[Click eStock] "Shinhan Financial Group, Stock Price Decline Inevitable Due to Capital Increase"

Daishin Securities Report
Bank Stocks Supply and Demand Deteriorate, Target Price Down 15%

[Asia Economy Reporter Minji Lee] Daishin Securities on the 7th forecasted that Shinhan Financial Group's stock price decline is inevitable due to the decision on a rights offering, lowering the target price by 15% from the previous to 43,000 KRW. The investment rating was maintained as Buy.

Shinhan Financial Group announced a third-party allotment rights offering worth 1.158 trillion KRW on the 4th. The number of new shares issued is 39,130, accounting for 8.2% of the total outstanding shares. The third-party allotment recipients are global PEFs Affinity and Baring, with a two-year sale restriction and a one-year mandatory lock-up period. If the shares are disposed of, Shinhan Financial Group has a preemptive purchase right. The new share issuance price is 29,600 KRW, reflecting a 2% discount from the reference price of 30,174 KRW, and the new shares are scheduled to be listed on October 20.

Researcher Hyejin Park of Daishin Securities said, "With this rights offering, the company's earnings per share (EPS) and book value per share (BPS) are expected to decline by 7.6% and 5.4%, respectively, and the return on equity (ROE) will also drop by 17 basis points (1bp = 0.01 percentage points). The common equity tier 1 capital ratio is expected to rise from 11.54% to 11.97% by the end of this year."

Thirty percent of the rights offering proceeds are intended to mitigate the impact of the COVID-19 pandemic, and the remaining 70% will be used to secure new growth engines such as inorganic M&A. Regarding this, the company explained that it is considering domestic and overseas non-bank acquisitions and focusing on digital innovation such as fintech.

Amid negative policies affecting domestic banks, such as support for small business owners due to COVID-19, the New Deal, and full compensation for incomplete sales, which have led to a weak stock price, the company's stock price decline is expected to deepen due to this rights offering.

Researcher Park said, "Although the deal itself is not bad given the sale restrictions on the rights offering and the relatively small discount rate, the degree of damage to BPS and EPS is significant. The fact that the company decided on a rights offering indicates concerns that further amplify investor worries." If common shares increase by 8.2%, the dividend per share (DPS) is also expected to decrease from 1,850 KRW this year to 1,800 KRW.

However, the willingness to pay quarterly dividends is positive. Researcher Park analyzed, "If the internal target of a 12% common equity tier 1 capital ratio is maintained, active shareholder return policies such as quarterly dividends and share repurchases and cancellations are expected to be implemented. The willingness to address the biggest cause of distorted bank stock supply and demand?the year-end lump-sum dividend issue?by showing the possibility of quarterly dividends is welcome."