Shinhan Financial Group is preparing to recover its position of dominance in the domestic financial sector. With its financial results in much better shape than those of other financial holdings companies in Korea, Shinhan appears to have returned from the shadow of the “Shinhan Fiasco”, a managerial dispute the Group suffered for several months last year.
The nation’s first-registered financial holdings company posted 924.3 billion won in net income for the first quarter this year, surprisingly beating its three competitors; KB, Woori, and Hana.
The result has shattered market expectations that it would be Shinhan Financial Group battling with KB Financial Group for the No.1 position. KB Financial Group announced net income of 757.5 billion won, exceeding market estimate of around 700 billion won. Shinhan’s net income for the period appears even more remarkable when compared to those of Woori Financial Group and Hana Financial Group, which posted 54 billion won and 389.5 billion won in net income, respectively.
Business conditions were not favorable for Shinhan, with worsening profitability in the construction division and rising bad debts in real-estate project financing (PF) loans. Nonetheless, thanks to the recovery in profit in the banking division and solid profits by non-banking affiliates, Shinhan realized the higher-than-anticipated result, up 0.7% from the same quarter last year and 57.9% up from the previous quarter.
The banking division experienced continued recovery in its net interest margin and stabilization of its loan loss provision, which resulted in net income of 651.6 billion won, a negative growth of 1.6%, and maintaining the same level as the first quarter last year.
In the meantime, non-banking affiliates of Shinhan Card, Shinhan Investment Corp., and Shinhan Life Insurance achieved a total net income of 357.2 billion won thanks to improved profit capabilities and enhanced asset quality.
Shinhan Card posted 32.3 trillion won in revenue, up 3.1 trillion won from the same period last year, and 19.1 trillion won in operating assets. Its net income for the period was 249.4 billion won, an 11.5% increase year-on-year. Net interest margin, including interchange fees, rose 7 basis points to 3.64%. The net interest margin of Shinhan Bank jumped 8 basis points to 2.28%, while the whole Group’s recorded 2.73%, exclusive of interchange fees in accordance with changes in accounting standards.
Shinhan Life Insurance announced 65. 4 billion won in net income for the first quarter this year, an 11.4% growth compared to last year. Shinhan Investment Corp., Shinhan Capital, and Shinhan BNP Paribas Asset Management registered 25.7 billion won, 10.5 billion won, and 6.5 billion won in net income after considering the equity ratio, respectively, demonstrating the group’s diversified sources of income.
Such results were reflected in the continued recovery in the Group’s overall profitability: Shinhan’s 1Q interest income increased 7.5% year-on-year and 4.5% compared to the previous quarter.
Despite growing bad debts in the construction sector and PF loans due to the sluggish real-estate market, overall asset quality remains stable, with loan loss provisions falling from 43 basis points to 39 basis points.
“Recovery in interest margin has supported continued growth in interest income, the core profit base of the Group. Against this backdrop, we lowered loan loss provisions through preemptive and aggressive management of asset quality. This, bolstered by solid improvement in profits achieved by non-banking affiliates, has resulted in a more stable profit base,” said a Shinhan source.
“When it comes to the banking division’s results, KB may outperform Shinhan. Solid profits by Shinhan’s non-banking affiliates have led to good results across the Group”, said Kim In, an analyst at Eugene Investment and Securities.
“Net income of 600 billion won per quarter amounts to well over 2 trillion won annually. A net income nearing 1 trillion won raises the possibility of achieving 3 trillion won,” he added.
As such, market observers are now paying attention to whether the Group will be able to overcome the stigma of the “Shinhan Fiasco”. Since the inauguration of Han Dong-woo as its new chairman, the financial conglomerate has concentrated on organizational restructuring and improvement in brand image, which is likely to be positively influenced by the Group’s performance this quarter.
“Although it may be too early to relate the recent organizational restructuring to financial performance, such remarkable results will certainly make a significant contribution to the recovery of our image”, said a source from the Korea Institute of Finance.
Another source from the banking sector stated, “It is difficult to directly link the managerial conflict at Shinhan last year with the 1Q performance. Nevertheless, the fact that it has achieved such results despite difficulties suggests that Shinhan has built a solid foundation that insulates the Group from external risks.”