1Q FY 2018 Earnings Release

Good afternoon. I am Yu Sung Hun, Head of the IR team.
I would like to thank everyone for taking part in today's earnings release for Q1 2018 despite your busy schedules.
We now begin the 2018 Q1 earnings presentation.
In today's presentation, we have with us our CSO, Woo Young-woong and our CFO, Jang Dong-ki and head of the financial management team.
Today we'll first invite our CFO, Jang Dong-ki, to deliver the 2018 Q1 business results and then have an Q&A session.
Now I like to welcome our CFO, Jang Dong-ki for the 2018 Q1 earnings presentation.

Good afternoon. I am the Group CFO, Jang Dong-ki.
First, I would like to thank our investors, analysts and journalists from both home and abroad for participating in today's earnings release.
From now on, let me walk you through the main highlights of Shinhan Financial Group's 2018 Q1business results.

Please refer to Page 3 of your presentation deck, the group's income.
Shinhan Financial Group posted KRW 857.5 billion in net income in Q1 of 2018. There appears to be a decline of 14.0% YoY.
But if we exclude the one-off factor of KRW 360 billion in provisioning write-back that happened in Shinhan Card last year, the recurring net income is up 18.9% and showing healthy improvements in earnings.
Let me briefly summarize what's noteworthy about the business results of Q1 2018.

First, based on a diversified profit base and continuously improving profit of the non-bank subsidiaries, quarterly recurring net income reached over KRW 800 billion confirming our ability to generate stable profit.
Not only the group's interest income, but across the board our operational fundamentals continues to strengthen including increasing fee income and stabilizing provisions.
With regards to capital markets and global business, the 2 key strategic directions to the group's 2020 smart project, visible results continue to be generated.
Last year after the launch of a GIB organization for the first time in the Korean financial sector, operating revenue from GIB grew 20.9% YoY to reach KRW 147.4 billion.
The group's financial products related fees have also expanded led by PWM channels.
In particular; securities, brokerage commissions and trust fees are up 60% YoY exhibiting significant growth. The bank's global business net income in Q1 falling last year is up 45.5% YoY posting KRW 76.1 billion.

Secondly, in the retail and SME loans as we balanced growth in Q1, 1.0% growth rate was achieved. Growth in quality based on profitability and stable funding has led to sustained improvements in net interest margin resulting in solid interest income performance for the group. This year as well, we intend to implement an optimal growth strategy in consideration of both profitability and risk, focusing on high credit-worthy SMEs to expand the interest income base of the group.

Third, with increase in other general administrative expense in Q1, the group's SG&A is up 2.1% YoY. But through efficient channel strategy and intense business process, including expansion of digital customer base and digital operations, the group's CI ratio is at a 5-year low posting 44.5% attesting to visible improvement in cost efficiency and profitability.

Finally, starting from this year despite the upward pressure on provisioning due to the implementation of IFRS 9, our growth strategy that takes various risk factors into account and preemptive risk management has resulted in credit cost ratio of 27 bp for the group contributing to enhanced group's net income.
On Page4, let me provide a more detailed breakdown of income. On the graph to the farthest left on Page 4, the group's interest income stands at around KRW 2.06 trillion, up 10.1% YoY.
The bank's loans in Korean won grew 1.0% YoY through loan growth focused on SMEs thus maintaining a healthy growth trend. The group's net interest margin also comes to 1.61% in Q1, up 3 bp from last year adding to the increase in the group's interest income.

Next, Page 5. The group's non-interest income posted KRW 384.4 billion, up 29.3% YoY.
The reason for such strong growth of the non-interest income is due to the significant increase in valuation gains and fee income related to FVPL financial products. Fee income despite a falling credit card fee income owing to the emergency cuts because of the increase in securities brokerage fees and financial product sales commissions is up 24.5% YoY.
And now I'd like to talk about SG&A. The group's SG&A increased 2.1% YoY to KRW 1,087,000,000,000. This is because other general expenses including rent went up 4.2% YoY. We expect our efforts to strategically cut cost through the digital platform will help manage the SG&A growth rate at an adequate level. The group's and the bank's CI ratios were improved by 4.7 percentage point and 5.2 percentage point YoY to 44.5% and 43% respectively.

Now, the group's credit cost. In Q1, the group set aside KRW 179.2 billion for credit loss provisioning. The credit cost ratio was maintained at 27 bp, a 7 bp improvement QoQ. Shinhan Bank's credit cost ratio recorded 16 bp, a huge improvement over the past 5 years average of 30 bp and is showing a steady improvement. It is worth noting that Shinhan Cards credit cost ratio reached its historical low of 142 bp, which is a 27 bp improvement YoY.

Moving on to Page 6, group's asset quality. As of March end, the group's NPL ratio came down to 0.64%, a 0.12 percentage point improvement YOY. This was possible because NPLs were reduced by 9.4% thanks to consistent risk management efforts. The bank's and the card's delinquency ratios were 0.3% and 1.37% respectively, which were an increase of 7 bp and 10 bp QoQ each but they improved on a YoY basis.

The group's and the bank's BIS ratios were estimated at 14.8% and 16.3%. Their CET1 ratios were 13% and 13.3% respectively having grown 0.1 percentage point and 0.5 percentage point QoQ. Shinhan Card's adjusted capital adequacy ratio was 23.2% this quarter, maintained at a stable level. Please refer to the remaining slides for the group's and the subsidiaries business performance and major indicators.

Finally, I would like to update you on the progress of Shinhan Financial Group's mid-term goal, 2020 smart project, by breaking it up into 4 major strategic areas.
First, for the group's balanced growth strategy, a 2020 strategic platform was built leading to the non-banks net income growth rate of 34% YoY and non-interest income growth rate of 29%. To include a new future growth engine in the group's business portfolio, Shinhan REIT's management was launched. We plan to take bold steps and implement diversified growth strategies to create 1 Shinhan synergy in a speedy manner.

Second, glocalization in the global businesses is going as planned showing visible results such as global banks' income growth rate reaching 45%. As of December last year, the acquisition of ANZ Vietnam's retail division has been completed.
And in January as the first large-scale non-bank M&A in the group, an agreement was signed to acquire 100% of PVFC shares, a Vietnamese retail financial company.
As such, many inorganic growth strategies have been put to action. Going forward, we'll continue to strengthen the profit base in the core markets and achieve superior performance and results.

The third point has to do with the task of upgrading to enable Digital Shinhan.
To provide differentiated customer experience, we have transformed the platforms for major subsidiaries including card and bank since last year. In March, we launched the integrated platform's Sol app for the first time in the financial industry and currently serve 8.29 million digital customers.
The diversified digital platform has increased its contribution to the growth of operating revenue and in the first quarter, the operating revenue recorded KRW 280.3 billion.

Lastly, in order to succeed and grow Shinhan Financial Group's organizational culture, we established a Shinhan Culture Leadership center in January and created a disciplined system for fostering and managing business leaders. We will continue to play a role as a sustainable financial company by providing compassionate finance.
Thank you.