Shinhan Financial Group Co., Ltd. (SHG) Q4 2022 Earnings Call Transcript

Shinhan Financial Group Co., Ltd. (NYSE:SHG) Q4 2022 Earnings Conference Call February 8, 2023 12:00 AM ET

Company Participants

Park Cheol Woo – Head, Investor Relations

Lee Taekyung – Chief Financial Officer

Kim Myoung Hee – Chief Development Officer

Bang Dong Kwon – Chief Risk Officer

Ko Seok-Hon – CSSO

Kim Kihoon – Shinhan Bank, CFO

Kim Nam-Jun – Shinhan Card, CFO

Park Kyoung Won – Shinhan Life, CFO

Conference Call Participants

Yafei Tian – Citi Securities

Baek Doosan – Korea Investment

Park Hye-jin – Daishin Securities

Won Jae-woong – HSBC

Cho Jihyun – JPMorgan Securities

Hongjae Lee – Hyundai Motor Securities

Park Cheol Woo

Good afternoon. I am Park Cheol Woo, Head of IR. I would like to welcome everyone to the Shinhan Financial Group’s 2022 Fiscal Year Earnings Presentation. Several housekeeping rules before we begin the earnings presentation. We are holding today’s earnings presentation via digital platforms including the Shinhan Financial Group IR YouTube channel and the Zoom applications. The YouTube live channel is in Korean only and questions cannot be asked. And so if you’d like to view today’s IR in English or if you have questions to raise, please join us through the Zoom application. More details on how to join us is explained to you on our website www.shinhangroup.com.

We now begin the 2022 fiscal year earnings presentation. In today’s presentation, we have with us the Group’s CFO, Lee Taekyung, the main presenter and the Group’s CDO, Kim Myoung Hee; the Group CRO, Bang Dong-Kwon; the Group CSSO, Ko Seok-Hon; Shinhan Bank CFO, Kim Kihoon; Shinhan Card CFO, Kim Nam-Jun; Shinhan Securities CFO, [indiscernible]; and finally from Shinhan Life, the CFO, Park Kyoung Won.

Today’s earnings presentation will proceed as follows. CFO, Lee Taekyung will walk you through the overall business results for 2022 achievements in the digital area will be presented by Kim Myoung Hee, after which we will have a Q&A session.

I now invite CFO, Lee Taekyung to present the business results of 2022.

Lee Taekyung

Greetings. I am Shinhan Financial Group CFO, Lee Taekyung. First of all, thank you for participating in our fiscal year 2022 annual business results presentation despite your busy schedules. On Page 4 of the business results presentation, I will first go over the highlights. Please go to Page 4.

‘22 Q4 due to factors such as-non recurring items and recognition of cost to prepare for future uncertainties, net income was lower than the market consensus and recorded KRW326.9 billion. Regarding the major non-recurring items which occurred in Q4, I will explain in more detail from the next pages. On an annualized basis, group’s cumulative net income posted KRW4.6423 trillion and despite uncertain economic conditions at home and abroad, we steadily improved net income excluding the KRW321.8 billion of sales gain from Shinhan Securities HQ building sale income, it was a 7.5% increase YoY. Group’s annual CIR posted 45.5% and despite the digital-related cost increase and inflationary factors is being managed at a stable level. Group’s annual credit cost ratio posted at around 33 bp level and despite additional provision for future uncertainties due to deterioration of the internal and external economic environment, it is being maintained at a stable level. And going forward, Shinhan Financial Group will maintain a conservative provisioning policy.

Last, I would like to go over the Group’s capital policy. At the BOD meeting held today, the 2022 year-end dividend per share was decided at KRW865. And if the previous quarterly dividends are included, the annual cash dividend payout ratio is 23.5%. In addition, if we include the two rounds of share buyback and cancellation that took place last year, 2022 TSR is 30%. Going forward, we will strive forward to maintain an appropriate capital ratio and also continuously improve our shareholder return ratio.

Let’s go to Page 5. First, I will go over the main reasons why Q4 performance fell short of the consensus. First item was the KRW146.4 billion of valuation loss, which was recognized for the Principal Protected pre-2000 Personal Pension Trust, which was newly recognized because of the newly released interpretation by Korea Accounting Institute. However, since this was mostly valuation loss from bond price decline due to interest rate hike, losses will be recovered in full amount when the bond reaches maturity and most of this will be recovered as valuation gains within 2 to 3 years. Second is the customer investment product-related losses of KRW180.2 billion, KRW130.7 billion after tax. At the beginning of last year at the 2021 annual business results presentation, I mentioned that the estimated loss related to the sale of investment products could go up at maximum to KRW200 billion after tax. Of this, considering the amount recognized in 2022, expected loss of about KRW70 billion should have been remained, but when we had about KRW80 billion, which was unforeseen at the time such as the decision of the Heritage Fund dispute Mediation Committee, we expect a total of KRW150 billion worth of additional losses going forward. Third, valuation loss on non-marketable securities increased by KRW73.5 billion YoY and recorded KRW104.1 billion. For this, the ERP expenses of KRW145 billion. Lastly, reflecting factors such as conservative future economic outlook, additional provisioning was KRW197 billion.

On Page 6, there is the major business performance of the overall group. So please refer to it if needed. Then starting from Page 7, I will go through the detailed performance of the group. First, Page 7 is the Group’s interest income. 2022 annual group interest income went up by 17.9% YoY recording KRW10.6757 trillion, driven by 15 bp quarterly group margin increase in interest-bearing assets, 4.5% YoY increase. Q4 quarterly bank NIM on the back of decrease in core deposits continuing from Q3, an increase in funding costs following LCR management, posted 1.67%, a 1 bp decline QoQ.

I will now cover bank loans in one. Bank loan growth, despite the continuous decline of household loans, saw solid corporate loan growth and grew 3.8% YoY. Corporate loans driven by increased demand from large and medium-sized companies following the direct funding market crunch grew 11.2% YTD. On the other hand, household loans with a sharp rise in interest rate leading to factors such as demand decrease and DSR regulatory effect decreased 3.7% YTD. Please refer to Page 31 for more details.

Please refer to the next page, Page 8, for Shinhan Bank’s margin loan and deposits. Next is Page 9, group non-interest income. Group’s non-interest income following securities-related income decreased due to market interest rate increase and fee income decreased following capital market and real estate market deterioration went down 30.4% year-over-year, compared to the previous quarter due to factors, including the aforementioned change in accounting or principal protected trust and recognition of alternative investment valuation losses, went down 89.8%. Fee income decreased by 5.6% YoY. This is mainly due to credit card fees, securities, brokerage fees and fund bancassurance fees.

Credit card fees decreased due to factors such as lower merchant fee rates, although credit card purchases increased. It decreased 13.6% QoQ. Credit card fee income decreased due to a reduction in interest-free installment plans, leading to lower volume and increase in seasonal marketing promotional expenses. IB commissions decreased due to real estate market slowdown in the capital market downturn.

Next, on Page 10, group G&A and provisioning; trading costs despite the decrease in ERP size, due to DT related marketing expenses and overall increase in general cost levels due to inflation, increased by 4.7% YoY. Group CIR recorded 45.5%, up 0.2 percentage points YoY and is being managed stably. The group’s annual credit cost posted KRW1.3057 trillion and driven by items such as KRW517.9 billion of additional provisioning to respond to the uncertain economy, increased 31%, but credit cost ratio posted 33 bps, a 6 bp increase YoY and is being stably managed. As economic uncertainty is growing to prepare for potential credit risks, we plan to continue our conservative provisioning stance.

In addition, through actively supporting vulnerable borrowers for individuals and companies and through active support for high-quality businesses among real estate PF, which are recently becoming problematic, we will work hard continuously to mitigate this risk. Looking at the delinquency ratio, which can be seen as a leading indicator of credit cards, in the case of the bank, it is maintained at 0.22 percentage level, up 3 bps QoQ. However, in the case of credit card, with the interest rate rise and increasing requests for readjustment of fresh start fund and financial products, credit limit cuts for preemptive asset quality management it went up 18 bps QoQ. Please refer to Page 11 for a preemptive preparation for future uncertainty plans. And please refer to Page 12 for details on the group’s asset quality management.

Next is Page 13, capital management and major profitability indicators. As of the end of December, the CET1 ratio increased by 0.1 percentage points QoQ and is tentatively expected to post 12.7%. This is attributable to a sharp decrease in credit RWA due to a decrease in foreign currency loans and currency derivatives as the value of the yuan rose despite the factors that reduced the ratio due to year-end dividends.

Next, on Page 14, the group subsidiaries income. Despite the negative non-interest income trends and spike in provisioning, the bank’s net income grew YoY owing to the increase in interest income on the back of margin improvement. In the case of non-bank subsidiaries, in the case of the Shinhan Card, despite across-the-board increase in operating profit, including credit purchases, loan and lease, a rapid rise in funding costs, merchant fee cards and provisioning increase led to a slight decline in net income.

In the case of securities, operating profit was down, owing to the losses and valuation of AFS securities and volume transaction volume. The net income rose YoY due to gains from the sale of the head office. In the case of insurance, despite the falling income from asset management due to the base effect of the ERP program of last year, operational profit – the insurance profit increased, resulting in higher net income YoY. In the case of Shinhan Capital, capital saw net income grow YoY due to the solid growth in interest income. But on a QoQ basis, net income fell due to increase in real estate PF related provisioning and valuation loss and equity securities on the back of rising funding rate. In the case of subsidiaries related to the capital market, including asset management, asset trust, REIT management, the continued downturn of the capital market business led to a decline in net income YoY. The next page is on the Group’s global business and please refer to it at your leisure.

Starting from Page 16, I will talk about the mid-term capital policy of the company. This is Page 16. The shareholder return policy at your left have been reported to the BOD last February and have been communicated through the IR presentations to the market. The mid-term financial targets for 2025 on the right have been resolved at the BOD of last August. In the case of the mid-term financial targets, this is a framework that is necessary to enhance corporate value and to achieve sustainable growth for various stakeholders and short-term shareholders, customers, employees and society as a whole.

First of all, from the double-digit ROE, we have changed our ROE target with more specific numbers and our ROTCE, which deducts intangible assets from ROE has been added as a management indicator. Although this is not an easy number to achieve, that 10.5% and 12% respectively are the midterm goals that have been set. Towards this end, we intend to pursue growth in the size of the Capital Life business, which is less capital intensive and for the more capital-intensive areas, growth in quality will be pursued to achieve efficient capital allocation.

In this process, asset growth will be managed at the nominal GDP growth rate level. This must be achieved on the basis of solid robust capital stability. For this, our plan is to maintain the CET1 ratio above 12% at a stable level and the surplus capital that can be secured as much as possible will be used for the shareholder returns. That is our principle. The reason for setting the CET1 ratio above 12% is because we consider the 10.5% regulatory ratio. And after going through regular stress testing, we consider the level of CET1 ratio that will allow us to continue providing credit and financial services to the customers and the society at large.

Next, on Page 17, the results of the 2023 shareholder returns and the 2023 shareholder return policy directions based on the mid-term financial targets. Through the BOD that was held today, our company has resolved to pay out year-end dividends of KRW865 per share through this resolution to quarterly cash dividends up until now and the two treasury buyback cancellation included, we have been able to achieve 30% total shareholder return ratio that we have announced back in last February.

Let me now explain about the 2023 shareholder return policy discussed in the 2023 business plan that was passed last year at the BOD. First, for the cash dividend to raise the predictability of dividend, not only the quarterly dividend, but the year end dividend will be of the same amount. For instance, for a total of KRW2100, it will be KRW525 each. Also, the treasury buyback and cancellation will be reviewed on a quarterly basis. Meanwhile, the distribution of profit generated this year will be 6 to 4 ratio and retained earnings is set at 68% and the remaining 40% can be used for shareholder returns, but depending on whether the economic uncertainties continue and on the results of the regulators stress testing, we expect total shareholder return ratio of 30% to 40%.

As part of the 2023 shareholder return policy today, our BOD resolved to buyback and cancel KRW150 billion of treasury stock. The size of this treasury stock buyback and cancellation will depend on the CET1 ratio this year. But given the dilution of the shareholder equity, we are taking into consideration the volume that will be converted to common stock as of the May 1 this year.

Next, from Page 18 to talk about our digital strategy, our CDO, Kim Myoung Hee will take over.

Kim Myoung Hee

Good afternoon. I am Kim Myoung Hee, the CDO. Let me walk you through the Shinhan Financial Group digital division’s 2022 business results. In 2022, based on the digital division strategies, we have pursued the creation of 6 customer values and strengthening of four core capabilities by each key index of the digital strategy framework at the right, the key highlights will be explained.

First, the more friendly financial services, the digital platform of the group has grown into a financial platform, which is visited by 22.28 million a day, up 30% YoY. The two mega platform, the Bank SOL and the card businesses play led to growth, while non-financial platforms had 3.62 million visitors, up 92% YoY. The group’s MyData service users are 6.96 million. Bank card, securities and life insurance are opening on MyData services, and so in all financial areas, customized personal services are now being provided. The second area is more secure. 6.71 million customers use the Shinhan Sign Certificate to safely access not only the Group’s financial platform, but also for public and private sector partners sites safely. The digital innovation branches, which makes use of a range of video technologies and devices has grown twice as high YoY and has expanded to 173 branches.

Next is the more creative; through the digital new business, KRW9.5 billion in operating profit – operating income was posted data business and non-financial platform sales growth has started becoming a new source of income for the Group. Also, the Group as of today has invested KRW260 billion in strategic investment to expand the future digital ecosystem. For the four core capabilities, namely data process, technology, people organization, please refer to the presentation materials.

On the next page, I will explain about the DP results posted and the strengthening of the foundation for sustained growth going forward. The Group digital platform since 2020 has posted a yearly average of 26% growth, continuing a solid growth trend. Key financial platforms such as SOL pLay and Alpha has posted 18.6 million MAU, successful launching of the new SOL, the accessibility of the Card pLay and strengthened consulting services and the U.S. improvement of Alpha has become more customer friendly. These were the key reasons behind the MAU increase.

As you can see from below, the digital new business operating income also showed steady growth on the right-hand side. The efforts to strengthen the basis for the Group’s growth is described. The license necessary for digital life has been preemptively acquired to pursue the relevant business opportunities. Despite the rapid fingers in the digital age to carry on the core values of the financial business and to ensure sustained growth, we are strengthening the data utilization framework and ICT modernization is being pursued.

The Shinhan Financial Group will continue to place top priority on creating customer value in 2023 and will strengthen our digital core capabilities toward this end.

Thank you very much.

Lee Taekyung

Thank you, Mr. Kim for that detailed explanation. Started from Page 20, the corporate sustainability and other details about the Group and the affiliates are included, so please refer to them at your leisure.

With this, let me conclude the presentation, and we will now move on to Q&A. Thank you.

Question-and-Answer Session

A – Park Cheol Woo

[Operator Instructions] We have the first question. The first question is from Yafei Tian from Citi Securities. Yafei Tian, please.

Yafei Tian

Thank you. I have two questions. The first one is on net interest margin. We saw a small drop in the bank net interest margin this quarter. And subsequently, this year-to-date, we have seen further decline in the interest rate environment. So would appreciate management’s forward-looking outlook on net interest margin for this year, please? And the second one is on the capital return plan that you have laid out. So compared to some of your peers, the CET1 ratio target of 12% is a bit lower than peers. Can I understand what is the reason behind that? And also the full year ‘22 payout ratio of 30% is also a little bit lower than peers. So just wanted to understand, going forward, are we likely to see a divergence in payout ratio among different Korean banks? And also, so far, what is the feedback from regulators on your ambition to increase the payout ratio towards 40%?

Park Cheol Woo

Thank you very much, Yafei Tian, for your question, and we will soon answer your question. Thank you.

Lee Taekyung

Well, I believe that you asked two large questions. First is about NIM. And second is about capital policy. So for our NIM, we will hear from our bank’s CFO, and I will talk about our capital policy going forward.

Kim Kihoon

Thank you very much. I am Kim Kihoon, the Bank’s CFO. Thank you very much for your great questions. And for Q4, looking at the market interest rate, it rose greatly from Q3, and in our case, until Q3, I think we had some room and from Q4, we had some funding. And that is why regarding the LCR management and for our liquid deposits, we had the money move toward time deposits. So that is why in Q4, the funding costs went up steeply and I believe that led to the downward NIM trend in Q4.

In addition, after entering into 2023, we are seeing the market interest rate go down and be stabilized, but the overall funding costs – well, it is a bit higher than the time deposit rate. So if the trend in Q4 we believe will continue until Q1 of this year. We believe that will continue. But from Q2 of this year, we believe that there will be some stabilization of the money moved toward time deposits. And in Q4 of the previous year, there was a time deposit that we had at higher interest rates, and we believe that we will have lower rates for those. So we believe that from Q2, it will be stabilized. So from Q2 to Q3, we will have moved toward a stabilization trend. And added to that, for the quarterly NIM basis in 2022, when we compare to 2022, we believe that in 2023, we will have a rise. Thank you very much.

Lee Taekyung

I would like to answer your question related to our capital policy about CET1 ratio of 12%. You mentioned that it is slightly lower than our peers. And we have had a consistent CET1 ratio goal of 12%. It is firstly because of the regulatory framework. So we have the capital buffer ratio of 4.5% at DSIOP, it’s 8%. And then we have taken on cyclical CapEx. And if we add that, it’s about 10.5%. And then there is the management buffer really against M&As and others, which is 2.5%. So that is why this will reach the number and then we had some internal stress tests. And when there are the regulatory stress tests – looking at the scenario that we recently received, well less than 1% is due to stress test. So we believe that sufficiently, if we have 12%, even if we add that, it’s going to be that number. So we believe that even if there is an economic crisis, then this will become quite sustainable, and we can provide financial services to our customers and to the local communities with confidence.

Secondly, I think you asked about our dividend policy about PSR, 30%, which is lower than our peers. Well, I don’t know the rationale behind the other peers, but in our case in 2022, well, we had 30% that we had committed to, including share buybacks and we had KRW150 billion of share buyback that we have resolved. And when we look at – by fiscal year for the dividends, we had the business decision of the retained earnings. So I think we can calculate it based on last year and the KRW150 billion that was resolve to date or that has been confirmed after our financial plan. So I think it can be included as 2023. But when we calculated to other bank standards, how they calculated it, then we believe that including the KRW150 billion, it’s 33.2%. So I don’t think that our TSR is lower than our peers.

And regarding the third question, related to differentiated TSR policies for Shinhan, Well, I mentioned in the mid to long-term plans for capital policy is not just – I believe, to get more profitability compared to our capital. So we need to get more income, more earnings. And based on that, not only 100% is important, but I believe that if we have excess of CET1 12%, we need to acquire this at maximum, so that if we have shareholder return, then we will have – differentiating between Shinhan and other peers. And for the response by the financial authorities in the past, well, they have been emphasizing loss absorption is very important. And that is why I think that the CET1 12%, while we have seen some numbers by the regulatory authorities for that. So that is why the profitability compared to our capital and for our capital buffer. I think you can take all of that into consideration for a differentiation. And you have seen, I believe, a lot of the news in the media. So I think those will be the points that differentiate us from others.

Yafei Tian

Thank you very much for your answers.

Park Cheol Woo

Now we receive the next question. Next question is from Korea Investment Baek Doosan. Mr. Baek, you’re online.

Baek Doosan

Hello. I am Baek Doosan. Can you hear me, well?

Lee Taekyung

Yes. We can hear you well.

Baek Doosan

Thank you very much. So I have a question about the digital business. I have two questions, actually. First question, recently, your affiliate’s consolidated data platform had been created, so [indiscernible] this utilization system of the data what kind of directions are you seeking? For instance, improving internal work processes? Are you emphasizing cost savings or by using the data, or are you trying to seek new sources of income or where is the emphasis, versus the overall data governance and data strategies? That is my first question. And my second question is recently in the securities affiliate, the Token Securities business will be pursued. That has been a news report that I read. So what kind of underlying assets do you see, and what kind of partnership strategies do you have? Is there anything if so, can you share that with us?

Park Cheol Woo

Mr. Baek, thank you very much for those questions. While we are preparing our answers, please hold for a few seconds.

Lee Taekyung

So two questions were all digital related. So our CDO will answer those questions.

Kim Myoung Hee

So recently, we have announced the Group consolidated data platform. The bank card, life and securities, we will be using a consolidated data platform So this platform has been created for the customers, more personalized and customized services will be provided. As you have mentioned, cost savings and new sources of income – yes, there might be that impact, but our primary purpose is to center on the customers to provide more customized and personalized services that have been our primary market. And so in the case of our Group, we will continuously use the data well, so that the data are well collected, generated and stored, and is also effectively utilized, so that for each group affiliates, they will all strengthen their data governance structures. And overall, as a Group, these data will be used from each affiliate, and they will consolidate it into our platform. So the more personalized, ultra-personalized services can be provided to our customers. This is our purpose.

Secondly, with regard to the securities, with regards to blockchain business, we have been continuously monitoring the regulatory trends last year at the Group level, digital assets safe have been operated. STO; in the case of STO, the capital business – there is product regulatory laws and regulations. They are being devised at the moment I do believe. And so those who have the necessary expertise, the Shinhan securities had been preparing for this blockchain business. And so in 2022, they have a new department on blockchain that was instituted and along with a fin-tech company, we are pursuing an STO infrastructure business. And so in keeping with the regulatory trends and developments in order to provide these new financial services, we will be continuing to put our best foot forward. Thank you very much.

Baek Doosan

Thank you very much for your answers.

Park Cheol Woo

We will take the next question. From Daishin Securities, we have Park Hye-jin on the line. You are on the line. Please ask your question.

Park Hye-jin

I am Park Hye-jin from Daishin Securities. I have two questions. First is on 17 Page of your presentation. In May, you can see there is a lot that will be converted to common shares. So regarding share buyback and cancellation well, because you said you made a resolve today. So will it be done every quarter. And going forward, for the share buyback and cancellation, will they be more predictable? Will they be more regular? Second question is about digitalization and I think you have paid keen attention to digital using many of your presentation pages. So what is your take on Internet bank from Shinhan’s perspective?

Park Cheol Woo

Thank you for your questions. Please hold until we answer your question.

Lee Taekyung

I believe you asked two questions. You asked about capital policy, and you also asked about Internet bank. And related to digital, our CSO will answer that, and then I will answer the question about capital policy. On May 1st, we will have about KRW750 billion that converted to common shares. And regarding this, we have the existing share amount. So we have plans for share buyback and cancellation taking the dilution into consideration with our existing shareholders and you asked about predictability for each quarter. And we have been mentioning that for the cash dividends, they will be uniform, as most as possible. And share buyback and cancellation, we will keep an eye on CET1 ratio for each quarter. So we will see if we can have enough room. And if the share price is low, it could be higher. So it will depend on the circumstances. So it’s quite difficult for it to be very predictable. But at most, we will have adequate asset growth, and we will make more room that exceeds CET1 target, so that we can have active share buyback and cancellation.

Ko Seok-Hon

I am CSSO, Ko Seok-Hon. Thank you for your question. And regarding your second question, I would like to answer that. for Shinhan Financial Group, regarding our willingness to enter into the Internet-only bank industry, while in principle, well KB Financial Group has – KakaoBank, Woori, K Bank, Hana has casting financial investments previously. So in principle, that is not blocked. Then for Shinhan, we are not excluding opportunities to invest in Internet-only banks. But our foremost priority is, in Shinhan Financial Group’s digital and platform competitiveness and strengthening that competitiveness, so that we can have connection and expansion through non-banking entities, so that we can strengthen our competitiveness in digital. Despite this, regarding investment in Internet-only banks or alliances with Internet-only banks, we are not excluding those possibilities at all. So I think that will be my best answer going forward.

Park Cheol Woo

Thank you very much for those answers. At present, there is no incoming questions. So, we will wait for further questions. If you have any questions, please join the Zoom application and press on the hands up icon. Yes. We have one more question from SRS Securities, Shim Jongmin [ph]. Mr. Shim, you are online.

Unidentified Analyst

Yes. I am Shim Jongmin. Thank you for giving me this opportunity. I have one simple question on Page 17. On the lower right-hand side, there is the shareholder return policy and the regulator, stress testing results need to be agreed upon, that is mentioned. And the CSSO also, when you provided an answer for a previous question, well under 100% of the results of the regulator stress testing, that was a standard. So, are you saying that the internal stress testing by the regulators have been introduced, or are you going to agree with the regulators and conduct the stress testing, so what had taken place? Depending on which had taken place, what are the additional provisioning can be required by the regulators, I think that can be sort of assessed.

Park Cheol Woo

Thank you very much for those questions. Please hold while we are preparing the answers. Thank you.

Lee Taekyung

Thank you very much for those questions. With regards to stress testing, so I am going to disclose what happened – discussed internally. As you are aware, in the case of U.S., the stress testing loss buffer in 2008, after the financial crisis, this has been maintained in the United States for over 10 years and the regulators for their part. They recently introduced the stress testing in Korea. And so we have several scenarios. There is a need to have more sophisticated scenarios to reflect reality to a greater degree. But we need to continue monitoring the situation. In my view, we can – as I know there in the loss stress as efficiently. However, but to compare to United States, your company has a stress loss this percent. I don’t think we are at that level in Korea. I think we will need further consultations with the regulators for the banking sector. So, what I said was where we are at present. Additional provision is a separate matter, I believe. For expected losses provisioning is set aside, where unexpected losses take place, to prepare for those kind of situations, stress testing is conducted. So, I think this is two different matters.

Park Cheol Woo

Thank you for your answer. We have the next question from HSBC, we have Won Jae-woong. You are on the line, sir.

Won Jae-woong

I have one question. Recently, there is delinquency and DCR that seems to have inched up in your trend. And for this year’s trend, what is your outlook for this? Do you have any guidelines? Secondly, for loan growth for the bank and for digital bank, I think your growth estimates or targets are quite different. So, for your loan book growth, what is your guidance for growth this year?

Park Cheol Woo

Thank you very much for your questions. We will soon answer your question. Please hold.

Lee Taekyung

I believe you asked two questions. First is about delinquency and second question is about loan growth. For delinquency, our CRO will answer and for loan growth, I will answer your question.

Bang Dong Kwon

Hello. I am the CRO, Bang Dong Kwon. Thank you very much for the opportunity. For delinquency, as you aforementioned, it is true that it is on the rise. And at the latter part of last year, it was on a rising trend. And I think that we had some changes. So, with the interest rate rise, it is true that the payment capability went down, and there has been some expectations about government support policies. And for real estate prices, well, there is a time lag it has on the real economy. And when we take all of those factors into consideration until Q1 and Q2 of this year, for the vulnerable borrowers, we think that it will probably deteriorate, and we are seeing some signs. However, from late last year, we have been quite preemptive by the bank and by the credit card, but our subsidiaries have made preemptive preparations. So, we are going to see some results of these preemptive measures from Q1 to Q2 of this year. And we believe that at the end of Q2, this upward trend in delinquency will go down, although we are seeing a rise in delinquency. As was mentioned in the presentation, until so far, we are seeing our collateral or securitized portions that are going up, and we are seeing the loss absorption capabilities that have been strengthened through our conservative provisioning policy. So, taking all of those into consideration, it seems that even if the delinquency trends virtually continues, well, we believe that there might be some possibilities of it impacting our credit costs, but it will be quite limited. Thank you very much.

Lee Taekyung

Regarding the credit cost to add to the previous answer. On Page 10, you can see that for the credit costs, you can see the trend on the left graph. And we have preemptively provisioned KRW1 trillion. So, we had 0.37% for the previous 3 years, and pre-COVID in a normal economic environment from 2018-2019, 0.26% and 0.31%. So, we have a bit higher than that. So, of course, for delinquency rate, it can go up. But for credit costs, we believe that it will be quite limited. Secondly, regarding loan growth, well, you asked about the target difference between our bank and digital bank – digital. And as I have aforementioned, for the nominal GDP rate, well, we don’t think that the growth will exceed that amount. And I mentioned that we need to grow in quality, so we need to have profitability compared to our capital, and the economy is quite uncertain. So, that is why I believe, compared to the past the growth in loans will be a bit lower than the past. And not only for the bank, but also for the credit card, I think we are at a similar position, and we have plans with that in mind.

Park Cheol Woo

Thank you very much for those answers. We will receive further questions. Next question from JPMorgan Securities, Mr. Cho Jihyun. Mr. Cho you are on line.

Cho Jihyun

Thank you very much for this opportunity. I have three questions actually. First question, when doing a quarterly dividend, you said that it’s going to be uniform and even. So, what will be the floor – what percentage will be the floor? Is there any guidance on the expectations for that? So, if we have the guidance, we may be able to know – so is the additional shareholder return at once, you have achieved more than 12% CET1 ratio, would that be in the form of share buyback and cancellation? And then you talked about KRW140 billion of valuation losses that have been recognized all that once, or was it done on a real-time basis, and that is the reason why this amount is large? And on Page 11, the real estate exposure, that was about the Principal Protected Trust. The capital share seem to be larger for the real estate exposure. The metropolitan region you are referring to. And also you have been provisioning well, I think you have managed this well. But going forward, the real estate market situation and within the group affiliates, what kind of exposure is there in the second-tier financial institutes exposure. How well do you think this exposure will be maintained, managed going forward in the real estate PS market?

Park Cheol Woo

So, please hold while we are preparing the answers for these questions. Thank you.

Lee Taekyung

So, you have three questions. I will take the number one and number two and the third will be answered by our CRO. So, we talked about the quarterly dividend. So, as I have repeatedly said, the per share cash dividend will be slowly maintained or increased. So, last year there was a KRW2055. In 2023, it will not go down. It might be slightly more than that. So, that is the reason why it’s a good example of KRW2,100 and divide that by four, that will be KRW525 for quarterly dividend. So, that is our plan going forward. And of course, for the surplus amount, excess of 12%, the excess amount will be subjected to buyback and cancellation. And then talking about the Principal Protected Trust, so yes, it was a lump-sum recognized that we haven’t been recognizing in the past. But there has been a new interpretation for the accounting rules. It came out in December last year. And so we changed our accounting rules. And so there was a lump-sum recognition of this amount. The third question will be answered by our CRO.

Bang Dong Kwon

Good afternoon. I am the CRO, Bang Dong Kwon. Thank you very much for the question. With regards to PF capital exposure and lower projections, well, the capital exposure is about 30%/. On the PF and bridge loan together is about KRW8.8 trillion and 30% is for the capital. So, average value is high. So, that’s the current situation. With regards to real estate market, recently it’s a hot issue. Well, in our view, as you are well aware, the permit delays and the progress rate delays, these are risk factors, and the ForEx rate has gone up and also the construction materials cost has gone up. They are actually impeding these products as well. And the bridge loans, they are now being converted to the principal PF loans. And so because of these issues, there are concerns about the real estate PF. However, despite that, in order to more clearly give a picture of our situation, among KRW8.8 trillion, below sub-standard is about KRW50 billion, and the precautionary is about KRW48 billion. So, below our precautionary, it’s about KRW480 billion. That’s what is being managed. And so in the case of our group, yes, the delinquency is slightly inching up. There was about KRW90 billion in January in terms of delinquency. But this is the result that I have looked into. We do believe that demand can go up during the first quarter of this year. But internally, with the creditors, with the borrowers group, we will be continuing to consult and cooperate and respond to the situation. And the government policies are coming out as well, and we will be proactively responding these regulatory trends. So, we will be fulfilling our roles. We will be providing support for those companies undergoing temporary difficulties and challenges, and we will try to contribute our bit in resolving the situation going forward. And talking about the Principal Protected Trust, so the question was whether it will occur on a quarterly basis. So, in the next quarter, some write-back of reversals will take place from this amount, because there will be a maturity of some marketable securities. So, in next quarter, although the amount will be small, not losses, but actually we will be gaining from this. Thank you.

Park Cheol Woo

Thank you for your answer. We have another question coming in from Hyundai Motor Securities, we have Hongjae Lee on the line. You are on the line, sir.

Hongjae Lee

Thank you for the opportunity. I have one question. It is a quite micro question. And on the 16th page of your presentation material, regarding shareholder return policy, it says until 2025. So, is there a special reason why you have set 2025 as the reason? So, will it be updated every 3 years, is that your plan? Also well, it is actually a few years into the future, but when we hear your presentation, 12% of CET1 ratio, well, it seems that the buffer is sufficient. So, CET1 ratio of 12%, well it seems that it would be better to hear more from you about the changes that might happen for this.

Park Cheol Woo

Please hold until we answer your question.

Lee Taekyung

CET1, 12%. What was your exact question related to that? Can you repeat your question – the latter part of your question?

Hongjae Lee

You mentioned in your presentation, the CET1 ratio, 12% that it is a sufficient buffer. And after 2025, I thought that there were no reasons for CET1 ratio of 12% to change. But why do you have 2025 as the cutoff point in that presentation slide?

Lee Taekyung

Yes. Thank you. I now understand your question. The reason why it’s 2025 is because, first of all, when we discussed this last year, well – this was discussed when we talked about our strategy and our mid-term strategy framework was until 2025. So, that is why that year is included. And the second reason behind that is ROE and ROTCE, 10.5% and others that are targets. Well, these are numbers that are not quite easy, in the Korean financial markets, it’s quite challenging. So, we want to try our best for the next 3 years going forward. And we will see the situation after the next 3 years, and then we will have another discussion. And for CET1 ratio, well, even if it goes beyond 2025, I think this will still hold.

Park Cheol Woo

Thank you very much for your answer. Because of time constraint, we will wait for a few seconds for any further questions, and then we will wrap up. Because we have no further incoming questions, I would like to wrap up the Q&A session. With this, we would like to conclude the 2022 Shinhan Financial Group’s fiscal year earnings presentation. We would like to thank everyone for participating in today’s earnings presentation. And the materials for today’s earnings presentation can be viewed again in our website, as well as our YouTube channel. In the case of our YouTube channel, not only last IR events, but also other promotional videos have been uploaded. So, please refer to them at your leisure. Thank you very much for your attendance today.