Shinhan Financial Group's Saga

Financial conglomerate racks up 2 tln won in net profit for 2 consecutive years and will strive to maintain asset soundness

Shinhan Financial Group posted 2.186 trillion won in net profit in 2008, recording over 2 trillion won in net profit for two years in a row, including 283.7 billion won in net profit in the fourth quarter last year, the group announced recently. The record is considered one of the greatest as it came despite an adverse banking environment ushered in by the sweeping global economic crisis, especially in the fourth quarter. Shinhan Bank, one of its major affiliates, had to increase its loan loss provision due to financial difficulties experienced by the shipbuilding and construction industries, two of the bank's major sources of profit, and Shinhan Card was hit with restructuring expenses, which have been costly to the group.
The fourth quarter net profit therefore, showed a reduction compared to previous quarters and down 5.8 percent YoY. The group's fourth quarter net profit remained about the same as the previous year taking into account the 490 billion won in one-time nonrecurring income through the sale of securities. Net profit in the banking sector posted 1.461 trillion won, down 29.1 percent from the previous year, while the non-banking sector posted net profit rising 25.5 percent over that of the previous year at 1.335 trillion won.
The share of the contribution to the group's total net profit by the non-banking sector rose to 48 percent in 2008 from 34 percent in the previous year and 24 percent in 2006, in a show of the balanced contribution by each sector of the financial group. The ratio of nonperforming loans increased by 14 bp from the end of last year and 8 bp from the previous quarter of 1.14 bp, which is still considered stable, showing that the health of its assets have been managed soundly.
Of particular note, Shinhan Card has been able to continue to keep its high profitability despite the adverse economic conditions, showing that its assets are sound. Officials of the financial group said they will strive to maintain the high level of soundness of the group's financial assets in 2009, during which the economic slump is expected to continue. They added that the group will try to turn the crisis into an opportunity and take care of various ineffective factors to continue to maintain its high customer confidence.
Major characteristics of the 2008 performance results were:
First, the portfolio was well balanced and savings in expenses led to high net income for the group. The group sustained one-time losses in its investments in such companies as Lehman Brothers and Taesan LCD, but its well-balanced portfolio between the banking and non-banking affiliates and savings in marketing expenses amounted to 2.2 percent YoY, enabling the group to post over 2 trillion won in net profit for two years in a row.
Second, the group's excellent performance results were the result of its ability to maintain a high net interest margin (NIM) averaging 3.52 percent, one of the highest in the financial industry. NIM rose 4 bp in the fourth quarter with the jump in money market interest rates in the previous quarter.
Major affiliates of the group maintained adequate capital ratios at the end of 2008 with Shinhan Bank at 13.4 percent and Shinhan Card at 20.3 percent, tops in their respective industries, which are likely to be maintained in the days ahead.
Third, the health of the group's assets was sound, despite the economic downturn. Increases in unsold new apartments, sluggish exports and deterioration of corporate finances centered around the construction and manufacturing industries and SMEs caused increases in NPLs, but most of the industrial sector maintained sound financial conditions.
NPLs for the entire group rose 14 bp YoY and 8 bp in Q4 from Q3. Shinhan Card was able to reduce payment delays to less than a month by 22 bp from the end of the previous year through a portfolio improvement to upgrade the soundness of its assets.
A look at the performance results by affiliates, Shinhan Bank recorded 1.447 trillion won in annual net profit in 2008, down 29.5 percent YoY, but its Q4 profit increased 66.4 percent from Q3 at 356.7 billion won. Interest income rose 11.8 percent at 439.4 billion won, up 17.6 percent in Q4 at 178.6 billion won from Q3, and NIM fell 14 bp YoY in 2008, but rose 4 bp in Q4 from Q3. Non-interest income fell in 2008 due to reduced commission fees from stock transactions as the bourse took a dive amid the economic downturn and the absence of non-recurring income such as those from the sale of securities in 2008, unlike in 2007.
Marketing expenses were reduced by 174.4 billion won YoY or 7.3 percent, and 58.7 billion won or 10.3 percent in Q4 compared to Q3. The default ratio on household loans recorded 0.33 percent, an improvement from the previous year and default rates on the part of SME borrowers increased slightly at 1.25 percent, but still a manageable rate. nw

President Shin Sang-hoon of Shinhan Financial Group