Shinhan Financial Group(SHG) - 2020 Q4 - Annual Report

PART I IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS This section is not applicable as per the report - The report states that this item is not applicable[25] OFFER STATISTICS AND EXPECTED TIMETABLE This section is not applicable as per the report - The report states that this item is not applicable[26] KEY INFORMATION This section presents key financial data, risk factors, and exchange rate information for Shinhan Financial Group, covering selected consolidated financial statements, profitability, asset quality, capital ratios, and business risks Selected Financial Data This subsection presents selected consolidated financial data for 2016 through 2020, covering income, balance sheet, profitability, asset quality, and capital ratios under IFRS Consolidated Income Statement Data (2016-2020) | Indicator | 2018 (W billion) | 2019 (W billion) | 2020 (W billion) | | :--- | :--- | :--- | :--- | | Net Interest Income | 8,580 | 9,738 | 9,883 | | Operating Income | 4,499 | 5,046 | 4,930 | | Profit for the year | 3,198 | 3,642 | 3,498 | | Profit attributable to Equity holders | 3,156 | 3,403 | 3,415 | | Basic earnings per share (Won) | 6,579 | 7,000 | 6,654 | Consolidated Balance Sheet Data (2018-2020) | Indicator | As of Dec 31, 2018 (W billion) | As of Dec 31, 2019 (W billion) | As of Dec 31, 2020 (W billion) | | :--- | :--- | :--- | :--- | | Total Assets | 459,601 | 552,420 | 605,234 | | Total Liabilities | 422,949 | 510,489 | 558,877 | | Total Equity | 36,652 | 41,931 | 46,357 | Profitability Ratios (2018-2020) | Ratio | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Return on Average Assets (ROA) | 0.72% | 0.69% | 0.60% | | Return on Average Equity (ROE) | 9.23% | 9.02% | 7.95% | | Dividend Payout Ratio | 24.81% | 25.97% | 25.42% | | Net Interest Margin | 2.14% | 2.07% | 1.92% | Asset Quality Ratios (2018-2020) | Ratio | As of Dec 31, 2018 | As of Dec 31, 2019 | As of Dec 31, 2020 | | :--- | :--- | :--- | :--- | | Impaired Loans as % of Total Loans | 0.56% | 0.57% | 0.56% | | Non-Performing Loans as % of Total Loans | 0.36% | 0.40% | 0.47% | Capital Ratios (2018-2020) | Ratio | As of Dec 31, 2018 | As of Dec 31, 2019 | As of Dec 31, 2020 | | :--- | :--- | :--- | :--- | | Group BIS Ratio | 14.87% | 13.90% | 15.74% | | Tier I Capital Adequacy Ratio | 13.42% | 12.34% | 14.37% | | Common Equity Tier I Ratio | 12.55% | 11.12% | 12.87% | Risk Factors This subsection details various risks, including those related to business operations, specific financial products, regulatory changes, and the Korean economy, that could materially affect the company's financial condition - The COVID-19 pandemic presents significant uncertainty, potentially impacting business, operations, and financial conditions through increased loan defaults, interest rate decreases, and operational disruptions. The company accumulated an additional W394.4 billion in COVID-19-related provisions during 2020[63][65][67] - The company's business is heavily dependent on the Korean economy, which is susceptible to global economic turbulence, trade disputes (e.g., U.S.-China), and domestic issues like rising household debt and real estate market volatility[68][69][70] - Intense competition exists in the Korean financial services industry from domestic banks, foreign institutions, and new entrants like internet-only banks and fintech companies. This competition pressures net interest margins and may increase marketing expenses[75][76][87] - The company and its subsidiaries must maintain capital ratios above regulatory minimums (e.g., Basel III requirements). Failure to do so could result in operational suspensions. The implementation of stricter standards like Basel III may require raising additional capital[92][94][96] - The company has significant exposure to small- and medium-sized enterprises (SMEs), which are more vulnerable to economic downturns. As of December 31, 2020, loans to SMEs represented 29.9% of the total loan portfolio[114][115][118] - The credit card business faces risks from market saturation, stricter regulations on merchant fees, and competition from new payment methods. Government regulations have put downward pressure on merchant fees, impacting revenues[131][134][135] - The company may suffer losses from financial products sold by its subsidiaries, such as those related to Lime Asset Management. The Financial Supervisory Service has investigated and recommended sanctions against Shinhan Bank and Shinhan Investment for improper sales[147][149][150] - Tensions with North Korea, including its nuclear program and military actions, could escalate and have a material adverse effect on the company's business, the Korean economy, and the price of its securities[215][218][219] INFORMATION ON THE COMPANY This section provides a comprehensive overview of Shinhan Financial Group, detailing its history, strategic direction, principal business activities, structure, key subsidiaries, and regulatory environment History and Development of the Company Established on September 1, 2001, as Korea's first privately-held financial holding company, Shinhan Financial Group has grown through strategic acquisitions and implements a 'F.R.E.S.H. 2020s' mid-term strategy for sustainable growth - Shinhan Financial Group was established on September 1, 2001, as the first privately-held financial holding company in Korea[235][250] - The company has grown substantially through key acquisitions, including Chohung Bank in 2003, LG Card in 2007, and Orange Life Insurance in 2019, making it a leading financial services provider in Korea[237][251] - The Group's new mid-term strategy is 'F.R.E.S.H. 2020s', which stands for Fundamental, Resilience, Ecosystem, Sustainability, and Human-talent. This initiative aims to drive distinguished and sustainable growth[240] - As of December 31, 2020, the Group has 18 direct and 30 indirect subsidiaries, serving approximately 19 million active customers through a network of 1,383 branches[238] Business Overview This subsection details the Group's principal activities across banking, credit cards, securities, and insurance, covering its network, IT, competitive landscape, assets, liabilities, risk management, and regulatory environment - The Group's principal activities are commercial banking, credit card services, securities brokerage, life insurance, asset management, and other services like leasing and savings banking[260] Loan Portfolio by Type (As of Dec 31) | Loan Type | 2018 (W billion) | 2019 (W billion) | 2020 (W billion) | | :--- | :--- | :--- | :--- | | Total Corporate Loans | 159,790 | 169,130 | 190,255 | | Total Retail Loans | 120,832 | 134,424 | 146,790 | | Credit Cards | 22,448 | 24,024 | 23,759 | | Total Gross Loans | 303,070 | 327,578 | 360,804 | - As of December 31, 2020, total exposure to the 10 largest main debtor groups (chaebols) was W26,011.5 billion[429][430] - The Group's risk management framework is hierarchical, overseen by the Group Risk Management Committee, and covers credit, market, interest rate, liquidity, and operational risks. It utilizes tools like Value-at-Risk (VaR) and stress testing[590][594][595] - The Group and its subsidiaries are heavily regulated by Korean authorities like the Financial Services Commission (FSC) and are subject to various laws including the Financial Holding Companies Act, the Banking Act, and capital adequacy standards based on Basel III[786][837][851] Organizational Structure This subsection illustrates Shinhan Financial Group's organizational structure, listing its direct and indirect subsidiaries and highlighting its extensive domestic and international network - As of the report date, Shinhan Financial Group has 18 direct and 30 indirect subsidiaries[1002] - Key subsidiaries include Shinhan Bank, Shinhan Card, Shinhan Investment Corp., Shinhan Life Insurance, and Orange Life Insurance, all of which are 100% owned (except for Jeju Bank at 75.3% and Asia Trust Co. at 60.0%)[1002][1670] - The Group has a significant number of overseas subsidiaries, including banking operations in the USA, Canada, China, Japan, Vietnam, and Indonesia, reflecting its global presence[1003][1007] Properties This subsection details the Group's principal owned and leased properties, including locations and sizes, with a net book value of W3,030 billion as of December 31, 2020 - The net book value of all properties owned by the Group was W3,030 billion as of December 31, 2020[1011] - Shinhan Bank owned approximately 21.9% of its 859 branch facilities, with the remainder being leased. Other subsidiaries like Shinhan Card and Shinhan Investment also primarily lease their branch locations[1009][1010] UNRESOLVED STAFF COMMENTS This section is not applicable as the company reports no unresolved comments from the staff of the U.S. Securities and Exchange Commission - The company reports no unresolved staff comments from the SEC regarding its periodic reports[1012] OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section provides management's discussion and analysis of the Group's financial condition and operating results, including performance comparisons, analysis of financial items, liquidity, capital resources, and critical accounting policies Operating Results This subsection analyzes the Group's operating results, comparing performance across years, detailing income trends, segment performance, and critical accounting policies Operating Income Comparison (2019 vs 2020) | Component | 2019 (W billion) | 2020 (W billion) | % Change | | :--- | :--- | :--- | :--- | | Net Interest Income | 9,738 | 9,883 | 1.5% | | Net Fees & Commission Income | 2,141 | 2,383 | 11.3% | | Net Other Operating Expense | (6,833) | (7,336) | 7.4% | | Operating Income | 5,046 | 4,930 | (2.3)% | - In 2020, net income decreased by 4.0% to W3,498 billion from W3,642 billion in 2019. This was primarily due to a significant increase in provision for credit loss allowance (up 40.9% to W1,382 billion), largely driven by proactive provisioning for corporate loans in response to the COVID-19 pandemic[1154][1158][1160] - Net interest margin decreased by 15 basis points from 2.07% in 2019 to 1.92% in 2020, mainly due to decreases in the base interest rate by the Bank of Korea[1144] - In 2019, net income increased by 13.9% to W3,642 billion from W3,198 billion in 2018. The growth was driven by a 13.5% increase in net interest income and a 10.4% increase in net fees and commission income, partly due to the acquisition of Orange Life Insurance[1164][1190] - The adoption of IFRS 9, 15, and 16 in recent years affects the direct comparability of financial data. IFRS 9, adopted in 2018, replaced the 'incurred loss' model with a forward-looking 'expected credit loss' model for impairment, leading to earlier recognition of losses[1053][1061][1086] Liquidity and Capital Resources This subsection details the Group's liquidity and capital management, highlighting customer deposits as the primary funding source and outlining capital adequacy ratios and funding strategies - The principal source of funding is customer deposits, accounting for 70.9% of total funding as of December 31, 2020[1274] Contractual Cash Obligations as of Dec 31, 2020 | Obligation Type | Total (W billion) | | :--- | :--- | | Deposits | 329,350 | | Borrowings | 41,922 | | Debt securities issued | 78,799 | | Lease liability | 593 | | Total | 450,664 | Capital Adequacy Ratios (Basel III) as of Dec 31, 2020 | Ratio | 2020 | | :--- | :--- | | Total Capital Adequacy Ratio | 15.74% | | Tier I Capital Adequacy Ratio | 14.37% | | Common Equity Capital Adequacy Ratio | 12.87% | - In September 2020, the Group issued 39.13 million new common shares to two private equity funds, raising approximately W1,158 billion to increase loss absorption capacity in response to the COVID-19 pandemic[1282] DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section provides information on the company's directors, senior management, and employees, covering their backgrounds, compensation, board practices, and workforce details Directors and Senior Management This subsection lists the executive, non-executive, and outside directors, including CEO Cho Yong-byoung, and provides their professional backgrounds - The board of directors consists of one executive director, one non-executive director, and twelve outside directors[1345] - Cho Yong-byoung serves as the Chief Executive Officer and executive director, with his term ending in March 2023[1297][1298] Compensation This subsection details director and executive officer compensation, noting W4.0 billion aggregate remuneration in 2020 and the use of performance-based incentives - The aggregate remuneration paid to the chairman, executive directors, non-executive directors, and executive officers for the year ended December 31, 2020, was W4.0 billion[1334] - CEO Cho Yong-byoung received W1,251 million in 2020, consisting of W800 million in salary and W450 million in incentive compensation[1342] - The company has ceased granting stock options since April 1, 2010, and now uses performance-based cash compensation like 'performance shares' for high-ranking officers[1337][1339] Board Practices This subsection describes the board of directors' structure and practices, including its composition with a majority of outside directors and its seven key committees - The Board of Directors has ultimate responsibility for management and currently consists of one executive director, one non-executive director, and 12 outside directors[1345] - The Board has seven key management committees: Risk Management, Audit, Remuneration, Committee for Recommending Candidates for Independent Directors and Members of Audit Committee, Committee for Recommending Candidates for CEO, ESG Strategy Committee, and Committee for Managing Subsidiary's Business[1349][1350][1356] Employees This subsection details the Group's workforce, comprising 21,652 regular and 1,439 non-regular employees across the holding company and subsidiaries as of December 31, 2020, with many employees belonging to labor unions - As of December 31, 2020, the Group employed 21,652 regular employees and 1,439 non-regular employees at the holding company and subsidiary levels[1360] - A large number of employees are members of various labor unions, including the Korean Financial Industry Union and the Korean Federation of Clerical and Financial Labor Union. Employee relations are considered good[1361][1362] Share Ownership This subsection details share ownership by directors, executive officers, and the employee stock ownership association, noting their respective holdings as of April 1, 2021, and year-end 2020 - As of April 1, 2021, directors and executive officers as a group beneficially held 1,383,133 common shares, representing approximately 0.27% of outstanding stock[1364] - The employee stock ownership association owned 24,788,139 shares of common stock, or 4.80%, as of December 31, 2020[1365] MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section identifies the company's major shareholders and describes significant related party transactions, including the strategic alliance with BNP Paribas and loans to directors and officers Major Shareholders This subsection lists Shinhan Financial Group's major shareholders, with the National Pension Service and BlackRock Fund Advisors as the largest holders as of December 31, 2020 Major Shareholders as of December 31, 2020 | Name of Shareholder | Beneficial Ownership (%) | | :--- | :--- | | National Pension Service | 9.81% | | BlackRock Fund Advisors | 5.62% | | Shinhan Financial Group Employee Stock Ownership Association | 4.80% | | Centennial Investment Limited | 3.96% | | BNP Paribas SA | 3.62% | Related Party Transactions This subsection discloses related party transactions, including the alliance with BNP Paribas and loans to directors and executive officers made on normal commercial terms - The company maintains an alliance agreement with BNP Paribas, which held 3.62% of common stock as of December 31, 2020, and has the right to nominate one director to the board[1378] - As of December 31, 2020, the principal amount of loans outstanding to directors, executive officers, and their affiliates was W5.1 billion. These loans were made in the ordinary course of business on normal commercial terms[1379] FINANCIAL INFORMATION This section provides consolidated financial statements and other financial information, detailing significant legal and regulatory proceedings, including investigations into Lime Asset funds and German Heritage DLS Products Consolidated Statements and Other Financial Information This subsection refers to the full consolidated financial statements and details ongoing legal and regulatory proceedings, including investigations into Lime Asset funds and German Heritage DLS Products - As of December 31, 2020, the Group was a defendant in pending lawsuits with an aggregate claim amount of W320 billion, for which a provision of W15 billion was recorded[1382] - The Financial Supervisory Service is investigating the sale of Lime Asset funds by Shinhan Bank and Shinhan Investment. This has led to sanctions, including a partial business suspension for Shinhan Investment, and recommendations for fines and business suspension for Shinhan Bank[1386][1388] - Shinhan Investment and Shinhan Bank have resolved to compensate investors for losses on certain Lime Asset products. Shinhan Investment has also made prepayments to investors in German Heritage DLS Products and recognized W138.2 billion in provisions for potential future compensation in 2020[1389][1390] THE OFFER AND LISTING This section details the trading markets for the company's common stock and American Depositary Shares (ADSs), including historical market price data, Korea Exchange regulations, and foreign investor restrictions Offer and Listing Details This subsection provides market price information for the company's common stock on the Korea Exchange (KRX) and ADSs on the New York Stock Exchange (NYSE), including historical high, low, and trading volumes Market Price Summary (2020) | Security | Exchange | High Price | Low Price | | :--- | :--- | :--- | :--- | | Common Stock | Korea Exchange | W42,750 | W22,200 | | ADS | NYSE | $37.45 | $17.37 | Markets This subsection describes the Korea Exchange (KRX), the principal market for common stock, detailing its structure, regulations, trading rules, and reporting requirements for foreign investors - The principal trading market for the common shares is the KRX KOSPI Market Division of the Korea Exchange[1397] - The Korea Exchange has a daily price fluctuation limit of 30% of the previous day's closing price for any listed stock[1412] - Under Korean law, any person acquiring 5% or more of a company's voting shares must report the holding status and purpose to the Financial Services Commission and the Korea Exchange within five business days[1425] ADDITIONAL INFORMATION This section provides additional details on the company's corporate structure and governance, including share capital, articles of incorporation, exchange controls, and Korean and U.S. taxation for shareholders Memorandum and Articles of Incorporation This subsection summarizes key provisions of the company's Articles of Incorporation and Korean laws, covering share capital, dividend policy, preemptive rights, and shareholder procedures - As of December 31, 2020, the authorized share capital is 1,000,000,000 shares, with 516,599,554 common shares issued and outstanding[1445][1446] - Dividends are declared annually at the general shareholders' meeting and paid to shareholders of record as of December 31 of the preceding year. The company may also pay quarterly dividends upon a resolution by the board of directors[1449][1450] - Existing shareholders have preemptive rights to subscribe to new shares in proportion to their holdings, with certain exceptions for public offerings, issuances for depositary receipts, and strategic alliances, which can be approved by the board of directors[1454] Exchange Controls This subsection outlines Korean exchange control regulations affecting foreign investors, detailing procedural requirements for securities investment and remittance of funds - The Foreign Exchange Transaction Laws regulate investment in Korean securities by non-residents. The Ministry of Strategy and Finance may temporarily suspend transactions or impose deposit obligations in emergency situations[1483][1485] - Foreign investors must designate a foreign exchange bank and open foreign currency and Won accounts for stock investments. Remittance of funds into Korea for investment does not require approval, and funds in the foreign currency account can be remitted abroad without approval[1486] Taxation This subsection summarizes Korean and U.S. federal income tax consequences for non-resident investors holding common shares or ADSs, covering dividends, capital gains, and PFIC status - Dividends paid to non-resident holders are subject to a Korean withholding tax of 22% (including local surtax), which may be reduced under an applicable tax treaty[1491] - Capital gains from the transfer of shares or ADSs by non-residents are generally subject to Korean withholding tax at the lower of 11% of gross proceeds or 22% of net gain, unless exempt under a tax treaty or specific domestic law provisions[1492] - For U.S. holders, dividends are generally taxable as ordinary income. Qualified dividends may be subject to reduced tax rates, provided the company is a 'qualified foreign corporation' and holding period requirements are met[1517][1518] - The company does not believe it was a Passive Foreign Investment Company (PFIC) for 2020 and does not expect to become one, but notes that PFIC status is an annual factual determination[1529] QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section refers to Item 4.B. for quantitative and qualitative disclosures about market risk - Quantitative and qualitative disclosures about market risk are provided in 'Item 4.B. Business Overview — Risk Management'[1552] DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES This section addresses securities other than equity, including debt securities, warrants, and rights, all stated as not applicable, and details fees and payments related to the American Depositary Shares (ADSs) program administered by Citibank, N.A., in 2020 American Depositary Shares This subsection details fees and charges for ADS holders payable to Citibank, N.A., and discloses payments received by Shinhan Financial Group from the depositary in 2020 - Holders of American Depositary Shares (ADSs) may be required to pay fees to the depositary, Citibank, N.A., for services such as issuance (up to $5.00 per 100 ADSs) and cash distributions (up to $2.00 per 100 ADSs)[1556][1557] - In 2020, Shinhan Financial Group received payments totaling US$305,928.28 from the depositary, primarily for reimbursement of proxy process expenses and contributions to investor relations efforts[1561] PART II CONTROLS AND PROCEDURES This section confirms the effectiveness of the company's disclosure controls and internal control over financial reporting as of December 31, 2020, as concluded by management and audited by Samil PricewaterhouseCoopers - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[1565] - Management assessed the internal control over financial reporting based on the COSO 2013 framework and concluded it was effective as of December 31, 2020[1566][1567] - The independent registered public accounting firm, Samil PricewaterhouseCoopers, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2020[1568] AUDIT COMMITTEE FINANCIAL EXPERT This section identifies Yoon Jaewon, chair of the Audit Committee, as an audit committee financial expert, noting all four committee members are independent - The Board of Directors has determined that Yoon Jaewon, the chair of the Audit Committee, is an 'audit committee financial expert'[1570] CODE OF ETHICS This section confirms the adoption of a code of ethics for principal officers and all employees, with no waivers granted during the most recent fiscal year - The company has adopted a code of ethics applicable to its principal executive officer, principal financial officer, and other senior financial officers, as well as all employees of the Group[1571] PRINCIPAL ACCOUNTANT FEES AND SERVICES This section details fees paid to the principal auditors, Samil PricewaterhouseCoopers, for 2018 through 2020, and outlines the Audit Committee's pre-approval policies for services Principal Accountant Fees (2018-2020) | Type of Services | 2018 (W million) | 2019 (W million) | 2020 (W million) | | :--- | :--- | :--- | :--- | | Audit fees | 8,009 | 10,659 | 11,751 | | Audit related fees | 40 | 30 | 244 | | Tax fees | 209 | 35 | 152 | | All other fees | — | 284 | — | | Total | 8,258 | 11,008 | 12,147 | - The Audit Committee pre-approves all audit and non-audit services provided by the principal accountants, with delegated authority to its chair for certain approvals between meetings[1574] PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS This section discloses the company's purchase of 5,035,658 common shares between April and May 2020, which were subsequently retired on June 1, 2020 - From April 29, 2020, to May 28, 2020, the company purchased 5,035,658 of its own common shares[1578][1579] - All 5,035,658 treasury shares purchased in 2020 were retired on June 1, 2020[1579] CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT This section explains the change in independent auditor from KPMG Samjong to Samil PricewaterhouseCoopers (PwC) for fiscal years 2020-2022 due to mandatory Korean auditor rotation regulations - Due to Korean regulations on mandatory auditor rotation, the Securities and Futures Commission designated Samil PricewaterhouseCoopers (PwC) as the independent auditor for fiscal years 2020, 2021, and 2022[1581][1582] - PwC replaced KPMG Samjong Accounting Corp., whose engagement expired upon completion of the 2019 audit[1582] - There were no disagreements with the former auditor, KPMG Samjong, on any matter of accounting principles, practices, or financial statement disclosure during the two most recent fiscal years[1583] CORPORATE GOVERNANCE This section details the company's corporate governance practices, highlighting compliance with key NYSE standards as a foreign private issuer while noting differences from U.S. company requirements - As a foreign private issuer listed on the NYSE, the company is permitted to follow home country (Korean) corporate governance practices in lieu of certain NYSE standards[1590] - The company is in compliance with the NYSE requirement for a majority-independent board, with 12 of its 14 directors being independent[1591] - The Audit Committee is composed of four outside directors, all of whom meet NYSE and SEC independence requirements[1594] - Unlike NYSE rules for U.S. companies, Korean law does not require nomination or compensation committees to be composed entirely of independent directors, though the company's Remuneration Committee is fully comprised of outside directors[1595][1601] PART III FINANCIAL STATEMENTS The company has elected to respond to Item 18, which requires the provision of audited financial statements, in lieu of this item - The registrant has responded to Item 18 in lieu of responding to this item[1615] FINANCIAL STATEMENTS This section refers to the full audited consolidated financial statements and related independent auditor reports, included in the report starting from page F-1 - This item refers to the full financial statements filed as part of the annual report, which can be found starting on page F-1[1616][1626] EXHIBITS This section lists the exhibits filed as part of the annual report, including Articles of Incorporation, CEO/CFO certifications, and the former independent auditor's letter - This section provides an index of all exhibits filed with the annual report, such as the Articles of Incorporation (Exhibit 1.1), CEO/CFO certifications (Exhibits 12.1, 12.2, 13.1, 13.2), and a list of subsidiaries (Exhibit 8.1)[1617][1620]