Fundamental ViewAS OF 16 Feb 2023
Shinhan 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 again has shown an improvement, thanks to rising interest rates. However, margin growth has stopped in 4Q22. Capital is comfortable, asset quality is sound, and provision coverage is strong.
Business DescriptionAS OF 16 Feb 2023
- 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, with interests in credit cards, securities, asset management and insurance.
- 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 recently bought a consumer finance business), and Indonesia. ~30% of Shinhan Bank's overseas loan book is in Japan and China.
Risk & CatalystsAS OF 16 Feb 2023
As one of the “Big Four” financial groups in Korea, we believe that Shinhan FG would very likely receive governmental support if needed.
Credit costs are rising from very low levels as expected, but normalized credit costs (excluding additional provisions) are still stable.
NIM growth challenge came in earlier than expected with 4Q NIM down 1-2 bp QoQ for both the group and the bank, as rising yields were offset by increased finance costs and some amount of moral suasion by the government to not pass on rate increases / reduce mortgage rates.
Shinhan FG has a lower CET 1 ratio target than KBFG and Hana FG at 12%, likely leaving room for future M&A opportunities or share buybacks.
Shinhan FG had some recent missteps, with the misselling 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.
CreditSights ViewAS OF 16 Feb 2023
We have a Market perform recommendation on Shinhan Financial Group (Shinhan FG). Shinhan 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 Hana and KB, although Shinhan’s FY22 performance was strong and KB’s less compelling. Coverage ratios are comfortable and pre-emptive provisions have been taken. Capital had been stretched by acquisitions but improved subsequently. We are surprised to see it set a relatively low CET 1 ratio target of 12%, likely to make room for future M&A opportunities or share buybacks. A senior bond from their card sub is trading at compelling levels.
Recommendation Reviewed: March 01, 2023
Recommendation Changed: September 22, 2020