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Analysts cast doubt on Shinhan‘s motive behind PE-backed capital increase

Shinhan Financial Group Chairman Cho Yong-byoung presides over a video conference with heads of Shinhan group affiliates at the holding company's headquarters in central Seoul, Sept. 7. (Shinhan Financial Group)
Shinhan Financial Group Chairman Cho Yong-byoung presides over a video conference with heads of Shinhan group affiliates at the holding company's headquarters in central Seoul, Sept. 7. (Shinhan Financial Group)
Shinhan Financial Group’s plan to increase capital, list new common shares and invite foreign private equity firms as new shareholders in October has left local market watchers with doubts about the motivation behind the move.

Last week, the nation‘s No. 1 banking group by total assets said the fundraising is aimed at a securing long-term capital buffer amid COVID-19 uncertainties and a new growth driver in its global business.

Questions still linger, according to analysts here, as to what Shinhan can get by paying the price of stock dilution and the negative impacts existing shareholders will face.

The key point of contention is the validity of Shinhan’s argument that it needs to raise common equity tier 1 ratio, a barometer used to gauge minimum core capital adequacy recognized by the international regulatory standard Basel III.

Eyes are on the motivation behind the increase of Shinhan‘s core capital -- or 8.2 percent of common shares combined in exchange for 1.16 trillion won ($975.8 million) -- provided that Shinhan last Monday reneged on its intention to “improve its corporate governance” last week.

Announcing the financing plan from Hong Kong-based PEs Affinity Equity Partners and Baring Private Equity Asia, Shinhan Financial Group vowed to increase its CET1 capital ratio to 12 percent internally.

Shinhan‘s CET1 capital ratio stood at 11.4 percent as of end-June. The figure is lower than that of two years prior at 13.04 percent, but still way above the global standard at 7 percent.

The adequacy ratio has over the past couple of years gradually dipped following a series of acquisitions of companies such as Orange Life Insurance and real estate trust Asia Trust in 2019.

This indicates that Shinhan internally felt a need to improve capital buffer and prepare dry powder to keep its growth engine intact, analysts said, adding Shinhan, however, could have come up with other measures to improve its ratio of equity capital and disclosed reserves to its total risk-weighted asset, considering the cost it will be paying to existing shareholders.

“It’s regrettable to see that Shinhan chose to issue new common shares and increase capital to improve capital adequacy,” said Koo Kyung-hoe, an analyst at SK Securities. “It is also hard to evaluate what fruits Shinhan‘s strategic partnership private equity firms could bear at this juncture.”

Another analyst said the sales proceeds at just over 1 trillion won are not large enough to finance the global expansion plan, making the existing shareholders less inclined to the capital increase plan.

“The degree of the paid-in capital increase is too small to buy a big foreign financial company, and at the same time too big to do small-sized M&As,” wrote Lee Byung-geon, an analyst at DB Financial Investment. “Shinhan‘s intention to do small M&As in Asian market appears to make little case for existing shareholders considering the current level of Shinhan’s earnings.”

While the capital increase plan adds to uncertainties surrounding Shinhan, the major task at hand is to stave off the uncertainties, another analyst noted.

“The reasoning behind the fundraising of over 1 trillion won seems obscure at this moment,” wrote Kim Do-ha, an analyst of Cape Investment & Securities. “The destination of the new capital with regards to global expansion and M&As has to materialize as soon as possible.”

Shinhan is reportedly in talks to buy the controlling stake in Seoul-based nonbanking companies such as AXA General Insurance and Franklin Templeton Investment Trust Management.

By Son Ji-hyoung (consnow@heraldcorp.com)
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