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

Shinhan Financial is one of Korea’s big four private-sector banking groups that together account for nearly half of the country’s loans, with the other half composed of government-owned and cooperative institutions accounting for 35% and foreign, regional, and savings banks together accounting for around 15%. We see the relatively large presence of policy banks and cooperative institutions in Korea, which is similar in size to Germany and larger than Japan, as a key factor making it difficult for the big four banks to earn returns sustainably above their cost of capital. Another factor underpinning our no-moat ratings on Korean banks is a history of relatively heavy-handed regulation that has prevented fee income from rising and sometimes inserted political considerations into credit decisions.