Shinhan Financial Group Co., Ltd. (NYSE:SHG) Q3 2022 Earnings Conference Call October 24, 2022 9:30 PM ET
Company Participants
Park Cheol Woo – Head, IR
Lee Tae Kyung – CFO
Bang Dong Kwon – CRO
Kim Myoung Hee – CDO
Ko Seok Hon – CSSO
Moon Dong Kwon – Shinhan Card CFO
Jung Sang Hyuk – Shinhan Bank CFO
Keum Sung Weon – Shinhan Financial Investment CFO
Park Kyoung Won – Shinhan Life CFO
Heo Young Taeg – CMO
Conference Call Participants
Yafei Tian – Citi
Jae-woong Won – HSBC
Jongmin Shim – CLSA
Jihyun Cho – JPMorgan
Park Cheol Woo
Good morning, I am Park Cheol Woo, head of IR. We are conducting today’s earnings presentation. As we are on digital platforms, [Indiscernible] Shinhan Financial Group IR YouTube channel and the Zoom app.
As we have announced last quarter, the new Shinhan Financial Group IR YouTube channel, those of you who have missed the live streaming today, will be able to find the updated Korean and English presentation, so please subscribe to our channel.
Before starting today’s earnings presentation, a brief explanation on how to log in. for YouTube Live channel will enable the participants to watch the Korean presentation and if you have questions, please log on to the Zoom app. Also, the YouTube channel will only stream to Korean presentations, so if you want to listen to English, log on to zoom and click English for the translation. For more details, please refer to our homepage www.shinhangroup.com.
Now, we will begin the 2022 Q3 Earnings Presentation of Shinhan Financial Group. In today’s presentation we have with us our main presenter, CFO, Lee Tae Kyung of the Group; the Group CMO, Heo Young-Taeg; the Group CRO, Bang Dong-Kwon; the Group CDO, Kim Myoung Hee; the Group CSSO, Ko Seok Hon; from Shinhan Bank CFO, Jung Sang Hyuk; Shinhan Card CFO, Moon Dong Kwon; Shinhan Financial Investment CFO, Keum Sung Weon; and finally; Shinhan Life CFO, Park Kyoung Won.
In order to provide detailed answers to our investors questions, we like to give the opportunity to as many — as many people as possible to ask questions. Today we’ll invite CFO, Lee Tae Kyung for the business results of Q3 2022. And then CRO, Bang Dong Kwon will speak on the Group’s risk management; and the achievement of digital sector will be presented by CDO, Kim Myoung Hee; and then we’ll proceed to a Q&A.
And now we will invite our CFO, Lee Tae Kyung for the earnings presentation of Q3 2022.
Lee Tae Kyung
Good morning. I am Lee Tae Kyung, the CFO of Shinhan Financial Group. First of all, I’d like to thank everyone for taking part in the earnings presentation for Q3 of 2022 despite your busy schedules.
I’d like to walk you through the highlights of this quarter on page four and then go into the details of the business results for Q3 of the Group. Page four, in Q3 of 2022, the Group’s cumulative net income posted KRW4,315.4 billion, posting solid results despite the deteriorating external environment.
In Q3 alone, net income came to KRW1594.6 billion and ordinary net income excluding the gains from the sale of the office building of Shinhan Investment Securities posted KRW1272.8 billion. Thus, we were able to defend a stable net income by offsetting the sluggish performance of the non-interest income segment with a growth in interest income and decline in provisioning.
In Q3, the cumulative cost income ratio CI posted 40.1% and despite the increase in digital related costs, the SG&A was managed at a stable level. The Group’s Q3 credit card’s ratio was that 29 bps maintained at a stable level, and going forward, we plan to maintain our conservative provisioning policy.
Finally, the Group’s capital policy, the per share dividend in Q3 was KRW400 and this was decided at the BOD meeting held on October 6th, along with the treasury stock buyback and the cancellation of an additional KRW150 billion. As has been noted last time, we will continue to make an effort to enhance shareholder value through gradual improvement of shareholder return ratio, while maintaining appropriate capital ratio.
On page five, please refer to the key business results of the Group as a whole during the third quarter. So, please refer to it.
And starting from page six, I will now explain about the detailed performance of the Group. Page six, the Group’s interest income. In Q3 2022, the Group’s interest income posted KRW2,716 billion, up 2.7% QoQ. Interest-bearing assets grew 2.3% QoQ and this is due to the improvement in the bank NIM.
In Q3, the Bank’s NIM posted 1.68%, up six — up five bps QoQ, but compared to Q2, the pace of growth of the Bank’s NIM has slowed down. This is due to the rise in the funding costs owing to the repricing of the deposit interest rate outflow of low-cost deposits and growth in time deposits.
Now, on the subject of the Bank’s loan in Korean won which is of great interest to you, for your reference, more details can be found on page 29. The loan groups of the Bank grew only 0.7% in Q3 owing to the continued decline in retail loans despite the solid growth in corporate loans.
Segment-wise, the corporate loans grew 2.5% QoQ due to an increase in demand for loans from large companies and audited companies, which resulted from the liquidity crunch in the corporate bond market. On the other hand, the retail loans was down 1.3% QoQ, impacted by strengthened LCR regulations and declining demand from rapid interest rate hikes.
On page seven, we have [Indiscernible] margin funding and learning status for your reference.
Next, on page eight, the Group’s non-interest income. The Group’s non-interest income was down 28.8% QoQ due to declining fee income for the week capital or real estate PF market as well as the declining gains on AFS securities and the FX derivatives arising from the growing market volatility.
The fee income is down 16.1% QoQ and the decline owes itself to the fall in credit card income on the back of merchant fee, refund, and growth in the seasonal promotional expense despite the solid growth of the credit purchase, absence of investment banking fees related to IPO, and the real estate big deal that occurred in the first half and the contraction of brokerage commissions.
Gains related to AFS securities was down 22.9% QoQ, driven by the growing volatility in the securities market and rising interest rates despite efforts to defend against losses as an investment portfolio adjustment and duration management.
Next, on page nine, the Group’s SG&A and credit cost. The SG&A increased slightly over the previous quarter, but excluding the expenses related to Shinhan Life HR integration that occurred in Q3, it is maintained stably at the Q2 level.
The Group’s CIR grew 1.1 percentage point over Q2, driven by the fall in operating profit was up 1.4 percentage point YoY, posting 40.1%. In Q3, provisions for credit losses was managed at a stable level posting KRW250.6 billion and is up when excluding the KRW224.5 billion of counter-cyclical provisioning.
As economic uncertainties grow to address potential credit risk, we intend to continue our conservative provisioning policy. If you look at the delinquency rate which can be taken as a leading indicator of credit cost, in the case of the Bank, it is maintained at 0.20%, up one bps QoQ. In the case of the Card business, it is down six bps QoQ, but when excluding the seven bps increase owing to one-off factors like the Bank, the card business also posted 0.86%, up one bp QoQ.
Please refer to page 10 for issues related to our preemptive preparations made to address future uncertainties. For greater details on the Group’s asset quality management, please refer to page 11.
Next on page 12, our capital management and profitability. As of the end of September, the CET1 ratio is expected to post 12.7% similar to last quarter. Next on page 13, the Group’s income by subsidiaries. Despite a weak non-interest income, net income increase in the Bank QoQ, thanks to the interest income growth led by NIM improvement and lower provisioning costs.
In the case of non-banking subsidiaries, Shinhan Cards recurring net income decreased somewhat despite the growth in credit purchases and operating assets increased, driven by business diversification efforts due to rapid hikes in funding costs and the merchant fee cuts.
Shinhan Securities net income decreased owing to fall in brokerage fees reflecting slow market trading activities and valuation losses and securities on the back of higher interest rates.
Shinhan Life insurance profit remained solid, although investment profit decreased due to HR integration cost and the decline in gains from disposal of AFS securities. Shinhan Capital net income decreased QoQ reflecting valuation losses and IB-related securities on the back of rising interest rates and the increased provisioning related to real estate related PF.
In addition, in the case of capital market related subsidiaries, mainly Shinhan Asset Management and Shinhan Asset Trust, the net income declined QoQ due to the recent interest rate hikes including volatility in the market. For details related to the Group’s global business, please refer to page 14.
As there are heightened interest by our investors for the current state of our risk management owing to growing uncertainties for the future, we have added supplementary slides to explain about our preemptive risk management measures.
Next on page 15, our CRO, Bang Dong Kwon will walk you through our preemptive risk management status.
Bang Dong Kwon
Hello, I’m the Group CRO Bang Dong Kwon. I would like to talk about the risk side of the Group. Uncertainties in the domestic and foreign financial markets are increasing due to the recent tightening monetary policies and the strong dollar. And if the contraction as the real economy intensifies going forward, then the potential risk factors may manifest.
In this regard, I would like to address Shinhan Financial Group’s risk management system and current status regarding soundness, liquidity, and capital adequacy, which are the main concerns.
First about enhanced Shinhan financial current status and countermeasures in preparation for possible deterioration of asset quality due to the rapid rise in the market interest rates and the impact of the economic recession. The graph on the left shows the trend of the loan ratio of the potentially vulnerable segments selected by the Group on the basis of various risk factors such as income, debt level, and credit rating.
We’re maintaining a stable proportion of vulnerable segments by refining the screening strategy for potentially vulnerable segments and strengthening credit line management to support the soft landing of potentially vulnerable borrowers, various internal programs such as temporary liquidity, shortage, support for borrowers are being prepared to minimize the system risks.
Second, liquidity management amidst the recent strong dollar and tight funding market. The graph in the center shows our Group has maintained a stable liquidity ratio that far exceeds the regulatory standards through a preemptive and conservative liquidity policy.
In addition, to withstand the worst stressful situations, we have expanded our FX liquidity funds, and we have prepared an emergency funding plan to regularly check its availability.
Lastly, to strengthen efficient capital adequacy management, we’re strengthening portfolio rebalancing and management in consideration of asset sector risk return profile. The risk rate level is maintained stably despite the recent sharp rise in the exchange rate through asset management by sector mindful of the risk rate and the expansion of the RWA budget system.
In addition, the stress test results show that the capital ratio exceeds the regulatory requirements as can be seen from the table on the right. We will continue to strengthen the Group-wide crisis management system to maintain a stable capital ratio even in the face of a financial crisis and take preemptive measures for sectors at issue.
And the digital strategy on page 16, the Group CDO, Kim Myoung Hee will present.
Kim Myoung Hee
Hello, I am Kim Myoung Hee, the Group’s CDO. I would like to go over the Q3 results based on the Group’s digital strategy. We’re seeing continuous creation of quantitative and qualitative results centering on the six customer values. Along with the quantitative growth of the platform, its financial contribution is growing. In addition, we’re actively fulfilling our social responsibilities by continuing our efforts to ensure the safe financial life of our customers and to overcome the digital divide.
By utilizing core technology business experiences accumulated and process automation is expanded. We’ll explain the main achievements for each key index on the right.
First, More Friendly, which is easier and convenient financing. The Group’s digital platform MAU has surpassed 21 million, which is an increase of 4.1 — 4.01 million YoY. Shinhan’s two mega platforms, Bank SOL and Card pLay continue to show solid growth, where the Life platform has nearly doubled the number of monthly users YTD. Thanks to Shinhan’s My Data service chosen by 6 million people, Shinhan’s platform is developing into a platform where customers frequently visit and stay on for a long time.
Second, More Secure. There are 6 million Shinhan’s Sign users benefiting from secure mobile financial transactions. And as a result of stronger monitoring activities against voice phishing and fraudulent payment using the latest AI technology, we were able to prevent fraud-induced loss of KRW38 billion by Q3 this year.
And moving on to More Creative. The profit from the new digital business has increased to more than KRW30 billion. Among them, the Data business income exceeded KRW10 billion and Life platform garnered more than KRW20 billion in new business.
After the stabilization of the pandemic, the investment system to expand the global ecosystem has been strengthened, along with the creation of a global SI fund worth KRW200 billion, we also reorganized the global base of startups. Please refer to the materials for data process, technology, and people on the next page about the platform growth and business strategy in more detail.
The Group’s financial and non-financial platforms grew 33.3% YoY. As a result of continuous improvement of ease of use and core functions of the financial platform, the number of customers and sales of financial products is increasing. Sales opportunities using digital are steadily expanding and efficiency is also continuously increasing.
The growth of the lifestyle platform closely related to finance has translated to securing non-financial traffic and transactions. This led to an increase in sales from new businesses. We will continue with our digital strategy. Thank you.
Lee Tae Kyung
Thank you, both CDO and CRO. The page 18 and onward, there are detailed explanations of sustainable management activities and major indices for Group and subsidiaries.
With this, we would like to conclude the presentation and move on to Q&A. Thank you.
Question-and-Answer Session
Park Cheol Woo
Thank you. We will take questions from you. [Operator Instructions]
We’ll take the first question. DNK, Kim [Indiscernible] please go ahead.
Unidentified Analyst
Thank you very much for the good results. Can you hear me well?
Park Cheol Woo
Yes, we can hear you well.
Unidentified Analyst
I have two questions. With regards to preemptive risk management, after Q2, there has been steeper interest rate rises. There has been big impact on the bond and stock markets. Starting from first quarter, I think there will be more concerns about their real estate PF market. What is the PF status? And what is your future strategies for this segment?
And second question has to do with ESG. Making preparations for ESG is important and financial companies, I believe, are well-prepared for ESG. However, because of the war, this year, the fossil fuel cost has increased and because of economic uncertainties, a lot of burden is imposed on the corporate sector. So, the pace of real progress in ESG, I believe will slow down. So, with regards to ESG going forward for Shinhan Financial Group what is your strategy?
We have experts here. And so with regards to such fears about the pace of our progress of ESG slowing down, what would be your view or the expert view on this?
Park Cheol Woo
Thank you very much Mr. Kim. So, while we are preparing an answer to your question, please wait for a few minutes. Thank you.
Lee Tae Kyung
With regards to the risk question, real estate PF, the current status and strategy that was the first question and our CRO, Bang Dong Kwon will answer that question. The second question on ESG, the CSSO will answer the question.
Bang Dong Kwon
So, for the risk question. Good morning, I’m Bang Dong Kwon, I’m the CRO. Thank you very much for the good question. So, the real estate PF or the bridge loan, there are a lot of concerns in the market that is quite true. And in keeping with such a trend, starting the credit line management and screening of real estate PF is our strategy.
If you look at our current status among our total loans, the real estate PF in a bridge loan, their proportion is about 2% of the total portfolio and recently across the Group PF and bridge loan, we had total inspection conducted and according to that inspection, NPL is about KRW20 billion and so according to our current situation, I believe we are managing this risk very well.
But going forward — what are we going to do going forward? Well, for each business division and the risk-related divisions, we all engage in closed our discussion. Next year, credit line management and a bidding strategy has been discussed. The current strategy and policy need to be strengthened going forward. Thank you very much.
Ko Seok Hon
Second question on ESG. So, let me get that question. This is my third earnings presentation this year, but this is my first question on ESG. As you have there is economic slowdown, because of the rise in the price of fossil fuel, slowdown in progress is of concern.
With regards to or lowering carbon emissions, Shinhan is also participating in this effort. All of the financial companies across the world is participating. That is quite true. The financial emission management is very important, that is our ultimate goal, but the capital intensity management starting from 2020, we have been lowering those emissions and 0.6% target has been reached of reduction by Q2, but we have to maintain the sustained efforts on this front.
But I don’t think this is something that can be achieved by Shinhan alone. Globally, assessment criteria or standards have not been devised yet. So, [Indiscernible], a draft version has come out. But by early next year, if an official version comes out, then I believe carbon emissions can be linked to that standard.
Among the financial group, Shinhan is the very first and the only financial group that is actually using carbon emissions as a key criteria in assessing the CEO. So, this is a very difficult task to be sure and environment is truly daunting. However, we are making genuine efforts on this front. That will be my answer to your question.
Park Cheol Woo
Thank you very much. We’ll take the next question. There’s a bit of a delay. Yes. From Citi, Ms. Yafei Tian. Please go ahead.
Yafei Tian
Good morning. Thank you for taking my questions. I have two. The first one is more around the Card business, seeing quite a number of quarters of strong fee income coming through, but this quarter is a little bit softer than usual. So, just wanted to understand the longer term outlook for the Card business in terms of fee income as well as asset quality?
Second one is on the liquidity risk. Recently, Bank of Korea has injected liquidity into the system. There seems to be a little bit of stress for corporates as well as for certain financial institutions — securities companies when it comes to liquidity risk. Can you help us to quantify how does this impact funding costs for Shinhan Group going forward? Are there any areas of stress that you are seeing in the system? Thank you.
[Foreign Language]
Park Cheol Woo
Thank you for the questions. We will get back to you with the answer in a short while.
Lee Tae Kyung
[Foreign Language]
Thank you for the two questions. One was about the Card fee income and the asset quality and this will be answered by the Card CFO and as for the liquidity risk and the effect it has on the funding cost, I’ll answer that. So, the first question to the Card CFO.
Moon Dong Kwon
Hello, I am the Shinhan Card CFO, Moon Dong Kwon, thank you for the question. And I’d like to answer the question. First of all, as for the card fee income, in conclusion, there are some cyclical and seasonal factors starting in Q4, we believe that the fee income will formalize. In Q3, it was soft, and as for that reason, the fee income was due to the merchant fee, a decrease and the marketing fee increase. And that’s why it was soft temporarily in Q3.
Of the Q1 and Q3, for the smaller merchants, we had a lot of refund given to the smaller merchants in Q3. And we also extended the refund to the smaller malls and that is why we had KRW14.2 billion less fee income. And as for that marketing fee income in the second — May — or June, July, and August, that was reflected in Q3, but starting in Q4, the fee income will be back to normal.
And as for the asset quality, the Group CRO in his presentation mentioned that up until Q3, the asset quality did not cause any concerns. But starting in Q4, we may expect slight hiccups. But Q4, we don’t think there will be a huge instance, but we believe that this could become a bigger issue next year and we will be prepared for that.
So, what will be the impact on asset quality next year? On an annual basis compared to the credit cost this year, we believe that the credit cost could rise by 19% to 20% next year, and so we will take the appropriate measures so that we will be able to maintain the recurring profit level. So that will be my answer. Thank you.
Lee Tae Kyung
Thank you. I will address the second part of your question about the liquidity risk. Yes, it has been highlighted since September, there were margin cost and the financial institutions had liquidity shortage. And the second reason because of the LCR and ratios that were excused during the pandemic, the regulations are being strengthened. And as for the legal land, there was the commercial paper issue. But yesterday and the day before, the government made announcements and there are many funds prepared by the government to inject liquidity. So, we put out the fire and as was mentioned by the CFO’s presentation for a long time, Shinhan Financial Group had enough liquidity and even though there were some liquidity risks in the market, we were not affected. But with the rise in the interest rate by funding cost is on the rise, but it’s not because of the liquidity risk that will have a drastic impact on the funding costs. Thank you.
Park Cheol Woo
Next question is from [Indiscernible]. Mr. Kim, you’re online.
Unidentified Analyst
Good morning. I have two questions. First is related to interest rate, the funding interest rate is hiked up and this is an issue. In the month of September and also on the month of October, there’s been a steep increase. So, the past when interest rate rises, we believe margins improved. However, nowadays, the current situation is not that good. We have issues of whether this will actually come true. So, I think there are risk issues as well.
And this will actually negatively impact margin and also impact the asset quality? And so next year margin, what should be the outlook for next year guidance or your views?
My second question is related to digital. We have looked at the slides that you showed us, one thing of note is that unlike other companies, you have many different applications that are leveraged not just one single app. Of course, there is no one right answer, but this kind of strategy one app versus many different apps, what is the difference between these kinds of business strategies? And what do you intend to gain from using these diverse apps? And will you continue to expand the number of apps that you use? Or what are you going to go in a different direction going forward?
Park Cheol Woo
Thank you much for the question. While we are preparing the answer, please wait for a short while. Thank you.
Lee Tae Kyung
Those are two questions. The first question has to do with interest rate hikes and how it will impact the margins. Second question was on digital — on the apps. So, with regard to the digital question, our CDO will take up that question. Margin or the bank margins most important and the CFO will take that question. So, from the Bank, our CFO?
Jung Sang Hyuk
I’m Jung Sang Hyuk, the CFO of Shinhan Bank, thank you very much for the question. The funding rate increases, well, in the banking sector, we believe it is a one-off temporary phenomenon and in the fourth quarter in the banking sector, not only maturities, but also bond market instability, these are all coinciding and so the funding rate is increasing.
After the fourth quarter is over and starting from the next year first quarter, we believe things will become stabilized. And after the end of October, from the banking sector, our view is that the funding rate will not increase drastically. But with regard to the funding rate increase is that able to be translated to the loan interest rate? Well, although there are vulnerable sectors of society, we have to consider that and so the — we cannot translate all of them to the loan sector. But because of [Indiscernible] rate hike, basically NIM has increased.
We don’t think this will be much — very much impacted and assistance for the vulnerable sector, because our profit has increased because of the NIM increases, we will be able to provide assistance to the vulnerable sectors.
And next year NIM outlook for this year fourth quarter, vulnerable sector assistance and funding rate increases. So, temporarily in the fourth quarter, we do believe that margins will be stagnated.
Traditional BOK rate hikes at the end of the year. We do believe that the funding rate will be stabilized in Q1. And so given all of this in 2023, we do believe NIM will continue to be improved.
And with regards to sensitivity, although not 100% can be reflected, about 10 bps or more of NIM growth is possible in our view for 2023. That is all.
Lee Tae Kyung
Additionally, let me add to that. That was the bank side. And at the group level, the NIM continues to grow and capital and other subsidiaries, the NIM is contracting because the funding rate is rising and the Bank’s outlet can be offset somewhat by negative impact to other subsidiaries. Because of assistance to vulnerable borrowers, it will not have a negative impact on the NIM competition for deposits and competition for loans. I think competition can intensify because of that.
But as I’ve said, due to the interest rate hikes, the NIM can possibly continue to stably rise.
Kim Myoung Hee
With regard to digital question, not using one app using diverse apps was different and the future direction of our strategy that was your question. In today’s earnings presentation what I talked about is at the group level, Bank, Card, Securities, and Life, I talked about apps at the group level. I talked about 21 million MAU, we are employing two strategies through the group level apps. Each subsidiaries are providing the services that can be provided digitally and for the customers making use of the services. They are making use of these subsidiaries apps. And the one app strategy — universal convenient app strategy, that is also slightly different from other financial groups, slightly different tilt.
Other financial group, so for instance, a lot of their efforts are focused on the bank and that is the center of their one-app strategy. But in the case of Shinhan, several years ago, Shinhan Plus, this integrated app was launched already and among the subsidiaries, services can be interlinked through this app.
And one step further — going one step further, Bank, Securities, Card, and Life is for all one single entity, what kind of integrated functionalities could be provided to the customers, this was the focus of our strategy. And so this universal one-app strategy is what differentiates us from others. That is the two-point strategy.
So, that is our current situation and our future strategy. In the month of August at the Financial Service Commission, universal one-app guideline, I think it has been eased significantly. And so a lot of uncertainty surrounding the universal one-app has been lifted. So, I think this is beneficial for our strategy. Thank you very much.
Park Cheol Woo
Thank you. We’ll take the next question from HSBC, Jae-woong Won. Please go ahead, sir.
Jae-woong Won
Congratulations on a wonderful quarter. I have two questions. First is about overseas business. Looking at the results, there seem to be no major issues, but Vietnam, Indonesia, are there any details, NPL ratios, or delinquencies, credit cost, NIM? Some more detailed information, could we get access to them?
And the second question is the insurance sector, the IFRS 17 will kick in, other insurers, well they have to iron out some of the details, but I would like to know the overall trend for — like the net income, capital, what will be the direction going forward in preparation for IFRS 17 and insurance? Thank you.
Park Cheol Woo
We’ll get back to you with the answers in a short while.
Lee Tae Kyung
Thank you for the two questions. One was about the global Vietnam and Indonesia markets; you would like some detailed indicators. And the second question was about introducing IFRS 17 and insurance. The Insurance CFO will handle the second question, and the CMO will deal with the first question.
Park Kyoung Won
First about the second question insurance and IFRS 17, I’m Park Kyoung Won, thank you for the question. IFRS 17 how we’re preparing for it and the direction going forward. So, we are at the last stretch of our preparation efforts. As for IFRS 17, internal preparation and preparation for the external audit, we are working on the final details. And the accounting policies are not finite, so with that in mind, I’d like to give you some numbers.
What is most important is when IFRS 17 is introduced, a valuation will change and the capital will be affected and we will be using the three-year method and so about KRW400 billion was on average, but with the 17, the capital will increase by twice, twice the amount.
And in the future, CSM, the margin I think you will be interested in that, by 2023, we believe we’ll be able to secure KRW7 trillion that is our estimate. So, given that Shinhan Life standard loan, P&L will be about an increase of 30% on a recurring basis. Thank you.
Heo Young Taeg
Hello, I’m CMO, Heo Young Taeg. Thank you for taking interest in the global business. And as for the global business results compared to last year, we have seen a huge growth. And overall, in the global channels, there was even growth and the reasons were as follows.
During the pandemic, the economy was sluggish, but there was normalization and our businesses benefited. It was KRW397 billion in 2019 and we expect KRW600 billion this year. And looking at the time series in 2020 and 2021, the net income had decreased, but it is now back to normalization and getting back on track.
And our strength lies in Vietnam and Cambodia, Indonesia, these are the global markets that we are strong in and looking at the major indicators ROE in Vietnam is 2 and ROA 19 — 15 and NIM 14; and as for Cambodia, ROE — ROA 2.6, ROA 13 and NIM about 4.6. In Indonesia, ROA 2%, ROE 0.6% [ph], NIM 2.8%.
And as for delinquencies, there are no outliers there within the range of 1% to 2%. So, looking at the Southeast Asian markets, going forward, we believe that there will be robust figures and growth. And as for as asset quality or any issues to be expected, we see none. Thank you.
Lee Tae Kyung
Thank you very much for those answers. Last year — up until last year, I was the Head of the Vietnamese unit. I couldn’t recall the second numbers after the presentations are over, we’ll send you the numbers.
Park Cheol Woo
Thank you very much for those answers. Our next question is from DS Securities, Mr. [Indiscernible]. Mr. Na [ph], you’re online.
Unidentified Analyst
Good morning. I have just one question. Treasury’s stock buybacks, another measure you have taken in order to raise the shareholder return ratio. I think our high level of our dividend is expected by the market at the end of the year. So, in the fourth quarter, do you think the dividend level will go down? Or do you think the current level will maintain going into the fourth quarter?
Park Cheol Woo
Thank you very much for that question. While we’re preparing to answer, please wait for a short while.
Lee Tae Kyung
Thank you very much for taking interest in our shareholder return ratio and the dividend related question. Let me answer that question. Basically, as we have noted in the earlier part of the year, that still stands, the cash dividend will continue to increase on a solid manner. So, we have done cancellation on our favorite stock and in the fourth quarter — we have noted this previously, but we’re going to maintain a solid increase. So, our policy to increase it in a solid manner. So, I think you can figure out the level.
The regulatory stands — and the regulator says recently that stress test must be done in a more sophisticated manner so that the capital ratio or [Indiscernible] noise closely and our CRO has noted the results of the stress testing in a global financial crisis situation. Even in that kind of situation, the CET1 will go beyond over the appropriate level.
And a more sophisticated stress testing has been done recently. We have a shown relatively high CET1 ratio and even if a different scenario — much scenario comes upon us, I don’t think much will change. We will be — I think be able to maintain the high level of shareholder return ratio. So, we’ll continue to communicate with regulators and proceed accordingly.
Park Cheol Woo
Thank you very much for that answer. We will take the next question from CLSA, Shim Jongmin. Please go ahead.
Jongmin Shim
Hello, I am Shim Jongmin from CLSA. I have one question it’s about the PF loans. You did mention it recently overall, the real estate market is weak and risk management for real estate loans, how are you doing it for retail and corporate loans? And as for SOHO loans, the LTV is higher than for the mortgage loan, but if the weak — real estate marketing continues, then it may increase the risk. So, how do you see this and how do you manage the risks? Thank you.
Park Cheol Woo
Thank you for the question. Please wait for the answer.
Lee Tae Kyung
Yes, there are many issues related to real estate. So, we get another question about the real estate. The CFO had addressed the PF question earlier and as for SOHO and retail, yes, the situation is as such, we did talk about the real estate PF earlier but to develop on that delinquency is 0.09 for mortgage loans, and the LTV is 40.2%. So, the delinquency is low and the LTV is 40.2% and there’s DSCR. And so we do not consider this as a risk.
But as for the SOHO loans, the real estate collateralized loans, you may consider SOHO is a vulnerable borrower, but if they have real estate [Indiscernible], there are also PB clients they’re able to do and they have good quality real estate as collateral.
So, the delinquency for these segments is lower than the retail loans 0.04 and as for LTV is higher than retail, but in the non-financial banks — the non-banking financial institutions the LTV is higher, but in the bank and in Shinhan, we are managing it tightly. So, this is not causing any concerns. Thank you.
Park Cheol Woo
Thank you. Next question. From [Indiscernible].
Unidentified Analyst
[Indiscernible] Securities. Thank you very much for giving me this opportunity. Just now among the questions, the funding rate increase will be reflected in the month of October and after that it will come gradually down I think that was your view.
That means in other words, the interbank interest rate competition is expected to be easy, I think that’s your anticipation. The interbank deposit rate competition is linked to the loan rate increase. So, this is very important.
So, first, recently the interest rate hike and the subsequent competition compared to 2005 to 2008, when there was interest rate hikes, I think the competition is much more intensified compared to that period. Why do you think this is so? And so your view is that this will be eased going forward? If it is indeed in ease, what kind of factors will drive that easing? Is there any internal views or ideas on that?
And second question is, so our anticipation going forward is the [Indiscernible] and the bank loans wage will go up and POK rate — if it goes additionally, the average loan rate for the retail loans will go up steeply. So, roughly next year, the need to — there was — later half of 5% range, is interest rate hikes, how much of asset quality deterioration will come down? For now your NPL ratio is 0.24, how much do you think this will go up additionally? And not only vulnerable, very vulnerable borrowers, but you know well moderately vulnerable borrowers as well how do you intend to respond to these sectors? I think if you share your views on this matter, it will be very helpful.
Park Cheol Woo
Thank you very much for those questions. While we are preparing an answer, please wait for a short while.
Lee Tae Kyung
Thank you very for those questions. Your first question was — I think it was already answered by the Bank CFO. So, in Q4 the funding rate increase will ease, and what are the factors behind that?
And second question if interest rate hikes continue, it will be reflected in loan rates, and this will have an impact on asset quality. And what is our response or outlook? I think that was your question.
So, first question, our Bank CFO will take that question. And second question will be taken up by our CRO. The CFO first.
Jung Sang Hyuk
Jung Sang Hyuk, the Bank CFO. Thank you very much for that question. The banking sector the competition has intensified and the first reason for that is because of the midst of the pandemic, the LCR ratio has been eased and it is now normalizing starting from third quarter, it has been raised to 92.5%. That’s the biggest reason. And because of FX rate increases, the derivative products volatility is increasing and also the BOK increases has led to highly liquid assets impaired. And in the fourth quarter, the funding maturity is coming due and starting from the month of July, the low cost deposits start to come down in the month of July.
And so till the end of September, there has been strong funding competition among the banks, that is true. The bond market is quite unstable now, and the government with regards to LCR regulation, they have postponed on analyzing the LCR regulation six months and they said that they will review after six months over, the [Indiscernible] ratio easing and qualified collateral will be used by the BOK, these have been announced by the regulators and so with the bank’s liquidity situation, I think we will see some buffer starting from the month of October.
Starting from September, the banks have been raising funds, so we do have efficient room. In the fourth quarter, the fund inflow and the deposit inflow will leave as we near the end of the year, it will increase that is our view. So, starting from the fourth quarter, as we near the end of the fourth quarter, the banking sector — the funding rate competition is expected to be eased that is our expectation. That is all.
Bang Dong Kwon
I’m the CRO, Bang Dong Kwon. So, let me see if I understood the question right. The market rate [Indiscernible] on the wage of retail loan rate goes up and this can have a negative impact on the quality and how are we going to respond to this? That is quite true. That is how the process will unfold if it happens, so but. So, asset quality deterioration, we do believe that will happen and we are making preparations as we have noted at the beginning for the vulnerable segment, we have segment ties this sector, we are monitoring closely this segment. And asset quality is being maintained at a stable level, but we do believe that there will be some deterioration going into next year. So, thorough management is called for, we are aware of that.
And so with interest rate hikes, the repayment capability the stress — the CSR is being reflected in our screening process. And not only has risk management centering around the vulnerable borrowers, we are providing liquidity in order to minimize the risks. So, customized programs and policies are being formulated. So, with the rise of interest rate, in order to respond to certain asset quality deterioration, various responses are being formulated. Thank you very much.
Park Cheol Woo
The next question we want to has this transparent in our process, somebody with a Galaxy S has raised his hand, but we need to know your name. From JPMorgan Cho Jihyun, please go ahead.
Jihyun Cho
Thank you for giving me the opportunity. I have one question. With the interest rate rise, there is correction on the real estate market and it will affect profitability. What about the overseas real estate exposure? And what type of exposure do overseas real estate and any precautionary assets that we need to watch out for? And going forward any management strategies or expansion strategies for your overseas real estate exposure? Thank you.
Park Cheol Woo
Thank you for the question. We will get back to you in a short while, please hold.
Lee Tae Kyung
Yes, this is about the overseas property and the CRO will address this question.
Bang Dong Kwon
Thank you. That’s a tough one. As you mentioned for the overseas property risk, we have similar idea. From a group perspective, the overseas real estate exposure is about KRW3.5 trillion and forms are varied. We have PF and we have equity investment, real estate funds. But as of now, the risk is not that visible. And as I was talking about PF earlier, we did conduct 100% investigation and the assets at issue and assets under management, they are two separate buckets. And because of COVID-19, we could not do due diligence and with that East regulation, I think we will have a more sophisticated monitoring system. Thank you.
Park Cheol Woo
Thank you very much for that answer. Because we are running behind time, but we will receive the next question from [Indiscernible].
Unidentified Analyst
Thank you very much for this opportunity to ask a question. The interest income of the group and the Bank when compared, the non-banking subsidiaries interest income seems rather low. So, I like to ask a question about the funding Card business. I think the funding increase has been larger than the others and the mix. The CP ABS [ph] has been larger than other instruments. So, the funding instrument mix and also the funding rate increase speed, how should we view this?
And also at the banking segment, the funding rate has risen steeply. The low cost or deposit has gone down by more than KRW100 billion and so I think this has led to an increase in the time deposit as well. So, in the banking sector, do you think that going into the fourth quarter, the low cost deposits will continue this pace of decline as we have seen in the third quarter? So, what kind of view should we take about this matter going forward? Thank you very much.
Park Cheol Woo
Thank you for the question. While we are preparing answers, please wait for a short while. Thank you.
Lee Tae Kyung
[Indiscernible] question was a fundamental question for both Card business and Bank business. The Card CFO will take up the question and the Bank CFO will also take the question on the Bank. So, first the Card.
Moon Dong Kwon
Thank you very much. With regards to funding cost for the Card business and the outlook, I think, was asked. Let me answer that question. Recently not only the Card, but the entire sector, the funding rate is increasing across the Board. Compared to repayment size, the interest rate itself has risen by several fold. So, according to our anticipation next year, the average funding — currently, it’s 2.2, we think it will grow to 3.2 going into next year, so KRW31,000 billion, KRW32,000 trillion will be the amount.
And free tax amount that about KRW300 billion to KRW350 billion of funding cost increase is expected and that impact is quite large. And how can we respond to that? Well, starting from the fourth quarter, various asset balancing effort and price realization and for various funding effort reorganization will be undertaken, so that the recurring or profitability of the company will — monthly KRW50 billion will be achieved next year. And to achieve that, we are making preparations starting from the fourth quarter and the funding related cost is also being prepared for and addressed.
Jung Sang Hyuk
Jung Sang Hyuk, the Bank CFO, thank you very much for that question. And with regard to the liquidity reduction, yes, we are also giving this a lot of thought. In the case of Shinhan Bank up until the second quarter compared to other banks, we had an increase of liquidity.
Starting from the month of July, all of the banking sector has assumed the reduction of low cost deposits. And the month of July, August, and September, decline in low cost deposit, the absolute level is going down. According to BOK, the reduction of the low-cost deposit throughout the banking sector in July was KRW53 trillion. In August, it was KRW15 trillion, and in September, it was KRW0.3 [ph] trillion. The reduction level is coming down, but we believe that going into the fourth quarter this reduction trend will continue because of various factors.
And in the first quarter of next year, due to seasonal issues like that the government spending and household bonus payment issues, starting from the first quarter of next year, we believe that the low-cost deposit will become normalize. This reduction trend will stop in our expectation. As in the case of institution deposits, it was extended in the first half. And there was a trend of this being reduced in the second half, so we’re taking that into consideration.
In case of Shinhan Bank, Seoul City 205 — our project KRW2.5 trillion will be reflected as well. So, in the fourth — in the first quarter of next year in the case of Shinhan Bank, we believe that we will see a rebound of the low-cost deposit starting from first quarter next year.
Park Cheol Woo
Thank you for the questions. We are running out of time and we won’t be able to take questions and we don’t have any questions. With this, we would like to conclude Q3 earnings presentation of Shinhan Financial Group. I would like to thank you once again for your participation. You may visit the website and the Shinhan Financial Group IR YouTube channel for the IR materials. Thank you very much.
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