Affinity Equity, Baring PEA tipped to invest $1 bn in Shinhan Financial

Affinity Equity Partners and Baring Private Equity Asia will likely invest a combined 1.2 trillion won ($1 billion) in new shares of Shinhan Financial Group, which is keen to bolster its capital base following a series of acquisitions, said sources with knowledge of the negotiations on September 3.

The two private equity firms are expected to buy Shinhan’s newly issued common shares in a third-party placement for 600 billion won each. Shinhan will finalize the capital increase plan at a board meeting on Sept. 4.

Under the share deal, Affinity and Baring will take 4% and 3.5% stakes, respectively, in South Korea’s No. 2 banking group. They will become the first foreign PEFs to buy Shinhan shares as a strategic investor.

The share sale has nothing to do with BNP Paribas, which, with a 3.55% stake, has been in strategic partnerships with Shinhan for nearly two decades, the sources said. There has been market speculation about the French lender’s possible Shinhan stake sale.

A financial industry source said BNP Paribas's influence as a strategic partner would weaken after the PEFs secure stakes in the group. But that will hardly affect its management, given that a pool of Korean descendants in Japan, who are believed to have a combined 10-15% stake in Shinhan, controls the group as the de-facto top shareholder.

The National Pension Service was the biggest shareholder with a 9.92% holding as of the end of last year, followed by BlackRock with 6.13% and Shinhan’s employee share ownership association with 5.11%. Citibank and Singapore’s GIC held 2.80% and 2.54%, respectively.

Last year, the financial holding company raised 750 billion won in fresh capital by selling to Seoul-based IMM Private Equity its preferred stock convertible into common shares. If converted, the shares will be equivalent to a 3.7% stake in Shinhan.

New share issues come after Shinhan acquired Orange Life, formerly known as ING Life, from MBK Partners for 2.3 trillion won in 2018. Since then, Shinhan has purchased two small non-banking financial services firms in Korea, which lowered its tier 1 capital adequacy ratio to 11.42% as of the end of June, from as high as 14%.

After the share deal with Affinity and Baring, its tier 1 capital ratio is expected to rise to nearly 12%. Korean financial regulators have called on financial holding firms to shore up capital bases to brace for a protracted economic slump caused by COVID-19.

LOW PRICE-TO-BOOK RATIOS

South Korean banking shares have been underperforming the broader market, weighed down by growing default risk from corporate loans that have increased following the coronavirus outbreak. Record-low interest rates have squeezed lending margins, coupled with the emergence of online and mobile banking platforms.

Shares of Shinhan have tumbled 31% year to date, with sector leader KB Financial down 22%. In comparison, the KOSPI gained 9% this year.

Shinhan’s Thursday closing price of 30,000 won represents 0.36 times its book value, with the country’s leading banking groups trading at 0.24 to 0.39 times their book .

But private equity firms, with record levels of dry powder, saw the low share prices as a chance to hunt for bargains.

In June, the Carlyle Group agreed to buy $200 million worth of bonds convertible into shares in KB Financial Group, paying more than a 30% premium to the market price. At the time, the US private equity house said that KB shares had more upward potential and that it would invest an additional 260 billion won to buy KB shares.

"The low price-to-book ratios of Korean financial holding companies, at just 0.3 to 0.4 times, increase their allure in stock markets brimming with liquidity,” said another financial industry source.

With the new capital, Shinhan may pursue another acquisition to further bolster its non-banking business. It is tapped as a strong candidate to buy AXA General Insurance Co., up for sale by French insurer AXA, in a deal valued at up to 240 billion won.

Shinhan also may team up with Affinity and Baring to explore global expansion and investments.

Meanwhile, KKR also submitted a proposal to invest in Shinhan's new shares last month. But the US private equity firm was dropped because it failed to meet certain conditions, the source added. In 2018, Shinhan’s talks with KKR & Co. to sell a stake in itself broke down for unknown reasons.

Write to Daehun Kim and Chaeyeon Kim at daepun@hankyung.com