Elevator Pitch
I continue to have a Bullish rating assigned to Shinhan Financial Group Co., Ltd. (NYSE:NYSE:SHG) [055550:KS].
My prior update on Shinhan Financial was published on April 20, 2021, and the company's share price rose by +9% from KRW36,800 as of April 19, 2021 to KRW40,250 as of July 2, 2021 since then. Shinhan Financial's stock price has increased by +28% in the past five months, after I turned Bullish on the name with an earlier article published on February 2, 2021.
In the current article, I provide key updates relating to Shinhan Financial and the Korean banking industry.
Shinhan Financial's move towards quarterly dividends this year is supported by the Korean regulators' recent decision to remove the dividend cap for Korean financial companies starting from July 2021. Also, there are indications from The Bank Of Korea that an interest hike is possible this year, which is positive for Shinhan Financial's future net interest margin and net interest income.
The market currently values Shinhan Financial at 0.47 times P/B and 5.1 times consensus forward FY 2022 P/E, and the stock boasts a forward FY 2022 dividend yield of 5.4%. I think that Shinhan Financial's current valuations remain appealing, which supports my Bullish rating for the name.
Move Towards Quarterly Dividends Supported By Removal Of Dividend Cap
Quarterly dividends are not the norm for Korean companies. In March 2021, Shinhan Financial became the first Korean financial services company and one of eight Korea-listed companies to make a move towards quarterly dividend payouts.
At its 1Q 2021 results briefing in late-April 2021, Shinhan Financial disclosed that the "Articles of Incorporation amendment was completed at the Ordinary Shareholders' Meeting" to "allow quarterly dividends from this year." Notably, Shinhan Financial also stressed at the earnings call that it wishes to "execute more diverse shareholder return policies." This suggests that Shinhan Financial could potentially raise its dividend payout ratio or increase the amount of share buybacks going forward.
More importantly, certain obstacles which have prevented Shinhan Financial from paying dividends on a quarterly basis have been removed.
The Korea Times reported on June 25, 2021 that "the Financial Services Commission" was "lifting its 20 percent dividend cap" imposed earlier, which implies that "domestic banks and financial holding companies will be allowed to pay unlimited interim dividends" in July 2021. Earlier in January 2021, Korean banks and financial services companies were asked by the Financial Services Commission to restrict their respective dividend payout ratios in 1H 2021 to 20% or below. This paves the way for Shinhan Financial to implement quarterly dividend payouts in the near future.
Another obstacle that Shinhan Financial had to overcome was the negative impact of the coronavirus pandemic on the company's financial performance, which could have limited its capacity to pay out dividends on a more regular basis. But Shinhan Financial's 1Q 2021 financial results have turned to be much stronger than expected. Shinhan Financial's net income attributable to shareholders grew by +28% YoY and +157% QoQ to KRW1,192 billion in the first quarter of fiscal 2021.
Notably, Shinhan Financial's efforts to diversify away from its core banking business, such as the acquisition of an insurance company, have paid off. The company's non-interest income increased by +40% YoY to KRW1,031 billion, and the earnings contribution from its non-banking subsidiaries as a proportion of total net income grew from 41% in 1Q 2020 to 48% in 1Q 2021. I believe this also gives Shinhan Financial greater confidence to move towards quarterly dividend payouts, because its income streams are now more diversified.
In a nutshell, the removal of the dividend cap for Korean financial companies and Shinhan Financial's good 1Q 2021 financial performance are supportive of the company's new quarterly dividend payout policy.
Potential Interest Rate Hike Will Be Positive For The Korean Banking Sector
In contrast with its non-banking business as outlined in the preceding section, the performance of Shinhan Financial's core banking business has been modest.
Shinhan Financial's net interest income rose by +6% YoY to KRW2,118 billion in 1Q 2021, and this only represented a marginal +0.4% growth on a QoQ basis. Its +10% YoY loan growth was partially offset by a contraction in net interest margin from 1.86% in 1Q 2020 to 1.81% in 1Q 2021. Shinhan Financial's net interest margin has already declined from 2.10% in FY 2018 to 2.00% and 1.80% for FY 2019 and FY 2020, respectively.
According to a June 24, 2021 Bloomberg article, The Bank of Korea's Governor Lee Ju-yeol has noted at a recent briefing that Korea's current interest rates were "significantly accommodative" and he expects "policy normalization" to happen "at an appropriate time this year." Last week, it was reported by Reuters that inflation in South Korea is "near a nine-year peak", which further supports the case of a rate hike in the country.
Shinhan Financial's net interest margin expansion from 2.02% in FY 2016 to 2.08% in FY 2018 coincided with a new interest rate hiking cycle in Korea which started in 2017. If interest rate hikes in Korea do happen this year, Shinhan Financial could potentially deliver better-than-expected net interest margin and net interest income in 2H 2021 and FY 2022.
Valuation And Risk Factors
The market values Shinhan Financial at a trailing P/B of 0.47 times, based on its share price of KRW40,250 as of July 2, 2021. Shinhan Financial is also valued by the market at consensus forward FY 2021 and FY 2022 P/E multiples of 5.2 times and 5.1 times, respectively. The stock also boasts consensus forward dividend yields of 5.0% and 5.4% for FY 2021 and FY 2022, respectively.
The valuations of Korean banks are generally attractive, as per the peer valuation comparison table below. Although Shinhan Financial is more expensive than most of its peers, this is reasonable considering that the company has the highest earnings contribution (48% as of 1Q 2021 highlighted above) from non-banking businesses among its peers based on my estimates. In other words, the market is valuing Shinhan Financial at a premium taking into account its more diversified earnings mix.
Peer Valuation Comparison For Shinhan Financial
Stock | Trailing P/B | Consensus Current Year P/E | Consensus Forward One-Year P/E | Consensus Current Year Dividend Yield | Consensus Forward One-Year Dividend Yield |
Woori Financial Group (WF) [316140:KS] | 0.35 | 4.5 | 4.2 | 5.7% | 6.2% |
Hana Financial Group [086790:KS] | 0.43 | 4.5 | 4.4 | 5.7% | 6.1% |
KB Financial Group Inc (NYSE:KB) [105560:KS] | 0.51 | 5.3 | 5.1 | 5.0% | 5.4% |
Source: S&P Capital IQ
Shinhan Financial's key risks include future dividends and share repurchases falling short of market expectations, and the absence of an interest hike this year.
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