[Korea] Banks April 26, 2021 Shinhan Financial Group Buy (055550 KS ) (Maintain) Strong growth in non -bank and non -interest income, TP: W49,000 ▲▲▲ plus rebound in bank NIM Upside: 31.7% Mirae Asset Securities Co., Ltd. Heather Kang [email protected] 1Q21 review: Record quarterly Net profit attributable to owners of the parent of W1.19tr (+28% YoY) earnings Shinhan Financial Group’s (SFG) 1Q21 net profit came in 11-14% above consensus estimates (which had been continuously revised upward) and 6% above our expectation. Net profit from non-bank operations grew 84% YoY to W620bn (a record high), contributing 48% of group net profit. Group non-interest income increased 40% YoY. The quarter included a one-off charge of W62.6bn due to the Financial Dispute Settlement Committee’s ruling on compensation for those who invested in Lime Asset Management’s credit- insured fund. New NPL formation remained benign, and credit cost ratio fell to 21bps (-14bps YoY, -18bps QoQ). Strong across the board Recurring profit expands on the back of diversified income base SFG’s subsidiaries displayed visibly stronger fundamentals, with 1Q21 net profit growing more than 20% in most cases. Securities profit recovered, and the credit card and capital subsidiarie s posted robust growth. Earnings improved across all matrix business lines, including Group & Global Investment Banking (GIB) and Global Markets & Securities (GMS). The bank subsidiary saw net interest margin (NIM) gain 5bps and loans grow 2.5% QoQ, expanding the income base. The NIM improvement was largely attributable to lower funding costs resulting from deposit repricing and deposit portfolio improvements (+17% QoQ for low-cost demand deposits vs. -0.1% QoQ for time deposits). Valuation and recommendation Reaffirm Buy and raise TP to W49,000 We revise up our 2021-23 net profit estimates by 2.4-4.0%, reflecting the stronger-than-expected 1Q21 results. We raise our target price from W48,000 to W49,000 (target P/B of 0.55x based on a sustainable ROE of 7.8%). SFG boasts earnings stability supported by its diversified business portfolio and the growth of its global division. SFG has finished amending its articles of incorporation to allow for quarterly dividend distributions. The group plans to pay out quarterly dividends and repurchase shares as soon as external circumstances permit. Key data Current price (4/22/21, W) 37,200 Market cap (Wbn) 19,218 180 Shinhan Financial Group KOSPI NP (21F, Wbn) 4,048 Shares outstanding (mn) 534 160 Consensus NP (21F, Wbn) 3,795 Free float (%) 75.0 140 120 EPS growth (21F, %) 11.3 Foreign ownership (%) 60.1 100 P/E (21F, x) 4.8 Beta (12M) 0.96 80 Market P/E (21F, x) 14.0 52-week low (W) 27,150 4.20 8.20 12.20 4.21 KOSPI 3,177.52 52-week high (W) 37,700 Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2018 2019 2020 2021F 2022F 2023F Absolute 4.5 23.2 34.8 Net interest income (Wbn) 8,580 9,720 9,883 10,553 10,922 11,307 Relative -0.2 -8.7 -19.6 Net non -interest income (Wbn) 1,399 1,415 1,650 1,958 1,904 1,885 OP (Wbn) 4,499 5,049 4,930 5,784 6,027 6,218 NP (Wbn) 3,157 3,403 3,415 4,048 4,205 4,327 EPS (W) 6,657 7,170 6,906 7,685 7,873 8,101 EPS growth (%) 8.2 7.7 -3.7 11.3 2.4 2.9 P/E (x) 5.6 5.2 5.4 4.8 4.7 4.6 P/PPOP (x) 3.7 3.2 3.0 2.7 2.6 2.5 P/B (x) 0.49 0.46 0.45 0.42 0.38 0.35 ROE (%) 9.2 9.1 8.2 8.9 8.5 8.0 Div. yield (%) 4.3 5.0 4.0 5.4 5.8 6.3 Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent Source: Company data, Mirae Asset Securities 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. April 26, 2021 Shinhan Financial Group Figure 1. SFG: Earnings breakdown by subsidiary in 1Q20 Figure 2. SFG: Earnings breakdown by subsidiary in 1Q21P (before reflecting consolidation adjustments and other (before reflecting consolidation adjustments and other factors) factors) Shinhan Capital Other Orange Life Shinhan Capital 4.6% 2.6% Orange Life Insurance 4.4% Other 6.2% 1.8% Insurance 8.4% Shinhan Life Insurance Shinhan Life 4.1% Insurance Shinhan Inv. 5.7% 4.8% Banking 51.9% Shinhan Card Shinhan Inv. Banking 13.1% 13.2% 65.5% Shinhan Card 13.2% NP Stake NP NP Stake NP (Wbn) (%) (Wbn) (%) (a) (b) (a) x (b) (a) (b) (a) x (b) Banking 664.2 662.3 51.9 Banking 632.2 630.7 65.5 Shinhan Bank 656.4 100.0 656.4 51.5 Shinhan Bank 626.5 100.0 626.5 65.0 Jeju Bank 7.8 75.3 5.9 0.5 Jeju Bank 5.6 75.3 4.2 0.4 Non-banking 620.0 613.2 48.1 Non-banking 337.3 332.7 34.5 Shinhan Card 168.1 100.0 168.1 13.2 Shinhan Card 126.5 100.0 126.5 13.1 Shinhan Inv. 168.1 100.0 168.1 13.2 Shinhan Inv. 46.7 100.0 46.7 4.8 Shinhan Life Insurance 72.8 100.0 72.8 5.7 Shinhan Life Insurance 39.7 100.0 39.7 4.1 Orange Life Insurance 107.7 100.0 107.7 8.4 Orange Life Insurance 59.5 100.0 59.5 6.2 Shinhan Asset Mgmt 11.2 100.0 11.2 0.9 Shinhan BNP Paribas 4.6 65.0 3.0 0.3 Shinhan Capital 59.2 100.0 59.2 4.6 Shinhan Capital 42.7 100.0 42.7 4.4 Shinhan Savings Bank 5.4 100.0 5.4 0.4 Shinhan Savings Bank 6.3 100.0 6.3 0.7 Asia Trust 16.7 60.0 10.0 0.8 Asia Trust 7.4 60.0 4.4 0.5 Shinhan DS 1.4 100.0 1.4 0.1 Shinhan DS -0.9 100.0 -0.9 -0.1 Shinhan AITAS 1.9 99.8 1.9 0.2 Shinhan AITAS 3.6 99.8 3.6 0.4 Shinhan Credit Info. 0.8 100.0 0.8 0.1 Shinhan Credit Info. 0.7 100.0 0.7 0.1 Shinhan Alternative Inv. 0.3 100.0 0.3 0.0 Shinhan Alternative Inv. 1.6 100.0 1.6 0.2 Shinhan REITs Mgmt 1.9 100.0 1.9 0.1 Shinhan REITs Mgmt -1.2 100.0 -1.2 -0.1 Shinhan AI 0.2 100.0 0.2 0.0 Shinhan AI 0.1 100.0 0.1 0.0 Shinhan Venture Inv. 4.2 96.8 4.1 0.3 Total 969.5 963.4 100 Total 1,284.2 1,275.5 100 Source: Company data, Mirae Asset Securities Research Notes: Shinhan BNP Paribas has become a fully-owned subsidiary named Shinhan Asset Management. Source: Company data, M irae Asset Securities Research Table 1. SFG: Low-cost core deposits (Wbn, %, %p) 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 YoY QoQ Won-denominated deposits 205,681 205,408 208,349 216,748 221,795 221,376 232,998 244,183 243,617 251,704 260,212 267,824 9.7 2.9 Low-cost deposits 92,280 94,187 92,950 94,745 96,398 96,317 101,700 111,191 118,058 124,221 131,224 139,799 25.7 6.5 Demand deposits 28,455 28,256 28,455 29,349 30,246 29,899 30,455 34,845 36,499 39,747 40,743 47,502 36.3 16.6 Low-cost savings 63,826 65,931 64,495 65,396 66,152 66,418 71,245 76,346 81,558 84,474 90,481 92,297 20.9 2.0 Time deposits 105,084 102,605 106,684 113,306 116,618 116,052 122,073 124,055 116,620 118,489 120,018 119,859 -3.4 -0.1 Installment deposits 8,317 8,616 8,715 8,697 8,778 9,006 9,225 8,937 8,939 8,993 8,971 8,166 -8.6 -9.0 CDs 8,679 8,709 8,603 7,828 7,708 8,673 8,602 9,233 8,349 6,249 4,870 5,386 -41.7 10.6 RPs/bills sold 212 69 61 78 53 95 123 197 239 209 170 142 -27.9 -16.4 Core deposits as % of total 43.0 44.0 42.8 42.2 42.0 41.9 42.1 45.5 48.5 49.4 50.4 52.2 6.7 1.8 Source: Company data, Mirae Asset Daewoo Research Mirae Asset Securities Research 2 April 26, 2021 Shinhan Financial Group Table 2. SFG: 1Q21 review YoY chg. QoQ chg. (Wbn) 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 (%, %p) (%,%p) Net interest income 2,472.7 2,466.6 2,463.4 2,446.1 2,452.7 2,520.5 2,556.4 3.8 1.4 Net fee/commission income 530.3 522.2 531.5 598.4 625.2 627.9 681.5 28.2 8.5 Net other income -138.1 -369.3 -256.9 21.8 -125.5 -372.3 -88.6 RR RR Total net operating income 2,864.9 2,619.5 2,738.1 3,066.3 2,952.3 2,776.2 3,149.2 15.0 13.4 SG&A expenses 1,225.6 1,504.3 1,197.9 1,271.3 1,256.2 1,487.1 1,279.0 6.8 -14.0 PPOP 1,639.2 1,115.2 1,540.2 1,795.0 1,696.1 1,289.1 1,870.2 21.4 45.1 Provisions 221.3 203.8 282.8 539.3 228.4 340.1 187.8 -33.6 -44.8 OP 1,417.9 911.4 1,257.4 1,255.7 1,467.7 949.0 1,682.4 33.8 77.3 Non-operating income -1.6 -152.8 19.2 -24.9 94.0 -264.2 -37.0 TTR RR Pretax profit 1,416.3 758.6 1,276.6 1,230.9 1,561.6 684.8 1,645.3 28.9 140.3 NP 981.6 507.5 932.4 873.1 1,144.7 464.4 1,191.9 27.8 156.7 Total assets 546,005 552,420 578,240 578,422 591,812 605,328 618,817 7.0 2.2 Total loans/receivables 317,058 323,245 334,162 338,355 352,758 356,253 368,137 10.2 3.3 Won-denominated loans (bank) 220,737 225,002 231,468 237,212 242,284 248,813 255,079 10.2 2.5 Total credit 305,648 312,243 321,834 329,243 334,412 341,897 349,696 8.7 2.3 Total deposits 284,142 297,874 308,911 310,865 319,150 326,459 336,693 9.0 3.1 Total shareholders' equity 41,757 41,930 41,943 42,934 45,930 46,356 46,742 11.4 0.8 (%) NIM (bank) 1.53 1.46 1.41 1.39 1.36 1.34 1.39 -0.02 0.05 Cost-to-income ratio 42.8 57.4 43.7 41.5 42.6 53.6 40.6 -3.1 -13.0 NPL (substandard & below) ratio 0.60 0.52 0.54 0.56 0.54 0.56 0.56 0.02 0.00 NPL coverage ratio 265.4 290.6 280.2 267.8 274.9 272.9 267.8 -12.4 -5.1 ROA 0.18 0.09 0.16 0.15 0.20 0.08 0.19 0.03 0.12 ROE 2.55 1.30 2.35 2.14 2.69 1.06 2.69 0.34 1.64 Credit cost ratio 0.07 0.07 0.09 0.16 0.07 0.10 0.05 -0.03 -0.05 BIS ratio 14.17 13.90 14.06 14.07 15.97 15.74 15.90 1.83 0.16 Tier 1 ratio 12.61 12.34 12.60 12.63 14.59 14.37 14.66 2.06 0.28 CET1 ratio 11.40 11.12 11.34 11.40 13.13 12.87 12.95 1.62 0.08 Notes: ROA, ROE, and credit cost data are non-annualized.