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.
Key MetricsAS OF 16 Feb 2023
|Pre-Provision Profit ROA||1.09%||1.11%||1.09%||1.19%||1.17%|
|Net Interest Margin||1.96%||1.81%||1.80%||2.00%||2.10%|
CreditSights ViewAS OF 21 Jun 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. Its 1Q23 results lagged its peers with marginal topline revenue growth. Capital had been stretched by acquisitions and now is only better than Woori’s. Shinhan has a relatively low CET 1 ratio target of 12%, likely to make room for future M&A opportunities or share buybacks.
Recommendation Reviewed: June 21, 2023
Recommendation Changed: September 22, 2020
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Fundamental ViewAS OF 18 Aug 2022
- KEXIM is a pure policy bank that is directly and indirectly wholly owned by the government of the Republic of Korea which is obliged under Article 37 of the Export-Import Bank of Korea Act to fund any losses that cannot be covered by the bank’s reserves.
- While this is a solvency guarantee and does not explicitly guarantee the timely repayment of debt, we view it as inconceivable that the Korean authorities would fail to provide KEXIM with support in a timely manner, should this be needed, given its crucial policy role and close government links.
Business DescriptionAS OF 18 Aug 2022
- KEXIM was set up in 1976 to support Korean companies in their overseas business through export credit guarantee programs, as well as providing finance for imports and for overseas investment. It provides funding for both short term trade and long term investment, manages the Economic Development Cooperation Fund, a Korean official development assistance program, and was a conduit through which the government doled out COVID-19 assistance to affected companies.
- Till 2030, KEXIM aims to preferentially focus on seven sectors (hydrogen energy, wind and solar power, rechargeable battery and energy storage systems (ESS), future mobility, 5G and next-generation semiconductors, pharmaceutical and healthcare, and digital technology and cultural content) which are considered new growth drivers of the Korean economy. It has historically focused on the shipbuilding, and engineering & construction industries.
- KEXIM is 100% owned by the Korean government: 69% directly and the remainder through stakes held by the Bank of Korea (9%) and Korea Development Bank (22%). In contrast to peer policy banks IBK and KDB, KEXIM has remained more consistently a policy bank but its role has been adjusted to ensure it complements rather than competes with the Korean commercial banks.
Risk & CatalystsAS OF 18 Aug 2022
- Previous Korean governments have made moves to privatise the other policy banks, but KEXIM has retained its policy bank role and government ownership, and these are not likely to change.
- Korea’s shipbuilders have long been the largest users of KEXIM’s services. Losses on exposure to the sector, in particular Daewoo Shipbuilding (DSME), pushed KEXIM into the red in 2016 but the government injected capital and its condition has recovered.
- Together with KDB, KEXIM has played a key role in helping corporate Korea survive the COVID-19 induced crisis.
- KEXIM’s ratings are the same as the Korea’s sovereign ratings, which are now all in the AA range.
Key MetricsAS OF 18 Aug 2022
|Pre-Impairment Operating Profit / Average Assets||1.12%||1.17%||1.34%||1.34%||1.42%|
|Nonperforming Loans/Total Credits||1.31%||1.22%||1.47%||1.38%||3.37%|
|Total Equity/Total Assets||15.1%||14.8%||14.9%||15.0%||14.8%|
|Net Interest Margin (NIR/Ave Assets)||0.92%||0.94%||0.98%||1.14%||1.26%|
CreditSights ViewAS OF 30 May 2023
KEXIM is a wholly government owned policy bank benefiting from a Korean government solvency guarantee. It plays a key role in financing large-ticket exports in particular ships and large-scale overseas engineering projects. Its credit exposures include some industry and borrower concentrations especially to Korea’s shipbuilders and its financial performance has at times suffered. But the Korean government has always acted in a timely manner to endure its solvency and with this strong backing we view it as a sound credit. We view its secondary levels as in line with where we would expect it to trade and so continue with our Market perform recommendation.
Recommendation Reviewed: May 30, 2023
Recommendation Changed: September 22, 2020