[1mm Financial Talk] Buying Treasury Shares and Meeting Overseas Investors... Why Shinhan?

The foreign shareholder stake in Shinhan Financial Group is noticeably decreasing. Although other financial holding companies such as KB, Hana, and Woori are also experiencing declines in foreign ownership, Shinhan Financial Group's drop is relatively larger. In response, Chairman Jin Ok-dong has stepped in to purchase additional treasury shares and is increasing engagement with overseas investors.

According to the Korea Exchange on the 27th, Shinhan Financial Group's foreign ownership ratio as of the 23rd was 58.77%. This represents a 3.50 percentage point decrease compared to the end of last year (62.27%). The foreign ownership ratio, which once fell to the mid-to-high 50% range in 2020, had risen to around 62-63% by the end of the first quarter this year but has been declining again since last month.

Of course, the decline in foreign ownership is not unique to Shinhan Financial Group. The foreign ownership ratios of other major financial holding companies excluding Shinhan are also on the decline. KB Financial decreased by 1.02 percentage points to 72.17%, Hana Financial fell by 0.97 percentage points to 69.11%, and Woori Financial dropped by 0.86 percentage points to 38.87%. Typically, a stronger Korean won leads to increased purchases of bank stocks, but this time, despite the won's appreciation starting last month, there has been an increase in sales of bank stocks, according to securities industry explanations.

The primary reason for the decline in foreign ownership of financial holding companies is an unfavorable management environment. This includes high-intensity regulations from authorities at the beginning of the year criticizing the financial sector's "interest business" and urging expansion of win-win finance, increased provisions to respond to financial market uncertainties to enhance soundness, and negative factors such as forecasts of declining net interest margins (NIM).

However, Shinhan Financial Group's decline of 3.50 percentage points is relatively larger compared to other holding companies, which have declines around 1 percentage point. Within the financial sector, it is assessed that the 1.9 trillion KRW third-party allotment rights offering conducted by Shinhan Financial Group in 2019-2020 is holding it back. In particular, approximately 750 billion KRW worth of convertible preferred shares issued in 2019 for the acquisition of Orange Life (now Shinhan Life) were converted into common shares starting last month, raising concerns about overhang (potential excess stock supply).

Especially, the 1.15 trillion KRW capital increase conducted in 2020 remains an issue. In September 2020, Shinhan Financial Group carried out a 1.15 trillion KRW third-party allotment rights offering targeting Affinity Equity Partners, Baring Private Equity Asia, and others, citing "capital adequacy enhancement" as the reason, which sparked controversy.

A financial industry insider said, "KB Financial also conducted a third-party allotment rights offering around the same time targeting the private equity fund Carlyle, but it was for the purpose of acquiring Prudential Life (now KB Life Insurance), and communication with the market was relatively well managed. However, Shinhan proceeded with the rights offering under the somewhat lukewarm justification of 'capital adequacy enhancement for mid- to long-term growth strategy,' which caused distrust, and this seems to be affecting the current foreign ownership ratio."

Shinhan Financial Group is striving to enhance shareholder value. Chairman Jin Ok-dong purchased 5,000 common shares of Shinhan Financial Group worth approximately 17 million KRW on the 23rd through on-market transactions. This was his first stock acquisition since taking office in January, and it is evaluated as a clear indication of his intention to boost the stock price and enhance shareholder value. Additionally, earlier this month, Chairman Jin visited the Netherlands (Amsterdam), France (Paris), and the United Kingdom (London) to engage with local investors and attract investment.

Share buybacks to address the overhang issue are also being steadily carried out. Shinhan Financial Group purchased and canceled treasury shares worth 150 billion KRW in the first quarter and another 150 billion KRW in the second quarter this year, totaling 300 billion KRW. This amount already matches the scale of treasury share cancellations conducted last year (300 billion KRW).

However, the industry believes that this trend is likely to continue for the time being. Seol Yong-jin, a researcher at SK Securities, stated, "In the second half of the year, unfavorable management conditions such as rising delinquency rates and declining NIM are likely to persist, and authorities are also managing soundness by imposing a 1% countercyclical capital buffer (CCyB). Therefore, it is uncertain whether holding companies will be able to proceed with shareholder value enhancement measures such as share buybacks and cancellations as planned."