Shinhan Financial Group's review of acquiring Lotte Insurance has emerged as the first test of its new shareholder return formula. The group's common equity tier 1 (CET1) ratio stood at 13.30% in Q1, and analysts expect it to rebound to around 13.4% in Q2. However, an acquisition price exceeding 1 trillion won combined with post-acquisition capital injection requirements could threaten the 13% threshold. The market is focused on which priority Shinhan Financial will choose among maintaining CET1 at 13%, non-banking growth, and shareholder return rates above 50%. This situation tests the sustainability of the company's new capital allocation framework announced in Q1 earnings against the backdrop of South Korea's financial holding companies increasingly investing in securities subsidiaries to strengthen capital market competitiveness.
Lotte Insurance Acquisition Could Push CET1 Near 13% Threshold
According to the financial sector on the 9th, Shinhan Financial's Q2 CET1 is observed to rebound to around 13.4%. According to Yonhap Infomax consensus aggregation (screen number 8031), Shinhan Holdings is expected to post net profit of 1.6193 trillion won in Q2, similar to Q1 levels. Based on net profit growth, CET1 is expected to rise by approximately 45 basis points.
Shinhan Holdings' CET1 at the end of Q1 was 13.19%, revised to 13.30% with retroactive application of an 11bp impact from structural foreign exchange position overseas branch retained earnings expansion. This changed the year-over-year decline in Shinhan Holdings' CET1 to around 5bp.
In Q2, the increase in risk-weighted assets (RWA) compared to the previous quarter is expected to be somewhat lighter. In Q1, regulatory impacts totaled 1.6 trillion won, which has a strong one-time nature at the beginning of the year. Additionally, if loss events with low recurrence concerns such as fines are excluded from operational risk calculations, there is room for improvement of more than 10bp depending on approval timing.
The refund (700-800 billion won) from reduced fines related to Hong Kong H Index (HSCEI) equity-linked securities (ELS) is also a positive factor for Q2 net profit. Even after deducting quarterly dividends and remaining treasury stock acquisitions, calculations show that net accumulation of 10-20bp is possible during the quarter.
Hana Securities presented Shinhan Holdings' Q2 CET1 at 13.4%, citing low RWA growth rates. Considering the RWA exclusion effect from shortened operational risk application periods for loss events, it could exceed 13.5%.
The problem is that the CET1 increase earned over a full quarter disappears at once upon acquiring Lotte Insurance. Considering Lotte Insurance's basic capital solvency ratio and adding post-acquisition capital increases, analysis suggests the decline could exceed 60bp.
A chief financial officer (CFO) at a financial holding company stated, "Lotte Insurance has a significant capital ratio shortfall, so even if acquired, a capital increase would be necessary, which could be burdensome." However, the CFO added, "Insurance companies are attractive in terms of group synergy due to operating assets and monthly insurance premium cash flows, so it appears Shinhan, which lacks a non-life insurance lineup, is approaching this from a portfolio completeness perspective."
The CFO continued, "If a reasonable deal on price can be made depending on the due diligence level, there could also be positive aspects."
Growth Rate Buffer Emerges as Key Variable in Return Formula
Shinhan Financial's new shareholder return formula presented at Q1 earnings is also drawing attention in connection with this acquisition review. The core of the new value-up formula is to increase the predictability of return scale by reflecting both profit generation capacity and growth speed. The structure returns profits to shareholders after setting aside capital needed for company growth.
The key variable in this formula is the growth rate. The growth rate Shinhan Financial refers to is closer to the concept of RWA or capital increase rather than net profit. The typical RWA growth rate has been presented at 4-5% levels, similar to nominal GDP growth rates.
However, the problem is that the Lotte Insurance acquisition is an event that falls outside the range of such typical growth rates. The item drawing attention at this time is the buffer that adjusts growth rates. Shinhan Financial has set up a system where buffers can be established through internal decision-making processes, considering internal and external environments or temporary fluctuation factors. This creates a mechanism to adjust return rates by reflecting unexpected RWA or capital requirements from mergers and acquisitions (M&A) in growth rates.
However, how this value will be reflected in the return formula requires separate explanation. The Lotte Insurance acquisition can be reflected in the growth rate adjustment buffer to calculate return rates, and if the buffer is applied in a direction that increases growth rates, the shareholder return rate in the formula decreases.
Conversely, if the acquisition burden can be absorbed through capital efficiency or RWA reallocation, the impact on shareholder returns may be limited. Accordingly, market interest is focused on how Shinhan Financial will reflect the CET1 and RWA burden arising from the Lotte Insurance acquisition process in the new return formula if it actually proceeds.
Market Questions Capital Allocation Priorities
The market is also paying attention to how Shinhan Financial will explain the Lotte Insurance acquisition to shareholders. The new shareholder return formula has a structure that can flexibly adjust return rates through growth rates and buffers, but the process of convincing the market of the basis for such adjustments has become equally important.
There is considerable skepticism in the market about whether the Lotte Insurance acquisition will actually help improve Shinhan Financial's shareholder value. While there is room to partially absorb CET1 ratio burdens through quarterly profit accumulation, second-half RWA management, and capital regulation rationalization effects, the more fundamental question is whether the deal can lead to improved profit capacity for Shinhan Financial.
A securities firm researcher stated, "It's not a situation where capital ratio management becomes impossible if Shinhan Financial acquires Lotte Insurance," but added, "Ultimately, what's important is convincing shareholders that this deal can bring greater profits."
The researcher pointed out, "The non-life insurance industry is a sector where economies of scale are important, but it's questionable whether meaningful economies of scale can be secured just by acquiring Lotte Insurance." The researcher added, "In a situation where the insurance market is already saturated, price competition is inevitable to expand scale, which can lead to profitability burdens."
Questions about capital allocation priorities have also been raised. Considering that Shinhan Financial returns about half of its annual profits to shareholders, resources available for growth investment are limited. In this situation, considering an acquisition cost of around 1 trillion won plus the possibility of additional capital injection of around 1 trillion won, total capital burden inevitably grows larger. The market points out that explanations are needed on whether investing such resources in insurance company acquisition is optimal.
The fact that financial holding companies have recently been strengthening capital market competitiveness through securities subsidiary capital expansion, including integrated management accounts (IMA), is also a point of comparison. Notably, KB Financial conducted capital expansion of 1.7 trillion won for KB Securities this year.
The researcher stated, "The current market trend is aligned with productive finance and capital market-centered money movement," adding, "If investing the same capital, the view that it would be better to inject capital into securities companies to expand profit opportunities rather than acquire insurance companies is bound to emerge."
FAQ
What is Shinhan Financial Group's current CET1 ratio?
Shinhan Financial Group's CET1 ratio stood at 13.30% at the end of Q1 after retroactive adjustments. Analysts expect the ratio to rebound to around 13.4% in Q2 based on quarterly profit accumulation and lighter RWA growth compared to Q1.
How could the Lotte Insurance acquisition affect Shinhan Financial's capital ratio?
An acquisition price exceeding 1 trillion won combined with post-acquisition capital injection requirements could push Shinhan Financial's CET1 ratio down toward the 13% threshold. Analysis suggests the decline could exceed 60 basis points when considering Lotte Insurance's capital solvency ratio shortfall and necessary capital increases.
What did KB Financial do with its securities subsidiary this year?
KB Financial conducted capital expansion of 1.7 trillion won for KB Securities this year. This move represents the trend among Korean financial holding companies to strengthen capital market competitiveness through securities subsidiary investments rather than insurance acquisitions.
