Shinhan Makes Most of Low Yields to Refinance Debt

Shinhan Financial Group Co., South Korea’s largest financial-services group by market value, plans to sell about 1.2 trillion won ($1.1 billion) of bonds in total this year as record-low yields reduce borrowing costs.

“We’ve been able to take advantage of favorable borrowing conditions to refinance our maturing debt at lower yields,” Chief Financial Officer Min Jung Kee said in an interview on Aug. 17 in Seoul. “We need to pre-emptively raise capital when we can, as it’s not certain how long this low-rate environment will last.”

Corporate borrowing costs in Korea plunged to the lowest level on record on Aug. 3, after the central bank in July cut interest rates to bolster Asia’s fourth-largest economy. Gross domestic product grew at the slowest pace in almost three years last quarter as Europe’s debt crisis weakened exports.

Refinancing debt at lower rates will help Shinhan make up for a drop in loan profitability, Min said, forecasting that net income for 2012 will meet market estimates of about 2.4 trillion won to 2.6 trillion won.

Shinhan Financial has sold 830 billion won of bonds in the local currency this year, including 200 billion won of five- and seven-year notes offered today, according to data compiled by Bloomberg. It plans to issue a further 400 billion won of debt this year, according to Min.

The projected 1.2 trillion won of bond sales would still be the least since 2009 as Shinhan tries to reduce its debt.

‘Ideal Level’

Shinhan has the equivalent of 7.7 trillion won of bonds outstanding, excluding debt issued by subsidiaries, according to data compiled by Bloomberg. Min, 53, said the company will cut the level to about 5.5 trillion won by gradually repaying debt using cash generated from operations.

“That’s the ideal level of debt for us,” he said.

Deteriorating economic growth prospects have amplified demand for safer assets in South Korea. Three-year AA- rated corporate yields, the benchmark according to the Korea Financial Investment Association, have declined to the lowest since the association began compiling the data in 1993.

Shinhan has 540 billion won of bonds maturing this year, according to data compiled by Bloomberg. That compares with 820 billion won and 460 billion won in the equivalent periods of 2013 and 2014, the data show.

Shares of Seoul-based Shinhan have dropped more than 5 percent this year, compared with a 3.9 percent increase in the 57-stock Korea Financial Industry Index. Shinhan gained 0.7 percent to close at 37,600 won today in Seoul.

More Conservative

The company will probably post net income of 2.65 trillion won this year, according to the average of 32 analyst estimates compiled by Bloomberg. Shinhan posted record profit of 3.1 trillion won in 2011.

“Our initial target was higher, but we became more conservative due to the domestic and global environment,” Min said of the 2012 forecast. “We’ll focus more on risk management rather than asset growth.”

Net income fell 23 percent in the first half from a year earlier to 1.46 trillion won as reserves for soured debt rose and the lending margin narrowed, the company said July 31. The drop was exacerbated by a 352.2 billion won gain from selling a stake in Hyundai Engineering & Construction Co. a year earlier.

The Bank of Korea’s quarter-point rate cut to 3 percent, its first reduction in three years, has put pressure on loan profitability that is already shrinking. Shinhan’s net interest margin narrowed to 2.52 percent in the second quarter from 2.57 percent in the first quarter and 2.72 percent a year earlier.

“It’s hard to expect the net interest margin will expand in the rest of the year given the current circumstances,” said Min, who became CFO in April last year. “But we aim to protect it at the first-half level of 2.5 percent due to funding costs that are near a record low.”

The group will look for small takeovers in Southeast Asian markets such as Indonesia as domestic growth weakens, Min said. Shinhan won’t pursue large-scale acquisitions at home or abroad for the time being, he said.

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