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Fundamental View
AS OF 07 Mar 2024Shinhan FG was for many years the best managed of the large Korean financial groups, taking the opportunity around the Asian Financial Crisis to acquire competitors and other businesses that increased its scale and expanded its business lines.
It has a good track record, but in the past few years, its performance has had more variability. After a bumpy 2020, it had a better 2021, and FY22 was better still thanks to rising interest rates. However, operating performance has turned weak again in FY23. NIM is well controlled. Credit costs have increased but are within our expectations. Recurring credit costs are expected to decrease in FY24, but additional provisions may still be needed. Capital is comfortable, but the distance vs. KBFG has increased.
Business Description
AS OF 07 Mar 2024- Shinhan Financial Group (Shinhan FG) is one of the most diversified financial groups in Korea and the holding company of the second largest Korean bank - Shinhan Bank. It also has credit cards, securities, asset management and insurance subsidiaries.
- Shinhan Bank was set up in 1982 with seed capital from Korean residents in Japan. It was more professionally managed than the heavily politicised older banks and came through the 1997 Asian Financial Crisis in relatively good shape, taking the opportunity to acquire the larger and much longer-established Chohung Bank in 2003.
- In 2007, it made another timely acquisition, buying LG Card from its creditors after it failed during the 2003 Korean consumer lending crisis. Shinhan Card is the largest card issuer in Korea.
- Shinhan is also looking for overseas opportunities where growth is strong and Korean businesses have a presence, with a focus on Vietnam (where Shinhan Card also bought a consumer finance business in 2019) and Indonesia. ~30% of Shinhan Bank's overseas loan book is in Japan and China.
Risk & Catalysts
AS OF 07 Mar 2024As one of the “Big Four” financial groups in Korea, we believe Shinhan FG would likely receive governmental support if needed.
Asset quality pressure is rising from domestic real estate project financing and overseas real estate investments, with credit costs rising from very low levels. Management expects recurring credit costs to decrease in FY24, but additional provisions may still be needed due to regulators’ guidance for financial institutions to take a more conservative stance on provisioning.
Shinhan FG had some relatively recent missteps, with the mis-selling of asset management products to retail investors, resulting in KRW 63 bn in fines in 1Q21. The Shinhan Securities senior management was replaced as a consequence.
The group is under investigation for mis-selling equity linked products to retail investors in 2021; fines and regulatory actions may ensue.
Key Metrics
AS OF 07 Mar 2024KRW bn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
Pre-Provision Profit ROA | 1.19% | 1.09% | 1.11% | 1.10% | 1.23% |
ROA | 0.64% | 0.60% | 0.66% | 0.72% | 0.66% |
ROE | 9.4% | 8.4% | 9.2% | 10.0% | 8.6% |
Provisions/Average Loans | 0.32% | 0.43% | 0.28% | 0.34% | 0.78% |
NPL Ratio | 0.52% | 0.49% | 0.39% | 0.41% | 0.56% |
CET1 Ratio | 11.20% | 12.90% | 13.10% | 12.79% | 13.13% |
Equity/Assets | 7.1% | 7.3% | 7.3% | 7.6% | 7.8% |
Net Interest Margin | 2.00% | 1.80% | 1.81% | 1.96% | 1.97% |
CreditSights View
AS OF 09 Feb 2024Shinhan FG is one of the four nation-wide commercial banking groups in Korea, with credit card and insurance arms. It had over many years the best operating track record, but the gap has narrowed and we now view Shinhan as overtaken by KB and Hana. 2023 has been challenging, as topline revenue growth was more than offset by increasing operating expenses and provisions. Asset quality is under pressure with the highest NPL ratio among the four FGs, though it is well within manageable levels. Its CET1 ratio is slightly above its 13% target.
Recommendation Reviewed: February 09, 2024
Recommendation Changed: September 22, 2020