[BiTransition] Shinhan Bank Losing Differentiation

Prolonged Economic Slump Exposes Shinhan to Growing Credit Risks

This is the fourth in a series of articles featuring challenges and tasks local banks are facing in the midst of the deepening economic downturn. The Korea Times will look into pending issues for the overall banking industry, as well as each major Korean bank. ― ED.

By Kim Jae-kyoung
Staff Reporter

In the banking industry, Shinhan Bank is often picked as the most competitive lender among Korean banks thanks to its high profitability and talented management team.

Shinhan Bank President & CEO Shin Sang-hoon

Customers may not recognize that, but bankers and analysts agree on it.

Entering year 2008, Shinhan Bank, the flagship firm of the Shinhan Financial Group, geared up to become a leading bank on the local financial market to overtake Kookmin Bank, the nation's largest lender by assets.

Shinhan appeared to have nearly snapped up the top position, with Shinhan Financial's market capitalization exceeding KB Financial but it did not move further forward, hit hard by the fallout from the deepening economic downturn.

The prolonged economic slump has exposed the lender to growing credit risks, particularly the risks associated with its project financing, resulting in a substantial fall in its stock price. Stock price plunges are not isolated to Shinhan but its volatility and magnitude seems wider than its peers lately.

This suggests that markets do not believe that Shinhan is set apart from other Korean lenders by profitability and asset quality and thus does not deserve its valuation premium against its peers anymore.

Shinhan Bank President and CEO Shin Sang-hoon might be the one who is most uneasy about the recent stock price movement, as his tenure is to expire next March. It is critical for him to boost the stock price to be reelected or appointed as president of the financial holding company.

A company's stock price is often the barometer of a CEO's leadership and capability, as the price reflects its fundamentals and are directly related to earnings and dividends.

However, the odds are not in his favor. Many brokerages have turned negative toward Shinhan Financial, noting that the group, in particular its flagship firm Shinhan Bank, is lacking differentiation from its peers in the industry.

``Shinhan Financial's management has a track record of achieving growth and controlling asset quality. However, the company lacks differentiation in various areas, including loan growth, exposure to risky assets, contingent liabilities and capital base, along with non-bank affiliates showing lower-than-expected business performance,'' Credit Swisse said in a research note.

``That said, the current valuation premium to its peers has been fully factored in its strengths. We thus downgraded the company and have taken it off our top pick list,'' it added, recommending that investors should switch from Shinhan to KB Financial.

It pointed out that the company is unlikely to deliver any meaningful differentiation in its exposure to risky assets, deteriorating profitability outlook, asset quality, capital base and contingent liabilities, which implies that the group may not deserve valuation premiums in the sector.

Against this backdrop, the biggest concern for Shin might be a heap of risky loans, including loans associated with real estate project financing and SOHO.

According to the Financial Supervisory Service (FSS), the lender's loans for real estate project financing amounted to 5.9 trillion won in June. The amount, once asset-backed commercial paper is included, increases to 7.6 trillion won, accounting for 7.7 percent of the bank's total corporate lending.

This accounted for nearly 70 percent of its equity capital valued at around 11.4 trillion won. ``So far it looks fine. However, if the property market heads further south, the bank may face real challenges,'' a market analyst said, asking not to be named.

Shin is clearly seeing challenges lying ahead and taking preemptive steps to head off the worst-case scenario.

``We hope that the worst-case scenario will not take place but recent developments indicate that things have turned out to be worse than that,'' Shin said at a monthly statement to bank employees. He stressed that focus should be placed on securing liquidity, controlling asset quality and boosting efficiency.

``In particular, it is very important to control the Bank for International Settlements (BIS) capital ratio by disposing of risky, unprofitable assets,'' he added.

The lender's BIS ratio decreased to 11.9 percent in September from 12.45 percent the previous quarter. Its profitability has also deteriorated, with its net profit falling by 32.2 percent in the third quarter from a year ago.

Shinhan Still in Better Shape

Despite all these difficulties, Shinhan Bank is in better standing to weather the current economic turmoil than other Korean lenders due to the strong leadership of the bank's management team.

CEO Shin has sped up its move to streamline its operations. From next year, the lender has decided to dispatch 30 percent of workers at its headquarters, or 500-600 employees, to branches to boost efficiency. It also plans to either shut down or consolidate more than 100 branches as part of efforts to cut down expenditure.

``Among banks Shinhan Bank is the most respected in terms of internal processes. Particularly, Shinhan management is very talented,'' a global consulting firm head said on the condition of anonymity.

Given that Shin has different growth strategy from his peers, it is highly probable that Shinhan Bank will pursue a different expansion approach from other lenders once the current economic turmoil dies down.

Unlike most other bank CEOs seeking to expand here through M&A, Shin is not looking to become the biggest lender at the local market. Instead he will seek overseas expansion.

In an earlier interview with The Korea Times, Shin said, ``I will not pursue M&As with other domestic banks just to expand size as I don't see any benefits or synergy effects from doing so.''

``I believe that local banks should seek localization in other countries to gain medium- and long-term competitiveness on the global market and maximize synergy between domestic and overseas businesses,'' he added.

kjk@koreatimes.co.kr