Shinhan Bank has put its Shinhan Alpha Plus, a foreign exchange trust fund, up or sale to benefit from rising U.S. interest rates.
American interest rates are widely expected to rise in December, which will hike demand for the U.S. dollar, increasing the value of the currency.
The financial product has been divided into two types, the first being the U.S. dollar denominated with the guarantee for principal investments, and the latter being a foreign exchange bond type. The foreign exchange denominated type has a six-month maturity designed mostly for corporate investors who want to make more than deposit interest rates in a short-term investment period.
For those who prefer long-term investments, foreign exchange bonds may be the right product. The trust investment account has been a popular investment facility in recent years, where the interest rates are low and thus investors want to operate investments in diverse ways. But not for investors whose investment funds are in foreign currencies, with most of the trust account funds in the Korean won, not giving investors too much room to maneuver.
Shinhan Bank has been able to offer its customers a choice between the domestic and foreign currency funds as their investment funds.
The bank has also been selling short-term investment funds in the U.S. dollar, callws “Shinhan BNNP, the U.S. Dollar Short-term Income Investment Trust,” which was jointly developed with its affiliate Shinhan BNPP Asset Management, designed to give additional profit to investors when used as a hedge fund timed with the hike of U.S. interest rates at the end of this year.
Fitch Ratings has affirmed South Korea-based Shinhan Bank's Long-Term Issuer Default Rating (IDR) at 'A'. The Outlook is Stable. Fitch has also affirmed Shinhan's Viability Rating at 'a'.
The bank's IDRs, Viability Rating and senior debt ratings reflect its strong franchise and prudent risk appetite, backed by a stable management team and strong capitalization.
It also takes into account the bank's improving, but challenging, operating environment, sound loan quality and, like the rest of Korea's banking system, a modest liquidity and funding profile by international standards, especially in foreign currency, which is mitigated by ordinary support from local authorities.
The Stable Outlook reflects Fitch's continued expectation that Shinhan will deliver a broadly stable and consistent performance amid the low interest rate environment. Shinhan has taken tighter control of loan growth following its slightly more aggressive risk-appetite in 2014 and 2015.
Focusing on the traditional commercial banking business, the bank has generated consistent performance through the economic cycle under the stable management that has a prudent risk appetite. Fitch expects Shinhan's underlying profitability, measured by operating profit/risk-weighted assets, to marginally improve to 1.5% in 2017 (2016: 1.3%).
Shinhan's Fitch Core Capital ratio has been undermined by the capital floor since 2014, which cut the ratio by about 110bp to 13.1% as of end-2016.
Shinhan's reported risk-weighted assets will continue to be inflated given its focus on low-risk assets and the benign credit cost environment over the previous few years. Fitch expects the adjusted Fitch Core Capital ratio - that is, without capital-floor impacts - to remain strong at around 14% for the next couple of years due to its low loan growth target, which is around the nominal GDP growth rate.
Fitch said it believes Shinhan's ratio of loans classified as precautionary and below under the local regulator's loan-quality category will remain at a low -1% for the next two years, better than the commercial bank average of 1.7% at end-2016. Its significantly higher reserves for impaired loans of 122% at end-2016 compared with the commercial bank average of 82% should buffer Shinhan against abrupt shocks.
Commercial lenders, including Shinhan, have focused on household loans and the property leasing sector following the buoyant local property market since mid-2014. Shinhan's customer loans/deposits ratio - after adjusting for loans to and deposits from financial institutions - improved noticeably by 9pp to 111% in 2016, as abundant liquidity drove customer deposit growth of 13%.
Fitch said it expects the ratio to improve further in the near-term given modest loan growth prospects.