Shinhan Financial Group(SHG) - 2022 Q1 - Quarterly Report

Independent Auditors' Report This report presents the independent auditors' opinion on the consolidated financial statements and highlights key audit matters and significant economic impacts Opinion and Basis for Opinion The auditors issued an unqualified opinion, confirming the financial statements are fairly presented in all material respects in accordance with Korean IFRS - The auditors issued an unqualified opinion, confirming the financial statements are fairly presented in accordance with Korean IFRS[7] - The audit was conducted following Korean Standards on Auditing, and the auditors confirmed their independence from the Group[8] Emphasis of Matter and Key Audit Matters The report emphasizes COVID-19's economic impact and identifies key audit matters regarding expected credit losses and Level 3 OTC derivative valuation - Emphasis of Matter: The auditors highlighted the negative impact of the COVID-19 pandemic on the global economy, which could increase the Group's expected credit losses and impair assets[9] - Key Audit Matter 1: Expected Credit Losses on Loans. This was significant due to the high level of management judgment and complex models required by IFRS 1109, especially in using forward-looking information. As of Dec 31, 2021, loans measured at amortized cost were W 392.3 trillion with allowances of W 3.17 trillion[11][12][13] - Key Audit Matter 2: Valuation of Level 3 OTC Derivatives. This was a key matter due to the complexity and judgment involved in using internally developed valuation models. These derivatives amounted to W 8.38 trillion as of Dec 31, 2021[20] Consolidated Statements of Financial Position The Group's financial position shows significant growth in total assets and liabilities, primarily driven by increased loans and customer deposits Consolidated Statements of Financial Position (Amounts in KRW billions) | Account | 2021 | 2020 | YoY Change | | :--- | :--- | :--- | :--- | | Total Assets | 648,152.185 | 605,234.104 | +7.1% | | Loans at amortized cost | 389,137.156 | 356,221.519 | +9.2% | | Total Securities | 114,768.399 | 105,598.735 | +8.7% | | Total Liabilities | 598,613.763 | 558,877.246 | +7.1% | | Deposits | 364,896.675 | 326,416.868 | +11.8% | | Debt securities issued | 80,149.363 | 75,134.394 | +6.7% | | Total Equity | 49,538.422 | 46,356.858 | +6.9% | - Total assets grew by 7.1% YoY to W 648.2 trillion, primarily driven by a 9.2% increase in Loans at amortized cost[34] - Total liabilities increased by 7.1% YoY to W 598.6 trillion, mainly due to an 11.8% rise in customer deposits[36] - Total equity rose by 6.9% YoY to W 49.5 trillion, supported by retained earnings growth, despite an increase in accumulated other comprehensive loss[36] Consolidated Statements of Comprehensive Income The Group reported strong profit growth for the year, driven by increased net interest and fee income, alongside reduced credit loss provisions Consolidated Statements of Comprehensive Income (Amounts in KRW billions) | Account | 2021 | 2020 | YoY Change | | :--- | :--- | :--- | :--- | | Net Interest Income | 10,769.325 | 9,882.700 | +9.0% | | Net fees and commission income | 2,674.997 | 2,382.933 | +12.3% | | Operating Income | 5,952.096 | 4,929.736 | +20.7% | | Profit for the year | 4,112.628 | 3,498.076 | +17.6% | | Profit attributable to equity holders | 4,019.254 | 3,414.595 | +17.7% | | Total comprehensive income for the year | 3,494.839 | 3,324.232 | +5.1% | | Basic and diluted EPS (in won) | 7,308 | 6,654 | +9.8% | - Profit for the year increased by 17.6% YoY to W 4.11 trillion, driven by a 9.0% growth in Net Interest Income and a 20.7% rise in Operating Income[39] - The provision for allowance for credit loss decreased to W 974.7 billion in 2021 from W 1.38 trillion in 2020, contributing to higher profitability[39] - Total other comprehensive income was a loss of W 617.8 billion, a significant increase from the loss of W 173.8 billion in 2020, primarily due to losses on securities at fair value through other comprehensive income[40] Consolidated Statements of Changes in Equity Total equity increased, primarily driven by annual profit and hybrid bond issuance, partially offset by dividends and other comprehensive losses Changes in Total Equity (Amounts in KRW billions) | Account | 2021 | 2020 | | :--- | :--- | :--- | | Balance at beginning of year | 46,356.858 | 41,930.381 | | Profit for the year | 4,112.628 | 3,498.076 | | Other comprehensive income (loss) | (617.789) | (173.844) | | Dividends paid | (1,102.920) | (883.929) | | Issuance of hybrid bonds | 1,154.597 | 448.699 | | Other changes | (364.952) | 1,537.475 | | Balance at end of year | 49,538.422 | 46,356.858 | - Total equity increased from W 46.4 trillion to W 49.5 trillion in 2021. The growth was primarily driven by the profit for the year (W 4.11 trillion) and the issuance of hybrid bonds (W 1.15 trillion), partially offset by dividends paid (W 1.1 trillion) and other comprehensive losses[45] - In 2020, total equity increased from W 41.9 trillion to W 46.4 trillion, supported by profit for the year (W 3.5 trillion) and a paid-in capital increase of W 1.4 trillion[43] Consolidated Statements of Cash Flows The Group experienced a significant turnaround in operating cash flow, offset by increased investing outflows, leading to overall cash and equivalents growth Consolidated Statements of Cash Flows (Amounts in KRW billions) | Account | 2021 | 2020 | | :--- | :--- | :--- | | Net cash inflow (outflow) from operating activities | 11,080.115 | (4,409.317) | | Net cash outflow from investing activities | (12,030.510) | (3,025.926) | | Net cash inflow from financing activities | 4,961.745 | 7,880.569 | | Effect of exchange rate changes | 109.553 | (61.518) | | Increase in cash and cash equivalents | 4,120.903 | 383.808 | | Cash and cash equivalents at beginning of year | 8,962.982 | 8,579.174 | | Cash and cash equivalents at end of year | 13,083.885 | 8,962.982 | - The Group generated a strong net cash inflow from operating activities of W 11.1 trillion in 2021, a significant turnaround from a W 4.4 trillion outflow in 2020. This was mainly due to a large increase in deposits[46][48] - Net cash outflow from investing activities increased to W 12.0 trillion in 2021 from W 3.0 trillion in 2020, primarily due to a net increase in the acquisition of securities[48] - Net cash inflow from financing activities decreased to W 5.0 trillion in 2021 from W 7.9 trillion in 2020. While proceeds from debt securities issued increased, this was offset by lower net increases in borrowings compared to the prior year[50] Notes to the Consolidated Financial Statements This section provides detailed disclosures on the Group's reporting entity, accounting policies, financial risk management, and significant business combinations - The Group's risk management is overseen by the Group Risk Management Committee, which establishes basic policies and risk limits for the Group and its subsidiaries[269][270] 1. Reporting entity Shinhan Financial Group, incorporated in 2001, is a financial holding company managing subsidiaries in banking, credit cards, securities, and insurance - Shinhan Financial Group Co., Ltd. is the controlling company, incorporated on September 1, 2001, to manage its financial subsidiaries[52] Ownership of Major Consolidated Subsidiaries (as of Dec 31, 2021) | Investee | Ownership (%) | | :--- | :--- | | Shinhan Bank | 100.0 | | Shinhan Card Co., Ltd. | 100.0 | | Shinhan Investment Corp. | 100.0 | | Shinhan Life Insurance Co., Ltd. | 100.0 | | Shinhan Capital Co., Ltd. | 100.0 | - On July 1, 2021, Shinhan Life Insurance Co., Ltd. and Orange Life Insurance Co., Ltd. merged, with the surviving entity named Shinhan Life Insurance Co., Ltd[54] 2. Basis of preparation The consolidated financial statements adhere to Korean IFRS, requiring management estimates, with a key accounting policy change related to LIBOR reform - The financial statements are prepared in accordance with Korean IFRS on a historical cost basis, with certain exceptions like derivatives measured at fair value[59][61][66] - The Group adopted amendments related to the interest rate benchmark reform (LIBOR suspension) from January 1, 2021. The report details the carrying values and notional amounts of financial instruments still linked to LIBOR[68][69][71] - The Group applied a practical expedient for COVID-19 related rent concessions, recognizing W 47.59 billion in profit or loss for the year ended December 31, 2021, to reflect changes in lease payments[74][75] 3. Significant accounting policies This section details the Group's accounting policies for operating segments, consolidation, financial instruments, ECL, leases, and insurance contracts, consistent with prior year except as noted - The Group's accounting policies are based on K-IFRS and are consistent with the prior year, except for the changes detailed in Note 2[77] - Financial assets are classified and measured based on the business model and contractual cash flow characteristics as either at amortized cost, fair value through other comprehensive income (FVOCI), or fair value through profit or loss (FVTPL)[97][103][104] - The Group uses a three-stage expected credit loss (ECL) model for impairment of financial assets, recognizing 12-month ECL for Stage 1 assets and lifetime ECL for Stage 2 (significant increase in credit risk) and Stage 3 (impaired) assets[124][125] - The Group is preparing for the adoption of K-IFRS No. 1117 'Insurance Contracts' effective January 1, 2023, which is expected to have a significant impact on the valuation of insurance liabilities and revenue recognition[250][251][265] 4. Financial risk management The Group manages credit, market, interest rate, and liquidity risks through a structured framework, including limits, monitoring, and stress testing, while maintaining Basel III capital adequacy Credit Risk Credit risk, the Group's largest risk, is managed through comprehensive evaluation, monitoring, and limit systems, using a three-stage ECL model with forward-looking scenarios - Credit risk is managed via credit evaluation systems (e.g., ASS, BSS for cards), credit monitoring, and a limit management system to control portfolio risk[283][284][288] - To measure ECL, the Group uses forward-looking information based on three macroeconomic scenarios (Upside, Central, Downside) reflecting the impact of COVID-19[303][305][317] Maximum Exposure to Credit Risk (Amounts in KRW billions) | Category | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Due from banks and loans | 415,086.775 | 389,906.694 | | Securities | 171,847.833 | 159,967.087 | | Derivative assets | 3,799.189 | 5,633.915 | | Guarantees & Loan commitments | 199,253.152 | 191,549.327 | | Total | 813,425.881 | 767,398.214 | Market Risk Market risk from trading positions is managed using VaR, investment limits, and stress tests, with interest rate risk assessed via EaR and EVE under Basel III Group's Market Risk Capital Requirement (Standard Method, Amounts in KRW billions) | Risk Type | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Interest rate risk | 576.515 | 592.668 | | Stock price risk | 219.900 | 222.544 | | Foreign exchange risk | 299.909 | 113.497 | | Total | 1,123.399 | 941.482 | - Interest rate risk for non-trading positions is measured using the Basel III IRRBB method, assessing changes in Economic Value of Equity (△EVE) and Net Interest Income (△NII)[370][374] - The Group's net foreign currency exposure was W 7.37 trillion as of Dec 31, 2021, up from W 4.32 trillion in 2020[379][382] Liquidity Risk Liquidity risk is managed by maintaining adequate liquidity through systematic monitoring, early detection, and stress testing, with short-term liabilities being a key focus - The Group manages liquidity risk by comparing liquidity requirements under normal and stress situations (internal, external, and combined crises) and monitoring various liquidity indices[383][384][385] Maturity of Non-Derivative Financial Liabilities (Dec 31, 2021, Amounts in KRW billions) | Maturity | Amount | | :--- | :--- | | Less than 1 month | 258,829.710 | | 13 months | 47,580.176 | | 36 months | 52,503.110 | | 6 months ~ 1 year | 83,879.492 | | 1~5 years | 77,760.091 | | More than 5 years | 13,079.460 | | Total | 533,632.039 | Fair Value Measurement Fair value measurements are categorized into a three-level hierarchy based on input observability, with a significant portion of financial instruments measured at Level 3 - Fair value is determined using a three-level hierarchy: Level 1 (quoted prices), Level 2 (observable inputs), and Level 3 (unobservable inputs)[394] Fair Value Hierarchy of Financial Instruments (Dec 31, 2021, Amounts in KRW billions) | Category | Level 1 | Level 2 | Level 3 | Total | | :--- | :--- | :--- | :--- | :--- | | Financial Assets at Fair Value | 33,497.763 | 83,457.029 | 14,086.479 | 131,041.271 | | Financial Liabilities at Fair Value | 1,560.286 | 3,460.166 | 7,959.207 | 12,979.659 | Capital Risk Management The Group manages capital to comply with Basel III requirements, maintaining capital ratios well above regulatory minimums as of December 31, 2021 - The Group is required to maintain minimum capital ratios under Basel III: Total Capital Ratio (8.0%), Tier I (6.0%), and Common Equity Tier I (4.5%), plus additional buffers[453] Capital Adequacy Ratios (Basel III) | Ratio | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total capital ratio | 16.20% | 15.74% | | Tier I capital ratio | 14.94% | 14.37% | | Common stock ratio (CET1) | 13.10% | 12.87% | 47. Business combination The Group completed several business combinations in 2020 and 2021, including the acquisition of Neoplux and Leaders Financial Sales departments, and the merger of Shinhan Life and Orange Life - The Group acquired Neoplux Co., Ltd. (now Shinhan Venture Investment) in 2020, recognizing W 14.0 billion in goodwill[855][859] - On July 1, 2021, Shinhan Life Insurance Co., Ltd. and Orange Life Insurance Co., Ltd. completed their merger[861] - The Group acquired business departments from Leaders Financial Sales Co., Ltd. in 2021, recognizing W 13.9 billion in goodwill[860] 49. Uncertainty due to changes in domestic and global economic conditions The report addresses ongoing economic uncertainty from the COVID-19 pandemic, detailing its impact on expected credit losses and the Group's exposure to affected industries and moratorium loans - The rapid spread of COVID-19 continues to create economic uncertainty, which may increase expected credit losses and negatively impact the Group's ability to generate revenue[865] Shinhan Bank Exposure to COVID-19 Affected Industries (Dec 31, 2021, Amounts in KRW billions) | Industry | Total Exposure | | :--- | :--- | | Lodging | 3,656.464 | | Oil/petroleum refinery | 3,881.950 | | Clothing manufacturing | 3,075.249 | | Airlift passenger | 643.413 | | Travel | 132.830 | Loans under Moratorium (Dec 31, 2021, Amounts in KRW billions) | Bank | Moratorium of interest payments | Moratorium of repayment in installments | Total | | :--- | :--- | :--- | :--- | | Shinhan Bank | 224.449 | 1,342.366 | 1,632.588 | | Jeju Bank | 0.348 | 276.193 | 276.541 |