Tuesday, April 11, 2017

A current AIM International Fund holding: Shinhan Financial (SHG) by Mitchell Beine. "The drivers are still in place and a new CEO supports the hold recommendation"


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


Image result for Shinhan Financial Group Co logo
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.




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