Chairman Cho Yong-byoung of Shinhan Financial Group.(Photo: Shinhan Financial Group)

Shinhan Financial Group’s 3rd quarter net profit exceeded 840 billion won for three consecutive quarters, raising expectations that the group’s net profit for the year may be around 3 trillion won for the first time in seven years since 2011 when its net profit amounted to 3.1 trillion won.

The financial group said on Oct. 24 that its Q3 net profit was up 3.8 percent YoY, with net profit for the first three quarters of the year coming to 2.643,4 trillion won, up 2.3 percent. But if the one-time profit of 280 billion won for Shinhan Card in Q1 is counted, the net profit for first three quarters for the year will be up 8.8 percent YoY.

Officials of the group said the increased net interest margin and a rise in SME loans aided the outstanding performance results. Also contributing to the positive results were rising net profit from overseas operations.

By affiliate, Shinhan Bank’s net profit in the quarter came to 644.7 billion won, up 8.9 percent YoY, bringing its net profit for the first three quarters to 1.916,5 trillion won, up 13 percent YoY. The bank’s global net profit in the first three quarters came to 244.8 billion own, up 24.4 percent YoY, surpassing the total net profit for 2017 in the sector.

Shinhan Card’s accumulated net profit for the third quarter for the year came to 395.5 billion won, down 49.3 percent YoY while Shinhan Financial Investment and Shinhan Life posted the three quarters net profits of 230 billion won and 129,2 billion won, up 46.3 percent and 25 percent, respectively.

Shinhan’s key strategy - achieving balanced growth between banking and non-banking as well as interest and non-interest income - has gained momentum as it bought Orange Life and is now moving to acquire Asia Trust. Another pillar of growth, globalization, is well underway as global banking net income grew 24% YoY and its portion has expanded to 13%.

The acquisition of Orange Life should boost consolidated income by KRW170bn annually. Accordingly, we expect ROE to increase by 0.5%p and EPS by 5%.

The share buyback plan (KRW200bn), which began in September, appears to be 30% complete. Since the trust agreement is valid for one year, we believe it will continue to provide support for shares. We applied 0.91x target P/B to 2018F BPS to arrive at our target price of KRW66,000 (COE 10.5%, ROE 9.5%).

Shinhan Financial Group has the lowest NPL Ratio of the major South Korean banks as well as the highest NPL coverage ratio. Its Return on Equity (ROE) is also the highest of the major Korean banks whilst its Return on Assets (ROA) is the second highest. Despite its better-than-peers asset quality and strong capital levels, the bank’s stock does not trade at a substantial premium to that of its peers.

Shinhan’s risks of increased non-performing loans arising from its exposure to the Shipping and Shipbuilding Industry also remains manageable whilst its high NPL coverage ratio reduces the need for substantial additional loan loss provisioning.

According to Fitch, the Big Four Commercial Banks had an exposure to the industry of around 2.3% of their total loans at the end of 2015. Its loans to the industry have also continued to decline as it has written off a number of loans in addition to encouraging the three biggest shipbuilders to cut costs aggressively. The risk of further weakening in the industry is thus manageable for the Big Four but should nevertheless not be overlooked.