Shinhan Financial Group: Unlocking Shareholder Value Through Strategic Initiatives

Shinhan Financial Group Co., Ltd. (NYSE:SHG) [055550:KS] has been identified as a promising investment opportunity, with analysts now rating the stock as a Buy. This latest assessment highlights the company's multiple levers for shareholder value creation, making its recent share price underperformance relative to its key peer KB Financial (KB) unjustified.

Unlocking Shinhan's Potential for Shareholder Value Creation

Targeting Higher ROE for Valuation Re-rating

Shinhan Financial's recent investor event has provided favorable insights into the company's shareholder value creation potential. The company's management has expressed a commitment to leading Korea's "corporate value-up program," a government-backed initiative aimed at boosting stock price performance and valuations of listed Korean companies. This suggests that Shinhan Financial is poised to take proactive steps to enhance shareholder returns and improve its valuation.One key lever for value creation is Shinhan Financial's ability to target a higher return on equity (ROE). The company's actual ROE for the most recent fiscal year (FY 2023) stood at 8.6%, but it has set a goal of improving this metric to 10% in the future. This confidence in its ability to deliver higher ROE is a positive signal, as it could justify a re-rating of the stock's valuation.

Diversifying Beyond the Home Market

Another strategic initiative that Shinhan Financial can pursue is to reduce its geographical concentration risk by expanding its presence in foreign markets. In May 2023, the company secured regulatory approvals to acquire an 11% equity stake in Indian lender HDFC Credila Financial Services. This move is a step in the right direction, as the proportion of earnings contributed by international businesses outside of Korea increased from 12.1% in FY 2022 to 12.9% in FY 2023.While the low-teens percentage income contribution from overseas businesses is not yet significant, there is ample room for Shinhan Financial to further diversify its revenue streams by investing in other promising foreign markets. This diversification strategy can help mitigate the company's reliance on its home market of South Korea and unlock additional growth opportunities.

Enhancing Shareholder Capital Distribution

Shinhan Financial has also demonstrated a commitment to increasing its shareholder capital distribution ratio, which is defined as the sum of buybacks and dividends divided by earnings. The company's shareholder capital distribution ratio rose from 30% in FY 2022 to 36% in FY 2023, and it has set a goal of increasing this ratio to 40% in the short-to-mid term. Furthermore, Shinhan Financial sees itself distributing as much as 50% of its earnings as dividends and buybacks in the long run.This focus on enhancing shareholder returns through increased capital distribution is a positive signal for investors, as it aligns with the company's stated goal of creating value for its shareholders.

Addressing Relative Underperformance

Shinhan Financial's share price performance in 2024 year-to-date has been relatively weaker compared to its peer KB Financial, with a gain of 21% versus KB Financial's 46% appreciation. However, this underperformance appears to be driven by non-fundamental factors, such as share sales by certain investors.According to media reports, bank BNP Paribas and private equity firm EQT Private Capital Asia sold a significant stake in Shinhan Financial earlier this year. These large-scale stake sales are less likely to occur going forward, which should ease the selling pressure on the company's shares.Furthermore, a recent report by Goldman Sachs noted that the "overhang concern (regarding future share sales by other investors) is largely under control" due to Shinhan Financial's "strategic relationship with remaining stakeholders," as per the company's recent Analyst Day comments.

Valuation Upside Potential

Shinhan Financial's shares are currently trading at attractive valuations, both on an absolute and relative basis. The company is valued at 0.54 times trailing price-to-book (P/B) and 5.5 times consensus next twelve months' price-to-earnings (P/E) ratio, which is lower than its peer KB Financial's trailing P/B and forward P/E ratios of 0.64 times and 6.2 times, respectively.Applying the Gordon Growth Model, which is a widely used valuation framework, Shinhan Financial's fair P/B valuation multiple is estimated to be 0.83 times, based on a target ROE of 10%, a conservative cost of equity of 12%, and a perpetuity growth rate of 0%. This suggests that the company's current valuation is significantly discounted compared to its intrinsic worth, providing a compelling investment opportunity.