Shinhan Financial Group (SHG) Q3 2025: Capital Allocation Tilts Toward Capital Markets as RWA Rises 8T KRW
Shinhan Financial Group’s third quarter highlighted a strategic pivot, with resource allocation shifting toward capital market activities as risk-weighted assets (RWA) rose by 8 trillion KRW. Despite resilient profitability and stable CET1 ratios, management signaled a cautious stance on loan growth and a greater emphasis on capital efficiency amid persistent macro uncertainty. Investors should watch for how this capital rebalancing influences earnings composition and risk appetite into 2026.
Summary
- Capital Deployment: Resource allocation is set to increase toward capital markets, reducing reliance on traditional lending.
- Risk Management: Conservative asset quality and CET1 buffer maintained despite rising RWA and macro volatility.
- Profitability Mix: Fee-based and capital market income are gaining strategic weight as loan growth slows.
Performance Analysis
Shinhan’s Q3 results reflected a nuanced balancing act between profitability, risk, and growth. Group net profit was impacted by lower non-interest income, with a year-over-year decline, as fee and commission income softened and insurance profits contracted. However, interest income grew 2.9% quarter-over-quarter, driven by asset expansion in profitable segments and active asset-liability management (ALM, the practice of managing financial risks that arise due to mismatches between assets and liabilities).
Loan growth was led by corporate lending, up 4 trillion KRW in Q3, but management flagged that annual expansion will likely fall short of the initial 9 trillion KRW target, reflecting regulatory and market headwinds. Non-performing loan (NPL) coverage improved, and cost of risk (46bp) remained within guidance, though management cautioned on the need for continued conservative provisioning given lingering economic uncertainty. Capital ratios were stable, with CET1 down 6bp sequentially, absorbing an 8 trillion KRW increase in RWA tied to FX and asset risk.
- Interest Margin Stability: Net interest margin (NIM) inched up 1bp QoQ to 1.56%, with proactive cost management offsetting a 12bp drop in loan yields.
- Fee Income Volatility: Non-interest income was pressured by lower childcare and FX-related fees, though capital market-related fees rebounded on stronger securities activity.
- Cost Discipline: Operating expenses were contained, with a 2.2% QoQ increase in group revenue aided by cost controls in Shinhan Card and other non-bank units.
Segment performance was mixed: Shinhan Bank’s profit fell on weaker non-interest income, while Shinhan Card and Shinhan Investment showed sequential improvement through productivity and capital market gains. Overseas operations in Japan and Vietnam remained a bright spot, posting differentiated growth versus domestic units.
Executive Commentary
"The group CET1 ratio was managed at the level of falling 6BP compared to the previous quarter based on stable short-term profits despite the fact that there were many factors of increase in RWA. In the future, we will do our best to provide sufficient funds that are necessary for each and every situation, and to maintain a stable capital ratio through internal efficiency and strategic resource distribution."
Go Seok-heon, Group CFO
"In the first half of the year, we grew conservatively considering our previous year's growth. In terms of corporate loans, as we said earlier, we had a conservative growth in the first half of the year. In the third quarter, we actively increased corporate loans... Overall, we have a growth plan of about 5% of the original loan. In fact, in the 25th year of this year, it will grow by about 4% and there will be no big difference compared to the plan. I think it will be difficult to grow in the next year due to various regulations and environment."
Lee Jung-bin, CFO, Shinhan Bank
Strategic Positioning
1. Capital Allocation Rebalancing
Management is shifting capital allocation toward capital market businesses, reflecting a strategic response to slowing loan growth and tighter regulatory constraints. The CFO noted that resource distribution will increasingly favor capital market units over traditional lending, aiming to enhance return on equity (ROE) and diversify earnings streams.
2. Asset Quality and CET1 Buffer
The group maintained a stable CET1 ratio in the mid-13% range, absorbing RWA growth while keeping a prudent buffer for future uncertainty. Conservative provisioning and disciplined risk management were emphasized, with NPL coverage and cost of risk metrics reflecting a cautious stance as macro risks persist.
3. Loan Growth Moderation
Loan growth is decelerating, with corporate loans leading expansion but total growth tracking below initial plans. Regulatory limits and market demand shifts are constraining further upside, and management expects next year’s loan growth to remain muted, likely in the 5-6% range.
4. Fee and Capital Market Income Emphasis
With interest income growth plateauing, Shinhan is placing greater emphasis on fee-based and capital market income. Securities, IV (investment banking), and fund sales fees rebounded in Q3, and management signaled ongoing efforts to capture capital market flows as retail and institutional investors shift allocations.
5. Overseas and Non-Bank Diversification
International operations, especially in Japan and Vietnam, continue to provide differentiated growth, helping offset domestic headwinds. Non-bank subsidiaries like Shinhan Card and Shinhan Investment are pursuing productivity and asset rebalancing to stabilize profitability.
Key Considerations
This quarter marks a turning point for Shinhan’s capital strategy, as the group adapts to a more mature domestic lending environment and regulatory tightening. Management’s willingness to reweight toward capital market businesses could reshape the risk-return profile and earnings mix in 2026.
Key Considerations:
- Capital Market Expansion: Increased capital deployment to capital markets could drive higher fee income but may expose the group to market volatility.
- Regulatory Headwinds: Tighter loan growth caps and evolving capital rules are constraining traditional banking expansion.
- Asset Quality Vigilance: Conservative provisioning and robust NPL coverage remain central as economic uncertainty lingers, especially for lower-tier borrowers.
- Profitability Mix Shift: Earnings composition is tilting toward non-interest and overseas income, diversifying away from domestic lending.
Risks
Key risks include persistent macroeconomic uncertainty, regulatory intervention in lending and capital policy, and potential volatility from increased capital market exposure. The shift in asset allocation could heighten earnings variability if capital markets soften, while muted loan growth may cap top-line expansion. Management’s cautious tone on liquidity and asset quality underscores the need for ongoing vigilance.
Forward Outlook
For Q4 2025, Shinhan guided to:
- Maintain CET1 ratio above 13.1%, absorbing seasonal profit declines and RWA growth
- Cost of risk expected to remain in the mid-to-high 40bp range
For full-year 2025, management maintained guidance:
- Loan growth to finish near 4%, below initial targets, with 2026 growth likely capped at 5-6%
Management highlighted several factors that will shape the outlook:
- Continued resource reallocation to capital market businesses
- Ongoing conservative provisioning and risk management to buffer against economic uncertainty
Takeaways
Shinhan’s Q3 results signal a deliberate pivot in capital strategy, with the group managing risk and profitability through tighter loan growth and increased capital market participation.
- Resource Rebalancing: Capital is being shifted toward fee-generating and market-driven businesses as traditional lending faces regulatory and market constraints.
- Risk Controls Remain Central: Stable CET1 and disciplined provisioning reflect a prudent approach amid macro and regulatory headwinds.
- Watch for Earnings Mix Evolution: Investors should monitor how increased capital market exposure and overseas diversification impact Shinhan’s risk and return profile in 2026.
Conclusion
Shinhan Financial Group’s Q3 underscores a strategic inflection point as management prioritizes capital efficiency and non-lending income sources. The group’s ability to balance risk, profitability, and capital allocation will define its trajectory in a challenging macro and regulatory landscape.
Industry Read-Through
Shinhan’s pivot toward capital market businesses and non-interest income reflects a broader trend among major Korean financial institutions, as regulatory caps and market saturation constrain loan growth. The emphasis on capital efficiency and risk management is likely to become more pronounced across the sector, with peers also navigating similar pressures on interest margins and asset quality. For regional banks, the shift toward fee and capital market income may increase earnings volatility but offers a path to higher ROE in a low-growth environment. Industry-wide, the ability to manage capital allocation and risk will be a key differentiator as macro and policy headwinds persist.