Shinhan FG: executes my favorite Banking Playbook

9.5%RoTCE, 0.61x P/TBV, 50% shareholder payout ratio

The content is for information purposes only, not investment advice.

Background

I recently trimmed Citi and Deutsche Bank as they approached Tangible Book Value (TBV); both have been successful investments, generating a 2x to 3x return in ~3 years.

They have a similar setup: a leading bank with a capable CEO initiating a turnaround focused on profitable growth, cutting unprofitable operations, and emphasizing shareholder returns over expansion. Despite this, they are viewed as persistent losers and traded at a significant discount to TBV.

As it continues to execute, using buybacks to highlight its substantial discount, the market eventually recognizes it, and the stock re-rates.

That’s my favorite banking playbook, and in my search for the next banking opportunity, I find that Shinhan FG (a top-tier South Korean bank dual-listed in the US and Korea) is executing exactly that playbook.

A Compelling Setup

At $45/share, ~500 Mn shares, $22.5 Bn Market Cap, Shinhan SHG 0.00%↑ (055550.KS) trades at 7x P/E, 0.61x TBV today.

In 2024, it reported a 40% shareholder payout ratio (including 24% in dividends and 16% in buybacks), a remarkable 1400 basis point increase since 2021, with a target to reach a 50% payout by 2027.

That is an incredible setup for a bank. Let me illustrate it with a model below, based on two assumptions:

1. Maintains its profitability at 9.5% RoTCE (Return on Tangible Common Equity);

2. Raises its shareholder return to 50% by 2028 (from 43% in 1Q25)

If the idea doesn’t work (the market doesn’t care), Shinhan stock would remain flat and trade at $45/share in 2028, despite TBV increasing to $109.5/share and $10 EPS; it would be valued at 4.6x P/E, 0.4x P/TBV, and a 11% dividend+buyback yield.

I call that crazy math.

Readers might raise some fair questions:
1. Can Shinhan maintain 9.5% RoTCE?
2. Will Shinhan raise its shareholder payout to 50% by 2027/28?
3. Do we overlook various Korean risks?

That’s what this article sets out to explore.

Outline

I examine Shinhan’s core business segments and explain why maintaining 9.5% RoTCE is a conservative goal.

I walk through Shinhan’s shareholder return initiatives and the government-backed nationwide program to explain why a 50% shareholder payout target, although it sounds aggressive, is a highly likely outcome.

I present my valuation model, which shows a 65% to 130% upside potential by 2028, along with a few risks.

I discuss my positioning strategy considering its high volatility.

Take #1: Maintain 9.5% RoTCE

With 15 business segments, analyzing Shinhan’s profitability at first glance appears overwhelming. As we look further, three of its key segments — Shinhan Bank, Credit Card, and Life Insurance — hold over 90% of Shinhan’s equity and account for nearly all its profits.

HY2024 Annual Report

We will focus on these three segments, examine their competitive landscape, past performance, current trends, and discuss why I believe maintaining a 9.5% RoTCE is conservative.

Shinhan Bank is the founding and largest business segment of the Shinhan Group, representing 60% of the invested capital and ~80% of the group's income.

Shinhan Bank is one of the 4 major banks in South Korea (The other three are: KB Kookmin ($KB), Hana, and Woori($WF)).

As the first 100% privately funded bank in Korea, Shinhan was founded in 1982 with KRW 25Bn (~$20Mn) capital, and grew to KRW 671Tn (~$500Bn) in assets, becoming the largest lender and the second-largest deposit base (behind KB Kookmin) in 2024.

It outgrows its peers with a 6.7% CAGR growth in assets since 2020 (compared to 4% to 4.1% CAGR asset growth for its three peers during the same period). Even more impressive is its 15.5% net profit growth CAGR since 2020. Its outperformance is driven by strong domestic deposit and loan growth, as well as robust global expansion.

Its overseas banking operation grew rapidly, with its net income increasing from KRW 334.6 Bn in 2020 to KRW 759 Bn in 2024 (23% CAGR), and its group profit rising from 10% to 17%.

Most notably, following its impressive profitable growth in Japan and Vietnam, Shinhan is actively developing future candidates in the adjacent Asian regions (e.g., Kazakhstan, Indonesia, and Myanmar).