1Q 2021 Earnings Conference Call
Good afternoon. I am Roh Yong-hoon, the group's CFO. First of all, I would like to thank the shareholders, investors, analysts and journalists from home and abroad for taking part in the earnings presentation for the first quarter of 2020.
Before going into the Q1 performance of Shinhan Financial Group, let me go over the issues and responses related to COVID-19. This is Page 5 of the presentation deck. The coronavirus is posing a severe threat to both people's livelihoods and economy. Shinhan is doing its utmost to faithfully undertake its social roles and responsibilities in the broad effort to overcome the economic crisis caused by the COVID-19.
The first and foremost is step with the government's livelihood financial stability package program, an inclusive financial policy is being pursued proactively to ensure that funds are provided in a speedy and timely manner to the society at large and our customers. As of the 20th of April, the bank has extended KRW 4.9 trillion, a total of 32,510 loans as financial support to SMEs. A new loan to SMEs have been increased from KRW 1 trillion to KRW 3 trillion.
Not only the bank, but the card, savings bank and the insurance arm of the group are taking part in various financial support programs, including assistance to individuals.
Secondly, Shinhan is actively involved in the government-led policies to stabilize the financial market through liquidity provision. We have contributed KRW 1.770 trillion to the fixed income market stabilization fund and another KRW 1 trillion will be provided for the securities market stabilization fund targeting the stock market. And so contributions are being made at present within the limit.
And thirdly, we are at the forefront of providing a necessary community-level assistance to most vulnerable groups and to health professionals. Going forward, we will continue to spearhead the efforts, proactively respond to COVID-19 crisis as befits the standing of a world-class financial company such as ours.
Next, on Page 6, let me provide some additional explanation about measures against the COVID-19. Along with such support measures for our customers and the society, the group subsidiaries have put into action their risk management systems. Against such a backdrop, Shinhan had kept a clear focus on our core capabilities, posting KRW 932.4 billion in Q1 of 2020 as net income, up 1.5% Y-o-Y. However, the coronavirus impact on the real economy has only started to become reflected in the business results since March. And thus, uncertainties regarding the performance from Q2 onward is growing.
As can be seen in the monthly indicators in March, loans mostly to large companies have grown sharply in anticipation of liquidity tightening and credit purchase sales of the card business also contracted in February and March compared to January. Bank delinquency, before write-offs and sales, was up in the month of March as well, an increase in the core deposit of the bank, cash equivalent increased as parts of effort to manage risk. Thus, we can see that the impact from COVID-19 started to become visible since March.
Key subsidiaries, the bank and the card company's asset quality remain stable at present, but we must be prepared for Q2 and beyond when the real economy will deteriorate in earnest. In order to minimize the credit cost volatility, we plan to manage the risk as we go forward in accordance with detailed scenarios for various possible situations.
We have summarized the business highlights of Q1 on Page 7 for your reference.
Next, on Page 8, let me walk you through the group's financial highlights. In Q1 of 2020, the group managed to maintain sound fundamentals in terms of interest income-focused earnings, so that net income posted KRW 932.4 billion. Ordinary income, excluding the lower income, tax impact from the treasury stock disposal losses, posted to the north of KRW 800 billion, same as last year.
However, when excluding the effect of acquiring the remaining or implied equity and the effect of lower write-off expense of intangible assets, ordinary income comes to mid-KRW 800 billion, down Y-o-Y, partially reflecting the impact from COVID-19. The Korean won loans of the bank was up 2.9% YTD including expansion of assistance to SMEs and households. Due to the increase in size, the interest income of the bank grew 3.8% Y-o-Y. Meanwhile, due to the expanding volatility in the financial market, actually more severe than during the 2008 global financial crisis, financial product losses have grown so that the noninterest income of the group fell 10.6% Y-o-Y.
By engaging in strategic cost management in the midst of the coronavirus crisis, the cost-to-income ratio of the group posted 43.7% and is being managed within the financial target. By harnessing digital technology from a mid- to long-term point of view, productivity will be enhanced, thus enabling continued cost efficiencies. We're at a point in time when striking the right balance between financial support that fulfills corporate social responsibility and maintaining asset quality is highly critical. To minimize any possible shocks, all subsidiaries within the group are implementing risk management systems and closely monitoring asset quality.
On Page 9, let me explain in detail about the group's interest income. In Q1 of 2020, the group's interest grew -- interest income maintained sound fundamentals, increasing 5.0% Y-o-Y (sic) [YTD]. During Q4 2019, 25 bp cut in the BOK rate was executed on top of which, an additional cut of 50 bp was carried out in March 2020, thus raising the downward pressure on the net interest margin.
However, low-cost core deposits was up 9.3% YTD, thus partially offsetting the margin decline. Also, solid growth is being realized overseas, thus contributing to a higher interest income.
And now the bank's loan growth. To secure liquidity early on with the credit spread widening, large corporates have preemptively increased their credit portfolio. And as a result, loans to large corporates increased 15.5% YTD, driving the overall loan growth. With inclusive financial policies in place, SME loans increased 2.3% YTD. Loans to the nonaudited SMEs, relatively more vulnerable to COVID-19, increased 3.6% YTD. SOHO loans also increased 2.4% YTD. Loans in this segment are on a par with the initial business plan.
Next, the group's noninterest income on Page 10. The group's noninterest income fell 10.6% Y-o-Y to KRW 734.2 billion. This is because the gain on marketable securities and FX derivatives decreased with higher volatility in the capital market indices. Q1 fee income increased 10.8% Y-o-Y to KRW 531.5 billion. The pandemic froze up consumption, slowing down the credit sales growth and leaving a dent in credit card fee income. However, with the significant increase in stock trading volume, brokerage commissions increased, offsetting some of the loss in credit card. Lease financing fees and other fees from relief debt conversion program increased, contributing to an increase in fee income overall.
The group's SG&A and credit cost on Page 11. The Q1 SG&A increased 2.5% Y-o-Y. The group's CI ratio is 43.7%, being managed within target. There will be continuous effort made for cost control by selection and concentration strategy to prepare for the uncertainty in the second half. The group's credit cost ratio recorded 35 bp, up 1 bp Y-o-Y and 5 -- up 5 bp Q-o-Q. Compared to the previous quarter, the banks' and cards' delinquency ratios have increased 5 bp and 9 bp, respectively, showing signs of the COVID-19 effect partially. From the second quarter and onward, when the outbreak impact will be more pronounced, it is possible that the credit cost may go up. Depending on which scenario unfolds, we will implement risk management measures accordingly.
Page 12, capital adequacy. This quarter, with the completion and the remaining stake purchase in Orange Life, the decline of the common equity ratio pursuant to the acquisition has come to a stop. In January this year, even though we acquired the remaining stake in the insurance company, due to our preemptive capital management, the effect on our capital ratio was minimal, and additional downward pressure on the capital ratio was relieved. Despite the higher volatility in Q1 FX rate and interest rate, by maintaining earnings power and stably managing risk-weighted assets, we were able to improve the group's CET1 ratio by Basel III standards by 23 bp Q-o-Q to 11.4%. As part of our capital policy in connection to the finalization of the Orange Life deal, the Board decided in March to buy back and cancel KRW 150 billion of treasury shares, which will be executed in Q2.
Contribution by subsidiaries and by matrix on the next page. We reinforced nonbank side of the business with Shinhan Card buying lease assets and the finalization of the Orange Life transaction. Wealth management seems to have taken a hit due to the financial market volatility and losses on the investment products, but with the growth in IB and global businesses, we're able to confirm once again Shinhan's diversified business portfolio. Going forward, we will continue to strengthen nonbank business so that we can enhance the fundamentals of the overall group's earnings base.
More detailed explanation about the global business on the next page. The group's income from the global business was KRW 89 billion in Q1, up 13.6% Y-o-Y with increased earnings from Japan and Vietnam. We will continue to manage profitability, liquidity and soundness in each country under the pandemic.
Sustainable management activities on Page 15. In March 2020, Shinhan Life was the first Korean life insurer to become a signatory to the UNEP Finance Initiative's Principles for Sustainable Insurance. In Q1 this year, eco-friendly, renewable energy loans and investments have been newly executed, bringing up Q1's green financing to KRW 449.4 billion. New technology financing in Q1 amounted to KRW 4.2421 trillion. And the cumulative, innovative and inclusive financing as of Q1 amounts to KRW 5.6639 trillion.
At the FY '19 General Shareholders Meeting, a female outside director was appointed, enabling diverse representation of the Board. The remaining slides are for your reference, guiding you through the subsidiaries' performance and business indicators.
2020 will be a year in which group-wide efforts are made to overcome the crisis posed by COVID-19 and to grow our fundamental strength to weather the storm. We will pay heed to the sound advice given us by the clients and the shareholders. We will live up to your expectations and perform our duties and roles more proactively. We sincerely hope the coronavirus will be conquered in the near future. Thank you.
Before going into the Q1 performance of Shinhan Financial Group, let me go over the issues and responses related to COVID-19. This is Page 5 of the presentation deck. The coronavirus is posing a severe threat to both people's livelihoods and economy. Shinhan is doing its utmost to faithfully undertake its social roles and responsibilities in the broad effort to overcome the economic crisis caused by the COVID-19.
The first and foremost is step with the government's livelihood financial stability package program, an inclusive financial policy is being pursued proactively to ensure that funds are provided in a speedy and timely manner to the society at large and our customers. As of the 20th of April, the bank has extended KRW 4.9 trillion, a total of 32,510 loans as financial support to SMEs. A new loan to SMEs have been increased from KRW 1 trillion to KRW 3 trillion.
Not only the bank, but the card, savings bank and the insurance arm of the group are taking part in various financial support programs, including assistance to individuals.
Secondly, Shinhan is actively involved in the government-led policies to stabilize the financial market through liquidity provision. We have contributed KRW 1.770 trillion to the fixed income market stabilization fund and another KRW 1 trillion will be provided for the securities market stabilization fund targeting the stock market. And so contributions are being made at present within the limit.
And thirdly, we are at the forefront of providing a necessary community-level assistance to most vulnerable groups and to health professionals. Going forward, we will continue to spearhead the efforts, proactively respond to COVID-19 crisis as befits the standing of a world-class financial company such as ours.
Next, on Page 6, let me provide some additional explanation about measures against the COVID-19. Along with such support measures for our customers and the society, the group subsidiaries have put into action their risk management systems. Against such a backdrop, Shinhan had kept a clear focus on our core capabilities, posting KRW 932.4 billion in Q1 of 2020 as net income, up 1.5% Y-o-Y. However, the coronavirus impact on the real economy has only started to become reflected in the business results since March. And thus, uncertainties regarding the performance from Q2 onward is growing.
As can be seen in the monthly indicators in March, loans mostly to large companies have grown sharply in anticipation of liquidity tightening and credit purchase sales of the card business also contracted in February and March compared to January. Bank delinquency, before write-offs and sales, was up in the month of March as well, an increase in the core deposit of the bank, cash equivalent increased as parts of effort to manage risk. Thus, we can see that the impact from COVID-19 started to become visible since March.
Key subsidiaries, the bank and the card company's asset quality remain stable at present, but we must be prepared for Q2 and beyond when the real economy will deteriorate in earnest. In order to minimize the credit cost volatility, we plan to manage the risk as we go forward in accordance with detailed scenarios for various possible situations.
We have summarized the business highlights of Q1 on Page 7 for your reference.
Next, on Page 8, let me walk you through the group's financial highlights. In Q1 of 2020, the group managed to maintain sound fundamentals in terms of interest income-focused earnings, so that net income posted KRW 932.4 billion. Ordinary income, excluding the lower income, tax impact from the treasury stock disposal losses, posted to the north of KRW 800 billion, same as last year.
However, when excluding the effect of acquiring the remaining or implied equity and the effect of lower write-off expense of intangible assets, ordinary income comes to mid-KRW 800 billion, down Y-o-Y, partially reflecting the impact from COVID-19. The Korean won loans of the bank was up 2.9% YTD including expansion of assistance to SMEs and households. Due to the increase in size, the interest income of the bank grew 3.8% Y-o-Y. Meanwhile, due to the expanding volatility in the financial market, actually more severe than during the 2008 global financial crisis, financial product losses have grown so that the noninterest income of the group fell 10.6% Y-o-Y.
By engaging in strategic cost management in the midst of the coronavirus crisis, the cost-to-income ratio of the group posted 43.7% and is being managed within the financial target. By harnessing digital technology from a mid- to long-term point of view, productivity will be enhanced, thus enabling continued cost efficiencies. We're at a point in time when striking the right balance between financial support that fulfills corporate social responsibility and maintaining asset quality is highly critical. To minimize any possible shocks, all subsidiaries within the group are implementing risk management systems and closely monitoring asset quality.
On Page 9, let me explain in detail about the group's interest income. In Q1 of 2020, the group's interest grew -- interest income maintained sound fundamentals, increasing 5.0% Y-o-Y (sic) [YTD]. During Q4 2019, 25 bp cut in the BOK rate was executed on top of which, an additional cut of 50 bp was carried out in March 2020, thus raising the downward pressure on the net interest margin.
However, low-cost core deposits was up 9.3% YTD, thus partially offsetting the margin decline. Also, solid growth is being realized overseas, thus contributing to a higher interest income.
And now the bank's loan growth. To secure liquidity early on with the credit spread widening, large corporates have preemptively increased their credit portfolio. And as a result, loans to large corporates increased 15.5% YTD, driving the overall loan growth. With inclusive financial policies in place, SME loans increased 2.3% YTD. Loans to the nonaudited SMEs, relatively more vulnerable to COVID-19, increased 3.6% YTD. SOHO loans also increased 2.4% YTD. Loans in this segment are on a par with the initial business plan.
Next, the group's noninterest income on Page 10. The group's noninterest income fell 10.6% Y-o-Y to KRW 734.2 billion. This is because the gain on marketable securities and FX derivatives decreased with higher volatility in the capital market indices. Q1 fee income increased 10.8% Y-o-Y to KRW 531.5 billion. The pandemic froze up consumption, slowing down the credit sales growth and leaving a dent in credit card fee income. However, with the significant increase in stock trading volume, brokerage commissions increased, offsetting some of the loss in credit card. Lease financing fees and other fees from relief debt conversion program increased, contributing to an increase in fee income overall.
The group's SG&A and credit cost on Page 11. The Q1 SG&A increased 2.5% Y-o-Y. The group's CI ratio is 43.7%, being managed within target. There will be continuous effort made for cost control by selection and concentration strategy to prepare for the uncertainty in the second half. The group's credit cost ratio recorded 35 bp, up 1 bp Y-o-Y and 5 -- up 5 bp Q-o-Q. Compared to the previous quarter, the banks' and cards' delinquency ratios have increased 5 bp and 9 bp, respectively, showing signs of the COVID-19 effect partially. From the second quarter and onward, when the outbreak impact will be more pronounced, it is possible that the credit cost may go up. Depending on which scenario unfolds, we will implement risk management measures accordingly.
Page 12, capital adequacy. This quarter, with the completion and the remaining stake purchase in Orange Life, the decline of the common equity ratio pursuant to the acquisition has come to a stop. In January this year, even though we acquired the remaining stake in the insurance company, due to our preemptive capital management, the effect on our capital ratio was minimal, and additional downward pressure on the capital ratio was relieved. Despite the higher volatility in Q1 FX rate and interest rate, by maintaining earnings power and stably managing risk-weighted assets, we were able to improve the group's CET1 ratio by Basel III standards by 23 bp Q-o-Q to 11.4%. As part of our capital policy in connection to the finalization of the Orange Life deal, the Board decided in March to buy back and cancel KRW 150 billion of treasury shares, which will be executed in Q2.
Contribution by subsidiaries and by matrix on the next page. We reinforced nonbank side of the business with Shinhan Card buying lease assets and the finalization of the Orange Life transaction. Wealth management seems to have taken a hit due to the financial market volatility and losses on the investment products, but with the growth in IB and global businesses, we're able to confirm once again Shinhan's diversified business portfolio. Going forward, we will continue to strengthen nonbank business so that we can enhance the fundamentals of the overall group's earnings base.
More detailed explanation about the global business on the next page. The group's income from the global business was KRW 89 billion in Q1, up 13.6% Y-o-Y with increased earnings from Japan and Vietnam. We will continue to manage profitability, liquidity and soundness in each country under the pandemic.
Sustainable management activities on Page 15. In March 2020, Shinhan Life was the first Korean life insurer to become a signatory to the UNEP Finance Initiative's Principles for Sustainable Insurance. In Q1 this year, eco-friendly, renewable energy loans and investments have been newly executed, bringing up Q1's green financing to KRW 449.4 billion. New technology financing in Q1 amounted to KRW 4.2421 trillion. And the cumulative, innovative and inclusive financing as of Q1 amounts to KRW 5.6639 trillion.
At the FY '19 General Shareholders Meeting, a female outside director was appointed, enabling diverse representation of the Board. The remaining slides are for your reference, guiding you through the subsidiaries' performance and business indicators.
2020 will be a year in which group-wide efforts are made to overcome the crisis posed by COVID-19 and to grow our fundamental strength to weather the storm. We will pay heed to the sound advice given us by the clients and the shareholders. We will live up to your expectations and perform our duties and roles more proactively. We sincerely hope the coronavirus will be conquered in the near future. Thank you.