Shinhan
Financial Group Co., Ltd. (SHG, $41.34): “Not Time to
Withdraw from this Bank Just Yet” By: Mitchell Beine, AIM Student
at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Shinhan Financial Group Co., Ltd. (NYSE: SHG) provides commercial
and consumer banking related financial and investment services, and is South
Korea’s largest financial group.
• The firm operates
through five segments, with Corporate and Investment Banking making up 49% of
the firm’s revenue.
• On March 9, 2017, the
Supreme Court of Korea ruled on charges against former directors of Shinhan by
finding them guilty for embezzlement and breaching the Financial Holding
Companies Act and Banking Act.
• On March 23, 2017, the
Board of Directors of SHG appointed Cho Yong-byoung as the Chairman and CEO of
SHG.
• Cho has stated that he
is eyeing M&A opportunities in Asia and the U.S. market
• As of the end of Q4
2016, SHG had increased its loan balance by 4.4% YTD, and overall revenues
increased 6.6% YoY.
Key
points: Shinhan’s management is in a period of transition as
it has recently appointed a new Chairman and CEO in Cho Yong-byoung. Cho has been with the bank since 2007, and
has been largely responsible for the bank’s efforts to expand
internationally. Now that he is in a
position of more power, he is continuing to emphasize this international
growth. Cho is hoping to expand through
M&A opportunities in Asia as well as the U.S. market, targeting 2020 as a
year where Shinhan becomes a leading financial institution in Asia. This global growth initiative was an original
driver when this stock was pitched in April of 2016, and it still holds strong
today.
Despite these ambitious goals, there has been some
negative news surrounding the firm as of late.
Transitioning to a new Chairman and CEO is not always a smooth process,
and while Shinhan may hit a few bumps in the road under Cho, they do have the
benefit of drawing on his decade plus of work experience with the bank. In addition, two former directors of SHG have
been charged by South Korea’s Supreme Court, one for embezzlement of funds
(guilty in part) and one for breaching of the Financial Holding Companies Act
and Banking Act. These black marks have
not had a drastic effect on the stock’s price however; since these two events
have been reported the share price has actually increased slightly over the
past month.
What
has the stock done lately?
SHG has experienced some
volatility lately, but for the most part it has been slowly creeping
upwards. Shinhan’s share price has
floated between $36.43 and $43.68 over the past 6 months. Given the news that has taken place over the
past month, it would be expected that the stock has lost some momentum. Surprisingly, the stock actually saw an
increase in price following the court’s ruling against its former directors as
the ruling came out more lenient than expected.
Since March 9, the stock has been in the range of $40.60 and $43.68
before closing his past week at $41.34.
Past
Year Performance:
Shinhan has been able to
grow its business through the aforementioned global expansion as well as
capturing growth opportunities in quality assets. The bank’s loan balance increased by 4.4%
YTD, with high quality unregistered SME loans increasing by 16.9% alone. Personal loans increased 14.4%, and deposits
grew 4% YTD. SHG has also maintained a
sufficient capital base, with a Common Equity Tier 1 ratio of 12.8% (down from
13.39%). It is very early in Cho’s
tenure as CEO but investors seem to be approving of his goals to expand the
bank’s business internationally.
Source:
FactSet
My
Takeaway
Shinhan Financial Group
Co. was pitched to the AIM International Portfolio with a target price of
$42.73 on April 15, 2016 with 21.9% upside.
Over the past year, SHG has surpassed this target several times, and
currently has captured most of this upside.
Despite this, the original drivers that were pitched remain firmly in
place, and with a new CEO hoping to expand the business further in the Asian
and U.S. markets, there is still room for more growth. As a result, I am recommending that the AIM
International Portfolio hold onto Shinhan as of 4/8/17.
