Is Shinhan's loss provision staying at sound level?

Headquarters of Shinhan Financial Group / Courtesy of Shinhan Financial Group

By Anna J. Park

This year has been rough for Shinhan Financial Group, with the company still mired in investigations and lawsuits about its mis-selling of fund products, such as those of Lime and Heritage. This is in contrast to the end of last year, which Shinhan finished as the nation's most profitable financial group with an annual net profit of 3.4 trillion won ($2.8 billion), pushing KB Financial Group to second place.

Due to a series of controversial fund sales involving its affiliates, the financial group had to put aside its largest provision for losses during the first half to dispel market concerns about fiscal soundness.

Shinhan deposited 538.7 billion won ($454 million) worth of loss provisions during the second quarter alone, which is a 90.5 percent increase from the previous quarter. This is the largest amount of loss reserves among the five major financial groups in Korea ― 821 billion won when combined the first and second quarters.

While the amount seems large, it is an aggregation of reserves assigned for every risk factor facing the group, such as compensation and bad loan provisions. That's why some market insiders question whether the financial group is preparing for a worst case scenario during the second half of the year.

To pay compensation for the mis-selling of Lime products ― Shinhan Financial Investment attracted 211.9 billion won in sales, while Shinhan Bank sold 274 billion won ― the group will hand over 485.9 billion won. However, It only placed 213 billion won in its reserves ― only about half of the total mis-selling of the problematic funds. Regarding sales for the Heritage fund, Shinhan Financial Investment sold 379.9 billion won, while its loss reserves stood at only 189.9 billion won.

Given that investigations and multiple lawsuits are ongoing regarding these issues, loss provisions of more than half of the total might be necessary.

The Financial Supervisory Service (FSS) recommended Shinhan Financial Investment, along with other firms that sold the Lime funds, to pay 100 percent of their clients' money as compensation at the end of last month. The firm seemed surprised by the strong recommendation; it may not accept the 100 percent figure, considering the possible negative implications on the firm's other mis-selling cases as well as multiple related civil lawsuits. Thus, the brokerage house told the FSS that it would come up with its own measures by the end of August.

An official from Shinhan Financial Investment told The Korea Times that although the company cannot comment further on issues related to ongoing prosecution investigations, the delay of the response to the 100 percent compensation recommendation has to with a necessary internal legal review of the matter. The firm also added that it is working to earn the public's trust by enhancing and protecting them as its first priority.

Another official from Shinhan Financial Group also explained that the group's loss provision is sophisticatedly calculated to reflect dangers and risks the company is facing, adding that the amount of loss reserves could be subject to adjustment, if changes occur in the ongoing investigations or lawsuits.

Shinhan maintained its top position as the most profitable financial group in the first half, despite the fact that it lost its top ranking to KB in the second quarter. Now, it remains to be seen whether it will sail flawlessly during the second half without facing unexpected risks to its loss reserves.

“Each company has a different set of rules regarding how much loss provision is required,” Choi Soon-young, a research fellow, at the Korea Capital Market Institute told The Korea Times. “Fortunately, domestic financial companies haven't yet had many problems owing to their loss reserve levels. However, as increased uncertainties surrounding COVID-19 could pose another risk factor to financial groups, companies need to keep a close eye on the appropriate level of loss reserves to keep them from further risks,” the researcher explained.