Shinhan (SHG) posted 4Q18 net income of KRW513.3bn, beating the consensus of KRW507.7bn. A solid increase in core income (+14% YoY, +1.6% QoQ) helped offset voluntary severance packages amounting to KRW90.3bn. 4Q18 NIM (net interest margin) slipped QoQ (banking -1bp, group -2bps). 2019 NIM is expected to increase further YoY, by 3-4bps, led by the interest rate hike at end-2018 and improving funding structure.
Loans in KRW rose 2.1% QoQ and 7.2% YoY. Thanks to loan growth, net interest expense continued to rise 2.6% QoQ and 7.5% YoY despite the lower NIM. The credit cost ratio stood firm at 24bps, after an improvement of 7bps QoQ and 35bps YoY. A new NPL ratio of 61bps was also very encouraging. The full-year CIR (cost:income ratio) came down to a six-year low of 47.5% on the back of effective cost controls.
Shinhan set its 2018 DPS at KRW1,600. Despite share buybacks, the dividend propensity rose, albeit slightly (+0.3%p YoY), to 23.9%. Management aims to enhance the dividend propensity further, and is open to additional share buyback programs. We note the company’s growing ability to generate earnings on the back of steadily increasing core income backed by asset soundness. We maintain BUY and our target price of KRW66,000.
Major issues and earnings outlook
Shinhan is set to agree on April 30 to issue KRW750bn worth of convertible preferred shares (17.5mn shares, representing 3.7% of total shares). The shares, convertible one year after the issuance date, will be offered at KRW42,900/share with a dividend yield of 4%. We believe Shinhan plans to: 1) boost the CET1 (common equity Tier 1)ratio after it took a hit from the Orange Life acquisition; and 2) buy the remaining stake in Orange Life.
Shinhan plans to run Orange Life separately from Shinhan Life Insurance as it believes each company’s strength, client base and sales channels differ, which will create great synergy in terms of revenue. Management expects the consolidated Orange Life to contribute KRW170-200bn to operating profit annually (ownership percentage 59% as of Feb. 1). Shinhan agreed to acquire a 60% stake in Asia Trust in October 2018. Management plans to boost Asia Trust’s ability to generate earnings (currently KRW20bn per year) further by creating synergy. Our target price is based on 2019F BPS and a target P/B of 0.85x (COE 11.4%, ROE 9.7%).
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Additional disclosure: Hyundai Motor Company is a passive shareholder in our bank.