FY 3Q 2019 Earnings Release

Good afternoon.
This is Sunghun Yu, CFO,in charge of Finance and Treasury at Shinhan Financial Group.

Thank you for joining our third quarter 2019 earnings conference call.
I would like to now start our presentation on the group's business results for the third quarter.

Please turn to Page 3, which are our performance highlights.

Shinhan Financial Group's third quarter net income was KRW 981.6 billion, which is a 15.8% year-over-year increase.
Year-to-date net income was KRW 2,896 billion, which is an increase of 9.6% year-over-year.

The third quarter results reflect the strength of the further diversified nonbanking business as well as improved growth and profit base and our stronger global operations, which we have achieved through our 2020 SMART Project, which we have been committed to during the past 3 years.

There are 5 key points to our third quarter results.

First is that with the growth of our nonbanking and global business profitability, we maintained recurring net income of about KRW 900 billion for 3 consecutive quarters, maintaining a step change in our profit growth trend.

In particular, the global business has become the new growth engine for our group, recording KRW 292.1 billion, which is a 19.2% year-over-year growth and the largest-ever overseas earnings.

The nonbanking business also recorded a profit of KRW 1,009 billion, which is a 14.6% year-over-year growth based on organic growth and M&A and increased its profit contribution to 34%.

Second is the group's interest income, which continued solid growth based on a well-balanced loan portfolio.

In particular, our Korean loan assets maintained its preemptive growth momentum starting from the first quarter, delivering SME and SOHO loan growth of 6.5% and 8.2% growth, respectively, year-over-year.

Despite the interest rate cuts that happened last July and the drop in the NIM driven by expectations of further rate cuts, the bank's interest income actually grew by 6.4% year-on-year and 1.8% quarter-on-quarter through stable asset growth.

Third highlight is that we have been continuously shifting away from the traditional reliance on interest income and moving towards the growth driven by noninterest income. The group's noninterest income share has reached 30%.

In particular, the positive performance of our nonbank affiliates, such as cards, life and capital was coupled with visible improvements in the performance of Asia Trust and [REITs] delivering 37.3% year-over-year growth in the group's noninterest income.

The group's noninterest income foundation will continue to expand with a balanced growth strategy and portfolio adjustments for greater profitability.

The fourth highlight is that the group has achieved the best level of cost income ratio in the industry through our continuous strategic cost management efforts.

Together with stable growth in operating income and cost management, our business process improvements have continued in terms of increase in customers using digital services and enhanced cost efficiency, and our cost income ratio has dropped to 42.6% as of Q3, which is the lowest in the recent 8-year period.

Lastly, we maintain a systematic risk management and consistent credit policy in anticipation of future down cycle.

During the first half, we focused on preemptive response to possible deterioration in asset quality by changing our credit risk RC and adopting stricter regular credit rating calculation processes for our SME customers of the bank.

This did increase the group's credit cost by 6 bp year-over-year to 33 bps, but this is still well within our anticipated and manageable levels.

Now if you will turn to Page 4, I will go over the P&L in more detail.

The left-hand chart shows that the group's interest income was about KRW 5.9 trillion, which is a 5.3% year-over-year growth.

The bank's Korean won loans grew by 0.7% during Q3 and grew by 5.3% year-over-year, with a balance between household and corporate loans. We were able to maintain a solid pace of growth with a differentiated approach focused on high-quality SOHO loans.

The bank's NIM was 1.53%, which is a 5 bp drop quarter-on-quarter due to the July rate cuts possibilities of further rate cuts.

Meanwhile, the bank's consolidated NIM, including overseas branches, was 1.57%, maintaining higher profitability compared to the domestic-only operations.

We will continue to focus on maintaining a solid stream of interest income with profitability oriented asset management and stable sourcing of liquid deposits.

Now Page 5. The group's noninterest income was KRW 2,586,700,000,000, which is a 37.3% growth year-over-year, thanks to insurance-related income with the inclusion of Orange Life and increase in securities-related gains.

Securities-related gains grew by about 34% year-over-year, thanks to the investment-related gains from the growth of GIB business and increased earnings from the fixed income trading.

Fee income also recorded noticeable growth in all sectors of around 9.8% year-over-year growth, except for credit card and brokerage commission. In particular, the IB-related fees and the lease financing fees grew by 96.5% and 82.1%, respectively, thanks to increase in IB deal arrangements and efforts to increase new lease businesses.

Next, the group's SG&A. The group's SG&A is up 9.9% Y-o-Y on the back of increase in labor-related costs with Orange Life Insurance and Asia Trust becoming new subsidiaries of the group. When the inclusion effect is removed, it is up 4.6%.

Given the increase in reserve for retirement allowance with the recent drop in interest rates and increase in manpower from overseas business expansion, a stable level of 3% is being maintained. Going forward, the increase of SG&A is expected to be maintained at an appropriate level thanks to strategic cost savings efforts including digitalization.

The cost-to-income ratio of the group and the bank has improved 1.4% percentage point and 0.1 percentage points, respectively, to post 42.6% and 43.1%, respectively, and this is the lowest level in recent periods.

Next is the group's credit costs. On a cumulative basis for the third quarter, the group's credit cost ratio in Q3 is 33 bp, having improved by 6 bp, the historical average over the past 5 years, but is up 6 bp Y-o-Y.

This is due to the fact that provisionings have increased on the back of strength in credit policy that take into account the growth of the card operating assets, including card loans, installer financing and leasing as well as the sluggish economic situation. Going forward, we will continue to engage in preemptive credit risk management and asset rebalancing to minimize any volatility in terms of profit.

Next on Page 6, the group's asset quality. As of the end of September, the group's NPL ratio is up 0.07 percentage point Y-o-Y to reach 0.6%. This is because of the growth in NPL assets as the regular credit rating assessment of the SOHOs were strengthened conservatively this year.

The bank's delinquency ratio is 0.33%, up slightly Y-o-Y as the write-off and sales fell KRW 120 billion, but the card delinquency ratio improved 3bp Y-o-Y to post 1.41% as the delinquency ratio of card loans and cash advances stabilized. So despite concerns for a possible deterioration of asset quality, they'll still be maintained at a stable level.

As of the end of September 2019, the group BIS ratio stood at 14.2% and 16.5%, while the CET1 ratio is expected to come to 11.4% for the group and 14.2% for the bank, respectively. The group's CET1 ratio is down 20 bp due to the buyback in Q3. But based on the group's stable ordinary profit margins, it is expected to recover going forward.

For more information, please refer to the group's major subsidiary detailed performance and business highlights in the presentation materials.

Now following our performance on Page 7. I would now like to briefly walk you through the results of the implementation of the 2020 SMART Project, our midterm goal for 2020 by major strategies.

First, in terms of balanced growth strategy of the group, the 2020 strategy platform is bearing fruit. And in the nonbank, noninsurance segment, income growth is being accelerated. The bank's net income growth rate is 3% Y-o-Y, while the noninterest segment is 15% Y-o-Y, maintaining a solid growth trend. And interest income and noninterest income also posted an income growth rate of 5% and 37%, respectively.

Last August 21, the group's 16th subsidiary, [Jinan] AI, was completely brought into the group, sold, and we expect the expansion of the nonbanking sector's profit base to further accelerate.

Second, the group's global business achieved the strongest income yet in Q3 on a cumulative basis, expanding the share of the overseas business up to 10% in terms of profit led by Vietnam, Japan and other key Asian markets, stable performance is maintained and the global nonbanking business also continues to post a solid business performance as the localization strategy is being accelerated.

Meanwhile, Shinhan Bank Vietnam became the first foreign bank approved to apply the Basel II standard. So going forward, we intend to further strengthen our position as a leading foreign bank in Vietnam through a proactive localization strategy. Moreover, we are committed to seek growth in quality through onsite inspections, risk system improvements and other measures to strengthen internal controls.

Finally, the digital Shinhan upgrade results.

Major subsidiaries of flagship platforms continue to be operated from the perspective of One Shinhan, and the contribution to operating income is also up KRW 125.9 billion Y-o-Y to reach KRW 1.88 trillion.

Also, we launched INO talk last September, a digital platform to identify and support innovative growth companies. Going forward, we'll continue to expand the group's digital capabilities, both in and out of the company, to create an ecosystem of innovation.

Up until now a differentiated growth strategy has been pursued in a consistent manner through our midterm strategy 2020 SMART Project. This was explained to you.

And finally, along with differentiated performance improvement, we will further commit ourselves to implementing sustainable business practices in Korea.

Thank you very much.