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Elevator Pitch
My Buy investment rating for Shinhan Financial Group Co., Ltd.’s (NYSE:SHG) [055550:KS] stays unchanged.
In my prior article for SHG published on October 13, 2022, I previewed Shinhan Financial’s Q3 2022 financial results, and highlighted my positive opinion regarding the company’s new share repurchase plan.
My attention turns to Shinhan Financial Group’s 2023 outlook with this latest write-up. I expect SHG to deliver positive earnings growth and dividend hikes in the upcoming year, and this explains why I remain bullish about Shinhan Financial’s prospects in the near term.
Recent Quarterly Bottom Line Beat Consensus Forecast
I previously noted in my mid-October update for Shinhan Financial that a lack of substantial provisions and an improvement in net interest margin should drive “a strong set of results” for SHG in the third quarter of 2022.
I turned out to be correct with my earlier assessment. Shinhan Financial’s net profit expanded by +43% YoY and +21% QoQ to KRW1,595 billion for Q3 2022, and this was +5% above the analysts’ consensus net income estimate of KRW1,518 million based on S&P Capital IQ data.
Expectations Of Positive Core Earnings Growth For 2023
The sell-side analysts’ consensus financial projections sourced from S&P Capital IQ imply that Shihan Financial’s headline net profit is expected to decrease by -0.4% from KRW5,033 billion in fiscal 2022 to KRW5,011 billion for FY 2023. But the market’s consensus financial figures aren’t adjusted for non-recurring and non-core items.
Shinhan Financial recognized a pre-tax gain of KRW444 billion in the third quarter of this year relating to the divestment of a building by its brokerage arm, as disclosed in its Q3 2022 earnings presentation slides. This represents a one-off gain, which should be excluded from the evaluation of SHG’s bottom line performance.
In other words, analysts see Shinhan Financial achieving a mid-single digit core net income growth for FY 2023, adjusted for the gain derived from the sale of real estate. In the next section, I discuss about the key driver of SFG’s bottom line expansion in the following year.
Life Insurance Business Will Be Key Earnings Growth Driver
In the first nine months of 2022, SHG’s life insurance business, Shinhan Life Insurance, was the third most significant earnings contributor among SHG’s non-banking businesses after its credit card business and securities business. Specifically, Shinhan Life Insurance accounted for close to a fifth of net income derived from Shinhan Financial’s non-banking businesses in the 9M 2022 period as indicated in its third quarter results presentation.
In my view, Shinhan Life Insurance should be the star for the company next year due to two key factors.
One key factor is higher rates.
Economists from DBS Group (OTCPK:DBSDF) (OTCPK:DBSDY) forecast that the benchmark interest rate for South Korea will rise by +50 basis points from the current 3.25% to 3.75% in the following year.
Separately, Fitch Ratings highlighted in a December 7, 2022 research report that the expected increase in interest rates for 2023 will be a tailwind for South Korean insurance companies in the form of “higher investment returns” and “a lower burden on negative spreads.”
The other key factor is the new International Financial Reporting Standard or IFRS 17 regarding insurance contracts.
Korean life insurance companies such as Shinhan Life Insurance are required to adopt IFRS17 with effect from 2023, and this change will provide a substantial boost to the reported earnings of Shinhan Financial’s life insurance business. At the bank’s most recent third quarter results briefing in late-October, SHG estimated that Shinhan Life Insurance’s earnings could potentially witness “an increase of 30% on a recurring basis” as a result of the IFRS 17 implementation.
High Dividend Yield Is A Key Investment Merit For SHG
The sell-side estimates that Shinhan Financial will distribute a dividend per share of KRW2,595 for fiscal 2023 as per S&P Capital IQ data. This will be equivalent to a +5% dividend hike in 2023 and an appealing consensus forward dividend yield of 6.8%.
There are two reasons why I think that SHG can meet or even exceed the market’s expectations in terms of dividend growth for FY 2023.
The first reason is that Shinhan Financial’s capital allocation priorities haven’t changed, with dividends remaining as a key component of the company’s shareholder capital return initiatives.
Shinhan Financial reiterated at its Q3 2022 earnings briefing that SHG’s “dividend will continue to increase in a solid manner” as part of its plans to “enhance shareholder value.”
The second reason is that SHG’s overall earnings and profit contribution from its life insurance business are expected to increase in a meaningful way in 2023 as outlined in the preceding section.
Considering Shinhan Financial’s focus on dividends, SHG should maintain its dividend payout ratio in the worst case scenario, and this suggests that the company’s higher earnings should translate into dividend hikes for shareholders.
In a nutshell, Shinhan Financial should remain as an attractive income stock for investors, taking into account its expected high-single digit dividend yield for 2023.
Concluding Thoughts
I still have a Buy rating assigned to Shinhan Financial. SHG’s earnings and dividends are projected to grow in 2023, so I don’t see any reasons to change my positive view of Shinhan Financial.
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