SHG - Shinhan Financial: Focus On Earnings Miss And Shareholder Return

2023-07-28 03:12:26 ET

Summary

• Shinhan Financial's Q2 2023 net profit was slightly below the sell-side's expectations, as its bottom line was hit by higher credit costs and general & administrative expenses.
• However, investors liked the fact that SHG maintained its dividend payout and announced a new share buyback plan, and its stock price went up by +3.6% on the news.
• I keep my Hold rating for Shinhan Financial unchanged, after reviewing SHG's recent financial performance and shareholder return initiatives.

Elevator Pitch

I still rate Shinhan Financial Group Co., Ltd. ( SHG ) [055550:KS] stock as a Hold. Previously, I wrote about Shinhan Financial's near-term financial outlook and the regulatory risks for Korean financial institutions in my May 16, 2023 article .

The focus of my latest update is the review of SHG's financial results for the second quarter of 2023 and an analysis of the company's recent capital return moves. Shinhan Financial's Q2 bottom line was a negative surprise, but it was encouraging to see SHG continue distributing excess capital to shareholders. As such, I have a Neutral view of Shinhan Financial's shares which translates into a Hold rating.

Shinhan Financial's Q2 2023 Earnings Fell Short Of Expectations

SHG revealed how the company performed in Q2 2023 with a 6-K filing issued on July 27, 2023 before trading hours.

Shinhan Financial's net profit attributable to shareholders decreased by -4.6% YoY and -10.8% QoQ to KRW1,238 billion for the most recent quarter. Also, the company's actual second quarter bottom line was -1.1% lower than the analysts' consensus net income projection of KRW1,252 billion as per data obtained from S&P Capital IQ .

Earlier, I predicted that there will be "a turnaround for Shinhan Financial Group's core banking business relating to loan growth and net interest margin expansion in Q2 2023" with my mid-May 2023 write-up for SHG, and I turned out to be right. Shinhan Financial's KRW-denominated loans expanded by +0.6% QoQ for the second quarter of this year. The net interest margin for SHG's banking business also increased by +5 basis points QoQ from 1.59% in Q1 2023 to 1.64% for Q2 2023.

Net interest income for Shinhan Financial rose by +4.7% QoQ and +3.3% YoY to KRW2,694 billion in the second quarter of the current year, as a result of positive loan growth and net interest margin expansion. But SHG's bottom line still declined and missed the market's expectations for Q2 2023, despite the fact that it delivered robust net interest income growth. This was because Shinhan Financial's earnings were hurt by higher operating expenses and an increase in credit costs.

SHG's cost-to-income ratio went up by +0.8 percentage points from 37.9% for Q1 2023 to 38.7% in Q2 2023. In the same time frame, the General & Administrative or G&A costs for Shinhan Financial grew by +9.1% from KRW1,356 billion to KRW1,443 billion.

Shinhan Financial's provision for credit losses increased by +19.0% QoQ and +53.2% YoY to KRW549 billion in the second quarter of 2023. This implied that SHG's credit cost ratio had gone up significantly from 0.37% in Q2 2022 and 0.48% in Q1 2023 to 0.57% for Q2 2023.

In a nutshell, SHG suffered from a slight earnings miss in the second quarter, as its net interest income growth was more than offset by higher than expected credit loss provisions and operating costs.

Spotlight On SHG's Share Buybacks And Dividends

Shinhan Financial's share price rose by +3.6% to close at $27.48 as of the end of the July 27, 2023 trading day, even though its earnings didn't meet the sell-side's expectations. In my opinion, SHG's shareholder capital return initiatives relating to share repurchases and dividends were positive surprises which drove up the company's stock price on the day it was reported.

I had warned readers in my May 16, 2023 update for Shinhan Financial that "SHG's ability to return more capital to its shareholders via buybacks and dividends in the future could be potentially constrained by regulatory factors." However, SHG's recent shareholder capital return was still pretty decent.

SHG declared a quarterly dividend per share of KRW525 for Q2 2023, which was the same what it paid out in Q1 2023. More significantly, Shinhan Financial's Q2 2023 dividend was +31% higher than the company's dividend distribution (KRW400 per share) for the second quarter of last year.

Shinhan Financial also committed to a KRW100 billion share buyback for the time period between July 28, 2023 and October 27, 2023. This suggests that SHG would have spent around KRW400 billion on share repurchases in the first 10 months of the year.

Between January 1, 2023 and June 30, 2023, SHG has returned KRW839 million of capital to its shareholders in the form of dividends and treasury share cancellation (following share buybacks). Shinhan Financial's shareholder capital return for 1H 2023 is already more than half of what the company returned to shareholders for full-year FY 2022. As a reference, SHG allocated KRW1,393 billion of excess capital to shareholder return last year, versus its 2023 annualized capital return amounting to KRW1,678 billion.

Nevertheless, Shinhan Financial did caution in its Q2 2023 results presentation that future shareholder capital return will be decided on a quarterly basis and dependent on "macroeconomic conditions and outlook" and "regulatory consensus on stress test results."

Closing Thoughts

There is a mix of both positives and negatives for SHG, and this explains my decision to retain a Hold rating for Shinhan Financial. On one hand, Shinhan Financial's Q2 2023 net income missed expectations, and its future earnings could be negatively affected by higher credit costs in an uncertain economic environment. On the other hand, SHG is actively returning capital to the company's shareholders, and this is expected to be viewed favorably by investors from a capital allocation perspective.

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