A Lucrative Investment
Shinhan Financial Group conducted a capital increase through third-party allocation on Sept. 4. Specifically, Hong Kong-based private equity firms Affinity Equity Partners and Baring Private Equity Asia invested 605 billion won and 553 billion won, respectively. Their investment is equivalent to 7.9 percent of the total issued shares. Their shares will be locked up for one year and subject to sale restrictions for two years.
It seems that the two firms regarded the stock price of the company undervalued. The capital increase was carried out with common stocks instead of redeemable convertible preferred stocks or exchangeable bonds.
The discount stood at 2 percent whereas it is approximately 10 percent in most capital increases through third-party allocation. The current stock price of the company is a 10-year low and its current PBR is 0.3.
Although the group’s dividend payout ratio is lower than those of global leading financial companies, its cash dividend yield for this year is estimated at 5 percent to 6 percent. Additional dividend payment is probable as well. The firms also demanded more dividends.
It appears that the firms’ goals are trading profits, dividend profits and influence as key shareholders. The two firms are now the third-largest shareholder in the group behind a Japanese shareholder and the Korea National Pension Service.
South Korean banks have been discounted compared to global banks due to their fragile governance structures. Their decision-making has been led by the management rather than the board and frequent government interventions have hindered their advancement. Shinhan’s recent capital increase, that is, governance diversification is expected to lead to synergy in terms of autonomous governance as well as overseas investment, M&A and digital transformation.
The two firms can appoint two outside directors in the group. As of June this year, the board of the company consists of one inside, two non-executive and 10 outside directors. The number of outside directors as shareholder representatives will increase from six to eight through the appointment. “The group’s governance structure, which has been led by minority shareholders, the National Pension Service and asset management firms such as BlackRock, is expected to go through a significant change,” said an industry source.