Tactical Risk Management And Shareholder Initiatives Propel Financial Optimism

Key Takeaways

• Shinhan Financial Group aims for a significant increase in shareholder value with regular share buybacks and a high total shareholder return goal by 2027.
  
• Strategic financial management and focus on qualitative growth over quantitative may enhance revenue, profitability, and operational efficiency.
  
• Significant losses and declining noninterest income at Shinhan Financial Group highlight challenges in risk management, asset quality, and profitability amid market uncertainties.

Catalysts

Provides financial products and services in South Korea and internationally.

• Shinhan Financial Group plans to maintain a CET1 ratio of 13% or above, indicating strong financial stability, which can support future capital returns initiatives like share buybacks, potentially boosting earnings per share (EPS).
  
• The group is committed to regular share buyback and cancellation programs, aiming for a 50% total shareholder return by 2027, which could significantly increase EPS and enhance shareholder value.
  
• Despite a challenging interest rate environment, Shinhan Financial Group is managing to increase its bank's interest income through strategic asset-liability management and loan growth, potentially boosting revenue.
  
• Efforts to improve internal controls and review deficiencies in Shinhan Securities signal proactive risk management, which could improve operational efficiency and stabilize net margins in the future.
  
• Shinhan Financial Group's focus on qualitative growth over quantitative, including improved resource allocation based on ROE and ROCE assessments, could enhance overall profitability and elevate earnings growth.

Shinhan Financial Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Shinhan Financial Group's revenue will grow by 2.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 29.6% today to 33.2% in 3 years time.
• Analysts expect earnings to reach ₩5267.5 billion (and earnings per share of ₩11558.39) by about November 2027, up from ₩4422.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.5x on those 2027 earnings, up from 6.3x today. This future PE is lower than the current PE for the US Banks industry at 12.8x.
• Analysts expect the number of shares outstanding to decline by 3.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.78%, as per the Simply Wall St company report.

Shinhan Financial Group Future Earnings Per Share Growth

Risks

• Significant losses on derivatives trading at Shinhan Securities have impacted the noninterest income segment, reducing net income by 13.1% quarter-over-quarter. This reflects poorly on the company’s risk management and could affect net margins and earnings.
  
• The incident involving the KOSPI 200 Futures contributed to a capital reduction and a decrease in the group CET1 ratio by 6 basis points, which may affect investor confidence and the group’s financial stability.
  
• The group’s noninterest income fell by 25.6% Q-o-Q due to securities derivative losses and impairments on overseas alternative investments, highlighting vulnerabilities in revenue generation and the effectiveness of diversification strategies.
  
• The declining NIM (Net Interest Margin) due to interest rate cuts poses a risk to the profitability of Shinhan’s core banking operations, affecting revenue and potential earnings growth.
  
• Uncertainties in the PF (Project Finance) market and potential provisioning pressures could pose a risk to asset quality and further impact earnings if the real estate market recovery is slower than anticipated.

Valuation

• The analysts have a consensus price target of ₩69780.0 for Shinhan Financial Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩81000.0, and the most bearish reporting a price target of just ₩52000.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₩15850.5 billion, earnings will come to ₩5267.5 billion, and it would be trading on a PE ratio of 7.5x, assuming you use a discount rate of 7.8%.
• Given the current share price of ₩55700.0, the analyst's price target of ₩69780.0 is 20.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.