[Korea] Banks September 7, 2020

Shinhan Financial Group Buy (055550 KS ) (Maintain)

Share issue is positive from a growth and capital TP: W37,000 ▼ buffer standpoint Upside: 24.8%

Mirae Asset Daewoo Co., Ltd. Heather Kang [email protected]

Capital increase plan approved New shares worth W1.16tr to be issued to global PEF s ó On Sep. 4, Shinhan Financial Group’s (SFG) board approved the issuance of 39,130,000 shares (7.9% of total shares issued) to third parties at W29,600 per share (2.0% discount to the base price). The total size of the capital increase plan is approximately W1.16tr. ó Through the share issue, SFG hopes to: 1) improve its CET1 rati o, which has declined to 11.4% due to a series of M&As, including Orange Life Insurance, Asia Trust, and Neoplux (in which SFG is set to acquire a controlling stake on Sep. 29); 2) bolster its capital buffer to guard against uncertainties (e.g., COVID-19); 3) identify new growth drivers in partnership with global investors (e.g., joint investments in Asia); and 4) advance its corporate governance. ó The investors are Centennial Investment Limited, an SPV advised by Hong Kong-based PEF Affinity Equity Partners (20,440,000 shares allocated; W605bn) and SUPREME L.P., an SPV advised by Baring Private Equity Asia (18,690,000 shares allocated; W553.2bn). The sale of new shares is restricted for two years (including a one-year lock-up period).

Announcement of m edium /long - Internal CET1 ratio target set at 12.0% term capital management policy ó SFG announced several details of its medium/long-term capital management policy but stressed that the plan is subject to change depending on economic conditions in Korea and abroad and new developments regarding COVID-19. ó Once CET1 ratio stabilizes above 12%, SFG plans to: 1) reserve an appropriate amount of capital to finance organic and inorganic growth; and 2) use a portion of retained earnings to carry out its shareholder return policy (e.g., quarterly dividends or share buybacks/cancellations). ó SFG aims to achieve a total shareholder return rate of 30% over the medium term (i.e., a round three years) and a gradual increase thereafter.

Investment recommendation Lower TP to W 37,000 (from W 39,000 ), but maintain B uy ó We believe the share issue is a necessary move to lay the foundation for medium/long-term growth. The attraction of strategic investors is also likely to generate positive effects. ó That said, we lower our target price to W37,000 (from W39,000) due to the inevitable near-term share dilution. Our target price implies a 2020F P/B of 0.45x.

Key data Current price (9/4/20, W) 29,650 Market cap (Wbn) 14,155 140 Shinhan Financial Group KOSPI NP (20F, Wbn) 3,352 Shares outstanding (mn) 534 120 Consensus NP (20F, Wbn) 3,186 Free float (%) 81.9 100

80 EPS growth (20F, %) -5.4 Foreign ownership (%) 62.3

60 P/E (20F, x) 4.4 Beta (12M) 1.19

40 Market P/E (20F, x) 16.7 52-week low (W) 22,200 9.19 1.20 5.20 9.20 KOSPI 2,368.25 52-week high (W) 45,800

Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2017 2018 2019 2020F 2021F 2022F Absolute -1.8 -10.6 -28.0 Net interest income (Wbn) 7,843 8,580 9,720 9,853 10,116 10,300 Relative -5.5 -22.2 -39.6 Net non -interest income (Wbn) 1,341 1,399 1,415 1,759 1,719 1,741

OP (Wbn) 3,829 4,499 5,049 4,721 4,933 4,975 NP (Wbn) 2,918 3,157 3,403 3,352 3,487 3,506 EPS (W) 6,153 6,657 7,170 6,779 6,621 6,566 EPS growth (%) 6.7 8.2 7.7 -5.4 -2.3 -0.8 P/E (x) 4.8 4.5 4.1 4.4 4.5 4.5 P/PPOP (x) 3.2 2.7 2.4 2.3 2.2 2.2 P/B (x) 0.43 0.39 0.37 0.36 0.33 0.31 ROE (%) 9.1 9.2 9.1 8.1 7.6 7.1 Dividend yield (%) 4.9 5.4 6.2 5.7 6.2 6.7 Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent Source: Company data, Mirae Asset Daewoo Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. September 7, 2020 Shinhan Financial Group

Table 1. SFG: TP calculation

Sustainable ROE 7.00% Growth 2.00% Cost of equity 13.12%

Cost of equity 13.12% Rf 2.50% Beta 1.77 Market premium 6.00%

Fair P/B (x) 0.45 2020F BPS (W) 82,336 TP (W) 37,000 Source: Mirae Asset Daewoo Research estimates

Table 2. SFG: Valuation metrics at TP of W37,000

2017 2018 2019 2020F 2021F 2022F P/B (x) 0.53 0.49 0.46 0.45 0.42 0.39 P/E (x) 6.0 5.6 5.2 5.5 5.6 5.6

ROE (%) 9.1 9.2 9.1 8.1 7.6 7.1 EPS growth (%) 6.7 8.2 7.7 -5.4 -2.3 -0.8

Dividend yield (%) 3.9 4.3 5.0 4.6 5.0 5.4 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 2 September 7, 2020 Shinhan Financial Group

Shinhan Financial Group (055550 KS)

Income statement (summarized) Balance sheet (summarized) (Wbn) 2019 2020F 2021F 2022F (Wbn) 2019 2020F 2021F 2022F Interest income 15,689 15,108 15,217 15,486 Cash & dues 28,424 33,786 33,140 33,460 Interest expenses 5,969 5,255 5,100 5,186 Securities 162,408 135,722 134,775 136,532 Net interest income 9,720 9,853 10,116 10,300 Net loans & receivables 323,245 349,618 358,475 372,209 Net fees & commissions 2,142 2,317 2,304 2,267 Tangible assets 4,572 4,732 4,597 4,522 Net other non-interest income -727 -558 -585 -527 Other assets 33,771 71,473 71,981 72,622 Total net operating income 11,134 11,612 11,835 12,041 Total assets 552,420 595,331 602,968 619,345 G&A expenses 5,135 5,325 5,415 5,459 Deposits 297,874 318,456 323,783 334,192 PPOP 6,000 6,287 6,420 6,582 Borrowings 34,863 38,409 37,327 36,813 Total provisioning expenses 951 1,566 1,488 1,607 Debentures 75,363 75,475 74,765 75,089 OP 5,049 4,721 4,933 4,975 Other liabilities 102,388 117,307 117,810 120,335 Net non-operating income -137 -24 0 0 Total liabilities 510,489 549,647 553,685 566,429 Pretax profit 4,912 4,696 4,933 4,975 Capital stock 2,732 2,969 2,969 2,969 Income tax 1,269 1,267 1,357 1,368 Hybrid securities 1,731 1,731 1,731 1,731 NP 3,403 3,352 3,487 3,506 Capital surplus 10,565 12,288 12,288 12,288 NP attributable to owners 3,403 3,352 3,487 3,506 Retained earnings 25,526 27,800 31,303 34,836 Normalized NP 3,403 3,352 3,487 3,506 Capital adj. -1,117 -833 -833 -833 Other comprehensive income -260 13 21 21 Core income 11,861 12,170 12,421 12,567 Minority interests 2,752 1,715 1,804 1,905 Core PPOP 6,727 6,846 7,005 7,108 Total shareholders' equity 41,930 45,683 49,283 52,916

DuPont analysis (%) 2019 2020F 2021F 2022F Key ratios/growth metrics (%) 2019 2020F 2021F 2022F Interest income 3.10 2.63 2.54 2.53 Growth (YoY) Interest expenses 1.18 0.92 0.85 0.85 Won-denominated loan growth (bank) 7.4 7.6 4.3 4.0 Net interest income 1.92 1.72 1.69 1.69 Net loan & receivables growth 7.9 8.2 2.5 3.8 Net commission income 0.42 0.40 0.39 0.37 Deposit growth 12.4 6.9 1.7 3.2 Net other non-interest income -0.14 -0.10 -0.10 -0.09 Shareholders' equity growth 14.4 9.0 7.9 7.4 Total net operating income 2.20 2.02 1.98 1.97 Total asset growth 20.2 7.8 1.3 2.7 G&A expenses 1.02 0.93 0.90 0.89 Net interest income growth 13.3 1.4 2.7 1.8 PPOP 1.19 1.10 1.07 1.08 Net commission income growth 10.5 8.2 -0.6 -1.6 Total provisioning expenses 0.19 0.27 0.25 0.26 PPOP growth 14.5 4.8 2.1 2.5 Net non-operating income -0.03 0.00 0.00 0.00 OP growth 12.2 -6.5 4.5 0.9 Pretax profit 0.97 0.82 0.82 0.81 NP growth 7.8 -1.5 4.0 0.5 Income tax 0.25 0.22 0.23 0.22 Profitability NP attributable to minority interests 0.05 0.01 0.02 0.02 NIS (bank) 1.81 1.66 1.67 1.67 ROA 0.67 0.58 0.58 0.57 NIM (bank) 1.54 1.38 1.38 1.38 Leverage (x) 13.5 13.8 13.1 12.4 PPOP margin 1.2 1.1 1.1 1.1 ROE 9.09 8.06 7.63 7.12 ROA 0.7 0.6 0.6 0.6 Asset quality (%) 2019 2020F 2021F 2022F ROE 9.1 8.1 7.6 7.1 NPL ratio 0.53 0.54 0.52 0.49 Liquidity Broad NPL ratio 1.18 1.13 1.10 1.07 Won-denominated LDR ex-CDs (bank) 95.4 99.4 99.4 99.4 NPL coverage ratio 290.6 270.3 284.3 298.6 Loan/assets 58.5 58.7 59.5 60.1 Reserves/total credit 1.5 1.5 1.5 1.5 Capital adequacy Credit costs/total loans 0.29 0.45 0.42 0.43 Total CAR 13.9 13.8 14.1 14.3 Credit costs/total credit 0.31 0.47 0.43 0.45 Tier 1 CAR 12.3 12.5 13.1 13.5 Per share items (W) 2019 2020F 2021F 2022F Tier 2 CAR 1.6 1.2 1.0 0.8 EPS (reported) 7,170 6,779 6,621 6,566 Operating efficiency EPS (normalized) 7,170 6,779 6,621 6,566 Cost-to-income ratio 46.1 45.9 45.8 45.3 BPS 81,209 82,336 88,910 95,526 Cost-to-asset ratio 0.9 0.9 0.9 0.9 DPS (common) 1,850 1,700 1,850 2,000 Dividends PPOP/share 12,639 12,716 12,190 12,325 Dividend payout ratio 26.0 27.1 28.3 30.3 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 3 September 7, 2020 Shinhan Financial Group

Appendix 1

Important disclosures and disclaimers Two-year rating and TP history

Company Date Rating TP (W) (W) Shinhan Financial Group Shinhan Financial Group (055550) 09/07/20 Buy 37,000 80,000 07/20/20 Buy 39,000 03/17/20 Buy 41,000 60,000 01/22/20 Buy 54,000 10/22/19 Buy 57,000 40,000 12/04/18 Buy 60,000 20,000 10/19/18 Buy 62,000

07/05/18 Buy 59,000 0 Sep 18 Sep 19 Sep 20

Stock ratings Sector ratings Buy Expected 12-month performance: +20% or greater Overweight Expected to outperform the market over 12 months Trading Buy Expected 12-month performance: +10% to +20% Neutral Expected to perform in line with the market over 12 months Hold Expected 12-month performance: -10% to +10% Underweight Expected to underperform the market over 12 months Sell Expected 12-month performance: -10% or worse

Rating and TP history: Share price (─), TP (▬), Not Rated ( ■), Buy (▲), Trading Buy (■), Hold (●), Sell ( ◆) * Our investment rating is a guide to the expected return of the stock over the next 12 months. * Outside of the official ratings of Mirae Asset Daewoo Co., Ltd., analysts may call trading opportunities should technical or short-term material developments arise. * The TP was determined by the research analyst through valuation methods discussed in this report, in part based on estimates of future earnings. * TP achievement may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Ratings distribution and services Buy Trading Buy Hold Sell Ratings distribution 76.22% 11.59% 11.59% 0.60% Investment banking services 75.00% 10.00% 15.00% 0% * Based on recommendations in the last 12 months (as of June 30, 2020)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of Shinhan Financial Group as an underlying asset; other than this, Mirae Asset Daewoo has no other special interests in the covered companies.

Analyst certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws or regulations thereof. Each Analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the personal views of the Analyst about any and all of the issuers and securities named in this report and (ii) no part of the compensation of the Analyst was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director, or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. Like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading, and private client divisions. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Mirae Asset Daewoo except as otherwise stated herein.

Disclaimers This report was prepared by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the . Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein or of any translation into English from the Korean language. In case of an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws, and accounting principles, and no person whose receipt or use of this report would violate any laws or regulations or subject Mirae Asset Daewoo or any of its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof. This report is for general information purposes only and is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The report does not constitute investment advice to any person, and such person shall not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates, and their directors, officers, employees, and agents

Mirae Asset Daewoo Research 4 September 7, 2020 Shinhan Financial Group

do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views, and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may make investment decisions that are inconsistent with the opinions and views expressed in this research report. Mirae Asset Daewoo, its affiliates, and their directors, officers, employees, and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Mirae Asset Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making, or other financial services as are permitted under applicable laws and regulations. No part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Mirae Asset Daewoo. For further information regarding company-specific information as it pertains to the representations and disclosures in this Appendix 1, please contact [email protected] or +1 (212) 407-1000.

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Mirae Asset Daewoo Research 5 September 7, 2020 Shinhan Financial Group

Mirae Asset Daewoo International Network

Mirae Asset Daewoo Co., Ltd. () Mirae Asset Securities (HK) Ltd. Mirae Asset Securities (UK) Ltd. One-Asia Equity Sales Team Units 8501, 8507-8508, 85/F 41st Floor, Tower 42 Mirae Asset Center 1 Building International Commerce Centre 25 Old Broad Street, 26 Eulji-ro 5-gil, Jung-gu, Seoul 04539 1 Austin Road West London EC2N 1HQ Korea Kowloon United Kingdom Hong Kong Tel: 82-2-3774-2124 Tel: 852-2845-6332 Tel: 44-20-7982-8000

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