Investors who want to put new money to work in the banking sector are finding a shrinking pool of good options out there. While there are a few banks here and there, like U.S. Bank (NYSE:USB), that still offer some solid long-term potential, most U.S. and Canadian bank stocks have caught up to their fundamental values and so many European banks are just a horror show of credit risk and low growth.
So what about emerging markets? Investors have started to worry about the growth outlook in Brazil, and the problems in Argentina have offered up a reminder that success in these markets can be fleeting. But Asia may be a different case. In particular, investors may want to consider the opportunity in Korea's leading bank Shinhan Financial Group (NYSE:SHG).
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Growth Is not Exactly Torrid
Unfortunately, right at the start it doesn't look like Shinhan's story is all that much better or different than that at major U.S. banks like U.S. Bank or Wells Fargo (NYSE:WFC). Specifically, net interest income growth was just 3% year-on-year for the last quarter, while core earnings were just barely positive.
Loan growth was weak, delinquencies are ticking up and non-interest lines aren't chipping in all that much. Like the U.S., South Korea too is adjusting to new rules and regulations in the credit card sector. This is a sector where Shinhan has spent a lot of capital to become the top dog, but hasn't really yet seen the sort of profits to make it seem well worth the capital.
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Time to Ramp up the International Expansion?
Although Shinhan has been active in expanding overseas, we're not talking about another HSBC (NYSE:HBC), Standard Chartered or Citigroup (NYSE:C) here. Shinhan does have operations in Japan, China, Vietnam, Cambodia, India and other overseas markets, but these have largely been run as overseas branches for Korean entities operating in those countries.
Still, a start is a start, and the company seems to be getting more serious about competing in the retail and commercial banking markets in these countries.
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Will the Home Market be a Source of Reliable Returns or Trouble?
South Korea's banking market is largely oligopolistic, with Shinhan, KB Financial (NYSE:KB), Woori (NYSE:WF), Hana Financial, Industrial Bank of Korea and Korea Exchange Bank commanding a significant share of the market. Moreover, while South Korea may not be fully on par with the U.S., Canadian or Western European economies, it is a well-developed economy with a fully mature financial sector.
Oftentimes, oligopolies mean relatively rational competition where the companies focus on sustainable returns. That is more or less the case in Canada, and the stability of the Canadian market has freed up capital for companies like Bank of Nova Scotia (NYSE:BNS) and Bank of Montreal (NYSE:BMO) to build overseas banking businesses.
Not so in Korea, though, where it appears that companies are willing to fight fiercely (if not self-destructively) for a tiny incremental market share gain. That suggests that Shinhan may well struggle to reap strong return on equity in its home market in the years to come.
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The Bottom Line
Even with a tough home market and overseas expansion is still in its very early stages, Shinhan ends up looking like an interesting value prospect. If Shinhan can produce 10% or better return on equity on a sustainable basis (as it has for all but three of the past 10 years), these shares ought to trade into the $90s.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.