Posco divests Shinhan stake

Steel group takes advantage of strong share price performance to execute clean up trade.
Investors debate the merit's of Posco block
Investors debate the merit's of Posco block

Posco completed a $157 million clean up trade in Korea's largest and most profitable private sector banking group on Monday, riding the back of momentum, which has enabled the banking sector to vastly outperform the underlying Kospi index over the course of the year. 

The steel group offered 4.369 million shares or 0.92% of Shinhan Financial’s outstanding share capital, marketing the deal of range of W42,450 to W43,950.

This represented a discount of zero to 3.4% on the stock's W43,950 ($36.35) close. 

Bankers said two investors had already more than covered the entire book pre-launch and final allocations were also highly concentrated. Four accounts took 70% of the deal, with 40 lines in total. 

Pricing was nevertheless fixed in the bottom quartile of the range at W42,650 per share, or a discount of 2.96%. 

Korean issuers have a reputation for aggressive pricing close to zero, but investors would have been conscious of Shinhan Financial's sharp share price spike during the final few hours of Monday's trading. 

The stock closed down 0.45% on the day, similar to the Kospi, which fell 0.43%. But, it rose 2% from its intra-day lows, outperforming other Korean banking stocks, which did not trade well on the day. 

Over the longer-term, however, analysts have an extremely positive view.

For example, Shinhan is the top Korean banking sector pick for lead manager Citi. The bank has a W60,000 target, equating to 35% upside from current levels. 

In a research report published at the beginning of this month its analyst said, "Since the global financial crisis of 2008, Korean banks have had little earnings visibility due to their deteriorating asset quality and the second lowest capital ratios in Asia."

But it thinks they will now outperform thanks to widening spreads, which should help to improve net interest margins. It also argues there will be a supportive asset quality cycle and stronger balance sheets.

This positive outlook has led Woori and Hana to outperform the pack, rising 37.76% and 37.5% respectively so far this year. KB is not that far behind on 21.72%.

Shinhan is the laggard. It has risen 11.13% year-to-date, although it has done far better than the Kospi, which is up 0.24% over the same period. 

At this level, Shinhan Financial is currently valued at around 9.7 times 2017 forecast earnings and at 0.68 times forecast 2017 price to book. 

UBS also believes it will now outperform its peers. A recent research report concluded that "peers have been reducing their reserves on normalised loans since the third quarter of 2014 resulting in lower credit costs and better share price performance."

But it added, "As we believe peers' practise is unsustainable and would amplify risks to credit costs in a slowing credit cycle, we expect Shinhan's credit costs to remain relatively stable in 2017 -18."

The group recently reported third quarter results, which beat analysts’ expectations for net profit to come in at W591 billion. 

Instead, Shinhan Financial achieved net profit of W708 billion, up 3.4% quarter-on-quarter. The group said this was supported by a W100 billion boost in non-interest income thanks to gains from investment securities. 

It was also able to maintain a fairly stable net interest margin, which only dropped 1bp to 1.49% despite a rate cut in June.  

Joint global co-ordinators for the block trade were Citi and JP Morgan. 

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