Shinhan Financial Group(SHG) - 2021 Q4 - Annual Report

PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS The report indicates this section is not applicable - The report states that this item is not applicable[22] ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE The report indicates this section is not applicable - The report states that this item is not applicable[23] ITEM 3. KEY INFORMATION This section outlines key investment risks, encompassing macroeconomic, competitive, regulatory, geopolitical, and ADS-specific factors Risk Factors The company faces diverse risks including macroeconomic volatility, intense competition, regulatory changes, geopolitical tensions, and operational challenges across its banking and credit card segments - The COVID-19 pandemic's impact on business operations and financial conditions remains highly uncertain. The company accumulated an additional ₩187.9 billion in COVID-19-related provisions during 2021[40][43] - Intense competition in the Korean financial industry, heightened by the entry of internet-only banks and fintech companies, may pressure net interest margins and profitability[50][53][61] - The company and its subsidiaries must maintain capital ratios above minimum levels required by Basel III regulations, and failure to do so could lead to operational suspensions[65][68][72] - The company faces potential losses and reputational damage from financial products sold by its subsidiaries, such as those related to Lime Asset Management, which have led to regulatory investigations and compensation payments[126][127][130] - Tensions with North Korea, including its nuclear program and military actions, could have a material adverse effect on the company's business, financial condition, and the price of its securities[192][195][197] ITEM 4. INFORMATION ON THE COMPANY This section provides a comprehensive overview of Shinhan Financial Group, covering its history, strategic direction, diverse business activities, organizational structure, and properties History and Development of the Company Shinhan Financial Group, established in 2001, has grown through strategic acquisitions and is guided by its 'F.R.E.S.H. 2020s' mid-term strategy for sustainable growth - The Group's mid-term strategy is 'F.R.E.S.H. 2020s', which stands for Fundamental, Resilience, Ecosystem, Sustainability, and Human-talent[216] - Seven detailed strategic directions for 2022 have been established, including conversion to innovative digital platforms, pursuit of efficient growth, global expansion, sustainable performance, proactive risk management, development of a dynamic organization, and convergent human resources management[217][219][220] Key Acquisitions and Formations | Date of Acquisition | Entity | Principal Activities | | :--- | :--- | :--- | | August 2003 | Chohung Bank | Commercial banking | | March 2007 | LG Card | Credit card services | | February 2019 | Orange Life Insurance | Life insurance services | | September 2020 | Shinhan Venture Investment | Venture capital | Business Overview The company offers comprehensive financial services across banking, credit cards, securities, and insurance, detailing its diverse product offerings, risk management framework, and extensive regulatory oversight - The Group's principal activities are divided into commercial banking, credit card services, securities brokerage, life insurance, specialized credit services, and other services like asset management and savings banking[237][238] Corporate Loan Portfolio by Type (as of Dec 31) | Loan Type | 2019 (₩ Billion) | 2020 (₩ Billion) | 2021 (₩ Billion) | | :--- | :--- | :--- | :--- | | Small- and medium-sized enterprises | 91,162 | 108,016 | 121,961 | | Large corporate loans | 34,466 | 35,289 | 40,368 | | Total corporate loans | 169,130 | 190,255 | 208,468 | Retail Loan Portfolio by Type (as of Dec 31) | Loan Type | 2019 (₩ Billion) | 2020 (₩ Billion) | 2021 (₩ Billion) | | :--- | :--- | :--- | :--- | | Mortgage and home-equity loans | 68,074 | 73,188 | 79,860 | | Other retail loans | 66,350 | 73,602 | 79,146 | | Total Retail Loans | 134,424 | 146,790 | 159,006 | - The risk management framework is hierarchical, covering credit, market, liquidity, and operational risks, with oversight from the Group Risk Management Committee at the holding company level[572][576] - The company and its subsidiaries are subject to extensive regulation by Korean authorities (Financial Services Commission, Financial Supervisory Service) and U.S. authorities (Federal Reserve, FDIC, NYDFS) for its U.S. operations[761][925][926] Organizational Structure Shinhan Financial Group comprises 17 direct and 34 indirect subsidiaries, including wholly-owned entities like Shinhan Bank and Shinhan Card, with a significant international presence across multiple continents - The Group comprises 17 direct and 34 indirect subsidiaries[977] - Key wholly-owned subsidiaries include Shinhan Bank, Shinhan Card Co., Ltd., Shinhan Investment Corp., and Shinhan Life Insurance Co., Ltd[977] - The Group has a significant international presence with subsidiaries in the United States, Canada, China, Japan, Germany, Vietnam, Indonesia, and Mexico, among others[981] Properties The company's properties, primarily in Korea, had a net book value of ₩2,930 billion as of December 31, 2021, with most branch facilities being leased rather than owned - The net book value of all properties owned by the Group was ₩2,930 billion as of December 31, 2021[985] - Approximately 25% of Shinhan Bank's 784 branches are housed in buildings owned by the Group, with the remainder being leased properties[983] ITEM 4A. UNRESOLVED STAFF COMMENTS The company reports no unresolved comments from the staff of the U.S. Securities and Exchange Commission regarding its periodic reports - The company has no unresolved staff comments from the SEC[986] ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section analyzes the company's financial performance, liquidity, and capital resources, discussing operating results, funding sources, and capital adequacy within the context of Korean and global economic trends Operating Results In 2021, net income increased by 17.6% to ₩4,113 billion, driven by growth in net interest and fee income, against a backdrop of 4.0% Korean GDP growth and proactive credit loss provisioning Operating Income Summary (2020 vs. 2021) | Component | 2020 (₩ Billion) | 2021 (₩ Billion) | % Change | | :--- | :--- | :--- | :--- | | Net interest income | 9,883 | 10,769 | 9.0% | | Net fees and commission income | 2,383 | 2,675 | 12.3% | | Net other operating income (expense) | (7,336) | (7,492) | 2.1% | | Operating income | 4,930 | 5,952 | 20.7% | - Net income for 2021 increased by 17.6% to ₩4,113 billion from ₩3,498 billion in 2020[1070] - Provision for credit loss allowance decreased by 29.5% to ₩975 billion in 2021, following proactive provisioning in 2020 in response to COVID-19[1066][1068] - The Korean economy grew by approximately 4.0% in 2021, supported by robust exports and a recovery in private consumption, with moderate growth expected in 2022 despite inflation and monetary policy risks[1003][1004] Liquidity and Capital Resources The company manages liquidity primarily through customer deposits, which constitute 72.0% of total funding, while maintaining strong capital adequacy with a Group BIS ratio of 16.20% and Common Equity Tier 1 ratio of 13.10% as of year-end 2021 - The principal source of funding is customer deposits, accounting for 72.0% of total funding as of December 31, 2021[1205] Capital Adequacy Ratios (Basel III) | Ratio | Dec 31, 2019 | Dec 31, 2020 | Dec 31, 2021 | | :--- | :--- | :--- | :--- | | Group BIS ratio | 13.90% | 15.74% | 16.20% | | Tier I capital adequacy ratio | 12.34% | 14.37% | 14.94% | | Common equity capital adequacy ratio | 11.12% | 12.87% | 13.10% | - As of December 31, 2021, the company had contractual cash obligations totaling ₩496,475 billion, primarily consisting of deposits, borrowings, and debt securities[1220][1222] ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section details the company's leadership, including board composition and senior management, compensation practices, board committees, employee numbers, union memberships, and share ownership disclosures Directors and Senior Management The company is led by CEO Cho Yong-byoung, with a board comprising one executive, one non-executive, and twelve outside directors, all selected for diverse professional expertise - The Chief Executive Officer is Cho Yong-byoung, who has held the position since March 2017[1234][1235] - The board consists of one executive director, one non-executive director, and twelve outside directors, selected for their expertise in areas like law, finance, economics, and management[1238][1239] Compensation Aggregate compensation for directors and executive officers in 2021 was ₩4.9 billion, with the company utilizing a performance share plan for long-term incentives instead of stock options - Aggregate remuneration for directors and executive officers in 2021 was ₩4.9 billion, comprising ₩4.0 billion in salaries and ₩0.9 billion in bonuses[1274] - The company uses a performance share plan for long-term incentive compensation, which is tied to the company's business performance and share price movements over a four-year period[1278][1282] - In 2021, CEO Cho Yong-byoung's compensation included ₩839 million in salary and a grant of 30,000 performance shares[1281] Board Practices The 14-member Board of Directors, with 12 outside directors, oversees company affairs through seven committees, including the Audit Committee, which is entirely composed of independent outside directors - The Board of Directors consists of 14 members: one executive director, one non-executive director, and twelve outside directors[1283] - The board has seven key committees to oversee specific areas: Risk Management, Audit, Remuneration, CEO Candidate Recommendation, Independent Director Recommendation, ESG Strategy, and Subsidiary Management[1287][1293] - The Audit Committee is composed entirely of four outside directors, overseeing financial reporting and the independent auditors[1290] Employees As of December 31, 2021, the Group employed 21,530 regular and 1,947 non-regular employees, with a significant portion of subsidiary employees belonging to various labor unions - As of December 31, 2021, the Group employed 21,530 regular and 1,947 non-regular employees[1297] - Employees at major subsidiaries are members of various unions, including the Korean Financial Industry Union and the Korean Federation of Clerical and Financial Labor Union[1298] Share Ownership As of April 6, 2022, directors and executive officers collectively held 0.02% of common stock, while the employee stock ownership association held 4.93% as of December 31, 2021 - As of April 6, 2022, directors and executive officers as a group held 127,036 common shares, representing approximately 0.02% of outstanding shares[1302] - The employee stock ownership association held 25,464,625 common shares, or 4.93% of the total, as of December 31, 2021[1303] ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section identifies major shareholders, including the National Pension Service and BlackRock, and details related party transactions, such as the strategic alliance with BNP Paribas and loans to directors Major Shareholders As of December 31, 2021, the National Pension Service of Korea was the largest shareholder with an 8.78% stake, followed by BlackRock Fund Advisors at 5.45% Major Shareholders as of December 31, 2021 | Name of Shareholder | Number of Common Shares | Beneficial Ownership (%) | | :--- | :--- | :--- | | National Pension Service | 45,340,437 | 8.78% | | BlackRock Fund Advisors | 28,133,027 | 5.45% | | Shinhan Financial Group Employee Stock Ownership Association | 25,464,625 | 4.93% | | BNP Paribas SA | 18,690,310 | 3.62% | Related Party Transactions The company maintains an alliance with BNP Paribas, a 3.62% shareholder with board nomination rights, and had ₩6.1 billion in outstanding loans to directors and affiliates as of December 31, 2021 - The company maintains an alliance agreement with BNP Paribas, which holds 3.62% of common stock and has the right to nominate one board member[1316] - As of December 31, 2021, loans outstanding to directors, executive officers, and their affiliates totaled ₩6.1 billion, all made in the ordinary course of business[1317] ITEM 8. FINANCIAL INFORMATION This section references consolidated financial statements and details legal proceedings, including ₩404 billion in aggregate claims and ongoing matters related to Lime Asset funds and the CEO's hiring practices Consolidated Statements and Other Financial Information As of December 31, 2021, the company faced ₩404 billion in pending lawsuits with a ₩10 billion provision, alongside ongoing regulatory and legal issues concerning Lime Asset funds and the CEO's hiring practices - As of December 31, 2021, the company faced pending lawsuits with an aggregate claim amount of ₩404 billion and had recorded a provision of ₩10 billion[1320][1321] - The company is dealing with the fallout from the Lime Asset incident, including regulatory sanctions, fines, and compensation payments to affected investors[1324][1326][1327] - The CEO was acquitted by the Seoul High Court on charges of illegal hiring activities, but the case is currently pending in the Supreme Court[1323] ITEM 9. THE OFFER AND LISTING This section details the trading markets for the company's common shares on the KRX KOSPI Market and its American Depositary Shares (ADSs) on the NYSE, including historical price data and market regulations Offer and Listing Details The company's common stock trades on the KRX KOSPI Market, while its ADSs are listed on the NYSE under 'SHG', with historical price and volume data provided for both securities - The company's common shares are listed on the Korea Exchange, and its ADSs are listed on the NYSE under the symbol 'SHG'[1336] 2021 Stock and ADS Price Range | Security | High Price | Low Price | | :--- | :--- | :--- | | Common Stock (KRW) | 43,000 | 30,650 | | ADS (USD) | 39.07 | 27.67 | Markets This subsection describes the Korea Exchange (KRX), the primary market for common stock, detailing its structure, regulatory oversight, trading rules including a 30% daily price limit, and reporting requirements for substantial shareholders - The Korea Exchange (KRX) is the principal market for the common stock and operates four market divisions: KOSPI, KOSDAQ, Futures, and KONEX[1340][1343] - Share price movements on the KRX are limited to 30% upward or downward from the previous day's closing price[1352] - Under Korean law, any person whose beneficial ownership of Equity Securities reaches 5% or more must report the holding status and purpose to the Financial Services Commission and the Korea Exchange within five business days[1366] ITEM 10. ADDITIONAL INFORMATION This section provides supplementary information on the company's share capital, Articles of Incorporation, exchange controls, and taxation, outlining shareholder rights, dividend policies, and tax implications for non-resident investors Memorandum and Articles of Incorporation This subsection details the company's share capital, authorized at 1 billion shares, and outlines shareholder rights, dividend policies, preemptive rights, and procedures for general meetings as per its Articles of Incorporation - The company's authorized share capital is 1,000,000,000 shares, with 516,599,554 common shares issued and outstanding as of December 31, 2021[1386] - Dividends are declared annually at the general shareholders' meeting and can be paid in cash or shares. The company may also pay quarterly cash dividends by a resolution of the board of directors[1390][1391] - Shareholders have preemptive rights to subscribe to new shares in proportion to their existing holdings, though the board can issue new shares to third parties under specific circumstances, such as a public offering or strategic alliance[1396] Exchange Controls Korean Foreign Exchange Transaction Laws regulate non-resident investment, requiring foreign investors to designate a foreign exchange bank, with the government reserving the right to impose temporary restrictions during emergencies - The Foreign Exchange Transaction Act of Korea regulates investment in Korean securities by non-residents[1426] - Foreign investors must register with the Financial Supervisory Service and designate a foreign exchange bank to open accounts for stock investments[1428] - The Korean government may temporarily suspend foreign exchange transactions or impose other restrictions in the event of a national emergency or severe economic crisis[1427] Taxation This subsection summarizes Korean and U.S. federal income tax implications for non-resident holders, detailing dividend withholding tax (22%), capital gains tax, foreign tax credits, and the company's PFIC status assessment - Korean withholding tax on dividends paid to non-residents is 22% (including local surtax), which may be reduced under an applicable tax treaty[1433] - Capital gains for non-residents are generally taxed at the lower of 11% of gross proceeds or 22% of net gain, unless an exemption applies. Transfers of ADSs outside Korea are generally exempt from this tax under the Special Tax Treatment Control Law[1434][1437] - For U.S. holders, dividends are generally taxable as ordinary income. Qualified dividends may be subject to reduced tax rates. Korean withholding taxes may be eligible for a foreign tax credit, subject to limitations[1458][1459][1463] - The company does not believe it was a Passive Foreign Investment Company (PFIC) for 2021 and does not expect to become one, but notes that PFIC status is an annual determination that could result in adverse U.S. tax consequences if it were to change[1469] ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section refers to Item 4.B for comprehensive quantitative and qualitative disclosures regarding market risk management - Quantitative and qualitative disclosures about market risk are provided in 'Item 4.B. Business Overview — Risk Management'[1490] ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES This section details fees and charges for American Depositary Shares (ADSs) and discloses payments received from the depositary, while other security types are noted as not applicable American Depositary Shares This subsection outlines fees payable by ADS holders for issuance, cancellation, and annual services, and reports that the company received US$57,122.07 from the depositary in 2021 for proxy process expenses - ADS holders may be required to pay fees to the depositary for services such as issuance (up to US$5.00 per 100 ADSs), cancellation (up to US$5.00 per 100 ADSs), and an annual depositary services fee (up to US$2.00 per 100 ADSs)[1494] - In 2021, the company received US$57,122.07 from the depositary, Citibank, N.A., primarily for reimbursement of proxy process expenses[1498] PART II ITEM 15. CONTROLS AND PROCEDURES Management confirmed the effectiveness of disclosure controls and internal control over financial reporting as of December 31, 2021, with an unqualified audit opinion from Samil PricewaterhouseCoopers - Management evaluated and concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[1501] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2021, based on the COSO 2013 framework[1502][1504] - The independent registered public accounting firm, Samil PricewaterhouseCoopers, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[1505] ITEM 16G. CORPORATE GOVERNANCE This section details the company's corporate governance, noting compliance with Korean practices as a foreign private issuer while meeting key NYSE standards for board independence and audit committee composition - 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[1521] - The board of directors consists of a majority of independent directors (12 out of 14), which complies with the NYSE standard for U.S. companies[1522] - The Audit Committee is composed of four outside directors, all of whom meet the independence requirements of the NYSE and Rule 10A-3 under the Exchange Act[1524] - The company has adopted a code of ethics for its principal officers and a supplemental code of behavior for all employees, in compliance with the Sarbanes-Oxley Act[1532] PART III ITEM 18. FINANCIAL STATEMENTS This section directs the reader to Item 19(a) for a comprehensive list of all financial statements included in the annual report - This item references Item 19(a) for a list of all financial statements filed with the annual report[1548] ITEM 19. EXHIBITS This section lists all exhibits filed with the annual report, including the Articles of Incorporation, CEO/CFO certifications, and a detailed index to the financial statements - A list of exhibits filed with the annual report is provided, including the Articles of Incorporation, CEO/CFO certifications, and a list of subsidiaries[1553] - The financial statements filed as part of the report are listed in the Index to Financial Statements on page F-1[1549]