Company Reports

We will discontinue analyst coverage of Shinhan Financial Group on or about Feb. 7. We provide analyst research and ratings on over 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

Shinhan Financial is one of Korea’s Big Four private-sector banking groups that together account for nearly half of the country’s loans, with the other half composed of government-owned and cooperative institutions accounting for 35% and foreign, regional, and savings banks together accounting for around 15%. We see the relatively large presence of policy banks and cooperative institutions in Korea, which is similar in size to Germany and larger than Japan, as a key factor making it difficult for the Big Four banks to earn returns maintainably above their cost of capital. Another factor underpinning our no-moat ratings on Korean banks is a history of relatively heavy-handed regulation that has prevented fee income from rising and sometimes inserted political considerations into credit decisions.

We maintain our fair value estimates for Shinhan Financial, Hana Financial, and Woori Financial after their third-quarter earnings announcements. We continue to view all the Korean banks in our coverage as significantly undervalued. Shinhan, Hana, and Woori trade at 0.36 times, 0.34 times, and 0.31 times book value respectively, which imply earnings multiples of only 3 to 4 times given their returns on equity of 9%-10% and dividend yields of 6.5% to 8.5% given payout ratios of around 26%. Our estimates of KRW 54,000 for Shinhan, KRW 65,000 for Hana, and KRW 18,000 for Woori put their fair price/book ratios at 0.56 times book value for Shinhan, 0.54 times for Hana, and 0.47 times for Woori, representing around 50% upside to our fair values for all three.

Shinhan Financial is one of Korea’s Big Four private-sector banking groups that together account for nearly half of the country’s loans, with the other half composed of government-owned and cooperative institutions accounting for 35% and foreign, regional, and savings banks together accounting for around 15%. We see the relatively large presence of policy banks and cooperative institutions in Korea, which is similar in size to Germany and larger than Japan, as a key factor making it difficult for the Big Four banks to earn returns maintainably above their cost of capital. Another factor underpinning our no-moat ratings on Korean banks is a history of relatively heavy-handed regulation that has prevented fee income from rising and sometimes inserted political considerations into credit decisions.

We maintain our fair value estimates of KRW 54,000 for Shinhan Financial, KRW 65,000 for Hana Financial, and KRW 18,000 for Woori Financial after the Korean banks’ second-quarter earnings announcements. Our fair values are equivalent to 0.57 times June 2023 book value for Shinhan, 0.55 times book value for Hana, and 0.49 times book value for Woori, around 50% higher than current share prices for all three. Our fair value for KB Financial, which reported earnings earlier this week and is the largest Korean banking group, is equivalent to 0.60 times its book value and offers similar upside.

Shinhan Financial is one of Korea’s Big Four private-sector banking groups that together account for nearly half of the country’s loans, with the other half composed of government-owned and cooperative institutions accounting for 35% and foreign, regional, and savings banks together accounting for around 15%. We see the relatively large presence of policy banks and cooperative institutions in Korea, which is similar in size to Germany and larger than Japan, as a key factor making it difficult for the Big Four banks to earn returns maintainably above their cost of capital. Another factor underpinning our no-moat ratings on Korean banks is a history of relatively heavy-handed regulation that has prevented fee income from rising and sometimes inserted political considerations into credit decisions.

We lower our 2023 earnings forecasts for Korean banking groups Shinhan Financial, KB Financial, and Hana Financial by 6% and our 2024 earnings forecasts by 8%. We now forecast their returns on equity will average around 9% over the next five years, compared with our previous expectation of around 10%. The main reason for the change is that we see industrywide credit costs of around 40 basis points of loans compared with our previous assumption of 35 basis points. This is due to rising delinquencies in credit cards (affecting Shinhan and KB somewhat more than Hana due to their larger card businesses) and credit costs arising from the banks’ exposures to real estate projects given the decline in property prices that started in the second half of last year and accelerated in the first quarter of 2023.

Shinhan Financial is one of Korea’s Big Four private-sector banking groups that together account for nearly half of the country’s loans, with the other half composed of government-owned and cooperative institutions accounting for 35% and foreign, regional, and savings banks together accounting for around 15%. We see the relatively large presence of policy banks and cooperative institutions in Korea, which is similar in size to Germany and larger than Japan, as a key factor making it difficult for the Big Four banks to earn returns maintainably above their cost of capital. Another factor underpinning our no-moat ratings on Korean banks is a history of relatively heavy-handed regulation that has prevented fee income from rising and sometimes inserted political considerations into credit decisions.

Shares of Asian banks in our coverage declined again Thursday morning after Credit Suisse’s 24% drop overnight to below CHF 1.70 per share reignited concerns about global financial stability that emerged last week with the failure of Silicon Valley Bank. In terms of systemic risk, we see very low risk of bank runs occurring anywhere in Asia given policy support from each government and the absence of problematic large institutions like Credit Suisse which could become vectors of contagion. Japanese banks are the most susceptible in Asia, in our view, to worries over financial stability in the United States or Europe due to their greater linkages with these regions. Next in terms of vulnerability, in our view, is the Korean banking system, which depends on having access to U.S. dollar liquidity. However, we think the U.S. Federal Reserve, or the Fed, can be relied upon to set up a currency swap arrangement with the Bank of Korea again if needed to ensure stability. The Fed has a continuous unlimited swap agreement with the Bank of Japan.

We updated our forecast models for Korean banks following 2022 earnings reports. Our fair value estimates for KB Financial, Shinhan, and Woori are unchanged at KRW 75,000, KRW 54,000, and KRW 18,000 per share, respectively, with KB offering 35% upside, Shinhan 31% upside, and Woori 42% upside from Friday's close. Our estimate for Hana has increased from KRW 62,000 to KRW 65,000 per share (33% upside) as we lift its long-term forecasts slightly.

Shinhan Financial is one of Korea’s Big Four private-sector banking groups that together account for nearly half of the country’s loans, with the other half composed of government-owned and cooperative institutions accounting for 35% and foreign, regional, and savings banks together accounting for around 15%. We see the relatively large presence of policy banks and cooperative institutions in Korea, which is similar in size to Germany and larger than Japan, as a key factor making it difficult for the Big Four banks to earn returns maintainably above their cost of capital. Another factor underpinning our no-moat ratings on Korean banks is a history of relatively heavy-handed regulation that has prevented fee income from rising and sometimes inserted political considerations into credit decisions.

Shinhan Financial is one of Korea’s Big Four private-sector banking groups that together account for nearly half of the country’s loans, with the other half composed of government-owned and cooperative institutions accounting for 35% and foreign, regional, and savings banks together accounting for around 15%. We see the relatively large presence of policy banks and cooperative institutions in Korea, which is similar in size to Germany and larger than Japan, as a key factor making it difficult for the Big Four banks to earn returns maintainably above their cost of capital. Another factor underpinning our no-moat ratings on Korean banks is a history of relatively heavy-handed regulation that has prevented fee income from rising and sometimes inserted political considerations into credit decisions.

Shinhan Financial is one of Korea’s Big Four private-sector banking groups that together account for nearly half of the country’s loans, with the other half composed of government-owned and cooperative institutions accounting for 35% and foreign, regional, and savings banks together accounting for around 15%. We see the relatively large presence of policy banks and cooperative institutions in Korea, which is similar in size to Germany and larger than Japan, as a key factor making it difficult for the Big Four banks to earn returns maintainably above their cost of capital. Another factor underpinning our no-moat ratings on Korean banks is a history of relatively heavy-handed regulation that has prevented fee income from rising and sometimes inserted political considerations into credit decisions.

We maintain our fair value estimates of KRW 75,000 for KB Financial, KRW 54,000 for Shinhan Financial, KRW 62,000 for Hana Financial, and KRW 18,000 for Woori Financial after the four Korean banking groups reported third-quarter earnings on Tuesday. These fair values are equivalent to 0.65 times book value for KB and Shinhan, 0.56 times book value for Hana, and 0.52 times for Woori and are 50%-65% above the current share prices, which declined sharply in summer and have yet to rebound amid fears over how tight U.S. dollar liquidity, a weak Korean won, U.S.-China tensions, and global economic slowdown will affect the banks. Seemingly validating such fears, Iwon Jeil Cha, a special-purpose company established for the construction of Legoland Korea, in recent weeks missed payment on short-term debt that had been guaranteed by Gangwon Province and filed for bankruptcy protection. The Legoland default shocked Korean money markets as the provincial backing had appeared to many investors to be an indication of safety regardless of the theme park’s profitability level. We agree with the view that “there’s never just one cockroach in the kitchen when you start looking around” but think that current share prices of 0.33 times to 0.43 times book value more than prices in the risks. Third-quarter earnings were strong, with KB generating ROE of 11%, Shinhan 14%, and Hana and Woori 13% each, as growth in interest income (due to still-widening net interest margins and fast loan growth to large corporations offsetting the slowdown in household loans) and good cost control more than overcame declines in investment banking, credit card, and other fees. We continue to forecast low-single-digit earnings growth for all four banks in 2023 and 2024 even with a slowdown in loan growth, flattening and then slight narrowing of net interest margins, and moderately higher credit costs and think the current low prices present an excellent opportunity for investors to buy the shares.

We maintain our fair value estimates for four Korean banks after their second-quarter results. The shares have declined 15%-26% in the past three months, widening the disconnect between the banks' quite solid ROEs above 10% and price/book ratios of only around 0.4 times. Based on our forecasts and PitchBook consensus estimates, the two top banks KB Financial and Shinhan trade below 4 times earnings while Hana Financial and Woori now trade below 3 times earnings. Dividend yields are 6.7% for KB and Shinhan and 8.9% for Hana and Woori, conservatively assuming payout ratios of 26%, in line with last year.

Shinhan Financial is one of Korea’s big four private-sector banking groups that together account for nearly half of the country’s loans, with the other half composed of government-owned and cooperative institutions accounting for 35% and foreign, regional, and savings banks together accounting for around 15%. We see the relatively large presence of policy banks and cooperative institutions in Korea, which is similar in size to Germany and larger than Japan, as a key factor making it difficult for the big four banks to earn returns maintainably above their cost of capital. Another factor underpinning our no-moat ratings on Korean banks is a history of relatively heavy-handed regulation that has prevented fee income from rising and sometimes inserted political considerations into credit decisions.

Shinhan Financial is one of Korea’s big four private-sector banking groups that together account for nearly half of the country’s loans, with the other half composed of government-owned and cooperative institutions accounting for 35% and foreign, regional, and savings banks together accounting for around 15%. We see the relatively large presence of policy banks and cooperative institutions in Korea, which is similar in size to Germany and larger than Japan, as a key factor making it difficult for the big four banks to earn returns sustainably above their cost of capital. Another factor underpinning our no-moat ratings on Korean banks is a history of relatively heavy-handed regulation that has prevented fee income from rising and sometimes inserted political considerations into credit decisions.

Korea’s major banking groups reported strong first-quarter earnings, with KB generating annualized ROE of 12.5%, Shinhan 12.4%, Woori 13.6%, and Hana 11.0% per our estimates, above our assumed cost of equity of 10%-11%. We raise our fair-value estimate for KB by 6% from KRW 71,000 to KRW 75,000 (equivalent to 0.66 times book value, our fair-value estimate for Shinhan by 4% from KRW 52,000 to KRW 54,000 (also 0.66 times book value), our fair-value estimate for Woori by 15% from KRW 15,650 to KRW 18,000 (0.55 times book value) and maintain our fair-value estimate of KRW 62,000 for Hana, equivalent to 0.59 times book value. There’s more than 20% upside from Friday’s closing price to our fair-value estimates for Shinhan, KB and Hana, and slightly more than 10% upside for Woori.

We maintain our fair value estimate of KRW 52,000 for Shinhan Financial Group, 0.64 times book value and 28% above the current share price, after its October-December earnings. For full-year 2021, Shinhan had a cost/income ratio of 45.3%, the lowest of Korea’s major banks. We continue to view Shinhan as the highest-quality stock in the sector given this efficient cost structure combined with its relatively diversified profit sources and lower historical earnings volatility. However, since mid-2020 Shinhan’s earnings have been intermittently blemished by costs to compensate investors for bad investment products sold by its bank and brokerage until 2019, with the result that full-year 2021 ROE was 9.3% when the other major banks had ROEs around 10%. Excluding KRW 192 billion in nonoperating loss in the fourth quarter for such compensation as well as a similarly sized negative impact in the prior quarter for one-time costs associated with the integration of Shinhan Life Insurance and Orange Life, Shinhan’s ROE would have been 10% and in line with peers, per our estimates.

Shinhan Financial is one of Korea’s big four private-sector banking groups that together account for nearly half of the country’s loans, with the other half composed of government-owned and cooperative institutions accounting for 35% and foreign, regional, and savings banks together accounting for around 15%. We see the relatively large presence of policy banks and cooperative institutions in Korea, which is similar in size to Germany and larger than Japan, as a key factor making it difficult for the big four banks to earn returns sustainably above their cost of capital. Another factor underpinning our no-moat ratings on Korean banks is a history of relatively heavy-handed regulation that has prevented fee income from rising and sometimes inserted political considerations into credit decisions.