Summary in seconds
My Buy Investment Rating for Shinhan Financial Group Co., Ltd. (NYSE:SHG) [055550:KS] shares remains unchanged. In a previous article written on December 3, 2021, I discussed the company’s online financial results for the third quarter of 2021.
Shinhan Financial’s overall financial performance for the fourth quarter of 2021 was disappointing, but investors should instead focus on the company’s other metrics, such as continued net interest margin expansion and cost-to-income ratio. relatively low income. With the company’s stock trading at less than half book value and less than 5x forward P/E, Shinhan Financial could easily see a substantial expansion in its P/B and P/E multiples assuming that the future growth of its earnings and dividends is satisfactory. In this case, Shinhan Financial appears intent on increasing its dividend payout ratio, while expected rate hikes in South Korea support the company’s earnings growth in the near term. As such, I have decided to maintain a buy rating for Shinhan Financial.
Reported fourth quarter earnings fell short of market expectations
Net profit attributable to shareholders of Shinhan Financial fell -59% quarter-on-quarter from KRW 1.116 billion in the third quarter of 2021 to KRW 460 billion in the last quarter, according to financial results presentation slides from the company for the fourth quarter of 2021. More importantly, the company’s net income is -26% lower than sell-side analysts had expected, according to financial estimates from S&P Capital IQ.
But it looks like Shinhan Financial could have taken “a deep dip” in the fourth quarter of 2021 to clean the deck and lay the groundwork for stronger financial performance through an easier annual comparison in 2022.
The company’s operating revenue was actually up around +4% QoQ in Q4 2021, and a number of one-off factors were responsible for its earnings loss in the last quarter. Based on my calculations, Shinhan Financial recorded about KRW 0.5 trillion in one-time expenses related to early retirement plan costs and investment product losses.
In other words, Shinhan Financial would have exceeded market expectations with its Q4 2021 financial performance, if these one-off items were excluded. More importantly, Shinhan Financial performed well on a number of financial metrics in the fourth quarter of last year, which I will expand on in the next section.
Fourth Quarter Bright Spots Deserve More Attention
In my opinion, there are three key financial metrics that investors should pay attention to.
First, Shinhan Financial’s net interest margin increased by +7 percentage points year-on-year and +4% percentage points quarter-on-quarter to 1.83% in the fourth quarter of 2021. The market consensus, according to data from S&P Capital IQ, expects the company’s net interest margin to decline from 1.81% in full-fiscal 2021 to 1.84% in fiscal 2022 and further increase to 2.00% in fiscal 2024. Research firm Capital Economics predicts “another three 25 basis point hikes in 2022, bringing the policy rate (in South Korea) to 2.00%,” which supports the case for the expansion of the net interest margin.
Second, the company’s cost-to-income ratio was 46.1% in 2021. It should be noted that Shinhan Financial’s cost-to-income ratio is much lower than most of its major Korean financial services peers. For comparison, the cost/income ratios of KB Financial Group (KB) [105560:KS] and Hana Financial [086790:KS] were higher at 49.7% and 47.5%, respectively, last year. In the current inflationary environment, Shinhan Financial’s ability to manage costs should not go unnoticed.
Third, Shinhan Financial appears to have sufficiently provisioned for loan losses already. The company’s cost of credit ratio increased only slightly, from 0.40% in the last quarter of 2020 to 0.46% in the last quarter, while its NPL (non-performing loans) ratio increased. decreased from 0.44% in the third quarter of 2021 to 0.39% in the fourth quarter of 2021.
Expect earnings growth and higher dividend payouts this year
Based on market consensus financial forecasts from S&P Capital IQShinhan Financial is expected to see its net profit attributable to shareholders increase by +13% to KRW 4.528 billion in fiscal 2022.
There are two main drivers of earnings growth for Shinhan Financial this year. One of the drivers of growth is the expansion of the net interest margin in parallel with rate hikes. Shinhan Financial’s FY2021 net interest margin of 1.81% is quite low, as the company consistently generated net interest margins above +2% before the pandemic. With the Bank of Korea expecting it to continue raising rates, Shinhan Financial’s net interest margin still has room for expansion. The other growth driver is a weak revenue base in fiscal 2021, which makes the year-over-year comparison in fiscal 2022 more favorable. As I pointed out in the previous section of this article, I think it’s reasonable to infer that the company took a “big dip” last year with one-off items that hurt its recent fourth quarter of 2021.
Separately, Shinhan Financial’s dividend per share is expected to increase by +17% from KRW 1,961 in FY 2021 to KRW 2,304 in FY 2022 according to S&P Capital IQ data, and this implies an increase in the company’s dividend payout ratio from 25.2% last year to 27.1% this year.
I noted in my previous article from December 3, 2021 for Shinhan Financial that the company is “the first Korean financial institution to initiate quarterly dividends”. This speaks volumes about Shinhan Financial’s commitment to returning excess capital to shareholders via dividends. Notably, Shinhan Financial also emphasized on the company’s recent Q4 2021 earnings conference call that it was aiming to “continuously improve shareholder value” when disclosing the final dividend for fiscal 2021. There are good reasons to believe that Shinhan Financial will gradually increase the company’s dividend payout. report over time.
Shinhan Financial’s valuation metrics support a Buy investment rating. According to S&P Capital IQ According to the data, Shinhan Financial is valued by the market at 0.44x P/B, 4.7x consensus next-twelve-month P/E and a consensus next-twelve-month dividend yield of 5.8%. While Shinhan Financial offers earnings expansion and higher dividends, the market should be willing to assign a higher valuation to its shares over time.