Shinhan Financial Still Faces Costs From Improperly Sold Investment Products, but Outlook Is Good

We maintain our fair value estimate of KRW 52,000 for Shinhan Financial Group, 0.64 times book value and 28% above the current share price, after its October-December earnings. For full-year 2021, Shinhan had a cost/income ratio of 45.3%, the lowest of Korea’s major banks. We continue to view Shinhan as the highest-quality stock in the sector given this efficient cost structure combined with its relatively diversified profit sources and lower historical earnings volatility. However, since mid-2020 Shinhan’s earnings have been intermittently blemished by costs to compensate investors for bad investment products sold by its bank and brokerage until 2019, with the result that full-year 2021 ROE was 9.3% when the other major banks had ROEs around 10%. Excluding KRW 192 billion in nonoperating loss in the fourth quarter for such compensation as well as a similarly sized negative impact in the prior quarter for one-time costs associated with the integration of Shinhan Life Insurance and Orange Life, Shinhan’s ROE would have been 10% and in line with peers, per our estimates.