FY 1Q 2019 Earnings Release

Greetings.
I am Yu Sung-Hun, the CFO of Shinhan Financial Group.

Today,
I would like to thank all the shareholders, investors, analysts and journalists in and out of Korea, for taking part in our 2019 Q1 earnings release.

From now on, I would like to elaborate on the major highlights of Q1 business results.

Let me go to the group business result highlights, and Shinhan Financial Group's Q1 net income posted KRW 918.4 billion, a 7.1% increase Y-o-Y.
In particular, we have Orange Life Insurance as our new family member in Q1, and with the 2020 SMART Project strategies achievements during the past 2 years continuously being realized, a sound earnings improvement trend is taking place.
Let me summarize the 5 major characteristics of Q1 group earnings.

First,
the KRW 918.4 billion of net income in Q1 of this year was a result of the more diversified nonbanking income fundamentals through the integration or inclusion of Orange Life Insurance and the banking sector income improvement through our stable and sustainable earnings generation capability.
We were able to confirm our capability, once again, in particular, following the HR organization, which was implemented earlier than usual late last year.
The group subsidiaries sales capability was driven earlier than before, which led to a higher growth rate.

Second,
the bank started preemptive growth from Q1 and, in particular, in the SME and household sectors, through a balanced growth strategy a 2.6% growth rate was recorded.
In addition, despite the margin pressure of factors due to the higher growth rates through funding and management based on profitability, the bank NIM maintained 1.61% level similar to the previous quarter, and as a result, the group's interest income rose 5.1% Y-o-Y.
This year, we will also continue our growth strategy considering risks centering on SMEs.

Third,
since Orange Life Insurance was included as the fourth subsidiary in the nonbanking sector, the insurance segment's income basis was expanded through a more differentiated business portfolio, noninterest income grew 31.2%, Y-o-Y.
In particular, Shinhan Capital realized KRW 100 billion of income last year, and KRW 45.6 billion of income in Q1 of this year and has leaped forward to become a subsidiary contributing largely to our group income. You can see that the performance improvement of nonbanking sectors forecast to contribute to the group's income, safety and continuity.

The group's G&A or SG&A has increased 7.5% Y-o-Y with the increase in employee-related expenses, but this was an effect of the Orange Life insurance integration.
And excluding this, SG&A is being maintained at a 2.8% level, in particular, along with a sound increase in our operating income through expansion of digital customer bases and efficient channel strategy and improvement of working processes, including management efficiency.
The group's cost-income ratio recorded a historically low-level of 42.8%, continuing cost efficiency results and profitability improvements.

Lastly,
the group's asset quality is being stably maintained with continued high-quality assets centered growth and continued systematic and aggressive risk management.
The group's NPL ratio posted 54 bp, a 10 bp increase Y-o-Y.
In particular, the NPL coverage ratio posted 164%, maintaining our conservative provisioning policy.

Next from Page 4,
before explaining in more detail the other income items for your reference from Q1 of this year, to present our financial information more effectively and to reflect the IFRS 17 accounting standard, the interest portion of provision for policy reserve, which was previously categorized as noninterest expense is now categorized as interest expense.

On the material that you can see, when you see the left-hand graph, the group's interest income posted KRW 1.9 trillion and increased 5.1% Y-o-Y.
The bank's loans in won grew 2.6% in Q1 through balanced loan growth in household and corporate loans.

The bank's net interest margin, despite the market interest rate decline in Q1 and high asset growth, maintained the previous quarter level of 1.61% through asset management, taking into consideration profitability and stable funding cost improvement, as mentioned previously.
And the group's interest income rose 5.1%.

Let's move on to Page 5.
The group's noninterest income posted KRW 821.7 billion, and greatly increased 31.2% Y-o-Y.
With the inclusion of Orange Life Insurance, the insurance-related income increased more than 2x compared to the same period last year. Securities-related income grew by around 70% Y-o-Y, with the investment income and fixed income valuation gain expansion following the GIB sector growth.

On the other hand, fee and commission income maintained a level of the same period last year, despite factors including increase in credit card sales and expansion of participation in IB deal underwritings. In particular, despite the difficult environment of decline in merchant fee commissions through steady efforts to grow sales and through the new lease businesses, credit card fees and commissions and lease-related fees and commissions went up 13.3% and 121.6% Y-o-Y, respectively.

Next is the SG&A.
The group's SG&A along with the employee-related expense increased by -- the integration of Orange Life Insurance in Q1, increased 7.5% Y-o-Y.
Excluding the Orange Life Insurance effect, it is being maintained at a stable level of 2.8%, and going forward -- 2.8% increase. And going forward, we believe that the increase in SG&A will be maintained at an appropriate level with the realization of our digital-based strategic cost-cutting efforts.
And we believe that it will be well managed.

For your reference, the group's CI ratio has improved by 1.7 percentage point Y-o-Y to 42.8%, lowest in the recent period.
Next is the group's credit cost. The annual credit cost ratio of the group on a cumulative basis is 34 bp, having improved 5 bps compared to the past 5-year average, but up 7 bps Y-o-Y.
This is because of the growth of operating assets such as card loans and installment purchases, leases and one-off factors or namely to the change in the risk and prudence, these were reflected.

On the other hand, the credit cost ratio of Shinhan bank has improved 1 bps Y-o-Y and 24 bps over the past 5-year average to reach 15 bps.
And it is maintained at a stable level. Going forward, on the back of preemptive credit cost management and asset rebalancing, the volatility of the group's asset quality is expected to be kept low.

Next on Page 6.
The group's asset quality, as of the end of March, the group's NPL ratio has improved by 0.10 percentage point Y-o-Y to post 0.54%, a record low figure.
This is due to sustained risk management efforts, which resulted in the NPL falling by 5.9%. The delinquency rate of the bank and a card is 0.29% and 1.37%, respectively, similar to same period last year. And so despite conservatively deteriorating asset quality, it is still being maintained at a stable level.

Next, with regards to capital adequacy ratio, as at the end of March 2019, the group and the bank, BIS ratio is expected to reach 14.0% and 15.9%, respectively.
And the CET 1 ratio is 11.8% and 12.8%, respectively.
The group's CET 1 ratio is down by 80 bps Q-o-Q, due to the inclusion of Orange Life Insurance as a subsidiary into the group last February.
However, based on stable recurring profit of the group going forward, we expect gradual recovery of the figures. For your information, Shinhan Card at the end of March adjusted capital adequacy ratio is 21.1%, maintaining a stable level.
For greater details and major financial highlights of the group and the major subsidiaries, please refer to the presentation material.

Finally,
let me conclude today's presentation by providing you with a brief explanation of the implementation results of the 2020 SMART Project by major strategic tasks.
This will help you understand the strategy of Shinhan Financial Group as a sustainable company and the direction of our performance.

So there are 4 strategic tasks.
And after this explanation, let me conclude today's presentation.
The first strategic task is the balanced growth strategy.
Differentiated income continued to increase in the nonbank noninterest income statement due to the acquisition of Orange Life Insurance.
On a Y-o-Y basis, net income growth rate of 3% in the bank segment and 16% net income growth rate in the nonbank subsidiaries was achieved, continuing a solid growth trend. And interest income and noninterest income also saw growth rate expansion of 5% and 31% each, respectively.
Also, nonbank subsidiaries share of the income was increased to 36%, it is continuing to expand.

Also, the acquisition of Asia Trust, which was pursued to establish a new growth engine in the group's business portfolio, received final approval on April 17th.
So we expect to begin -- moving more quickly to create synergy in this front.

Secondly, in the capital market and global business sector, efforts to strengthen One Shinhan are yielding visible results, so that the process of diversifying the group's income is being accelerated.
GIB's operating income posted KRW 172.1 billion, up 82% Y-o-Y, demonstrating remarkable growth, in particular, by significantly contributing toward improving the income of life insurance and capital subsidiaries, One Shinhan synergy generation is being expanded. The group's global section's net income for the quarter is up 4% Y-o-Y, to post KRW 79.1 billion and maintaining the stable growth trend for the past 5 years.
This is due to the fact that for a long time thorough preparations have been made to expand the global business based on localization and sustained efforts made focusing on the Asian core markets, which are now bearing fruit.

Meanwhile, with closing of the acquisition of Prudential Vietnam, consumer finance business that has been pursued for the past year, localization of nonbank global subsidiaries is being realized as well.

This year, we intend to focus on qualitative growth of the global business, as we're upgrading internal control process, such as local review, risk management and compliance as well.

Finally, the results of the upgrade toward a digital Shinhan, we have overhauled the represented platforms of major subsidiaries and 33 million digital channel customers were newly brought into our fold as of the end of March. Based on such diversified digital platforms, contribution toward operating income gradually expanded, so that in Q1, KRW 276.4 billion of operating income was posted.

In addition, to ensure proactive participation in the digital ecosystem, we had expanded Shinhan futures now for the past 5 years and a total of 100 companies are supporting, including the 40 companies that were newly selected this year.
Going forward, through identifying companies with a potential for innovative growth, we are committed to continuously enhancing the digital capabilities of the group.

Up until now, leveraging the 2020 SMART Project, the mid-term goal of Shinhan Financial Group, this group has engaged in a consistent and differentiated growth strategy based on strong execution.
This year, as well, under a consistent strategy and based on the growth engines of One Shinhan, we will continue to generate sustainable and stable results.