Idea of the Week: Shinhan Financial Group shows strong performance, with bond yields up to 5.8%!

The core businesses continue to grow steadily, demonstrating strong profitability

From Table 1, Shinhan Financial Group’s overall net profit for the first three quarters of 2024 reached KRW 4.0 trillion, reflecting a YoY increase of approximately 4%. Shinhan Bank is the Group’s largest contributor, accounting for about 70% of net profit. Meanwhile, Shinhan Card contributed around 13% of the Group’s net profit. Both segments posted nearly 20% YoY profit growth.

Table 1: Shinhan Financial Group Overall Net Profit

However, the performance of the Group’s other businesses was relatively weaker. Specifically, Shinhan Securities’ net profit fell to KRW 190 billion, reflecting a YoY decrease of 14.8%, primarily due to capital market volatility and reduced investment income. Nevertheless, the Group’s core businesses (banking and credit card operations) continued to grow, maintaining solid profitability.

Growth in loans and deposits, along with effective asset and liability management

Shinhan Bank’s net interest income for Q3 2024 reached KRW 7.3 trillion (see Chart 1), an 8% YoY increase, primarily driven by continuous growth in loans and deposits, as well as effective asset and liability management. The net interest margin remained steady at 1.6%, consistent with levels observed in previous years.

Although the Bank of Korea lowered its benchmark interest rate by 25 basis points to 3% in November 2024, with further rate cuts possible in the future, this would theoretically exert pressure on the bank's net interest margin. However, Shinhan Bank has achieved a compound annual growth rate (CAGR) of 7.8% in loans and 7.6% in deposits over the past five years. This sustained growth could drive its net interest income and profitability in the long term, partially offsetting the negative impact of potential future rate cuts.

Chart 1: Shinhan Bank’s Net Interest Income, Non-Interest Income, and Net Interest Margin  

It is worth noting that Shinhan Bank's loan portfolio is highly diversified (see Chart 2). The loans are primarily categorized into the following segments: Mortgage, Retail Loan (exclude Mortgage), SME (exclude SOHO), SOHO, and Large Corporate.

Over the years, the proportion of these loan categories has remained relatively stable. A diversified loan structure allows the bank to better withstand risks from specific industries, such as fluctuations in the real estate market. However, this diversification may reduce the efficiency of risk management and lower the proportion of relatively low-risk loan categories, such as mortgage loans.

Chart 2: Distribution of Shinhan Bank's Loan Portfolio

The loan delinquency ratio (the ratio of loans with principal or interest overdue by more than one month) and the non-performing loan (NPL) ratio (the ratio of loans with principal or interest overdue by more than 90 days) both remain at low levels, below 0.3%. Specifically, the loan delinquency ratio stands at 0.28% (see Figure 3), while the NPL ratio is 0.27%. However, compared to 2023, the overall loan delinquency ratio in 2024 has slightly increased, primarily due to the weaker performance of SME loans.

Chart 3: Shinhan Bank Delinquency Ratio and NPL Ratio

It is worth noting that in the fourth quarter of 2022, Taeyoung Engineering & Construction, a local mid-sized construction company, unexpectedly defaulted on asset-backed securities related to loans for the Legoland project. These securities involved the Gangwon Province government of South Korea as a guarantor. This series of events triggered a confidence crisis among local corporations, leading to a significant sell-off of corporate bonds in Korea, which in turn increased refinancing risks for these companies.

At the time, Shinhan Bank implemented several measures to mitigate the impact. These included significantly increasing loss provisions (by approximately 50% compared to 2022), arranging long-term financing in advance, conducting tighter monitoring of asset-backed securities, and boosting foreign currency reserves to address geopolitical risks. As a result, despite the interest rate hike cycle and the aforementioned default incident, both the non-performing loan (NPL) ratio and loan delinquency rate did not deteriorate significantly.

With South Korea now entering an interest rate cut cycle, borrowers' repayment pressures are expected to ease. This should theoretically help maintain the NPL ratio at low levels, with potential for further improvement.

Compared to peers (see Chart 4), Shinhan Bank's loan delinquency ratio and NPL ratio are among the best in the industry. Both metrics remain at relatively low levels, reflecting the bank's strong overall performance.

Chart 4: Delinquency Ratio and NPL Ratios of Korea's "Big Four" Banks in Q3 2024

Shinhan Credit Card asset quality shows improvement, NPL ratio expected to remain stable

The asset quality of Shinhan Credit Card has improved (see Table 2). The delinquency ratio decreased from 1.5% at the end of 2023 to 1.3% as of September 2024, while the NPL ratio remained flat at 1.3%, reflecting lingering credit pressure in certain areas.

Despite this, the group has adequately prepared for NPL risks by maintaining sufficient provision for loss. While the provision coverage ratio declined from 333% at the end of 2022 to 244% as of September 2024, it remains at a healthy and adequate level.

Given that South Korea’s local economy continues to grow modestly (around 2% annually), we expect the NPL ratio to remain stable and unlikely to deteriorate further.

Table 2: Key credit metrics for Shinhan Credit Card

Shinhan Group's capital adequacy ratios remain stable and exceed regulatory requirements

As of September 2024, Shinhan Group’s Common Equity Tier 1 (CET1) ratio and Capital Adequacy Ratio stood at 13.1% and 15.9%, respectively (see Table 3). These levels have remained stable in recent years and are above the current regulatory requirements.

However, with South Korean regulators planning to raise the CET1 ratio requirement to 13% by the end of 2024 (including a 1.5% countercyclical capital buffer), Shinhan Group is expected to respond by further strengthening its CET1 capital. Based on historical precedent, the group is likely to issue new shares to meet this requirement, which would further improve its capital adequacy metrics.

Table 3: Shinhan Financial Group Capital Adequacy Metrics

On the other hand, as of June 2024, Shinhan Bank's Liquidity Coverage Ratio stood at 102.7%, and its Net Stable Funding Ratio was 111.8%, slightly above the regulatory minimum requirements (currently 97.5% and 100%, respectively). Although these ratios may appear modest, it is important to note that since the onset of the pandemic, South Korean regulators have alternately relaxed and tightened these requirements. Shinhan Bank has consistently managed to swiftly adjust and maintain compliance, demonstrating its capability to adapt to regulatory changes and adjust these ratios effectively.

With regulatory authorities planning to restore the minimum LCR requirement to its pre-pandemic level of 100% in early 2025, we believe Shinhan Bank will further enhance its Liquidity Coverage Ratio and Net Stable Funding Ratio to ensure continued compliance and strengthen its liquidity position.

Bond Investments

Currently, four Shinhan Financial Group-related bonds are available on our platform, including three issued by Shinhan Bank and one by Shinhan Credit Card (see Table 4 for details).

Notably, Shinhan Bank has issued two Tier 2 capital bonds: the 2028 AUD bond (SHNHAN 5.000% 30Aug2028 Corp (AUD)) and the 2034 USD bond (SHNHAN 5.750% 15Apr2034 Corp (USD)).

Tier 2 bonds are tools used to strengthen the capital base. In terms of seniority in liquidation, these bonds rank below senior bonds but above Additional Tier 1 (AT1) capital instruments. Given Shinhan Bank’s stable operational performance and credit conditions, the likelihood of triggering loss absorption mechanisms is relatively low.

Currently, the 2028 AUD bond offers a  yield to maturity of 5.5%, which is outstanding compared to similar bank bonds. This bond is particularly suitable for investors seeking exposure to AUD denominated assets.

In addition, the two other USD bonds provides stable and attractive returns. The 2027 Shinhan Card bond (SHINCA 2.500% 27Jan2027 Corp (USD)) offers a yield to maturity of 4.9%, while the 2028 Shinhan Bank bond (SHNHAN 4.500% 12Apr2028 Corp (USD)) offers a net yield to maturity of 4.9%. These bonds are well-suited for investors seeking stable returns.

Table 4: Comparison of Shinhan Bonds

Related Risks

The South Korean real estate market has shown signs of weakness in recent years, with fluctuations in housing price potentially impacting Shinhan Bank's credit demand and asset quality, thereby affecting its overall performance.

With the Bank of Korea entering a rate-cutting cycle, the low interest rate environment compresses banks' net interest margins, slowing the growth of interest income. Shinhan Bank will need to mitigate this pressure through business diversification and cost control.

Additionally, the South Korean government has been increasing regulatory scrutiny in the financial sector, especially in areas such as data security, consumer protection, and loan risk management. This trend could result in higher compliance costs for Shinhan Bank.

Shinhan Bank's Tier 2 capital bonds are a type of Contingent Convertible Bond (CoCo Bond), which is a tool used to bolster bank capital. These bonds are subject to loss absorption event, which can be triggered if regulators determine that the issuing bank is in financial distress. In such cases, the bonds may be partially or fully written off to absorb losses.

Conclusion

The Group’s core businesses including banking and credit card operations, continue to grow while maintaining solid profitability. Loan and deposit volumes have been steadily increasing, while effective asset and liability management has led to improved asset quality for Shinhan Card.

Shinhan Financial Group’s capital adequacy ratio has remained stable in recent years, consistently exceeding current regulatory requirements. We believe the Group will further enhance its core capital levels under new regulations, reinforcing its financial stability.

Currently, Shinhan Bank’s 2028 AUD bond offers a yield to maturity of 5.5%, outperforming similar bonds from peer banks. In addition, Shinhan Bank’s 2027 USD bond and Shinhan Card’s 2028 USD bond also have stable and attractive yields.