and growth of interest income. Based on this ROE and ROTCE, key metrics of the value of plan increased by one percentage point Y o Y, respectively, to 11.412.9% each. And I will break down the details starting from the next page.

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On to Page 10 for our interest income. Despite falling market interest rates, our group interest income increased by 1.4% year on year, driven by the average balance effect from growth in our income producing assets. Bank loans in won increased by 0.4% versus end of last year, mostly driven by blue chip SME loans. Please refer to page Slide seven for details. For bank NIM, although the yield on interest bearing assets, including loans in won, dropped 12 basis points Q on Q, Nonetheless, we saw alleviated funding pressure amid adequate asset growth under our broad profitability management stance and seasonal deposit inflows.

Moderator

On balance, improving NIM by three basis points Q on Q. Group NIM was also improved by five basis points Q on Q, thanks to the increase in bank NIM. Next on to noninterest income. Group noninterest income decreased 6.3% Y o Y from a decline in commission and insurance related income. Credit card fee income were impacted by an increase in proactive customer acquisition marketing spend, while brokerage commissions were also down Y o Y as brokerage trading volume decreased amid market uncertainties.

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However, we continue to achieve growth in trust fee income from fund and bank assurance sales centered around our bank business. Also despite the challenging environment, quite encouragingly, investment banking commissions recorded growth on both a Y o Y and Q on Q basis. In Q4, amid rising external and internal uncertainties, income from marketable securities, FX and derivatives was very poor, but has since recovered back to more recurring levels, reflecting lower market rates. Although insurance related income showed a decline Y o Y, this was due to the high base effect from last year where insurance sales were quite brisk, otherwise it's being managed at a stable level. Next, moving on to SG and A and credit costs.

Moderator

Group SG and A is stable with nothing notable versus last year. Cost to income ratio was up 1.4 percentage points Y o Y, recording 37.3%. For credit costs, even though additional provisioning for real estate TF loans fell, there was an increase in recurring provisioning, reflecting the economic cycle, resulting in a 15.4% increase Y o Y. As a result, group nominal credit costs recorded 41 basis points, up three basis points Y o Y, while recurring CCR was 38 basis points, up eight basis points Y o Y. As we move forward, while credit costs related to real estate PS is expected to stabilize gradually, corporates will likely face greater credit risk from delayed economic recovery and vulnerable customers may become increasingly challenged.

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So overall credit cost in terms of size may be slightly greater than our initial expectations, while recovery may take longer. However, we have already built up sufficient loss absorbing capacity and will enforce even closer monitoring and control for soundness and keep credit costs well under control within the limits of our established business plans. Please refer to pages thirteen and fourteen for details on group asset quality and loss absorbing capacity. Moving on to our group and overseas business earnings, Page 15. For Bank, thanks to solid interest income and balanced portfolio, we saw improved fee and marketable security income driving overall performance for the broad group.

Moderator

Question on Card and Capital. As profitability was impacted due to regulatory change and still high interest rate environment, both continued sluggish performance with pressure on both the funding and credit cost side. For Investment Securities, despite increased market uncertainty, we saw a gradual recovery in recurring earning power driven by top line performance in IB fee income and marketable securities. Insurance continues to deliver consistent performance same as last year, thanks to stable KICS ratio. For asset trust business, which recorded a loss last year from large loan loss provisioning amid completion guarantee real estate trust exposure has turned to profit.

Moderator

Overseas business, we're seeing solid performance trends from Vietnam, Japan this year as well. From pages 16 to 18, we outline the performance on digital and sustainability initiatives. Page 16 provides details on the main digital indicators that we have shared every quarter. Page 17 provides details on the Jeju Bank ERP banking initiative, which you may be interested in. Page 18 outlines our efforts in terms of greenhouse gas emissions reductions, also more on our inclusive and win win financial initiative as well.

Moderator

From Page 19, we list the detailed financials and performance of the respective affiliates, so please refer to the slides. Recently, the Korean economy faces structural issues as well as many internal and external challenges, which represent a complexity of challenging issues, including poor domestic and export demand, contraction in corporate investment and trench low growth. Our core role as a financial group is as a financial intermediary that supports the real economy, working in coordination with the policy authorities. We want to go beyond just the passive intermediary and we're looking to be more proactive across many fronts to provide preemptive liquidity to competitive corporates and allocate capital to productive sectors of the economy to support recovery of the real economy and help resolve the issues confronting Korea. Also as a value up leader and as a major player in the capital markets, we will faithfully implement our corporate value up commitments to the market, building on the customer trust and solid underlying fundamentals.

Moderator

Thank you very much for your attention.

Moderator

Thank you very much for the presentation. Now we will receive your questions. English questions will be consecutively interpreted into Korean, so please wait for a moment for that translation. Now we will receive the first question, Mr. Jae Young won from HSBC.

Moderator

REPRESENTATIVE:] Can you hear me? Yes, we can hear you well. Well, despite the difficult situation, you've delivered good performance and also you've shown a lot of effort for shareholder value. I have two questions. First is group NIM.

Moderator

Your full year guidance was that NIM may have dropped by about seven to eight bp. But looking at Q1, actually, in Q1, your group NIM went up by five bp. So what about the full year outlook? Do you see the need to change your full year NIM outlook? Or can you give us your expectations of how NIM would move throughout the year?

Moderator

My second question is about asset quality. We do see signs of asset quality deterioration not only at Shinam but across all banks. Your NPL coverage ratio has dropped from 143 to 129, a large drop. The current NPL coverage ratio, do you think there is additional downside room there? Or do you think that current levels, you'll be able to keep?

Moderator

I would appreciate your thoughts on that. Thank you very much for those two questions. Please give us a moment to prepare our answer. Well, thank you very much for that question. Regarding the NIM outlook and the second question was about asset quality, I think for NIM, it's best for our group our bank CFO to mention that.

Moderator

And regarding the asset quality, I, myself and our group CRO will take the question. UNIDENTIFIED Yes. This is Chongbin Lee Yi, the CFO of Shinam Bank. You've asked about our NIM. First of all, I'll answer based on bank NIM, which increased by three bp Q o Q.

Moderator

Group NIM increased by five bp Q o Q. And the reason why it went up is that on the lending side, market rates did come down, so loan profitability is declining. That said, we also have the growth lever that we can use. So by maintaining loan growth at appropriate level, we are able to somewhat defend or offset the decreasing loan yield. And then in Q1, the funding side the funding cost decreased because there were some core deposits that increased and overall funding scale was decreased.

Moderator

This decreased our funding cost and that resulted in the increase of our NIM in Q1. Now for the outlook on NIM going forward from Q2 going forward. In Q1, we were able to manage our NIM, but market rates do continue to decline. BOK rate is likely to go down further this year. And so we are expecting that the declining market rates will impact our NIM, and we are expecting our NIM to come down.

Moderator

That said, we still have the asset side, the loan profitability levers that we can use to defend. And also, we can try to collect more of the deposit based low cost funding to maintain our funding cost to defend our NIM as much as possible. So that was the bank CFO that answered the first question on NIM outlook. And as he mentioned, we are entering a rate declining cycle this year, and we still expect our NIM to decrease throughout the year. Our NIM did improve in Q1, and that is a bit of a seasonality.

Moderator

Usually, Q1 has better margins in terms of NIM seasonally. But looking at where the BOK rate is expected to go, our views have not changed. But about credit cost, as we mentioned in the presentation, we're expecting the credit cost to go up a little bit. But NIM, maybe the decline will be flatter than what we had originally expected, but that's very cautiously. Your second question is about the NPL coverage ratio.

Moderator

Our current coverage ratio number is probably the lowest in the past year or two. This coverage ratio is explained two ways. One is not only Hsinan, but the overall market is in the lower part of the credit cycle. Recovery is being pushed back. And so substandard and below is increasing faster than planned, and that seems to be happening throughout the market.

Moderator

And as you can see on Page 14 of our presentation, when we do provisioning at the end of each year, we do sales. But recently, the NPL sales conditions are not favorable. That's why in March, Jinam Bank sold less NPL than usual strategically. That was a strategic choice. And that is a reason that decreased the coverage ratio.

Moderator

What we have been emphasizing at Shinhan Financial Group level, we always prepare preemptively the loss absorption capacity. And we think that as the coverage ratio at the end of Q1 is most likely our bottom and so that in Q2 and Q3, our coverage ratio is expected to improve. This is the group CRO. If I may add on that answer, the coverage ratio when we calculate the coverage ratio, usually what we do is if we had we done similar level of NPL sales, our actually, coverage ratio would have been 180%. And so we think that we'll be able to come, bring it up to 190% at Q3 and 200% NPL coverage ratio by end of this year.

Moderator

That is our management target, and we will follow that plan. Thank you very much for those answers and we'll take the next question.

Moderator

Mr. Song Joon seo from NH Investment Securities. Please go ahead. Yes. Thank you for the opportunity to ask two questions.

Moderator

First,

Moderator

I think it was addressed before, but in terms of your 42% target, 42% or more shareholder return target, well, it is in line with your previous targets, the guidance. But given the share prices and the level of shareholder return by other companies, it does appear to be a little bit on the low side. And your capital ratio actually is improving by more than expected. So in terms of managing the pace as you work toward your 2027 targets, do you have any intention to speed things up a little bit? And then there were some discussions about different forms of reduced dividends.

Moderator

Could you elaborate more? So please bear with us as we prepare the answer. In terms of the total shareholder return level and also the pace, so 42% was our target, but actually, it was it's a minimal line. We're talking about 42% or more. As we mentioned during the presentation, regarding our corporate value program, we are approaching with speed, but the market valuation is quite low.

Moderator

So in terms of reduction in shares outstanding, whatnot, we are moving a little bit faster than planned. So as we mentioned regarding our value add program, we do want to speed up our shareholder return program. We will look at overall earnings this year and the market conditions as well. And so share buyback and cancellation, we are actually open and committed to speeding things up more than our initial plan. But as we move out through the second and third quarter, we will have to see the overall earnings circumstances and the final decision will be made by the Board.

Moderator

But the PBR actually is quite undervalued at the moment. And so we think that as far as shareholder buybacks are concerned, I think it would make sense to move faster than planned. So when we make our earnings call in the third quarter, we will elaborate more about any changes to our plans in terms of shareholder buyback or shareholder returns in the second half. In terms of capital reduction dividends, the government actually is collecting some views from the industry about tax benefits. So early this year, other companies did announce capital reduction dividends, and so we did give it a light review.

Moderator

And we do and did have the resources to affect that if we felt it was correct. But we felt that other than retail investors, we have a lot of foreign investors, of course, corporate investors as well. So the benefits actually could vary depending on the investor. So that was one point of consideration and among others. So for us to take the lead, well, we prefer just to observe the market developments and approach it slowly.

Moderator

So that was the conclusion of our initial review. So anyway, at present, as far as capital reduction dividends are concerned, we do not have any plans at the moment, but we will see what the tax authorities decide later on, also developments by other companies as well, and we will make our decision on balance. And in terms of how we want to return more value to our shareholders, we intend, of course, to be flexible, and we will be open to various measures.

Moderator

UNIDENTIFIED I hope that has answered your questions. We will take the next question from Hana Investment Security, Doha Kim. Please go ahead. I have a question about the value update. I just want to check if I understood correctly.

Moderator

The CET1 ratio this year is 13.1% or above. That seems to be your confidence, sign of your confidence. But even in April, the authorities have demanded increase of corporate loans. And this could the pressure could grow stronger as we move throughout the year. I think overall, we are seeing SME loans delinquencies coming up and credit card delinquencies are coming up faster than we had expected.

Moderator

So if you consider the external environment, considering export companies having difficulty and looking where we are in the cycle, which may be prolonged, you have raised your hurdle on the capital targets. I'm a bit concerned about that. So what is is this more of a commitment? Or do you need to satisfy 13.1 or more of CET1 to deliver on all the other business metrics that you have this year? Second part of the question is, if you have to give out more business loans than you had planned, would that increase your RWA versus plan?

Moderator

And how are you going to manage your CET1 if that happens? Thank you very much for those questions, and please give us a moment to prepare the answer. REPRESENTATIVE:] Well, thank you very much for that question. You've asked whether this is a sign of our confidence, the CET1 target this year being 13.1 or above. Well, actually, we have already always delivered our CET1 above 13%.

Moderator

And as you can see in Q1 CET1 numbers, our asset growth continues. And this is combined with internal efficiency efforts such as data cleansing to deliver 13.1%. We have increased the target by 10 bp, and that is explained by various issues. Last year, there was a lot of macro volatility, including exchange rate. And we wanted to actually keep an additional buffer, and that's why it's 13.1%.

Moderator

And this is comfortably deliverable. We have simulated this internally, and we are quite comfortable that we will be able to deliver at least 13.1% of CET1 this year. And then your question was what would happen if business loans have to be increased and delinquencies. We are carefully watching the business cycle in Korea. But even at current trends, we will be able to comfortably deliver our business plan this year.

Moderator

And relatively speaking, Shinon Financial Group, when it comes to asset quality, is a bit superior to others. And this year, asset soundness management is the top priority as we manage our business. So we will be particularly more tight in our management. Now in terms of funding and asset growth, we are going to be delivering the CET1 while supplying the funds in the right places.

Moderator

Yes, we'll move on. Swordong Joon from SK Securities. I would like to ask more about Jeju Bank regarding your cooperation You were seeking a license as an Internet only bank, but then it seems that you have shifted your corporate strategy. So I'd

Moderator

like to hear more about that.

Moderator

In the mid- long term, what is the size? Do you have a target in terms of how much you want to grow your business? And then the overall directionality, its position within the wider group, etcetera, if you could explain. Thank you for your questions. Please bear with us as we prepare the answer.

Moderator

For Jeju Bank's ERP banking initiative, the group CSO will address your question. Yes. This is Koo Seok Kwan. I'm the group CSO. I think I've been attending the IR session more than 10 times now, and I think I am taking the microphone.

Moderator

It's been quite a while. Regarding the background, in banking, of course, it's a Red Ocean domain with very intense competition. So in terms of remaining spoke or white space, of course, we have to look at the adequacy of financials. Also, it's a matter of trust. So for non audited SMEs or SOHOs, there's always some concern about the credit standing.

Moderator

How can we assess the credit standing of these types of potential customers, provide support? That's always very key. So that will be very key in terms of receiving licensing for an Internet bank. So yes, we did look at it as a potential. In terms of why we changed our direction, in order to become Internet only bank, there are many different stakeholders involved.

Moderator

So there are about four consortiums that applied for license and each actually have more than 10 stakeholders involved in each of the consortiums. With those own based on, we have set a clear direction in terms of what we want to achieve. If there are too many stakeholders, we whether it can be achieved. And then in terms of the capital, the size of the personnel, many resources or sizable resources are required. And there's a long period until we're ready to really launch products.

Moderator

So it will take a long time to become an Internet only bank. Now Jeju Bank, as a regional bank, was faced with various constraints. So we wanted to find some way to foster more competitiveness of Jeju Unaeng. So everything came together and we ultimately decided to change our task and direction. Of course, in the mid- long term, embedded banking is the model that we have announced.

Moderator

So short term corporate loans or SME loans, SOHO loans will be the focus. And so once that performance is validated, then employees corporate employees, for example, may be included in the scope as we expand business. So this is actually sort of a test bed for the group. In the short term, as you may know, we're thinking 1,500,000,000,000.0 to 2,000,000,000,000 yen So we hope that things go well somewhere around that level. But there are lots of things that we have to think hard about throughout the process.

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So whether our commitment and the desired direction can be achieved or not, we have to work very hard in order to really deliver on our commitments to our shareholders. So I look forward to a lot of interest and also a lot of support from everyone regarding this initiative. Okay. Thank you

Moderator

very much for the answer. We'll move on. Ms. Park Ge Jin from Taishin Securities.

Moderator

Yes. Thank you very much for this opportunity. I have a question to Shinam Card. As we saw in the presentation, delinquencies are worsening. And you said that the Shinam Bank sold less NPL than usual because of unfavorable conditions.

Moderator

I don't think that is the case for credit card assets. Can you give us overall your expectations, guidance for the credit card business this year? Thank you very much for that great question, and please give us a moment to prepare our answers. REPRESENTATIVE:] Well, regarding that, Shinang Card, CFO will answer. Yes.

Moderator

This is Hye Chang Park, the CFO of Shinang Card. The self employed businesses are the key reason for the higher delinquencies and they are not recovering. Interest rates did start to decline from 3Q last year, helped improve business situation, but then there was the impeachment. The impeachment is somewhat wrapped up now. And we are expecting overall environment to improve even for the self employed small businesses.

Moderator

So we think that delinquencies will start to improve. Also from April, we have our direct recovery organization in our call centers to once again reduce our delinquencies. And with that in place, we are expecting the delinquencies to improve from Q3. And then the Shinhan Card business performance outlook, it's mainly in the credit cost and the funding cost, which is the burden. And we are at the peak of the funding cost.

Moderator

And as market rates go down, our average funding cost will also go down, and that will be favorable to our P and L bottom line. And then as we approach the end of the year, we expect to recover to usual profitability levels. REPRESENTATIVE:] Currently, we have no other questions in the queue. We do know that there are other financial groups doing their earnings calls today. Perhaps that is the reason why we don't have more questions lined up.

Moderator

And I think this is a good place for us to end this earnings presentation. But actually, we have Duha Kim online.

Moderator

Actually, I was applauding. That was the applause icon, not the raise hand icon since IRG were wrapping up. Thank you very much then. With that, we will conclude our first earnings call for the first quarter twenty twenty five for Shinata Banasho Group. Please refer to our website and our YouTube channel for a video of today's earnings call.

Moderator

Thank you very much.

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