As filed with the Securities and Exchange Commission on June 30, 200828, 2010
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
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| (Mark One) | | |
o | | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR |
þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
| | For the fiscal year ended December 31, 20072009
|
OR |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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| | For the transition period from to |
OR |
o | | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
| | Date of event requiring this shell company report |
Commission File Number:001-31798
Shinhan Financial Group Co., Ltd.
(Exact name of registrant as specified in its charter)
| | | |
N/A
| | The Republic of Korea |
(Translation of registrant’s
name into English) | | The Republic of Korea
(Jurisdiction of incorporation
or organization) |
120, 2-Ga, Taepyung-Ro, Jung-Gu
Seoul100-102, Korea
(Address of principal executive offices)
Sung Hun Ryu,Yu, +822 6360 3071,3071(T),irshy@shinhan.com, +822 6360 30983082 (F), 120, 2-Ga, Taepyung-Ro.2- Ga, Taepyung-Ro, Jung-Gu, Seoul100-102 Korea
(Name, Telephone,E-mail and/or Facsimile number and Address of Company Contact Person))
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| | | |
Title of Each Class: | | Name of Each Exchange on Which Registered: |
|
Common stock, par value Won 5,000 per share
| | New York Stock Exchange* |
| American depositary shares | | New York Stock Exchange*
New York Stock Exchange |
| | |
| * | | Not for trading, but only in connection with the listing of American depositary shares on the New York Stock Exchange, pursuant to the requirements of the Securities and Exchange Commission. |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of Shinhan Financial Group’s classes of capital or common stock as of the close of the last full fiscal year covered by this Annual Report:396,199,587 474,199,587 shares of common stock, par value of Won 5,000 per shareshare.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yesþ Noo
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934: Yeso Noþ
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those sections.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definitionthe definitions of “large accelerated filer,” “accelerated filerfiler” and large accelerated filer”“smaller reporting company” in RuleRule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerþ Accelerated filero Non-accelerated filero
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| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o |
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAPþ International Financial Reporting Standards as issued by the International Accounting Standards Boardo Othero
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:Item 17o Item 18o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2) of the Exchange Act: Yeso Noþ
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court: Yeso Noo
EXPLANATORY NOTE
Effective asAcquisition of April 3, 2006, we merged Shinhan Bank, our principal banking subsidiary, into Chohung Bank, our then wholly-owned subsidiary whose controlling equity interest we acquired in August 2003, and renamed the merged entity as Shinhan Bank. Unless otherwise indicated, statistical and financial information relating to Shinhan Bank for the year ended December 31, 2006 includes the corresponding information of Chohung Bank for the period from January 1, 2006 through April 2, 2006. See “Item 4. Information on the Company — History and Development of Shinhan Financial Group — History and Organization.”LG Card
On March 23,19, 2007, we acquired the controlling equity interest in LG Card, the largest credit card company in Korea. We then applied the equity method of accounting for our previous ownership interest of 7.15% in LG Card. Where indicated, statistical and financial information of the prior years presented herein were adjusted to reflect the equity method of accounting. See note 2 in the notes to the consolidated financial statements included in this annual report for additional information. Effective as of September 21, 2007, we completed the acquisition of the remaining LG Card shares, and LG Card became our wholly-owned subsidiary. On October 1, 2007, LG Card assumed all of the assets, liabilities, and contracts of the former Shinhan Card, our then-existing credit card subsidiary, and changed its name to “Shinhan Card.” On the same date, the former Shinhan Card changed its name to “SHC Management Co., Ltd.” SHC Management Co., Ltd. is currently in liquidation proceedings. Unless otherwise indicated, statistical and financial information relating to Shinhan Card for the year ended December 31, 2007 include the corresponding information of the former Shinhan Card for the period from January 1, 2007 through September 30, 2007 and the corresponding information of LG Card (renamed Shinhan Card on October 1, 2007) for the period from March 1, 2007 through December 31, 2007. See “Item 4. Information on the Company5. Operating and Financial Review and Prospects — Acquisition of LG Card.”
Former Shinhan Card refers to the entity created on June 4, 2002 as a result of the spin-off of the credit card division of Shinhan Bank, into which the credit card division of Chohung Bank was merged on April 3, 2006. Following the transfer of all of its assets and liabilities to LG Card on October 1, 2007, former Shinhan Card currently survives under the name of SHC Management Co., Ltd. without any significant assets and liabilities. Unless otherwise indicated, statistical and financial information relating to former Shinhan Card for the year ended December 31, 2006 includes the corresponding information of the credit card division of Chohung Bank for the period from April 3, 2006 through December 31, 2006. See “Item 4. Information on the Company — History and Development of Shinhan Financial Group — History and Organization.”
In order to present more comprehensive financial data regarding Shinhan Card’s financial condition, this annual report contains certain financial information presented on a “managed” basis that includes, subject to certain adjustments, financial receivables that Shinhan Card has sold in asset-backed securitization transactions but which may continue to have an effect on Shinhan Card’s future operations and financial condition. The managed data is not audited and is not presented or prepared in accordance with U.S. GAAP or Korean GAAP. There can be no assurances that the managed financial and operating data accurately reflects Shinhan Card’s financial condition or performance had it not conducted asset-backed securitization transactions or fully consolidated the special purpose companies to which Shinhan Card sold the financial receivables or that the managed operating data accurately reflect Shinhan Card’s results of operations on an overall or product level basis.
CERTAIN DEFINED TERMS, CONVENTIONS AND CURRENCY OF PRESENTATION
Unless otherwise specified or the context otherwise requires:
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| | • | the terms “we,” “us,” “our,” “Shinhan Financial Group,” “SFG” and the “Group” mean Shinhan Financial Group Co., Ltd. and its consolidated subsidiaries; |
| |
| | • | the terms “Shinhan Bank”Financial Group Co., Ltd.”, “our company” and “SHB” refer to the surviving entity following the merger of the former“our holding company” mean Shinhan Bank into Chohung Bank effective April 3, 2006 and such entity’s consolidated subsidiaries; |
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| • | the term “former Shinhan Bank” refers to Shinhan Bank and its consolidated subsidiaries as in existence prior to its merger with Chohung Bank effective April 3, 2006; |
|
| • | the terms “Chohung Bank,” “Chohung” and “CHB” refer to Chohung Bank and its consolidated subsidiaries as in existence prior to its merger with Shinhan Bank effective April 3, 2006; |
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| • | the term “Shinhan Card” refers to LG Card, which on October 1, 2007 assumed all of the assets and liabilities of former Shinhan Card and was renamed as Shinhan Card, and its consolidated subsidiaries; |
|
| • | the term “former Shinhan Card” refers to the entity created on June 4, 2002 as a result of the spin-off of the credit card division of Shinhan Bank, into which the credit card division of Chohung Bank was split-merged on April 3, 2006, and currently surviving under the name of SHC Management after transferring of all of its assets and liabilities to LG Card (renamed Shinhan Card) on October 1, 2007; and |
|
| • | the term “LG Card” refers to LG Card and its consolidated subsidiaries. After acquisition by us of its controlling equity interest, LG Card became our subsidiary on March 23, 2007, and on October 1, 2007, LG Card assumed all of the assets and liabilities of former Shinhan Card and was renamed Shinhan Card.Financial Group Co., Ltd. |
All references to “Korea” or the “Republic” contained in this documentannual report mean The Republic of Korea. All references to the “government”“Government” mean the government of The Republic of Korea. The “Financial Supervisory Service” is the executive body of the Financial Services Commission renamed as such as of February 29, 2008 from the Financial Supervisory Commission.(“FSC”). References to “MOSF” are to the Ministry of Strategy and Finance, renamed as such as of February 29, 2008 from the Ministry of Finance and Economy.Finance.
Our fiscal year ends on December 31 of each year. All references to a particular year are to the year ended December 31 of that year.
The currency of the primary economic environment in which we operate is Korean Won.
In this annual report, unless otherwise indicated, all references to “Won” or “‘‘W” are to the currency of theThe Republic of Korea, and all references to “U.S. Dollars,” “Dollars,” “$” or “US$” are to the currency of the United States of America. Unless otherwise indicated, all translations from Won to Dollars were made at W935.81163.65 to US$1.00, which was the noon buying rate in Thethe City of New York on December 31, 2009 for cable transfers in Won per US$1.00 as certified for customs purposes byaccording to the H.10 statistical release of the Federal Reserve Bank of New YorkBoard (the “Noon Buying Rate”) in effect on December 31, 2007.. On June 16, 2008,11, 2010, the Noon Buying Rate was W1,038.5 =1,245.9 to US$1.00. The Noon Buying Rate has been volatile recently and the U.S. Dollar amounts referred to in this report should not be relied upon as an accurate reflection of our results of operations. We expect this volatility to continue in the near future. No representation is made that the Won or U.S. Dollar amounts referred to in this report could have been or could be converted into Dollars or Won, as the case may be, at any particular rate or at all.
Unless otherwise indicated, the financial information presented in this documentannual report has been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Any discrepancies in any tablethe tables included herein between totals and the sums of the amounts listed are due to rounding.
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FORWARD LOOKING STATEMENTS
This documentannual report includes “forward-looking statements,” as defined in Section 27A of the U.S. Securities Act, as amended, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding our expectations and projections for future operating performance and business prospects. The words “believe,” “expect,” “anticipate,” “estimate,” “project” and similar words used in connection with any discussion of our future operating or financial performance identify forward-looking statements. In addition, all statements other than statements of historical facts included in this documentannual report are forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. All forward-looking statements are management’s present expectations of future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. This documentannual report discloses, under the caption “Item 3. Key Information —3.D. Risk Factors” and elsewhere, important factors that could cause actual results to differ materially from our expectations (“Cautionary Statements”). Included among the factors discussed under the caption “Item 3. Key Information —3.D. Risk Factors” are the followings risks related to our business, which could cause actual results to differ materially from those described in the forward-looking statements: the risk of adverse impacts from an economic downturn; increased competition; market volatility in securities and derivatives markets, interest or foreign exchange rates or indices; other factors impacting our operational plans; or legislative or regulatory developments.
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We caution you not to place undue reliance on the forward-looking statements, which speak only as of the date of this document.
annual report. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Cautionary Statements.
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| ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
Not applicable.
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| ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE |
Not applicable.
SELECTED FINANCIAL DATA
Selected Consolidated Financial and Operating Data under U.S. GAAP
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| ITEM 3.A. | Selected Financial Data |
The selected consolidated financialincome statement and balance sheet data set forth below for the years ended December 31, 2003, 2004, 2005, 2006, 2007, 2008 and 2007 and as of December 31, 2003, 2004, 2005, 2006 and 20072009 have been derived from our consolidated financial statements which have been prepared in accordance with U.S. GAAP. Our consolidated financial statements as of and for the years ended December 31, 2003 have been audited by independent registered public accounting firm Samil PricewaterhouseCoopers. Our consolidated financial statements as of and for the years ended December 31, 2004, 2005, 2006, 2007, 2008 and 20072009 have been audited by independent registered public accounting firm KPMG Samjong Accounting Corp.
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You should read the following data with the more detailed information contained in “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements included in “Item 18. Financial Statements.”Statements”. Historical results do not necessarily predict future results.
Consolidated Income Statement Data
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| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2003 | | 2004 | | 2005 | | 2006 | | 2007 | | 2007 | | | 2005 | | 2006 | | 2007 | | 2008 | | 2009 | | 2009 | |
| | | (In billions of Won and millions of US$, except per common share data) | | | (In billions of Won and millions of US$, except per common share data) | |
| |
| Interest and dividend income | | W | 5,331 | | | W | 7,712 | | | W | 7, 488 | | | W | 8,893 | | | W | 12,149 | | | $ | 12,983 | | | W | 7,488 | | | W | 8,893 | | | W | 12,149 | | | W | 14,734 | | | W | 12,597 | | | $ | 10,826 | |
| Interest expense | | | 2,998 | | | | 4,138 | | | | 4,014 | | | | 4,912 | | | | 6,979 | | | | 7,458 | | | | 4,014 | | | | 4,912 | | | | 6,979 | | | | 8,955 | | | | 7,376 | | | | 6,339 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | 2,333 | | | | 3,574 | | | | 3,474 | | | | 3,981 | | | | 5,170 | | | | 5,525 | | | | 3,474 | | | | 3,981 | | | | 5,170 | | | | 5,779 | | | | 5,221 | | | | 4,487 | |
| Provision (reversal) for credit losses | | | 965 | | | | 135 | | | | (183 | ) | | | 226 | | | | 81 | | | | 86 | | | | (183 | ) | | | 226 | | | | 81 | | | | 1,437 | | | | 2,201 | | | | 1,892 | |
| Noninterest income | | | 1,118 | | | | 2,092 | | | | 2,945 | | | | 3,786 | | | | 4,738 | | | | 5,063 | | | | 2,945 | | | | 3,786 | | | | 4,738 | | | | 4,572 | | | | 5,685 | | | | 4,885 | |
| Noninterest expense | | | 1,937 | | | | 3,451 | | | | 3,641 | | | | 5,308 | | | | 6,745 | | | | 7,208 | | | | 3,641 | | | | 5,308 | | | | 6,745 | | | | 6,726 | | | | 7,137 | | | | 6,134 | |
| Income tax expense | | | 248 | | | | 682 | | | | 1,015 | | | | 650 | | | | 1,057 | | | | 1,131 | | | | 1,015 | | | | 650 | | | | 1,057 | | | | 695 | | | | 424 | | | | 364 | |
| Minority interest | | | 26 | | | | 153 | | | | 16 | | | | 18 | | | | 95 | | | | 101 | | |
| | | | | | | | | | | | | | | |
| Income before extraordinary item and effect of accounting change | | | 275 | | | | 1,245 | | | | 1,930 | | | | 1,565 | | | | 1,930 | | | | 2,062 | | | | 1,946 | | | | 1,583 | | | | 2,025 | | | | 1,493 | | | | 1,144 | | | | 982 | |
| Extraordinary gain | | | — | | | | 28 | | | | — | | | | — | | | | — | | | | — | | |
| Cumulative effect of a change in accounting principle, net of taxes | | | — | | | | (23 | ) | | | — | | | | (10 | ) | | | — | | | | — | | | | — | | | | (10 | ) | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | W | 275 | | | W | 1,250 | | | W | 1,930 | | | W | 1,555 | | | W | 1,930 | | | $ | 2,062 | | | W | 1,946 | | | W | 1,573 | | | W | 2,025 | | | W | 1,493 | | | W | 1,144 | | | $ | 982 | |
| Net Income attributable to noncontrolling interest | | | | 16 | | | | 18 | | | | 95 | | | | 12 | | | | 10 | | | | 8 | |
| | | | | | | | | | | | | | | |
| Net income attributable to the Group | | | W | 1,930 | | | W | 1,555 | | | W | 1,930 | | | W | 1,481 | | | W | 1,134 | | | $ | 974 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income per common shares (in currency unit): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income — basic(3)(4) | | W | 1,024 | | | W | 4,133 | | | W | 5,763 | | | W | 4,180 | | | W | 4,480 | | | $ | 4.79 | | | W | 5,467 | | | W | 3,964 | | | W | 4,250 | | | W | 2,993 | | | W | 1,957 | | | $ | 1.68 | |
Net income — diluted(3)(4) | | | 984 | | | | 3,704 | | | | 5,419 | | | | 4,180 | | | | 4,390 | | | | 4.69 | | | | 5,157 | | | | 3,964 | | | | 4,172 | | | | 2,955 | | | | 1,955 | | | | 1.67 | |
| Weighted average common shares outstanding-basic (in thousands of common shares) | | | 262,987 | | | | 292,465 | | | | 333,424 | | | | 372,173 | | | | 382,731 | | | | | | | | 351,496 | | | | 392,340 | | | | 403,475 | | | | 417,673 | | | | 461,500 | | | | — | |
| Weighted average common shares outstanding-diluted (in thousands of common shares) | | | 279,745 | | | | 337,479 | | | | 356,140 | | | | 372,173 | | | | 396,484 | | | | | | | | 374,212 | | | | 392,340 | | | | 417,228 | | | | 432,394 | | | | 476,221 | | | | — | |
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Notes:
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| (1) | | Basic earnings per share are calculated by dividing the net income available to holders of our common shares by the weighted average number of common shares issued and outstanding for the relevant period. |
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| (2) | | Dilutive earnings per share are calculated in a manner consistent with that of basic earnings per share, while giving effect to the potential dilution that could occur if convertible securities, options or other contracts to issue common shares were converted into or exercised for common shares. We have two categories of potentially dilutive common shares: (i) shares issuable upon the exercise of stock options and (ii) shares issuable upon conversion of the redeemable convertible preferred shares. In 2006, there was no dilutive effect on earnings per share due to a change in accounting policy in 2006 which resulted in the use of the number of the outstanding shares as of the beginning of the year and the election by us to grant cash in lieu of stock upon the exercise of stock options by our employees. We may in the future grant shares in lieu of cash upon the exercise of stock options by our employees, which may impact the dilutive earnings per share in the future. |
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| (3) | | We applied the equity method of accounting for the previous ownership interest of 7.15% in LG Card in conformity with ASC 323 (formerly APB opinion No. 18.18). Accordingly, the investment, our results of operation and retained earnings were retroactively adjusted as we acquired control over LG Card in 2007. |
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| (4) | | The computations of basic and diluted earnings per share (“EPS”) were adjusted retrospectively to include the effects of a discount offered to shareholders in connection with the rights offering in March 2009, which was due to the fact that the shares offered in the rights offering were issued and sold at a discount to the market price. |
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Consolidated Balance Sheet Data
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| | | As of December 31, | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2003 | | 2004 | | 2005 | | 2006 | | 2007 | | 2007 | | | As of December 31, | |
| | | (In billions of Won and millions of US$,
| | | 2005 | | 2006 | | 2007 | | 2008 | | 2009 | | 2009 | |
| | | except per common share data) | | | (In billions of Won and millions of US$, except per common share data) | |
| |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | W | 1,897 | | | W | 2,444 | | | W | 2,434 | | | W | 1,691 | | | W | 3,580 | | | $ | 3,826 | | | W | 2,434 | | | W | 1,691 | | | W | 3,580 | | | W | 1,365 | | | W | 4,363 | | | $ | 3,750 | |
| Restricted cash | | | 3,662 | | | | 3,301 | | | | 3,644 | | | | 6,758 | | | | 4,745 | | | | 5,070 | | | | 3,644 | | | | 6,758 | | | | 4,745 | | | | 7,049 | | | | 7,974 | | | | 6,853 | |
| Interest-bearing deposits | | | 409 | | | | 220 | | | | 627 | | | | 725 | | | | 1,094 | | | | 1,169 | | | | 627 | | | | 725 | | | | 1,094 | | | | 1,627 | | | | 2,164 | | | | 1,860 | |
| Call loans and securities purchased under resale agreements | | | 1,898 | | | | 1,591 | | | | 1,499 | | | | 1,243 | | | | 802 | | | | 858 | | | | 1,499 | | | | 1,243 | | | | 802 | | | | 3,066 | | | | 1,346 | | | | 1,157 | |
| Trading assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Trading securities and other | | | 2,857 | | | | 4,639 | | | | 3,573 | | | | 3,474 | | | | 8,220 | | | | 8,784 | | | | 3,573 | | | | 3,474 | | | | 8,220 | | | | 6,724 | | | | 6,681 | | | | 5,741 | |
| Derivatives assets | | | 520 | | | | 1,678 | | | | 934 | | | | 1,363 | | | | 1,962 | | | | 2,097 | | | | 934 | | | | 1,363 | | | | 1,962 | | | | 11,977 | | | | 4,617 | | | | 3,967 | |
| Securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale securities | | | 18,099 | | | | 18,108 | | | | 22,480 | | | | 16,939 | | | | 22,849 | | | | 24,416 | | | | 21,100 | | | | 16,894 | | | | 22,626 | | | | 29,016 | | | | 27,612 | | | | 23,729 | |
| Held-to-maturity securities | | | 3,605 | | | | 3,099 | | | | 2,963 | | | | 7,581 | | | | 8,224 | | | | 8,789 | | | | 2,963 | | | | 7,581 | | | | 8,224 | | | | 8,696 | | | | 12,794 | | | | 10,994 | |
Loans (net of allowance for loan losses of W3,631 billion in 2003, W2,311 billion in 2004, W1,512 billion in 2005, W1,575 billion in 2006 and W2,099 billion in 2007) | | | 91,791 | | | | 94,752 | | | | 104,447 | | | | 120,989 | | | | 149,723 | | | | 159,994 | | |
Loans (net of allowance for loan losses of W1,512 billion in 2005, W1,575 billion in 2006, W2,099 billion in 2007, W3,201 billion in 2008 and W3,638 billion in 2009) | | | | 104,447 | | | | 120,989 | | | | 149,723 | | | | 167,308 | | | | 165,594 | | | | 142,305 | |
| Customers’ liability on acceptances | | | 2,365 | | | | 2,012 | | | | 1,879 | | | | 1,417 | | | | 1,701 | | | | 1,817 | | | | 1,879 | | | | 1,417 | | | | 1,701 | | | | 2,433 | | | | 2,780 | | | | 2,389 | |
| Premises and equipment, net | | | 2,003 | | | | 1,848 | | | | 1,876 | | | | 2,097 | | | | 2,455 | | | | 2,623 | | | | 1,876 | | | | 2,097 | | | | 2,455 | | | | 2,412 | | | | 2,437 | | | | 2,094 | |
| Goodwill and intangible assets | | | 1,676 | | | | 1,660 | | | | 2,957 | | | | 2,584 | | | | 6,160 | | | | 6,582 | | | | 2,957 | | | | 2,584 | | | | 6,160 | | | | 5,571 | | | | 5,072 | | | | 4,359 | |
| Security deposits | | | 966 | | | | 968 | | | | 1,078 | | | | 1,108 | | | | 1,294 | | | | 1,383 | | | | 1,078 | | | | 1,108 | | | | 1,294 | | | | 1,334 | | | | 1,323 | | | | 1,138 | |
| Other assets | | | 4,601 | | | | 6,889 | | | | 4,688 | | | | 7,118 | | | | 8,813 | | | | 9,418 | | | | 6,068 | | | | 7,163 | | | | 9,036 | | | | 12,395 | | | | 10,153 | | | | 8,725 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | W | 136,349 | | | W | 143,209 | | | W | 155,079 | | | W | 175,087 | | | W | 221,622 | | | $ | 236,826 | | | W | 155,079 | | | W | 175,087 | | | W | 221,622 | | | W | 260,973 | | | W | 254,910 | | | $ | 219,061 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and Equity | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing | | W | 82,161 | | | W | 79,934 | | | W | 83,278 | | | W | 91,578 | | | W | 103,241 | | | $ | 110,324 | | | W | 83,278 | | | W | 91,578 | | | W | 103,241 | | | W | 119,762 | | | W | 140,809 | | | $ | 121,006 | |
| Non-interest-bearing | | | 1,328 | | | | 2,746 | | | | 3,143 | | | | 3,918 | | | | 3,162 | | | | 3,379 | | | | 3,143 | | | | 3,918 | | | | 3,162 | | | | 2,942 | | | | 2,890 | | | | 2,483 | |
| Trading liabilities | | | 513 | | | | 1,758 | | | | 1,048 | | | | 1,611 | | | | 2,509 | | | | 2,681 | | | | 1,048 | | | | 1,611 | | | | 2,509 | | | | 11,831 | | | | 4,565 | | | | 3,923 | |
| Acceptances outstanding | | | 2,365 | | | | 2,012 | | | | 1,879 | | | | 1,417 | | | | 1,701 | | | | 1,817 | | | | 1,879 | | | | 1,417 | | | | 1,701 | | | | 2,433 | | | | 2,780 | | | | 2,389 | |
| Short-term borrowings | | | 11,204 | | | | 10,954 | | | | 11,968 | | | | 10,995 | | | | 15,801 | | | | 16,886 | | | | 11,968 | | | | 10,995 | | | | 15,801 | | | | 23,225 | | | | 9,715 | | | | 8,349 | |
| Secured borrowings | | | 6,316 | | | | 6,308 | | | | 7,502 | | | | 8,103 | | | | 11,452 | | | | 12,237 | | | | 7,502 | | | | 8,103 | | | | 11,452 | | | | 10,226 | | | | 7,944 | | | | 6,827 | |
| Long-term debt | | | 21,218 | | | | 23,617 | | | | 26,172 | | | | 32,574 | | | | 46,496 | | | | 49,686 | | | | 26,172 | | | | 32,574 | | | | 46,496 | | | | 49,652 | | | | 44,795 | | | | 38,495 | |
| Future policy benefit | | | — | | | | — | | | | 4,778 | | | | 5,683 | | | | 6,769 | | | | 7,234 | | | | 4,778 | | | | 5,683 | | | | 6,769 | | | | 7,260 | | | | 8,310 | | | | 7,142 | |
| Accrued expenses and other liabilities | | | 6,555 | | | | 9,631 | | | | 7,078 | | | | 9,244 | | | | 13,369 | | | | 14,286 | | | | 7,078 | | | | 9,244 | | | | 13,369 | | | | 15,678 | | | | 12,553 | | | | 10,787 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total liabilities | | | 131,660 | | | | 136,960 | | | | 146,846 | | | | 165,123 | | | | 204,500 | | | | 218,530 | | | | 146,846 | | | | 165,123 | | | | 204,500 | | | | 243,009 | | | | 234,361 | | | | 201,401 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Minority interest | | | 583 | | | | 66 | | | | 80 | | | | 162 | | | | 212 | | | | 226 | | |
| Redeemable convertible preferred stock | | | 711 | | | | 736 | | | | 368 | | | | — | | | | — | | | | — | | | | 368 | | | | — | | | | — | | | | — | | | | — | | | | — | |
Stockholders’ equity: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Redeemable preferred stock | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Equity: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock | | | 1,472 | | | | 1,596 | | | | 1,795 | | | | 1,908 | | | | 1,981 | | | | 2,117 | | | | 1,795 | | | | 1,908 | | | | 1,981 | | | | 1,981 | | | | 2,371 | | | | 2,038 | |
| Redeemable convertible preferred stock | | | — | | | | — | | | | — | | | | — | | | | 74 | | | | 79 | | | | — | | | | — | | | | 74 | | | | 74 | | | | 74 | | | | 63 | |
| Redeemable preferred stock | | | — | | | | — | | | | — | | | | — | | | | 145 | | | | 155 | | | | — | | | | — | | | | 145 | | | | 145 | | | | 145 | | | | 125 | |
| Additional paid-in capital | | | 1,073 | | | | 1,658 | | | | 2,407 | | | | 2,710 | | | | 7,147 | | | | 7,637 | | | | 2,407 | | | | 2,710 | | | | 7,147 | | | | 7,147 | | | | 8,038 | | | | 6,907 | |
| Retained earnings | | | 1,189 | | | | 2,239 | | | | 3,928 | | | | 5,205 | | | | 6,801 | | | | 7,268 | | | | 3,928 | | | | 5,205 | | | | 6,801 | | | | 7,710 | | | | 8,621 | | | | 7,409 | |
| Accumulated other comprehensive income, net of taxes | | | 58 | | | | 158 | | | | (100 | ) | | | 141 | | | | 762 | | | | 814 | | | | (100 | ) | | | 141 | | | | 762 | | | | 595 | | | | 969 | | | | 833 | |
| Less: treasury stock, at cost | | | (397 | ) | | | (204 | ) | | | (245 | ) | | | (162 | ) | | | — | | | | — | | | | (245 | ) | | | (162 | ) | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total stockholders’ equity | | | 3,395 | | | | 5,447 | | | | 7,785 | | | | 9,802 | | | | 16,910 | | | | 18,070 | | |
| Total Group stockholders’ equity | | | | 7,785 | | | | 9,802 | | | | 16,910 | | | | 17,652 | | | | 20,218 | | | | 17,375 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total liabilities, minority interest, Redeemable Convertible Preferred Stock and stockholders’ equity | | W | 136,349 | | | W | 143,209 | | | W | 155,079 | | | W | 175,087 | | | W | 221,622 | | | $ | 236,826 | | |
| Noncontrolling interest | | | | 80 | | | | 162 | | | | 212 | | | | 312 | | | | 331 | | | | 285 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total equity | | | | 7,865 | | | | 9,964 | | | | 17,122 | | | | 17,964 | | | | 20,549 | | | | 17,660 | |
| | | | | | | | | | | | | | | |
| Total liabilities, Redeemable Convertible Preferred Stock and equity | | | W | 155,079 | | | W | 175,087 | | | W | 221,622 | | | W | 260,973 | | | W | 254,910 | | | $ | 219,061 | |
| | | | | | | | | | | | | | | |
5
Dividends
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | Year Ended December 31, | |
| | | 2003(1) | | 2004(1) | | 2005(1) | | 2006(1) | | 2007(1) | | 2005(1) | | 2006(1) | | 2007(1) | | 2008(1) | | 2009(1) | |
| | | (In Won and US$, except ratios) | | (In Won and US$, except ratios) | |
| |
U.S. GAAP: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash dividends per share of common stock: | | | | | | | | | | | �� | | | | | | | | | | | | | | | | | | | | | | | | | |
| In Korean Won | | W | 600 | | | W | 600 | | | W | 750 | | | W | 800 | | | W | 900 | | | W | 750 | | | W | 800 | | | W | 900 | | | W | 900 | | | W | — | |
| In U.S. dollars | | $ | 0.50 | | | $ | 0.50 | | | $ | 0.74 | | | $ | 0.86 | | | $ | 0.96 | | | $ | 0.74 | | | $ | 0.86 | | | $ | 0.96 | | | $ | 0.71 | | | $ | — | |
| Cash dividends per share of preferred stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In Korean Won | | | N/A | | | W | 135.12 | | | W | 365.34 | | | W | 365.34 | | | | — | | | W | 365 | | | W | 365 | | | W | — | | | W | 4,928 | | | W | 5,275 | |
| In U.S. dollars | | | N/A | | | $ | 0.13 | | | $ | 0.36 | | | $ | 0.36 | | | | — | | | $ | 0.36 | | | $ | 0.36 | | | $ | — | | | $ | 3.91 | | | $ | 4.53 | |
| Stock dividends per share of common stock | | | — | | | | — | | | | — | | | | — | | | | — | | |
Korean GAAP: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash dividends per share of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In Korean Won | | W | 600 | | | W | 600 | | | W | 750 | | | W | 800 | | | W | 900 | | | W | 750 | | | W | 800 | | | W | 900 | | | W | 900 | | | W | — | |
| In U.S. dollars | | $ | 0.50 | | | $ | 0.50 | | | $ | 0.74 | | | $ | 0.86 | | | $ | 0.96 | | | $ | 0.74 | | | $ | 0.86 | | | $ | 0.96 | | | $ | 0.71 | | | $ | — | |
| Dividend ratio(2) | | | 12.00 | % | | | 12.00 | % | | | 15.00 | % | | | 16.00 | % | | | 18.00 | % | | | 15.00 | % | | | 16.00 | % | | | 18.00 | % | | | 18.00 | % | | | — | |
| Cash dividends per share of preferred stock: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In Korean Won | | | N/A | | | W | 857 | | | W | 1,183 | | | W | 1,427 | | | W | 1,389 | | | W | 1,183 | | | W | 1,427 | | | W | 1,389 | | | W | 3,558 | | | W | 3,925 | |
| In U.S. dollars | | | N/A | | | $ | 0.83 | | | $ | 1.17 | | | $ | 1.54 | | | $ | 1.48 | | | $ | 1.17 | | | $ | 1.54 | | | $ | 1.48 | | | $ | 2.82 | | | $ | 3.37 | |
| Dividend ratio(3) | | | N/A | | | | 17.14 | % | | | 23.66 | % | | | 28.54 | % | | | 27.78 | % | | | 23.66 | % | | | 28.54 | % | | | 27.78 | % | | | 71.16 | % | | | 78.51 | % |
| Stock dividends per share of common stock | | | — | | | | — | | | | — | | | | — | | | | — | | |
N/A = Not applicable.
Notes:
| | |
| (1) | | Represents dividends declaredpaid on the common shares of Shinhan Financial Group. |
| |
| (2) | | Represents dividends declared and paid as a percentage of par value of W5,000 per common share of Shinhan Financial Group. |
| |
| (3) | | Represents dividends declared and paid as a percentage of par value of W5,000 per preferred share of Shinhan Financial Group. |
6
Selected Statistical Information
Profitability Ratios
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | Year Ended December 31, | |
| | | 2003 | | 2004 | | 2005 | | 2006 | | 2007 | | 2005 | | 2006 | | 2007 | | 2008 | | 2009 | |
| | | (Percentages) | | (Percentages) | |
| |
| Net income as a percentage of: | | | | | | | | | | | | | | | | |
| Net income attributable to the Group as a percentage of: | | | | | | | | | | | | | | | | | | | | | |
| Average total assets(1) | | | 0.29 | % | | | 0.86 | % | | | 1.29 | % | | | 0.93 | % | | | 0.91 | % | | | 1.29 | % | | | 0.93 | % | | | 0.91 | % | �� | | 0.60 | % | | | 0.43 | % |
| Average stockholders’ equity(1)(2) | | | 8.83 | | | | 27.35 | | | | 33.78 | | | | 17.55 | | | | 9.73 | | |
| Average total Group stockholders’ equity(1)(2) | | | | 33.78 | | | | 17.55 | | | | 9.73 | | | | 7.13 | | | | 5.21 | |
| Including redeemable convertible preferred shares(3) | | | 8.15 | | | | 23.62 | | | | 30.64 | | | | 17.17 | | | | 9.73 | | | | 30.64 | | | | 17.17 | | | | 9.73 | | | | 7.13 | | | | 5.21 | |
| Dividend payout ratio(4) | | | 57.20 | | | | 18.62 | | | | 14.41 | | | | 21.66 | | | | 18.48 | | | | 14.41 | | | | 21.66 | | | | 18.48 | | | | — | | | | 37.24 | |
| Net interest spread(5) | | | 2.48 | | | | 2.63 | | | | 2.64 | | | | 2.55 | | | | 2.49 | | | | 2.64 | | | | 2.55 | | | | 2.49 | | | | 2.38 | | | | 1.99 | |
| Net interest margin(6) | | | 2.65 | | | | 2.78 | | | | 2.70 | | | | 2.75 | | | | 2.82 | | | | 2.70 | | | | 2.75 | | | | 2.82 | | | | 2.74 | | | | 2.31 | |
| Efficiency ratio(7) | | | 56.13 | | | | 63.60 | | | | 56.72 | | | | 68.34 | | | | 68.08 | | | | 56.72 | | | | 68.34 | | | | 68.08 | | | | 64.98 | | | | 65.44 | |
| Cost-to-average assets ratio(8) | | | 2.01 | | | | 2.49 | | | | 2.44 | | | | 3.18 | | | | 3.17 | | | | 2.44 | | | | 3.18 | | | | 3.17 | | | | 2.71 | | | | 2.68 | |
| Equity to average asset ratio(9): | | | 3.24 | | | | 3.16 | | | | 3.83 | | | | 5.31 | | | | 9.32 | | | | 3.83 | | | | 5.31 | | | | 9.32 | | | | 8.37 | | | | 8.16 | |
| Including redeemable convertible preferred shares(3) | | | 3.51 | | | | 3.66 | | | | 4.22 | | | | 5.43 | | | | 9.32 | | | | 4.22 | | | | 5.43 | | | | 9.32 | | | | 8.36 | | | | 8.15 | |
6
Notes:
| | |
| (1) | | Average balances are based on (a) daily balances for Shinhan Bank (for each year ended December 31, 2003, 2004, 2005, 2006 and 2007 including Chohung Bank) and Jeju Bank and (b) quarterly balances for other subsidiaries. |
| |
| (2) | | Does not include the redeemable preferred shares or the redeemable convertible preferred shares, other than the Series 10 redeemable preferred shares and the Series 11 redeemable convertible preferred shares, which were issued in January 2007 partly as funding for the LG Card acquisition. The information for the Series 10 and Series 11 preferred shares areis included in the information for 2007. The terms of the Series 10 redeemable preferred shares are different from those of other redeemable preferred shares issued by us, and the terms of the Series 11 redeemable convertible preferred shares are different from those of other redeemable convertible preferred shares issued by us. Unlike the other preferred shares, the Series 10 and Series 11 preferred shares are treated as stockholders’ equity under U.S. GAAP. For a description of the Series 10 and Series 11 preferred shares, see Item 10 “Additional Information —“Item 10.B. Memorandum and Articles of Incorporation — Description of CapitalPreferred Stock — Description of Redeemable Preferred Stock — Series 10 Redeemable Preferred Stock”(Series 10)” and “— Description of Redeemable Convertible Preferred Stock — Series 11 Redeemable Convertible Preferred Stock.(Series 11).” |
| |
| (3) | | Prior to the issuance of the Series 10 redeemable preferred shares and the Series 11 redeemable convertible preferred shares, we issued several other series of redeemable preferred shares and redeemable convertible preferred shares in August 2003, as part of the funding for the Chohung Bank acquisition. Some of these shares have been redeemed since their issuance. The redeemable preferred shares other than the Series 10 redeemable preferred shares are treated as debt under U.S. GAAP, and their effects on the profitability ratio are not shownpresented in the table. The redeemable convertible preferred shares other than the Series 11 redeemable convertible preferred shares have characteristics of mezzanine securities and are treated as neither debt nor stockholders’ equity under U.S. GAAP, and their effects on the profitability ratio are shown in the table above for comparative purposes. For a description of these preferred shares, see Item 10 “Additional Information —“Item 10.B. Memorandum and Articles of Incorporation — Description of Capital Stock — Description of Redeemable Preferred Stock” and “— Description of Redeemable Convertible Preferred Stock.” |
| |
| (4) | | Represents the ratio of total dividends declared on common stock as a percentage of net income.income attributable to the Group. |
| |
| (5) | | Represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. |
| |
| (6) | | Represents the ratio of net interest income to average interest-earning assets. |
7
| | |
| (7) | | Represents the ratio of noninterest expense to the sum of net interest income and noninterest income, a measure of efficiency for banks and financial institutions. Efficiency ratio may be reconciled to comparable line-items in our income statements for the periods indicated as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | Year Ended December 31, |
| | | 2003 | | 2004 | | 2005 | | 2006 | | 2007 | | 2005 | | 2006 | | 2007 | | 2008 | | 2009 |
| | | (In billions of Won, except percentages) | | (In billions of Won, except percentages) |
| |
| Non-interest expense (A) | | W | 1,937 | | | W | 3,604 | | | W | 3,641 | | | W | 5,308 | | | W | 6,745 | | |
| Non-interest expense(A) | | | W | 3,641 | | | W | 5,308 | | | W | 6,745 | | | W | 6,726 | | | W | 7,137 | |
Divided by | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| The sum of net interest income and noninterest income (B) | | | 3,451 | | | | 5,666 | | | | 6,419 | | | | 7,767 | | | | 9,908 | | |
| The sum of net interest income and noninterest income(B) | | | | 6,419 | | | | 7,767 | | | | 9,908 | | | | 10,351 | | | | 10,906 | |
| Net interest income | | | 2,333 | | | | 3,574 | | | | 3,474 | | | | 3,981 | | | | 5,170 | | | | 3,474 | | | | 3,981 | | | | 5,170 | | | | 5,779 | | | | 5,221 | |
| Noninterest income | | | 1,118 | | | | 2,092 | | | | 2,945 | | | | 3,786 | | | | 4,738 | | | | 2,945 | | | | 3,786 | | | | 4,738 | | | | 4,572 | | | | 5,685 | |
| Efficiency ratio ((A) as a percentage of (B)) | | | 56.13 | % | | | 63.61 | % | | | 56.72 | % | | | 68.34 | % | | | 68.08 | % | |
| Efficiency ratio ((A) as a percentage of(B)) | | | | 56.72 | % | | | 68.34 | % | | | 68.08 | % | | | 64.98 | % | | | 65.44 | % |
| | |
| (8) | | Represents the ratio of noninterest expense to average total assets. |
| |
| (9) | | Represents the ratio of average stockholders’ equity (not including the redeemable preferred shares or the redeemable convertible preferred shares, other than the Series 10 redeemable preferred shares and the Series 11 redeemable convertible preferred shares) to average total assets. |
7
Asset Quality Ratios
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | | As of December 31, | |
| | | 2003 | | 2004 | | 2005 | | 2006 | | 2007 | | 2005 | | 2006 | | 2007 | | 2008 | | 2009 | |
| | | (In billions of Won, except percentages) | | (In billions of Won, except percentages) | |
| |
| Total loans | | W | 95,295 | | | W | 97,080 | | | W | 105,848 | | | W | 122,446 | | | W | 151,818 | | |
| Total gross loans | | | W | 105,848 | | | W | 122,446 | | | W | 151,818 | | | W | 170,541 | | | W | 169,255 | |
| Total allowance for loan losses | | | 3,631 | | | | 2,311 | | | | 1,512 | | | | 1,575 | | | | 2,099 | | | | 1,512 | | | | 1,575 | | | | 2,099 | | | | 3,201 | | | | 3,638 | |
| Allowance for loan losses as a percentage of total loans | | | 3.81 | % | | | 2.38 | % | | | 1.43 | % | | | 1.29 | % | | | 1.38 | % | | | 1.43 | % | | | 1.29 | % | | | 1.38 | % | | | 1.88 | % | | | 2.15 | % |
| Total non-performing loans(1) | | W | 1,844 | | | W | 1,750 | | | W | 1,594 | | | W | 1,253 | | | W | 1,322 | | | W | 1,594 | | | W | 1,253 | | | W | 1,322 | | | W | 1,357 | | | W | 1,415 | |
| Non-performing loans as a percentage of total loans | | | 1.94 | % | | | 1.80 | % | | | 1.51 | % | | | 1.02 | % | | | 0.87 | % | | | 1.51 | % | | | 1.02 | % | | | 0.87 | % | | | 0.80 | % | | | 0.84 | % |
| Non-performing loans as a percentage of total assets | | | 1.35 | % | | | 1.22 | % | | | 1.03 | % | | | 0.72 | % | | | 0.60 | % | | | 1.03 | % | | | 0.72 | % | | | 0.60 | % | | | 0.52 | % | | | 0.56 | % |
| Impaired loans(2) | | W | 3,488 | | | W | 2,646 | | | W | 2,285 | | | W | 1,375 | | | W | 1,487 | | | W | 2,285 | | | W | 1,375 | | | W | 1,487 | | | W | 2,178 | | | W | 2,326 | |
| Allowance for impaired loans | | | 1,349 | | | | 885 | | | | 704 | | | | 865 | | | | 909 | | | | 704 | | | | 865 | | | | 909 | | | | 1,181 | | | | 1,350 | |
| Impaired loans as a percentage of total loans | | | 3.66 | % | | | 2.73 | % | | | 2.16 | % | | | 1.12 | % | | | 0.98 | % | | | 2.16 | % | | | 1.12 | % | | | 0.98 | % | | | 1.28 | % | | | 1.37 | % |
| Allowance for impaired loans as a percentage of impaired loans | | | 38.68 | % | | | 33.45 | % | | | 30.81 | % | | | 62.91 | % | | | 61.13 | % | | | 30.81 | % | | | 62.91 | % | | | 61.13 | % | | | 54.22 | % | | | 58.04 | % |
Notes:
| | |
| (1) | | Non-performing loans are defined as loans, whether corporate or consumer, that are past due more than 90 days. |
| |
| (2) | | Impaired loans include loans that are classified as “substandard” or below according to the asset classification guidelines of the Financial Services Commission, loans that are past due more than 90 days and loans that qualify as “troubled debt restructurings” under U.S. GAAP. |
8
Capital Ratios
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | | As of December 31, | |
| | | 2003 | | 2004 | | 2005 | | 2006 | | 2007 | | 2005 | | 2006 | | 2007 | | 2008 | | 2009 | |
| | | (Percentages) | | | | (Percentages) | | | | | |
| |
| Requisite capital ratio(1) | | | 118.41 | % | | | 129.41 | % | | | 132.81 | % | | | 139.28 | % | | | N/A | | | | 132.81 | % | | | 139.28 | % | | | N/A | | | | N/A | | | | N/A | |
| BIS ratio(1) | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | 9.85 | % | | | N/A | | | | N/A | | | | 9.85 | % | | | 10.19 | % | | | 12.60 | % |
| Total capital adequacy ratio for Shinhan Bank(2) | | | 10.49 | | | | 11.94 | | | | 12.23 | | | | 12.01 | | | | 12.09 | | |
| Tier I capital adequacy ratio | | | 6.34 | | | | 7.45 | | | | 8.16 | | | | 7.81 | | | | 7.64 | | |
| Tier II capital adequacy ratio | | | 4.15 | | | | 4.49 | | | | 4.07 | | | | 4.20 | | | | 4.45 | | |
| Total capital adequacy ratio for Chohung Bank(2) | | | 8.87 | | | | 9.40 | | | | 10.94 | | | | N/A | | | | N/A | | |
| Total capital adequacy ratio of Shinhan Bank(2) | | | | 12.23 | | | | 12.01 | | | | 12.09 | | | | 13.43 | | | | 15.13 | |
| Tier I capital adequacy ratio | | | 4.47 | | | | 4.99 | | | | 6.52 | | | | N/A | | | | N/A | | | | 8.16 | | | | 7.81 | | | | 7.64 | | | | 9.30 | | | | 11.61 | |
| Tier II capital adequacy ratio | | | 4.40 | | | | 4.41 | | | | 4.42 | | | | N/A | | | | N/A | | | | 4.07 | | | | 4.20 | | | | 4.45 | | | | 4.13 | | | | 3.52 | |
| Adjusted equity capital ratio of Shinhan Card(3) | | | 13.78 | | | | 16.48 | | | | 17.68 | | | | 17.47 | | | | 25.31 | | | | 17.68 | | | | 17.47 | | | | 25.31 | | | | 20.32 | | | | 26.73 | |
| Solvency ratio for Shinhan Life Insurance(4) | | | 224.69 | | | | 265.69 | | | | 232.12 | | | | 232.60 | | | | 226.05 | | | | 232.12 | | | | 232.60 | | | | 226.05 | | | | 209.47 | | | | 212.40 | |
N/A = Not available
Notes:
| | |
| (1) | | We were restructured as a financial holding company on September 1, 2001, and until 2006, were required to maintain minimum capital as measured by the requisite capital ratio as set forth under the guidelines issued by the Financial Services Commission applicable to financial holding companies were required to maintain minimum capital as measured by the requisite capital ratio.companies. For 2003, 2004, 2005 and 2006, the minimum requisite capital ratio applicable to us as a holding company was 100%. Starting 2007, under the revised guidelines, the minimum requisite capital ratio applicable to us changed to the Bank for International Settlement (“BIS”) ratio of 8%. RequisiteThe requisite capital ratio is computed as the ratio of the net aggregate amount of our equity capital to the aggregate amounts of requisite capital. This computation is based on our consolidated financial statementstatements in accordance with Korean GAAP. See “Item 4. Information on the Company4.B. Business Overview — |
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| | |
| | Supervision and Regulation — Principal Regulations Applicable to Financial Holding Companies — Capital Adequacy.” |
| |
| (2) | | For 2005, represents information of former Shinhan Bank prior to its merger into Chohung Bank in 2006. For 2005, the total capital adequacy ratio, Tier I capital adequacy ratio and Tier II capital adequacy ratio of Chohung Bank was merged with Shinhan Bank in April 2006. Accordingly, the capital adequacy ratio10.94%, 6.52% and 4.42%, respectively. The information for 2006 and afterwards is not available for Chohung Bank.thereafter represents the information of the surviving entity following the merger. |
| |
| (3) | | Represents the ratio of total adjusted shareholders’ equity to total adjusted assets and is computed in accordance with the guidelines issued by the Financial Services Commission for credit card companies. Under these regulations,guidelines, a credit card company is required to maintain a minimum adjusted equity capital ratio of 8%. This computation is based on the nonconsolidated financial statements of the credit card company prepared in accordance with Korean GAAP. See “Item 4.B. Business Overview — Supervision and Regulation — Principal Regulations Applicable to Financial Holding Companies — Capital Adequacy.” |
The information as of December 31, 2003, 2004 and 2005 includes the information of former Shinhan Card and does not include the information of the credit card division of Chohung Bank. The information as of December 31, 2006 represents the information of former Shinhan Card (including that of the credit card division of Chohung Bank, which was split-merged into former Shinhan Card on April 3, 2006). The information as of December 31, 2007 represents the information for LG Card, renamed Shinhan Card on October 1, 2007 (including that of the assets and liabilities of former Shinhan Card, which were transferred to LG Card on October 1, 2006).
For comparison, the adjusted equity capital ratio of LG Card as of December 31, 2003, 2004, 2005 and 2006 was −28.08%, −6.89%, 25.55% and 34.25%, respectively.
|
| | The information as of December 31, 2005 includes the information of former Shinhan Card and does not include the information of the credit card division of Chohung Bank. The information as of December 31, 2006 represents the information of former Shinhan Card (including that of the credit card division of Chohung Bank, which was split-merged into former Shinhan Card on April 3, 2006). The information as of December 31, 2007 represents the information for LG Card, renamed as Shinhan Card on October 1, 2007 (including that of the assets and liabilities of former Shinhan Card, which were transferred to LG Card on October 1, 2006). This information as of December 31, 2008 and 2009 represents the information of Shinhan Card. |
|
| | For comparison, the adjusted equity capital ratio of LG Card as of December 31, 2005 and 2006 was 25.55% and 34.25%, respectively. |
|
| (4) | | Solvency ratio is the ratio of the solvency margin to the standard amount of solvency margin as defined and computed in accordance with the regulationsguidelines issued by the Financial Services Commission for life insurance companies. Under these regulationsguidelines, Shinhan Life Insurance is required to maintain a minimum solvency ratio of 100%. Shinhan Life Insurance’s solvency ratio as of the end of its latest fiscal year on March 31, 20082010 was 222.74%223.1%. See “Item 4.B. Business Overview — Supervision and Regulation — Principal Regulations Applicable to Financial Holding Companies — Capital Adequacy.” |
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In conformity with the FSC regulations on financial holding companies, the Group applied the net equity to requisite capital ratio calculated under the FSC guidelines to evaluate its capital adequacy. All Korean financial holding companies must meet the minimum requisite capital ratio of 100%, as regulated by the FSC. Requisite capital, as required and defined by FSC, represents the sum of (a) the minimum equity capital amount necessary to meet the FSC guidelines for Shinhan Bank, and Jeju Bank, (b) 8% of its total assets on its balance sheet (including off-balance assets, if any) for other subsidiaries, and (c) 8% of its total assets on its balance sheet (including off-balance assets, if any, but excluding the book value of investments in and financial supports to its direct and indirect subsidiaries) for the Group.
The FSCFinancial Services Commission regulations also require that the computation of the capital ratios be based on the Group’sour consolidated financial statements under Korean GAAP and regulatory guidelines, which vary in certain significant respects from USU.S. GAAP. The following table sets forth our capital ratios computed on the basis of our consolidated financial statements under Korean GAAP and the regulatory guidelines of the Financial Services Commission.
| | | | | | | | | |
| | | As of December 31, | |
| | | 2006 | | | 2007 | |
| | | (In millions of Won, except percentages) | |
| |
| Equity capital | | W | 14,184,052 | | | | N/A | |
| Requisite capital | | | 10,183,478 | | | | N/A | |
| Requisite capital ratio | | | 139.28 | % | | | N/A | |
| Tier 1 capital | | | N/A | | | W | 8,389,075 | |
| Tier 2 capital | | | N/A | | | | 7,556,865 | |
| | | | | | | | | |
| Total risk-adjusted capital | | | N/A | | | W | 15,945,940 | |
| | | | | | | | | |
| Total risk-adjusted assets | | | N/A | | | W | 161,849,385 | |
| | | | | | | | | |
| Capital adequacy ratio(%) | | | N/A | | | | 9.85 | % |
| Tier 1 capital ratio(%) | | | N/A | | | | 5.18 | % |
| Tier 2 capital ratio(%) | | | N/A | | | | 4.67 | % |
| | | | | | | | | | | | | |
| | | As of December 31, | |
| | | 2007 | | | 2008 | | | 2009 | |
| | | (In millions of Won, except percentages) | |
| |
| Risk-weighted assets | | W | 161,849,385 | | | W | 183,741,412 | | | W | 179,083,070 | |
| Tier 1 capital | | | 8,334,072 | | | | 9,822,433 | | | | 14,087,789 | |
| Tier 2 capital | | | 8,334,072 | | | | 9,822,433 | | | | 9,520,300 | |
| | | | | | | | | | | | | |
| Adjustment(1) | | | (852,710 | ) | | | (921,405 | ) | | | (1,035,959 | ) |
| | | | | | | | | | | | | |
| Total risk-adjusted capital | | W | 15,815,434 | | | W | 18,723,461 | | | W | 22,572,130 | |
| | | | | | | | | | | | | |
| Capital adequacy ratio (%) | | | 9.77 | % | | | 10.19 | % | | | 12.60 | % |
| Tier 1 capital ratio (%) | | | 5.15 | % | | | 5.35 | % | | | 7.87 | % |
Note:
| | |
| (1) | | Represents the subtraction from the capital line item of capital contributions to Shinhan Life Insurance and Cardif Life Insurance Company pursuant to the Financial Supervisory Service guidelines. |
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EXCHANGE RATESExchange Rates
The following table sets forth, for the periods and dates indicated, certain information concerning the Noon Buying Rate in Won per US$1.00.
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | At End of
| | | | | | | |
Year Ended December 31, | | At End of Period | | Average(1) | | High | | Low | | Period | | Average(1) | | High | | Low | |
| | | (Won per US$1.00) | | (Won per US$1.00) | |
| |
| 2000 | | | 1,267.0 | | | | 1,140.0 | | | | 1,267.0 | | | | 1,105.5 | | |
| 2001 | | | 1,313.5 | | | | 1,293.4 | | | | 1,369.0 | | | | 1,234.0 | | |
| 2002 | | | 1,186.3 | | | | 1,242.0 | | | | 1,332.0 | | | | 1,160.6 | | |
| 2003 | | | 1,192.0 | | | | 1,193.0 | | | | 1,262.0 | | | | 1,146.0 | | |
| 2004 | | | 1,035.1 | | | | 1,139.3 | | | | 1,195.1 | | | | 1,035.1 | | |
| 2005 | | | 1,010.0 | | | | 1,023.2 | | | | 1,059.8 | | | | 997.0 | | | | 1,010.0 | | | | 1,023.2 | | | | 1,059.8 | | | | 997.0 | |
| 2006 | | | 930.0 | | | | 950.1 | | | | 1,002.9 | | | | 913.7 | | | | 930.0 | | | | 950.1 | | | | 1,002.9 | | | | 913.7 | |
| 2007 | | | 935.8 | | | | 928.0 | | | | 950.2 | | | | 903.2 | | | | 935.8 | | | | 928.0 | | | | 950.2 | | | | 903.2 | |
| 2008 (through June 16) | | | 1,038.5 | | | | 991.1 | | | | 1,047.0 | | | | 935.2 | | |
| 2008 | | | | 1,262.0 | | | | 1,105.3 | | | | 1,507.9 | | | | 935.2 | |
| 2009 | | | | 1,163.7 | | | | 1,270.0 | | | | 1,532.8 | | | | 1,163.7 | |
| 2010 (through June 11) | | | | 1,245.9 | | | | 1,148.2 | | | | 1,253.2 | | | | 1,104.0 | |
| January | | | 943.4 | | | | 942.1 | | | | 953.2 | | | | 935.2 | | | | 1,158.7 | | | | 1,138.2 | | | | 1,163.1 | | | | 1,120.0 | |
| February | | | 942.8 | | | | 943.9 | | | | 948.2 | | | | 937.2 | | | | 1,159.0 | | | | 1,155.7 | | | | 1,170.0 | | | | 1,144.0 | |
| March | | | 988.6 | | | | 981.7 | | | | 1,021.5 | | | | 947.1 | | | | 1,131.2 | | | | 1,136.1 | | | | 1,153.0 | | | | 1,128.0 | |
| April | | | 1,005.0 | | | | 986.9 | | | | 1,005.0 | | | | 973.50 | | | | 1,108.0 | | | | 1,115.5 | | | | 1,126.3 | | | | 1,104.0 | |
| May | | | 1,028.5 | | | | 1,034.1 | | | | 1,047.0 | | | | 1,004.0 | | | | 1,194.5 | | | | 1,164.8 | | | | 1,253.2 | | | | 1,115.0 | |
| June (through June 16) | | | 1,038.5 | | | | 1,028.8 | | | | 1,044.0 | | | | 1,016.8 | | |
| June (through June 11) | | | | 1,245.9 | | | | 1,227.3 | | | | 1,250.4 | | | | 1,198.5 | |
Source: Federal Reserve Bank of New York
| |
| Source: | Federal Reserve Bank of New York (for the periods ended on or prior to December 31, 2008) and Federal Reserve Board (for the period since January 1, 2009) |
Note:
| | |
| (1) | | Represents the average of the Noon Buying Rates on the last day of each month during the relevant period. |
We have translated certain amounts in Korean Won, which appear in this document,annual report, into dollars for convenience. This does not mean that the Won amounts referred to could have been, or could be, converted into U.S. dollars at any particular rate, the rates stated above, or at all. Unless otherwise stated, translations of Won amounts to U.S. dollars are based on the Noon Buying Rate in effect on December 31, 2007,2009, which was W935.81,163.65 to US$1.00. On June 16, 2008,11, 2010, the Noon Buying Rate in effect was W1,038.51,245.9 to US$1.00.
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| ITEM 3.B. | Capitalization and Indebtedness |
RISK FACTORSNot applicable.
| |
| ITEM 3.C. | Reasons for the Offer and Use of Proceeds |
Not applicable.
An investment in the American depositary shares representing our common shares involves a number of risks. You should carefully consider the following information about the risks we face, together with the other information contained in this document,annual report, in evaluating us and our business.
Risks Relating to Competitionthe Recent Economic and Market Crisis
Difficult conditions and turbulence in the Korean and global economy and financial markets may adversely affect our business, asset quality, capital adequacy and earnings.
Most of our assets are located in, and we generate most of our income from, Korea. Accordingly, our business and profitability are largely dependent on the general economic and social conditions in Korea, including interest rates, inflation, exports, personal expenditures and consumption, unemployment, demand for business products and
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services, debt service burden of households and businesses, the general availability of credit, the asset value of real estate and securities and other factors affecting the financial well-being of our corporate and retail customers.
The Korean economy is closely integrated with, and is significantly affected by, developments in the global economy and financial markets. In recent years, the global economy and financial markets experienced hardship, which also had a significant adverse impact on the Korean economy and in turn on our business and profitability. During the second and third quarters of 2007, credit markets in the United States and globally began to experience significant difficulties and turbulence as a result of uncertainties in the U.S. subprime mortgage market, which then spread to markets involving highly leveraged structured financial products. In September and October 2008, liquidity concerns increased dramatically with the bankruptcy or acquisition of,and/or government assistance to, several major financial institutions based in the United States and Europe, including Lehman Brothers. These developments led to reduced liquidity in the credit markets, greater volatility in financial markets in general and an economic downturn in many of the world’s major economies, including Korea. In response to such adversity, governments in the United States, Europe and many other countries, including Korea, have implemented a number of initiatives designed to stabilize the financial markets and the economy in general, including fiscal stimulus measures, reduction of base interest rates and direct and indirect assistance to distressed financial institutions. In part due to such initiatives, the Korean and global economy have shown growing signs of recovery since the second half of 2009. However, there can be no assurance that there will not be further difficulties resulting from the recent financial and economic crisis. For example, in November 2009, the Dubai government announced a moratorium on the outstanding debt of Dubai World, a government-affiliated investment company. In addition, many governments worldwide, in particular in Greece, Spain, Hungary and other countries in Europe, are showing increasing signs of fiscal stress and difficulties meeting debt burdens, which have resulted in turbulences in the financial markets in Europe and elsewhere in the world. The stability of Korean financial markets is also affected in part by the actual and perceived military threats from North Korea. In March 2010, a Korean navy ship sunk allegedly as a result of a covert attack by a North Korean submarine, and this incident has further escalated the level of political and military tension in the Korean peninsula and added to the volatility of the Korean financial markets. Any of these or other developments could potentially trigger another financial and economic crisis, which could have a material impact on our business and profitability.
Furthermore, while many governments worldwide are considering or are in the process of implementing “exit” strategies in the form of reduced government spending, higher interest rates or otherwise, there can be no guarantee that such strategies will have the desired effect, and such strategies may, for reasons related to timing, magnitude or other factors, have the unintended consequences of prolonging or worsening economic and financial difficulties. In light of the high level of interdependence of the global economy, any of the foregoing developments could have a material adverse effect on the Korean economy and financial markets, and in turn on our business and profitability.
In particular, difficulties in financial and economic conditions could result in significant deterioration in the quality of our assets and accumulation of higher provisioning, allowances for loan losses and charge-offs as an increasing number of our corporate and retail customers declare bankruptcy or insolvency or otherwise face increasing difficulties in meeting their debt obligations. During the recent global financial crisis, our delinquent and non-performing loans increased significantly before returning largely to pre-crisis levels due in part to our preemptive measures and improvements in the general economy. For example, Shinhan bank’s delinquent loans (loans with principal payments overdue by one day or more or interest payments overdue for 14 days or more) under Korean GAAP increased during the recent global crisis but decreased as the economy showed signs of recovery, and likewise, Shinhan Bank’s delinquency ratio (total delinquent loans to total outstanding loans) under Korean GAAP increased from 0.62% in 2007 to 0.79% in 2008 but decreased to 0.59% in 2009. However, as was the case during the recent global financial crisis, depending on the nature of the difficulties in the financial markets and general economy, we may be forced to scale back certain of our core lending activities and other operationsand/or borrow money at a higher funding cost or face a tightening in the net interest spread, any of which may have a negative impact on our earnings and profitability. Furthermore, while we and our principal subsidiaries currently maintain a capital adequacy ratio at a level higher than the required regulatory minimum, there is no guarantee that an even higher capital requirement will not be imposed by the Government in case of a deepening or renewed crisis.
In addition, given the highly integrated nature of financial systems and economic relationships worldwide, there may be other, unanticipated systemic or other risks that may not be presently predictable. Any of these risks if
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materialized may have a material adverse effect on our business, liquidity, financial condition and results of operations.
Risks Relating to Our Overall Business
Competition in the Korean financial services industry is intense, and we may experience a loss of market share and declining marginsfurther intensify as a result.result of recent deregulation.
We compete principally with other national commercial banks in Korea but also face competition from other sources, including foreign banks operating in Korea, government-owned development banks, specialized banks and regional banks, as well as various other types of financial institutions, including credit card companies, securities companies and asset management companies. Competition in the Korean financial services industry has been,is, and is likely to remain, intense,intense. In the banking sector, Shinhan Bank competes principally with other major Korean commercial banks and we believe that regulatory reforms and the general modernization of business practicesmajor global banks operating in Korea, has led,as well as Government-run banks, specialized banks and will lead, to increased competition amongregional banks. In the credit card services factor, Shinhan Card competes principally with existing “monoline” credit card companies, credit card divisions of commercial banks, consumer finance companies, other financial institutions and, recently, mobile telecommunications service providers in Korea. In particular, we believe that foreignother financial services sectors, our other subsidiaries also compete in a highly fragmented market. Some of our competitors, particularly the major global financial institutions, many of which have greater experiencesexperience and resources than we do, will continue to enter the Korean market and compete with us in providing financial products and services either by themselves or in partnership with existing Korean financial institutions. Furthermore, the Korean banking industry is undergoing consolidation as well as several other developments. For example, Kookmin Bank may convert itself into a financial holding company and the Government is reportedly considering privatizing the whole or part of the government-invested development banks, including Korea Development Bank and Woori Financial Holding. The financial institutions resulting from these developments may, by virtue of their increased size, expanded business scope and more efficient operations, add further competitive pressure. There can be no assurance that we will be able to compete successfully with these or other domestic and foreign financial institutions.do.
OverIn the past several years,small- and medium-sized enterprise and retail banking segments, which have been Shinhan Bank’s traditional core businesses, competition has been particularly fierce in our core banking area of small-increased significantly and is expected to medium-enterprise lending, as mostincrease further. Most Korean banks have focused their businessbeen focusing on this area after reducingsmall- and medium-sized enterprises and retail customers in recent years through aggressive marketing campaigns and other investments, although they have begun to increase their exposure to large corporations. Such trendcorporate borrowers and focus on developing fee income businesses, including bancassurance and investment products, as increasingly important sources of revenue. The competition and market saturation resulting from this common focus may make it more difficult for Shinhan Bank to secure retail and small- and medium-sized corporate customers with the credit quality and on credit terms necessary to maintain or increase its income and profitability. In particular, Shinhan Bank has contributedbeen pursuing, and intends to continue to pursue, a strategy of maintaining or enhancing its margins where possible and avoid, to the extent possible, entering into price competition. If other banks and financial institutions adopt a strategy of expanding market share through interest rate competition, Shinhan Bank may further aggravate, lower profitabilitysuffer customer attrition. In addition, Shinhan Bank may in the future decide to compete to a greater extent based on interest rates, which could lead to a decrease in its net interest margins. Any future decline in Shinhan Bank’s customer base or its net interest margins as a result of its future competition strategy could have an adverse effect on its results of operations and asset quality problems in this area. Competition has also been intense infinancial condition.
In the credit card business,sector, competition has been intensifying and the market has seen further signs of saturation as Korean banksexisting and new credit card companiesservice providers have made significant investments and engaged in aggressive marketing activities,campaigns and promotions to acquire new customers and target customers with high credit quality. In addition, other credit card issuers may compete with Shinhan Card for customers by offering lower interest rates and fees, higher credit limits and more attractive promotions and incentives. As a result, Shinhan Card may experience customer attrition or lose service opportunities to competing credit card issuersand/or incur higher marketing expenses. Customer attrition, together with any lowering of interest rates or feesand/or more extensive marketing and promotional campaigns that Shinhan Card might implement to acquire and retain customers, could reduce its revenues and earnings.
Potential consolidation among our rival institutions may make the competitive landscape more adverse to us. For example, in June 2008, the Government announced its plans to privatize Korea Development Bank, one of the Government’s key policy banks, and in January 2010, the Government announced that it intends to sell its controlling stake in Woori Financial Group, one of the top three financial holding companies in Korea in terms of assets as of December 31, 2009, to another major bank or financial holding company. If Woori Financial Group were to be acquired by one of our major competitors, the consolidated entity will have a greater scale of operations, including a larger customer base, and financial resources than us, which may resulthurt our ability to compete effectively. Moreover, Lone Star Funds is seeking to sell its controlling stake in asset quality problems previously experienced with respectKorea Exchange Bank, potentially to a major domestic or international financial institution, and there are market rumors related to a potential merger among our rival financial institutions. Any of these developments, if materialized, may place us at a competitive disadvantage.
Furthermore, as the Korean economy further develops and new business opportunities arise, more competitors may enter the financial services industry. For example, in 2009, SK Telecom acquired an equity interest in Hana
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Card and Korea Telecom has expressed an interest in acquiring an equity interest in BC Card and both SK Telecom and Korea Telecom have begun to actively provide mobile phone payment services using advanced mobile phone technology. As these two companies are the two largest telecommunications service providers in Korea serving a substantial majority of the Korean population, a widespread consumer acceptance of mobile phone payment services in lieu of credit card receivables. In addition, whenservices could pose a serious competitive threat to the existing credit card service providers, including our credit card subsidiary.
Competition in the Korean financial services industry may also further intensify as a result of deregulation. For example, the Financial Investment Services and Capital MarketMarkets Act becomes(“FSCMA”), which became effective in February 2009, permits a wider range of financial services providers to engage in a broader sphere of financial activities, including depositary services, and has to a significant extent removed regulatory barriers among securities brokerage, asset management, derivative financial services and trust services in favor of creating financial investment companies that may engage in all of the foregoing activities. Accordingly, the FSCMA enables the creation of large financial institutions that can offer both commercial and investment banking services modeled after the major global financial institutions in the United States and Europe. Recently, in light of the recent global financial crisis, the Government has subjected Korean financial institutions to stricter regulatory requirements and guidelines in areas of asset quality, capital adequacy, liquidity and residential and other lending practices, which has been enacted withhad a dampening effect on competition. However, there is no assurance that these measures will continue to curb competition or that the aim of promoting integration and rationalization of the Korean capital markets and financial investment products industry, itGovernment will not reverse or reduce such measures or introduce other deregulatory measures, which may further intensify competition amongin the Korean financial institutions in Korea.services industry.
Increased competitionIf we are unable to compete effectively in the changing business and regulatory environment, our profit margin and market saturation from anyshare may erode and our further growth opportunities may become limited, which could adversely affect our business, results of operation and financial condition.
We and our subsidiaries need to maintain our capital ratios above minimum required levels, and the failure to so maintain could result in the suspension of some or all of our operations.
We and our subsidiaries in Korea are required to maintain specified capital adequacy ratios. For example, we and our banking subsidiaries in Korea are required to maintain a minimum Tier I capital adequacy ratio of 4.0% and a BIS ratio of 8.0%, each on a consolidated Korean GAAP basis. These ratios measure the foregoingrespective regulatory capital as a percentage of risk-weighted assets on a consolidated basis and are determined based on guidelines of the Financial Services Commission. In addition, our subsidiaries Shinhan Card, Shinhan Life Insurance and Shinhan Investment are required to maintain a consolidated adjusted equity capital ratio of 8.0%, a solvency ratio of 100% and a net operating capital ratio of 150%, respectively.
While we and our subsidiaries currently maintain capital adequacy ratios in excess of the respective required regulatory minimum levels, we or our subsidiaries may not be able to continue to satisfy the capital adequacy requirements for a number of reasons, including an increase in risky assets and provisioning expenses, substitution costs related to the disposal of problem loans, declines in the value of securities portfolio, adverse changes in foreign currency exchange rates, changes in the capital ratio requirements, the guidelines regarding the computation of capital ratios, or the framework set by the Basel Committee on Banking Supervision upon which the guidelines of the Financial Services Commission are based, or other adverse developments may resultaffecting our asset quality or equity capital or due to other reasons.
Specifically, beginning on January 1, 2008, the Financial Supervisory Service implemented the new Basel Capital Accord, commonly referred to as Basel II, in a lossKorea, which has affected the measurement of market share and declining margins. In particular, if other banks andrisk by Korean financial institutions, adoptincluding us and our subsidiaries. Building upon the strategyinitial Basel Capital Accord of competing1988, commonly referred to as Basel I, which focused primarily on capital adequacy and asset soundness as a measure of risk, Basel II expanded this approach by considering additional risks such as operational risk. Basel II also instituted new measures that require us and our subsidiaries to take into account individual borrower credit risk and operational risk when calculating risk-weighted assets. Recently, in order to further bolster the basissoundness of reduced interest rates,the banking sector in light of the recent global financial crisis, the Basel Committee on Banking Supervision has recently proposed measures, commonly known as Basel III, to further enhance the Basel II framework. While not finalized, these proposals, which are targeted to be implemented by the end of 2012, include, among others,
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narrowing the scope of Tier 1 capital, further strengthening capital requirements and introducing leverage ratio requirements. Our holding company is currently in compliance with Basel I requirements and our banking subsidiaries are currently in compliance with Basel II requirements, and we and our banking subsidiaries are taking active steps to comply with the additional requirements under the more advanced Basel levels, as applicable. However, there can be no assurance that the additional requirements under the more advanced Basel level will not require in the future an increase in our or our subsidiaries’ risk capital and liquidity requirements, among others, which may require us or our subsidiaries to improve asset quality or raise additional capital.
If the capital adequacy ratios of us or our subsidiaries fall below the required levels, the Financial Services Commission may impose penalties ranging from a warning to suspension or revocation of our or our subsidiaries’ business licenses. In order to maintain the capital adequacy ratios above the required levels, we or our subsidiaries may be required to raise additional capital through equity financing, but there is no assurance that we or our subsidiaries will be able to do so on commercially favorable terms or at all and, even if successful, any such capital raising may have a dilutive effect on our shareholders with respect to their interest in us or on us with respect to our interest in our subsidiaries.
Liquidity, funding management and credit ratings are critical to our ongoing performance.
Liquidity is essential to our business as a financial intermediary, and we may seek additional funding in the same,near future to satisfy liquidity needs, meet regulatory requirements, enhance our capital levels or fund the growth of our operations as opportunities arise. A substantial part of the liquidity and funding requirements for our banking subsidiaries is met through short-term customer deposits. While the volume of our customer deposits has generally been stable over time, there have been times when customer deposits declined substantially due to the popularity of other, higher-yielding investment opportunities, namely stocks and mutual funds, during times of bullish stock markets. During such times, our banking subsidiaries were required to obtain alternative funding at higher costs. In addition, following the deregulation of depositary and settlement services as a result of the Financial Investment Services and Capital Markets Act, our banking subsidiaries may experience a decrease in customer deposits due to intensified competition. We and our subsidiaries also raise funds in the capital markets and borrow from other financial institutions, the cost of which would underminedepends on the market rates and the general availability of credit and the terms of which may limit our ability to pay dividends, make acquisitions or subject us to other restrictive covenants. In addition, during times of sudden and significant devaluations of Korean Won against the U.S. dollar as was the case recently amid the global liquidity crisis, Korean commercial banks, including our banking and credit card subsidiaries, had temporary difficulties in refinancing or obtaining optimal amounts of foreign currency-denominated funding on terms commercially acceptable to us. While our subsidiaries are not currently facing liquidity difficulties in any material respect, if we or our subsidiaries are unable to obtain the funding we need on terms commercially acceptable to us for an extended period of time for reasons of Won devaluation or otherwise, we may not be able to ensure our financial viability, meet regulatory requirements, implement our strategies or compete effectively.
Credit ratings affect the cost and other terms upon which we and our subsidiaries are able to obtain funding. Domestic and international rating agencies regularly evaluate us and our subsidiaries and their ratings of our and our subsidiaries’ long-term debt are based on a number of factors, including our financial strength as well as conditions affecting the financial services industry generally and Korea. In light of the ongoing difficulties in the financial services industry and the financial markets, there can be no assurance that the rating agencies will maintain our current ratings or outlooks. Currently, Shinhan Bank maintains credit ratings of A2, A and A- from Moody’s Investor Service (“Moody’s”), Fitch and S&P, respectively, and Shinhan Card maintains credit ratings of A- and BBB+ from Fitch and S&P, respectively. There is no assurance that Shinhan Bank, Shinhan Card, any of our major subsidiaries or our holding company will not experience a downgrade in their respective credit ratings and outlooks for reasons related to the general Korean economy or reasons specific to such institutions. Additional downgrades in the credit ratings and outlooks of us and our subsidiaries will likely increase the cost of our funding, limit our access to capital markets and other borrowings, and require us to post additional collateral in financial transactions, any of which could adversely affect our liquidity, net interest marginmargins and profitability, and in turn, our business, financial condition and results of operation.
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Changes in interest rates, foreign exchange rates, bond and equity prices, and other market factors have affected and will continue to affect our business.
The most significant market risks we face are interest rate, foreign exchange and bond and equity price risks. Changes in interest rate levels, yield curves and spreads may affect the interest rate margin realized between lending and borrowing costs. Changes in currency rates, particularly in the Korean Won-U.S. dollar exchange rates, affect the value of our assets and liabilities denominated in foreign currencies, the reported earnings of our non-Korean subsidiaries and income from foreign exchange dealings. The performance of financial markets may affect bond and equity prices and, therefore, cause changes in the value of our investment and trading portfolios. While we have implemented risk management systems to mitigate and control these and other market risks to which we are exposed, it is difficult to predict with accuracy changes in economic or market conditions and to anticipate the effects that such changes could have on our business, financial condition and results of operation.
A significant increase in interest rates could decrease the value of our debt securities portfolio and raise our funding costs while reducing loan demand and the repayment ability of our borrowers, which could have a material adverse effect on our asset quality and profitability.
Commencing in the second half of 2008, interest rates in Korea have declined to historically low levels as the government has sought to stimulate the economy through active rate-lowering measures. However, as the Korean government is reportedly in discussions to increase base interest rates as part of the exit strategy from the recent global financial crisis, there is no assurance that the market interest rates will not significantly rise in the near future. The vast majority of debt securities we hold pay interest at a fixed rate. However, a considerable increase in interest rates in the future could lead to a decline in the value of the debt securities in our portfolio. A sustained increase in interest rates will also raise our funding costs, while reducing loan demand, especially among consumers. A considerable rise in interest rates may therefore require us to rebalance our assets and liabilities in order to minimize the risk of potential mismatches and maintain our profitability. In addition, rising interest rate levels may adversely affect the Korean economy and the financial condition of our corporate and retail borrowers, including holders of our credit cards, which in turn may lead to customer attrition resultingdeterioration of our credit portfolio. Since most of our retail and corporate loans bear interest at rates that adjust periodically based on prevailing market rates, a sustained increase in interest rate levels will increase the interest costs of our retail and corporate borrowers and could adversely affect their ability to make payments on their outstanding loans.
We may incur losses associated with our counterparty exposures.
We face the risk that counterparties will be unable to honor contractual obligations to us or our subsidiaries. These parties may default on their obligations to us or our subsidiaries due to bankruptcy, lack of liquidity, operational failure or other reasons. This risk may arise, for example, from competition. Anyentering into swaps or other derivative contracts under which counterparties have obligations to make payments to us or our subsidiaries or in executing currency or other trades that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, exchanges, clearing houses or other financial intermediaries. Counterparty risk has increased especially in light of such developments wouldthe recent credit crisis and global economic downturn. For example, Shinhan Investment, our securities brokerage subsidiary, recorded losses of W91 billion in 2008 as a result of the bankruptcy filing by Lehman Brothers. Similar losses in the future may have a material adverse effect on our business, growth, financial condition and results of operation.
Risks Relating to Our Banking Business
We have significant exposure to small- and medium-sized enterprises, and financial difficulties experienced by such enterprises may result in a deterioration of our asset quality and have an adverse impact on us.quality.
Our banking activities are conducted primarily through our wholly-owned subsidiary, Shinhan Bank. One of our core banking businesses ishas historically been and continues to be lending to small- and medium-sized enterprises (as defined in Item 4. Information on the Company —“Item 4.B. Business Overview — Our Principal Activities — Corporate Banking Services — Small- and Medium-sized Enterprises Banking)Banking”). Our loans to such enterprises increased from W39,943 billion as of December 31, 2005 to W47,159 billion as of December 31, 2006 and WW71,212 billion as of December 31, 2008 and W69,571 billion
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as of December 31, 2009, representing 37.7%41.0%, 38.5%41.8% and 41.0%41.1%, respectively, of our total loan portfolio as of such dates.
Compared to loans to large corporations, which tend to be better capitalized and weather business downturns with greater ease, or loans to individuals and households, which tend to be secured with homes and with respect to which the borrowers are therefore less willing to default, loans to small- and medium-sized enterprises have historically had a relatively higher delinquency ratio. In recent years, loans to such enterprises have been the target of aggressive lending by Korean banks, including Shinhan Bank, as part of their campaigns to increase their respective market shares. As of the same dates, the non-performing loan ratios for such loans were 2.54%, 1.64%,December 31, 2007, 2008 and 1.26%, respectively. Non-performing
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2009, under Korean GAAP, Shinhan Bank’s delinquent loans to small- and medium-sized enterprises were W1,015453 billion, W775820 billion and W784578 billion, of our total loans to small- and medium-sized enterprises, as of December 31, 2005, 2006 and 2007, respectively.
From 2002 to 2004, Korean banks, including our banking subsidiaries, generally experienced relatively high delinquency ratios with respect to loans in this segment, in large part due to aggressive lending by the banks to such enterprises with insufficient regard to asset quality as Korean economy experienced a downturn. While the delinquency ratios for loans in this segment generally stabilized and has remained relatively low since 2005, there is no assurance that delinquencies among such enterprises will not rise to the previous levels. According to the Financial Supervisory Service, the delinquency ratio for Won-currency loans by Korean commercial banks to small- and medium-sized enterprises was 1.1% as of December 31, 2007.
Our banking subsidiaries have significant exposure to the real estate leasing and service companies and the construction companies. Recently, these companies are increasingly experiencing financial difficulties due to a slowdown in the housing market following the adoption of government regulations designed to stem speculations in the real estate market. A substantial majority of these companies to which we have exposed are small- to medium-sized enterprises. These enterprises experienced significant difficulties in times of economic downturns in the past, which resulted in higher delinquencies and impairment. This has been particularly the case for our customers that are even smaller enterprises, such as small unincorporated businesses and sole proprietorships, which tend to be affected to a greater extent that the larger corporate borrowers by downturns in Korean economy. As of December 31, 2005, 2006 and 2007, under Korean GAAP, Shinhan Bank’s Won-denominated loans to the real estate leasing and service industry amounted to W6,649 billion, W8,719 billion and W12,212 billion, or 6.63%, 7.67% and 11.47% of the total Won-denominated loans, respectively, and hadrepresenting delinquency ratios (net of charge-offs and loansloan sales) of 1.23%0.85%, 0.62%1.33% and 0.90%0.98%, respectively. As of December 31, 2005, 2006 and 2007, underIf Korean GAAP, Shinhan Bank’s Won-denominated loansor global economy were to experience another economic downturn, the construction industry amounted to W2,311 billion, W2,874 billion and W3,893 billion, or 2.31%, 2.53% and 3.66% of total Won-denominated loans, respectively, and had delinquency ratios (net of charge-offs and loans sales) of 1.53%, 1.01% and 1.36%, respectively.
We are taking active measures to curtail delinquency with respect toratio for our loans to the small- and medium-sized may rise significantly.
Of particular concern is the significant exposure we have to enterprises in the real estate and leasing industry and the construction industry. As of December 31, 2009, our loans to the real estate and leasing industry and the construction industry was W18,530 billion and W6,675 billion, representing 10.9% and 3.9%, respectively, of our total loan portfolio. The enterprises in the real estate development and construction industries are concentrated in the housing market, which has been particularly affected by declining asset prices largely as a result of sustained efforts by the Government to stem speculation in the housing market. We also have a limited exposure to real estate project financing, particularly by construction companies that have built residential units in provinces outside the metropolitan Seoul area, which have experienced a relatively low rate of pre-sales, the proceeds from which the construction companies primarily rely on as a source for their liquidity and cash flow. In addition, we also have a limited exposure to the shipping and shipbuilding industries, which were disproportionately hurt by the recent economic downturn following a particularly robust period and are currently experiencing slow recovery.
The delinquency ratio for the small- and medium-sized enterprises in the construction, shipbuilding and shipping industries may increase significantly if restructuring of troubled companies in these industries intensifies as a result of a Government initiative or concerted efforts by lending institutions to improve their asset quality. Specifically, in December 2008, the Government announced that it would promote swift restructuring of troubled companies in certain industries that have been disproportionately affected by the then ongoing economic difficulties, such as construction and shipbuilding industries. These restructurings have been supervised primarily by major commercial banks that are creditor financial institutions of such companies, with the Government having an oversight role. In accordance with such program, 29 construction companies and eight shipbuilding companies became subject to workouts in February and March 2009, following review by their creditor financial institutions (including Shinhan Bank) and the Korean government. Currently, 10 construction companies and two shipbuilding companies remain under our supervision in connection with such program. In addition, on June 25, 2010, the Government announced that, following review of credit risk relating to 1,985 companies in Korea with outstanding debt of W50 billion or more, 65 of such companies will be subject to restructuring in the form of workout, liquidation or court receivership. Of the 65 companies, 16 are construction companies, three are shipbuilding companies and one is a shipping company. According to the Government’s announcement, such restructuring is expected to have a limited impact on the asset quality of the commercial banks in Korea given the relatively strong level of capital adequacy and financial position of commercial banks in Korea to absorb potential losses in respect of these troubled companies, if any. However, there is no assurance that the credit exposure to these trouble companies will not increase in the future as a result of an economic downturn or for other reasons, and additional restructuring may follow as a result of a Government initiative or otherwise. Any of the foregoing developments may result in deterioration in the asset quality of Shinhan Bank.
We are taking active steps to curtail delinquency among our small- and medium-sized enterprise customers, including by way of strengthening loan application review processes and closely monitoring borrowers in vulnerabletroubled sectors. Despite such efforts, however, there is no assurance that the delinquency ratio for our loans to the small- and medium-sized enterprises will not rise in the future. For example, the intensifying competition among banks to increase lending to these enterprises may result in aggressive lending with insufficient regard to asset quality and profitability. Furthermore,The current adverse economic developments, such as increaseswhich may deepen in oilterms of length and other raw material pricesseverity, are likely to cause deterioration in the liquidity and cash flow of these enterprises and result in higher delinquency and impairment of loans. Furthermore, adverse structural changes or volatility ofmacroeconomic trends in the Won against other currencies,Korean economy may underminefurther hurt the ability of our customers in these sectorssuch enterprises to generate revenues or service their debt. In addition, many small- and medium-sized enterprises have close business relationships with the largest corporate conglomerates, known as “chaebols,” primarily as suppliers or subcontractors. Any financial or operational difficulties faced by thosechaebols, or outsourcing of the relevant part of their supply chain to overseas suppliers, would likely hurt the operating results and liquidity of the domestic small- to medium-sized enterprises, including those to which we have exposure, resulting in an impairment of their ability to repay our loans. Any significant rise in the interest rates in Korea would also impair their ability to repay our loans. A
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significant rise in the delinquency ratios among these borrowers would have a material adverse effect on our business, liquidity,financial condition and results of operation and financial condition.operation.
A decline in the value of the collateral securing our loans andor our inability to fully realize the collateral value may adversely affect our credit portfolio.
Borrowers’Most of our home and mortgage loans are secured by borrowers’ homes, other real estate, other securities and guarantees (which are principally provided by the Government and other securities securefinancial institutions), and a substantial portionsportion of our loans.corporate loans are also secured, including by real estate. As of December 31, 2007,2009, under Korean GAAP, the secured portion of Shinhan Bank’s Won-denominated loans amounted to W67,35374,564 billion, or 63.54%61.3% of suchits total loans. We cannot assure you that the collateral value may not materially decline in the future. Shinhan Bank’s general policy for home and mortgage loans is to lend up to 50%40% to 70%60% of the appraised value of collateral (except in “highly speculated” areas designated by the government where we are required to limit our lending to 40% of the appraised value of collateral) and to periodically re-appraise ourits collateral. However, downturnsin light of the sustained downturn in the real estateresidential property market in Korea, have from time to time resulted in the value of the collateral fallingmay fall below the outstanding principal balance of the underlying loans. Declines in real estate prices reduce the value of the collateral securing our mortgage and home equity loans, and such reduction in the value of collateral may result in
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our inability to cover the uncollectible portion of our secured loans. A decline in the value of the real estate or other collateral securing our loans, or our abilityinability to obtain additional collateral in the event of such declines, may result in the deterioration of our asset quality and require us to takemake additional loan loss provisions.
In Korea, foreclosure on collateral generally requires a written petition to a Korean court. Foreclosure proceedingsprocedures in Korea typicallygenerally take from seven months to one year from initiation to collection depending on the nature of the collateral, and any foreclosure applicationapplications may be subject to delays and administrative requirements, which may result in a decrease in the recovery value of such collateral. There can be no assurance that we will be able to realize the full value of collateral as a result of, among others, delays in foreclosure proceedings, defects in the perfection of collateral fraudulent transfers by borrowers and general declines in collateral value due to the oversupply of properties available in the market.value. Our failure to recover the expected value of collateral could expose us to significant losses.
We have exposureGuarantees received in connection with our real estate financing may not provide sufficient coverage.
Primarily through Shinhan Bank, we, alone or together with other financial institutions, provide financing to large corporations,real estate development projects, which are concentrated in the construction of residential and, to a lesser extent, commercial complexes. Developers in Korea commonly use project financing to acquire land and pay for related project development costs. As a market practice, lenders in project financing, including Shinhan Bank, generally receive from general contractors a performance guarantee for the completion of projects by the developers as well as a result,payment guarantee for the loans raised by a special purpose financing vehicle established by the developers in order to procure the construction orders, as the developers tend to be small and highly leveraged. While the general contractors tend to be large and well-established construction companies, given the sustained downturn in the real estate market and the construction industry in general, there is no guarantee that even such companies will have sufficient liquidity to back up their guarantees made for the benefit of the developers if the real estate development projects do not generate sufficient cash flow from pre-sales of the residential or commercial units. This is particularly the case for development projects outside the Seoul metropolitan area, which have had lower than expected levels of pre-sales. If defaults arise under our loans to real development projects and the general contractors fail to pay the guaranteed amount necessary to cover the amount of our financings, this may have a material adverse effect on our business, financial condition and results of operations.
A limited portion of our credit exposure is concentrated in a relatively small number of large corporate borrowers, and future financial difficulties experienced by them may have an adverse impact on us.
Of our 20 largest corporate exposures as of December 31, 2007, ten2009, seven were companies that are or were members of the main debtor groups identified by the Governor of the Financial Supervisory Service, which are largely comprised of chaebols.chaebols. As of such date, the total amount of our exposures to the main debtor groupgroups was W22,61022,658 billion, or 10.9%6.33% of our total exposuresexposure. As of that date, our single largest outstandingchaebolexposure amounted to corporations.W3,974 billion, or 1.1% of our total exposures. See “Item 4.4.B. Business Overview — Description of Assets and Liabilities — Loans — Loan Portfolio — Exposure to chaebols.Main Debtor Groups.” If the credit quality of our exposures to the main debtor grouplarge corporations declines, we may be required to record additional loan loss provisions in respect of loans and impairment losses in respect of securities, which would adversely affect our financial condition, results of
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operations and capital adequacy. We cannot assure you that the allowances we have established against these exposures will be sufficient to cover all future losses arising from such exposures. exposures, especially in light of the possibility of another economic downturn. Specifically, starting in April 2009, the major creditor financial institutions to large corporations with outstanding unsecured debt of W50 billion conducted credit review on 433 such corporations under the supervision of the Government as part of a campaign to promote swift restructuring in the Korean corporate sector, and on June 11, 2009, the Financial Supervisory Service reportedly announced that, after the credit review, 22 and 11 of such corporations will become subject to workouts and liquidation, respectively.
In addition, the creditor financial institutions also entered into agreements with respectnine main debtor groups, largely comprised ofchaebols, under which such groups will undertake plans to thoseimprove their financial conditions, including through sale of subsidiaries. Detailed information regarding the exposure to the foregoing corporations and main debtor groups is not publicly available. While Shinhan Bank is not the main creditor financial institution to any of these main debtor groups, Shinhan Bank is one of the creditor financial institutions and has exposure to a limited number of such corporations and main debtor groups. In particular, Shinhan Bank had significant exposure (including loans and guarantees related to project financing) to Kumho Asiana in the amount of W706 billion as of December 31, 2009. Kumho Asiana, an airline company and a flagship member of the Kumho group, recently faced liquidity difficulties as a result of a put option which Kumho Industrial Co. Ltd., also a member of the Kumho group, in a consortium with Kumho Asiana provided to certain financial investors in connection with the acquisition of Daewoo Construction in 2006. Kumho Asiana is currently negotiating the terms of the put option with the financial investors and the Kumho group is currently negotiating with the creditors, led by Korea Development Bank, as to the liquidity issues facing the Kumho group, including Kumho Asiana, including an offer to sell certain of the group’s core assets, but there is no guarantee that such negotiations will be successfully completed. If Kumho Asiana or other companies thatto which Shinhan Bank has substantial exposure are in or in the future enter into a workout, restructuring or liquidation, proceedings, weShinhan Bank may not be able to make anyfull recoveries against such companies. WeBankruptcies or financial difficulties of large corporations, includingchaebolgroups, may therefore,have the adverse ripple effect of triggering delinquencies and impairment of our loans to small- and medium-sized enterprises that supply parts or labor to such corporations. If we experience future losses with respectfrom our exposures to those exposures, whichlarge corporations, includingchaebolgroups, it may have a material adverse impact on our business, financial condition and results of operations and capital adequacy.operation. See “Item 4. Information on the Company4.B. Business Overview — Description of Assets and Liabilities — Loans — Loan Portfolio — Exposure to the Main Debtor Groups.”
A significant portion of our credit exposure is concentrated in a relatively small number of large corporate borrowers, which increases the risk of our corporate credit portfolio.
As of December 31, 2007, our loans, securities, guarantees and acceptances to our 20 largest borrowers totaled W29,373 billion, or 14.2% of our total exposures. As of that date, our single largest corporate credit exposure was to the Samsung group, to which we had outstanding credit exposure of W4,425 billion, or 2.1% of our total exposures. On a consolidated basis, our exposure to any single borrower and exposure to any single group of companies belonging to the same conglomerate is limited under Korean law to 20% and 25%, respectively, of the Net Total Equity Capital (as defined in “Item 4. Information about the Company — Supervision and Regulation”) under Korean GAAP. However, any further deterioration in the financial condition of our large corporate borrowers may require us to take substantial additional provisions and may have a material adverse impact on our results of operations and financial condition.
Any deterioration in the asset quality of our guarantees and acceptances will likely have a material adverse affecteffect on our financial condition and results of operations.
In the normal course of our banking activities, we make various commitments and incur certain contingent liabilities in the form of guarantees and acceptances. Certain guarantees issued or modified after December 31, 2002 thatwhich are not derivative contracts have been recorded on our consolidated balance sheet at their fair value at inception. Other guarantees are recorded as off-balance sheet items in the footnotes to our financial statements and those guarantees that we have confirmed to make payments on become acceptances, which are recorded on the balance sheet. As of December 31, 2007,2009, we had aggregate guarantees of W12,772 billion and aggregate acceptances of W1,70117,823 billion, for which we provided allowances for losses of W21 billion in respect322 billion. Such guarantees and acceptances include refund guarantees provided by us to shipbuilding companies, which involve guaranteeing a refund payment of the initial cash payment (typically 25% of the contract amount for ship orders) received by shipbuilders from buyers in the event that such shipbuilders are unable to deliver the ships in time or otherwise default under the shipbuilding contracts. Recently, small- and medium-sized shipbuilding companies have faced increasing financial difficulties due to the global economic downturn and the resulting slowdown in shipbuilding orders, which has increased the risk that they may default on their shipbuilding contracts and we may have to make payments under the refund guarantees. The refund guarantees provided by us to small- and medium-sized shipbuilding companies amounted to approximately W2950 billion as of December 31, 2009. If there is significant deterioration in respectthe quality of acceptances. If we experience significant asset quality deterioration with respect toassets underlying our guarantees and acceptances, there is no assurance that our allowances willmay be sufficientinsufficient to cover any
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actual losses resulting in respect of these liabilities, or that the losses we incur on the relevant guarantees and acceptances will notmay be larger than the outstanding principal amount of the underlying loans.
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The loss of deposit accounts maintained by Korean courts may adversely affect our financial position and results of operations.
Following its merger with Chohung Bank, Shinhan Bank assumed Chohung Bank’s business of providing designated depositary services to litigants engaged in legal or other proceedings in Korea. Chohung Bank had an almost exclusive market share of that business for approximately 40 years. While more than 10 banks (including Shinhan Bank) compete for these services, as of December 31, 2007, Shinhan Bank’s market share for these services was approximately 70% based on the deposit amount. Since December 2004, newly opened courts are required to select the provider of these services through a competitive bidding, and the existing courts are required to evaluate the bank that provides these services on a periodic basis and, if such bank receives low marks on the evaluation, select a different bank through competitive bidding. In light of these requirements, there can be no assurance that we will continue to maintain the dominant market share at the current level. Because court deposits are a low-cost source of funding and we had total court deposits of W5,137 billion as of December 31, 2007, respectively, which accounted for 6.6% of our total Won deposits as of such date, the loss or reduction of such business may significantly hurt our financial condition and results of operations.
Risks Relating to Our Credit Card Business
Future changes in market conditions as well as other factors may lead to an increasereduced revenues and deterioration in delinquency levels.the asset quality of credit card receivables.
In recent years, credit card and other consumer debt has increased significantly in Korea. As of December 31 2007, our2008 and 2009, Shinhan Card’s credit card assets amounted to W14,681 billion.8,600 billion, W8,578 billion and W10,941 billion, respectively, on a reported basis and W14,066 billion, W14,011 billion and W14,569 billion, on a managed basis. Our large exposure to credit card and other consumer debt means that we are exposed to changes in economic conditions affecting Korean consumers in general. Accordingly,For example, a rise in unemployment, an increase in interest rates orand other difficulties inaffecting the Korean economy that have an adverse effect onmay lead Korean consumers could resultto reduce spending (a substantial portion of which is conducted through credit card transactions), which in turn leads to reduced growth andearnings for our credit card business, as well as to higher default rates on credit card loans, deterioration in the credit quality of our credit card asset portfolio. In line with industry practice, Shinhan Card has restructuredassets and increased difficulties in recovering written-off assets from which a largesignificant portion of delinquent balances as loans. AsShinhan Card’s revenues is derived. Any of December 31, 2007, these restructured loans outstanding amounted to W350 billion. However, there is no assurance that Shinhan Card will be able to prevent significant credit quality deterioration in its asset portfolio.developments could have a material adverse effect on our business, financial condition and results of operation.
Growing market saturation in the credit card sector may adversely affect growth prospects and profitability of Shinhan Card.
Over the past severalIn recent years, substantially all commercial banks and financial institutions in Korea have focused their businesses on, and engaged in aggressive marketing campaigns in, the credit card sector. The growth, market share and profitability of Shinhan Card’sour credit card subsidiary’s operations may decline or become negative as a result of growing market saturation in this sector, intensified interest rate competition, pressure to lower the fee rates and incur higher marketing expenses, as well as governmentGovernment regulation and social and economic developments in Korea, such as changes in consumer confidence levels, spending patterns or public perception of credit card usage and consumer debt. As the credit card market further saturates with increasing maturation in terms of the number of cardholders and transaction volume, it may become difficult for Shinhan Card to attract and maintain qualified customers.
Shinhan Card’s ability to continue its asset growth in the future will depend on, among other things,others, its success in developingability to develop and marketingmarket new products and services that are attractive to its capacitycustomers, to generatesource sufficient funding aton commercially reasonable rates and in amounts sufficient to support further asset growth, its abilityterms, to develop the personnel and systemsystemic infrastructure necessary to manage its growing and increasingly diversified business operations and to more effectively handle delinquencies. In addition, external factors such as competition and Government regulation in Korea may limit Shinhan Card’s ability to maintain its growth, and economic and social developments in Korea, such as changes in consumer confidence levels or spending patterns, as well as changes in the public perception of credit card usage and consumer debt, could have an adverse impact on the growth of Shinhan Card’s credit card assets and the level of delinquency in its assets in the future, any of which could have a material adverse affect on our business, financial condition and results of operation.
Shinhan Card may not be able to increase consumer and business spending and borrowing on its card products or manage the costs of its cardholder benefits intended to stimulate such use.
Increasing consumer and corporate spending and borrowing through credit cards depends in part on Shinhan Card’s ability to develop and issue new or enhanced card and prepaid products and increase revenue from such products and services. Shinhan Card’s future earnings and profitability also depend on its ability to manage increasing delinquencies, but there is no assurance that it willattract new cardholders, reduce cardholder attrition, increase merchant coverage and capture a greater share of customers’ total credit card spending in Korea and overseas. Shinhan Card may not be able to do so atmanage and expand cardholder benefits in a sufficient level.cost-effective manner, and may experience unprofitable growth in marketing, promotion and reward expenses. If Shinhan Card is not successful in increasing consumer and business spending or in properly managing costs or cardholder benefits, its financial condition, results of operation and cash flow could be negatively affected.
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Risks Relating to Our Strategy
As a holding company, we are dependant primarily on receiving dividends from our subsidiaries in order to pay dividends on our common shares.
We are a financial holding company with minimal operating assets other than the shares of our subsidiaries. Our source of funding and cash flow is dividends from, or disposition of our interests in, our subsidiaries or our cash
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resources, most of which are currently the result of borrowings. Since our principal assets are the outstanding capital stock of our subsidiaries, our ability to pay dividends on our common shares will mainly depend on the dividend payments from our subsidiaries.
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| • | Under the Korean Commercial Code, dividends may only be paid out of distributable income, an amount which is calculated by subtracting the aggregate amount of a company’s paid-in capital and certain mandatory legal reserves from its net assets, in each case as of the end of the prior fiscal year; |
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| • | Under the Banking Act, a bank also is required to credit at least 10% of its net profit to a legal reserve each time it pays dividends on distributable income until such time when this reserve equals the amount of its total paid-in capital; and |
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| • | Under the Banking Act and the requirements promulgated by the Financial Services Commission, if a bank fails to meet its required capital adequacy ratio or otherwise subject to the management improvement measures imposed by the Financial Services Commission, then the Financial Services Commission may restrict the declaration and payment of dividend by such a bank. |
Shinhan Bank is currently considered to be “well-capitalized” under the Banking Act and the Financial Services Commission requirements. However, we cannot assure you that Shinhan Bank will continue to meet the criteria under the regulatory guidelines, in which case it may stop paying or reduce the amount of dividends paid to us.
We may fail to fully realize the anticipated benefits of the acquisition of LG Card.
We aim to capitalize over time on the combined strengths of LG Card (renamed Shinhan Card on October 1, 2007) and former Shinhan Card in terms of market share, product and service mix, customer base and cost efficiencies. We have effected the integration of the operations of these two companies by transferring all of the assets and liabilities of former Shinhan Card to LG Card on October 1, 2007. Our ability to achieve the benefits of the acquisition is subject to risks and uncertainties, including with respect to fully integrating the information technology system, risk management and other systems of the two companies, merging the currently separate labor unions of LG Card and former Shinhan Card, and otherwise harmonizing the two corporate cultures.
Other Risks Relating to Our Businesses
We may incur significant losses from our investmentinvestments and, to a lesser extent, trading activities due to market fluctuations.
We enter into and maintain large investment positions in the fixed income markets,products, primarily through our treasury and investment business.operations. We describe these activities in “Item 4. Information on the Company —4.B. Business Overview — Our Principal Activities — Treasury and Securities Investment.” We also maintain smaller trading positions, including equity and equity-linked securities and derivative financial instruments as part of our banking operations. Taking these positions entails making assessments about financial market conditions and trends. The revenues and profits we derive from many of these positions and related transactions are dependent on market prices, which are at times beyond our control. When we own assets such as debt securities, a decline in market prices, includingfor example as a result of fluctuating market interest rates, can expose us to trading and valuation losses. If market prices move in a way we have not anticipated, we may experience losses. Also,In addition, when markets are volatile characterized byand subject to rapid changes in the price direction,directions, the actual market prices may be contrary to our assessments and lead to lower than anticipated revenues or profits, or even result in losses, with respect to the related transactions and positions.
We may generate lower revenuelosses from brokerage and other commission- and fee-based business.
Market downturns are likelyWe through our investment and other subsidiaries currently provide, and seek to increase the offerings of, brokerage and other commission-and fee-based services. Downturns in stock markets typically lead to a decline in the volume of transactions that we execute for our customers and, therefore, to a decline in our non-interest revenues. In addition, because the fees that we charge for managing our clients’ portfolios are in many casesoften based on the size of the assetassets under management, a downturn in the stock market downturn that reduceswhich has the effect of reducing the value of our clients’ portfolios or increasesincreasing the amount of withdrawals would reducealso generally reduces the revenuesfees we receive from our securities brokerage, trust account management and other asset management services. Even in the absence of a market downturn, below-market performance by our securities, trust account or asset managersmanagement subsidiaries may
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result in increased withdrawals and reduced cash inflows, which would reduce the revenue we receive from these businesses. In addition, protracted market movements involving result in declines of asset prices can reduce liquidity for assets held by us and lead to material losses if we cannot close out or otherwise dispose of deteriorating positions in a timely way or at commercially reasonable prices.
Other Risks Relating to Us
Our ability to continue to pay dividends and service debt will depend on the level of profits and cash flows of our subsidiaries.
We are a financial holding company with minimal operating assets other than the shares of our subsidiaries. Our primary source of funding and cash flow is dividends from, or disposition of our interests in, our subsidiaries or our cash resources, most of which are currently the result of borrowings. Since our principal assets are the outstanding capital stock of our subsidiaries, our ability to pay dividends on our common and preferred shares and service debt will mainly depend on the dividend payments from our subsidiaries.
Companies in Korea are subject to certain legal and regulatory restrictions with respect to payment of dividends. For example, under the Korean Commercial Code, dividends may only be paid out of distributable income, which is calculated by subtracting the aggregate amount of a company’s paid-in capital and certain mandatory legal reserves from its net assets, in each case as of the end of the prior fiscal year. In addition, financial companies in Korea, including banks, credit card companies, securities companies and life insurers, such as our subsidiaries, must meet minimum capital requirements and capital adequacy ratios applicable to their respective industries before dividends can be paid. For example, under the Banking Act, a bank also is required to credit at least 10% of its net profit to a legal reserve each time it pays dividends on distributable income until such time when this reserve equals the amount of its total paid-in capital, and under the Banking Act, the Specialized Credit Financial Business Act and the regulations promulgated by the Financial Services Commission, if a bank or a credit card company fails to meet its required capital adequacy ratio or is otherwise subject to the management improvement measures imposed by the Financial Services Commission, then the Financial Services Commission may restrict the declaration and payment of dividend by such a bank or credit card company. In addition, if the capital adequacy
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ratios of us or our subsidiaries fall below the required levels, our ability to pay dividends may be restricted by the Financial Services Commission.
Damage to our reputation could harm our business.
We are one of the largest and most influential financial institutions in Korea by virtue of our financial track records, market share and the size of our operations and customer base. Our reputation is critical in maintaining our relationships with clients, investors, regulators and the general public. Our reputation can be damaged in numerous ways, including, among others, employee misconduct (including embezzlement), litigation, compliance failures, failure to properly address potential conflicts of interest, the activities of customers and counterparties over which we have limited or no control, prolonged or exacting scrutiny from regulatory authorities and customers regarding our trade practices, or uncertainty about our financial soundness and our reliability. If we are unable to prevent or properly address these concerns, we could lose our existing or prospective customers and investors, which could adversely affect our business, financial condition and results of operation.
Our risk management policies and procedures may not be fully effective at all times.
In the course of our operation,operations, we must manage a number of risks, such as credit risks, market risks and operational risks. Although we devote significant resources to developdeveloping and improveimproving our risk management policies and procedures and expect to continue to do so in the future, our risk management techniques may not be fully effective at all times in mitigating risk exposures in all market environments or against all types of risk, including risks that are unidentified or unanticipated. For example, from time to time, our and our subsidiaries’ employees have engaged in embezzlement of substantial amounts for an extended period of time before such activities were detected by our risk management systems. In response to these incidents, we have strengthened our internal control procedures by, among others, implementing a real-time monitoring system, but there is no assurance that such measures will be sufficient to prevent similar employee misconducts in the future. Management of credit, market and operational risk requires, among other things,others, policies and procedures to record properly and verify a large number of transactions and events, and we cannot assure you that these policies and procedures will prove to be fully effective at all times against all the risks we are faced with.face.
Our Internet banking services are subject to security concerns relating toLegal claims and regulatory risks arise in the commercial useconduct of the Internet.our business.
In the ordinary course of our business, we are subject to regulatory oversight and potential legal and administrative liability. We provide Internet banking servicesare also subject to a variety of other claims, disputes, legal proceedings and government investigations in Korea and other jurisdictions where we are active. These types of proceedings expose us to substantial monetary damages and legal defense costs, injunctive relief, criminal and civil penalties and the potential for regulatory restrictions on our retailbusinesses. The outcome of these matters cannot be predicted and corporate customers, which require sensitive customer information, including passwordsthey could adversely affect our future business.
In 2009, we became a defendant in individual and account information, to be transferred over a secure connection on the Internet. However, connections on the Internet, although secure, are not free from security breach. No assurance can be given that security breachcollective lawsuits in connection with the sale of foreign currency derivatives products known as “KIKOs,” which stands for “knock-in knock-out,” to certain of our Internet banking servicecustomers comprised mostly of small- and medium-sized enterprises. The KIKOs, which are intended to be hedging instruments, operate so that if the value of Korean Won increases to a certain level, then we are required to pay the purchasers a certain amount, and if the value of Korean Won falls below a certain level, then the purchasers of KIKOs are required to pay us a certain amount. As the Korean Won significantly depreciated against the U.S. dollar in the second half of 2008, purchasers of KIKOs were required under the relevant contracts to make large payments to us, and some of such purchasers have filed lawsuits to nullify their obligations. The aggregate amount of such claims as of December 31, 2009 was W21 billion, which may increase if the Korean Won depreciates against the U.S. dollar. While we have won a limited number of preliminary injunction cases at the lower court level, other cases are pending and additional cases may be filed against us. Other commercial banks facing similar claims have lost some of their preliminary injunction cases. If we lose any of these cases, the relevant court may nullify the contracts under which KIKO products were sold and order us to return payments received from the customers. On February 8, 2010, Woori Bank and Citibank won the first case on the merits in respect of KIKOs. While the facts of the cases to which Shinhan Bank is a party are similar to those of the case ruled in favor of Woori Bank and Citibank, the actual outcomes of the cases to which Shinhan Bank is a party remain uncertain. While the final outcome of such
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litigation is uncertain and we plan to rigorously defend our position, the lawsuits, especially if the courts finally rule against us, may have a material adverse effect on our business, financial condition and results of operations.
In addition, due to the recent global economic slowdown and a deteriorating Korean stock market in the second half of 2008, investment funds whose performance was tied to domestic and foreign stock market indexes experienced a sharp fall in their rates of return. Consequently, investors in these funds brought lawsuits against commercial banks in Korea that sold such investment fund products based on the allegation that such banks used defective sales practices in selling such funds, such as failing to comply with disclosure requirements or unfairly inducing them to invest in the funds. There have been cases in which the courts required the banks to compensate their customers for inadequate disclosure and unfair inducement. We cannot assure you that, despite due training, all of our employees in charge of such sales have not breached disclosure requirements, engaged in unfair inducement or committed similar acts or will not occurdo the same in the future, whichfuture. As of December 31, 2009, there were 32 cases filed against Shinhan Bank in an aggregate amount of W5.0 billion. The total amount in dispute may increase during the course of litigation and other lawsuits may be brought against us based on similar allegations. While it is difficult to predict the outcome of each lawsuit against us as it will ultimately depend on the specific facts and circumstances underlying such lawsuit, if the courts rule against us, the lawsuits may have a material adverse effect on our business, financial condition and results of operations.
We may incur significant costs in preparing for and complying with the new IFRS accounting standards, we may not be able to fully comply with such standards within the prescribed timeline, and the IFRS may significantly impact the results of our financial reporting.
In March 2007, the Government announced that all companies listed on the Korea Exchange, including us, would be required to comply with the International Financial Reporting Standards (“IFRS”) by 2011. The IFRS is the financial reporting standard adopted in more than 110 countries and has requirements that are substantially different from those under Korean GAAP or U.S. GAAP. We have established a task force team and built out a financial reporting system upgrade and other infrastructure to assist in the preparation for our IFRS compliance. Such preparation, as well as actual compliance with IFRS, may result in significant liabilitycosts for us and may have a material adverse effect on our results of operations. In addition, we may not be able to comply with the IFRS requirements within the prescribed timeline, and such non-compliance may result in regulatory sanctions and harm to our customersreputation. Furthermore, compared to our current reporting standards under Korean GAAP or U.S. GAAP, the IFRS provides for differing reporting requirements with respect to the scope of consolidation, goodwill valuation, allowance for losses, revenue recognition and third partiesdetermination of employee compensation, which may make it difficult for our shareholders and materiallyother investors to compare our reported financial results under the IFRS to our reported financial results under the existing Korean GAAP or U.S. GAAP and adversely affect our business.thereby make their investment decisions on a sufficiently informed basis.
We may experience disruptions, delays and other difficulties fromrelating to our information technology systems.
We rely on our information technology systems for our daily operations including billing, effectingsettling online and offline bankingfinancial transactions and record keeping. As part of efforts to fully integrate the operations of LG Card (acquired in March 2007 and renamed Shinhan Card in October 2007) and former Shinhan Card, we plan to integrate the information technology system of former Shinhan Card into that of LG Card by August 2008. We also planupgrade from time to upgradetime our groupwide customer data sharingdata-sharing and other customer relations management systems. We may experience disruptions, delays or other difficulties fromrelating to our information technology systems, and may not integrate ortimely upgrade our systems as currently planned.needed. Any of these developments may have an adverse effect on our business and adversely impact our customers’ confidence in us.
Risks Relating to LiquidityLaw, Regulation and Capital Management
We may need to raise additional capital, and adequate financing may not be available to us on acceptable terms, or at all.
We may seek additional capital in the near future to fund the growth of our operations, including through mergers and acquisitions, to provide financial support for our subsidiaries, including funds needed to address liquidity difficulties, to meet minimum regulatory capital adequacy ratios and to enhance our capital levels. We may not be able to obtain additional debt or equity financing, and even if available, it may not be in an amount or on terms commercially acceptable to us, impose conditions on our ability to pay dividends or grow our business,and/or impose restrictive financial covenants on us. If we are unable to obtain the funding we need, we may be unable to continue to implement our business strategy, enhance our financial products and services, take advantage of future opportunities or respond to competitive pressures, all of which may have a material adverse effect on our financial condition and results of operations.
Difficult conditions in the global credit and financial markets could adversely affect our liquidity and performance.
Beginning in the second quarter of 2007, credit markets in the United States experienced difficult conditions and volatility that in turn have affected worldwide financial markets. In particular, in late July and early August
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2007, market uncertainty in the U.S. sub-prime mortgage sector increased dramatically and further expanded to other markets such as those for leveraged finance, collateralized debt obligations and other structured products. These conditions have resulted in reduced liquidity, greater volatility, widening of credit spreads and a lack of price transparency in the United States and global credit and financial markets. Recent increases in credit spreads, as well as limitations on the availability of credit, may affect our ability to borrow, which may adversely affect our liquidity and performance. In the event that the current difficult conditions in the global credit markets continue, we may be forced to fund our operations at a higher cost or we may be unable to raise as much funding as we need to support our lending and other activities. This could cause us to curtail our business activities and could increase our cost of funding, both of which may reduce our profitability.
A considerable increase in interest rates could raise our funding costs and decrease the value of our debt securities portfolio and while reducing loan demand and the ability of our borrowers to repay loans, which, as a result, could adversely affect us.
From 2000 to 2004, interest rates in Korea declined to historically low levels as the government sought to stimulate economic growth through active rate-lowering measures. Interest rates started to rebound in the second half of 2005 and continued to rise in 2006 and 2007, although they have remained relatively flat in the first quarter of 2008. The vast majority of debt securities we hold pay interest at a fixed rate. However, all things being equal and assuming that the interest rate sensitivity gap of our assets and liabilities is narrow, a considerable increase in interest rates would lead to a decline in the value of the debt securities in our portfolio. A sustained increase in interest rates will also raise our funding costs, while reducing loan demand, especially among consumers. A considerable rise in interest rates may therefore require us to rebalance our assets and liabilities in order to minimize the risk of potential mismatches and maintain our profitability.
In addition, rising interest rate levels may adversely affect the Korean economy and the financial condition of our borrowers, including holders of our credit cards, which in turn may lead to deterioration in our credit portfolio. Since most of our loans bear interest at rates that adjust periodically based on prevailing market rates, a sustained increase in interest rate levels will increase the interest costs of our borrowers and could adversely affect their ability to make timely payments on their loans.
Our banking subsidiaries are dependent on short-term funding sources that are susceptible to the availability of alternative funding sources and market volatility, which dependence may adversely affect our operations.
Our banking subsidiaries meet most of their funding requirements through short-term funding sources, which consist primarily of customer deposits. As of December 31, 2007, approximately 52.5% of Shinhan Bank’s total deposits had current maturities of one year or less. In the past, largely due to the lack of alternative investment opportunities for individuals and households in Korea, especially in light of the low interest rate environment and volatile stock market conditions, a substantial portion of such customer deposits were rolled over upon maturity and accordingly provided a stable source of funding for our banking subsidiaries. However, due to the increasing popularity of higher-yielding investment opportunities driven by the bullish stock market in the recent past, an increasing portion of customer deposits maintained at banks have shifted to money market funds and other brokerage accounts maintained at securities companies, which resulted in temporary difficulty in finding sufficient funding for Korean banks in general, including our banking subsidiaries, in January 2008. As a result, during this time, the Korean banks, including our banking subsidiaries, met their funding needs, in part, through an increased use of call loans and other short-term loans, which carried higher interest rates than customer deposits and therefore had an adverse effect on their net interest margin. No assurance can be given that our banking subsidiaries will continue to enjoy a stable funding source in the future through rollovers of customer deposits. In addition, upon the effectiveness of the Financial Investment Services and Capital Market Act, customers that currently maintain demand deposit or savings accounts that are payable upon demand at our banking subsidiaries, which accounted for approximately 47.5% of Shinhan Bank’s total deposits as of December 31, 2007, elect to have such accounts established at securities and investment management companies. In any such event, our liquidity position could be adversely affected and our banking subsidiaries may be required to seek more expensive sources of short-term and
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long-term funding to finance their operations. See Item 5 “Liquidity and Capital Resources — Financial Condition — Liquidity.”
We and our banking subsidiaries may be required to raise additional capital to maintain our capital adequacy ratios, which we or our banking subsidiaries may not be able to do on favorable terms or at all.
Pursuant to the new capital adequacy requirements of the Financial Services Commission applicable from January 1, 2007, we, as a financial holding company, are required to maintain a minimum consolidated equity capital ratio, which is the ratio of equity capital as a percentage of risk-weighted assets on a consolidated Korean GAAP basis, of 8.0%. See “Item 4. Information on the Company — Supervision and Regulation — Principal Regulations Applicable to Financial Holding Companies — Capital Adequacy.” In addition, each of our banking subsidiaries is required to maintain a minimum Tier I capital adequacy ratio of 4.0% and a combined Tier I and Tier II capital adequacy ratio of 8.0%, on a consolidated Korean GAAP basis. In both cases, Tier II capital is included in calculating the combined Tier I and Tier II capital adequacy ratio up to 100% of Tier I capital. As of December 31, 2007, our consolidated equity capital ratio and the capital adequacy ratios of our banking subsidiaries exceeded the minimum levels required by the Financial Services Commission. However, our capital base and capital adequacy ratio or those of our subsidiaries may deteriorate in the future if our or their results of operations or financial condition deteriorates for any reason, including as a result of a deterioration in the asset quality of our loans (including credit card balances), or if we or they are not able to deploy our funding into suitably low-risk assets. If we or our subsidiaries fail to maintain our or their capital adequacy ratios in the future, Korean regulatory authorities may impose penalties ranging from a warning to suspension or revocation of our or their licenses.
If our capital adequacy ratio or those of our subsidiaries deteriorate, we or they may be required to obtain additional Tier I or Tier II capital in order to remain in compliance with the applicable capital adequacy requirements. In addition, as the financial holding company for our subsidiaries, we may be required to raise additional capital to contribute to our subsidiaries. We or our subsidiaries may not be able to obtain additional capital on favorable terms, or at all. Our ability or the ability of our subsidiaries to obtain additional capital at any time may be constrained to the extent that banks or other financial institutions in Korea or from other countries are seeking to raise capital at the same time. For a description of the capital adequacy requirements of the Financial Services Commission, see “Item 5. Liquidity and Capital Resources — Financial Condition — Capital Adequacy.” Depending on whether we or our subsidiaries are able to obtain the necessary additional capital, and the terms and amount of such capital obtained, holders of our common stock of ADSs may experience a dilution of their interest, or we may experience a dilution of our interest in our subsidiaries.
Our banking subsidiaries may face increased capital requirements under the new Basel Capital Accord.
Beginning on January 1, 2008, the Financial Supervisory Service implemented the new Basel Capital Accord, referred to as Basel II, in Korea, which has substantially affected the way risk is measured among Korean financial institutions, including our banking subsidiaries. Building upon the initial Basel Capital Accord of 1988, which focused primarily on credit risk and market risk and on capital adequacy and asset soundness as measures of risk, Basel II expands this approach to contemplate additional areas of risk such as operational risk. The implementation of Basel II may require an increase in the capital requirements of our banking subsidiaries, which may require us to either improve our asset quality or raise additional capital.
In addition, under Basel II, banks are permitted to follow either a standardized approach or an internal ratings-based approach with respect to calculating credit risk capital requirements. Shinhan Bank has voluntarily chosen to establish and follow an internal ratings-based approach, which is more risk-sensitive in assessing its credit risk capital requirements. On April 28, 2008, the Financial Supervisory Service approved Shinhan Bank’s foundation internal ratings-based approach for credit risk. Accordingly, starting June 30, 2008, Shinhan Bank plans to implement the foundation internal rating-based (“F-IRB”) method with respect to the Basel II credit risks related to loan portfolios of large companies, small and medium enterprises and retail outlets. While we believe that the implementation of Shinhan Bank’s foundation ratings-based approach will increase its capital adequacy ratio and lead to a decrease in its credit risk-related capital requirements in 2008 as compared to those under its previous approach under the initial Basel Capital Accord of 1988, there can be no assurance that such approach under
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Basel II will not require an increase in Shinhan Bank’s credit risk capital requirements in the future, which may require Shinhan Bank to either improve its asset quality or raise additional capital.
See “Item 4. Information on the Company — Risk Management — Upgrades and Integration of Risk Management” and “Item 5. Operating Results — Overview — Basel Capital Accord.”
Risks Relating to Government Regulation and Policy
We are a heavily regulated entity and operate in a legal and regulatory environment that is subject to change, which may have an adverse effect on our business, financial condition and results of operations.violations could result in penalties and other regulatory actions.
As a financial services provider, we are subject to a number of regulations that are designed to maintain the safety and soundness of Korea’s financial system, to ensure our compliance with economic and other obligations and to limit our exposure risk.risk exposure. These regulations may limit our activities, and changes in these regulations may
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increase our costs of doing business. Regulatory agencies frequently review regulations relating to our business.business and implement new regulatory measures, including increasing the minimum required provisioning levels, capital ratios or capital adequacy ratios applicable to us and our subsidiaries from time to time. We expect the regulatory environment in which we operate to continue to change. Changes to regulations applicable to us and our business or changes in their implementation or interpretation could affect us in unpredictable ways and could adversely affect our businesses,business, results of operations and financial conditions.
In addition, a breachviolations of law and regulations could expose us to potentialsignificant liabilities and sanctions. For example, If the Financial Services Commission deemsdetermines that our financial condition, including the financial conditions of our operating subsidiaries, to beis unsound, or if we or our operating subsidiaries or we fail to meet the applicable requisite capital ratio or the capital adequacy ratio, as the case may be, set forth under Korean law, the Financial Services Commission may order, among others, at the level of the holding company or that of itsthe relevant subsidiary, capital increases or reductions, stock cancellations or consolidations, transfers of business, sales of assets, closures of branch offices, mergers with other financial institutions, or suspensions of a part or all of our business operations. If any of such measures is imposed on us or on our operating subsidiaries by the Financial Services Commission as a result of poorunsound financial condition or failure to comply with minimum capital adequacy requirements or for other reasons, such measures mayit will have a material adverse effect on our business, financial condition and results of operation.
For further details on the price ofprincipal laws and regulations applicable to us as a holding company and our common sharesand/or American depositary shares.principal subsidiaries, see “Item 4.B. Business Overview — Supervision and Regulation.”
Government oversightIncreased government involvement in the economy and tighter regulation of the financial services industry in Korea in response to a financial crisis or economic downturn could impose greater restrictions on our lending business particularly regarding home equity and mortgage loans, has become stricter, which may adversely affecthurt our banking business.profitability.
DueIn response to concerns regarding the potential risksrecent global financial crisis and the ensuing economic downturn, many governments worldwide, including the Government, have played a more active role in the economy through a variety of excessive retail lending, particularly regarding home equityfiscal and mortgage lending,macroeconomic measures, including increased government spending and lowering of base interest rates. In addition, the governments at times became directly involved in providing assistance, by direct investment otherwise, to troubled financial institutions and corporations, typically in exchange for increased government monitoring and guidance of the operations of such entities. In Korea, for example, in November 2008, in response to the high volatility in foreign exchange rates, several major commercial banks, including Shinhan Bank, entered into a memorandum of understanding with the Government under which they would accept greater government monitoring of their operations if they were to receive government guarantees for foreign currency-denominated borrowings. In addition, in the first half of 2009, in response to the tightened market liquidity, several major commercial banks, including Shinhan Bank, applied for a Government-backed credit line designed to ensure greater liquidity and capital adequacy, which however would impose, upon a drawdown, greater Government scrutiny of bank operations and conditionality on the use of proceeds. Shinhan Bank did not make actual use of either program, and as the volatility in foreign exchange rates and the liquidity crisis have abated to a large extent, both programs have since been terminated. However, there can be no assurance that if the Korean or global economy were to experience another severe crisis, the commercial banks in Korea, including Shinhan Bank, will not require similar or more stringent forms of Government assistance, or that the Government would be able or willing to provide assistance to the extent required. In addition, even if available, receipt of Government assistance may result in heightened Government scrutiny and guidance of bank operations to the extent that it may have a material adverse effect on Shinhan Bank’s business, results of operations and financial condition.
Currently, as the global economy shows growing signs of recovery, many governments worldwide, including the Korean government, hashave implemented or are considering implementing “exit” strategies, including reduced government spending and an increase of base interest rates. There can be no assurance that the implementation of such strategies will have the desired effect on the economy, and depending on the timing and magnitude, such strategies may result in a prolonged or more severe economic downturn, which would have a material adverse effect on our business, results of operations and financial condition.
In light of the widely held perception that the recent years adopted more strict regulations with respectglobal liquidity crisis is at least partly attributable to retail lending by Korean banks. The Korean government has also indicated a continuing commitment to stabilize rising pricesdeficiencies in the real estate marketrisk management systems and a willingness to take necessary measures for this purpose. For example, in recent years, the Korean government:capital adequacy of financial institutions, many governments
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| • | adopted guidelines that require financial institutions to impose stricterdebt-to-income ratio limits on customers, in addition toloan-to-value ratio requirements, in connection with mortgage loans for real property located in areas of intense real property speculation or excessive investment; |
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| • | raised the property tax applicable to residential properties if such property represents the third or more residential property owned by a single individual; |
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| • | adopted a ceiling on the sale price of newly constructed residential properties and, under certain circumstances, required developers to disclose the costs incurred in connection with the construction of such properties; |
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| • | amended the Urban and Residential Environment Improvement Act to require that at least 25% of any increased floor space resulting from the redevelopment of existing residential properties be allocated to the construction of residential rental properties; |
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| • | issued recommendations that Korean banks further limit their mortgage and home equity lending; and |
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| • | undertook new measures to increase the supply of residential properties, including long-term residential lease properties. |
Theseworldwide have taken or are considering taking measures as well as any future regulationsto increase regulatory oversight in these and other areas. Examples of such measures currently being considered by the Government include proposals to further regulate capital and liquidity of financial institutions in line with the additional requirements established or being proposed to be established by the Basel Committee. There can be no assurance that the Korean government may undertake for a similar policy goal, maysuch measures will have the effect of limiting the growth and profitability of our retail banking business, especially in the area of mortgage and home equity lending. Furthermore, these measures may contribute to substantial future declines in real estate prices in Korea, which will reduce the value of the collateral securing our mortgage and home equity loans. See “—Other risks relating to our business—A decline in the value of the collateral securing our loans and our inability to realize full collateral value may adversely affect our credit portfolio.”
New loan loss provisioning guidelines implemented by the Financial Services Commission may require us to increase our provisioning levels under Korean GAAP,desired consequences or not have untended adverse consequences which could adversely affect us.
In recent years, the Financial Services Commission has implemented changes to the loan loss provisioning requirements applicable to Korean banks under Korean GAAP, which have resulted in increases tohurt our provisions and have adversely impacted our reportedbusiness, results of operationsoperation and financial condition under Korean GAAP. Until 2004, this requirement to establish allowances for possible losses in respect of confirmed acceptances and guarantees applied only to those classified as substandard or below. Commencing in the second half of 2005, this requirement was extended to cover confirmed acceptances and guarantees classified as normal or precautionary, as well as unconfirmed acceptances and guarantees and bills endorsed. These changes resulted in a significant increase in our allowance for acceptances and guarantees and other allowances under Korean GAAP, and a corresponding decrease in our income before income tax under Korean GAAP, in 2005. Furthermore, in the second half of 2006, the Financial Services Commission increased the minimum required provisioning levels applicable to loans, confirmed and unconfirmed acceptances and guarantees, bills endorsed and unused credit lines that are classified as normal and precautionary. These changes resulted in a significant increase in our allowance for loan losses, allowance for acceptances and guarantees and other allowances under Korean GAAP, and a corresponding decrease in our income before income tax under Korean GAAP, in 2006. In addition, in the second half of 2007, the Financial Services Commission increased the minimum required provisioning levels applicable to corporate loans and other credits classified as normal. For monoline credit card companies, until 2007, the requirement to establish other allowances in respect of unused credit lines applied only to the unused credit limit for cash advances on active credit card accounts, defined as those with a transaction recorded during the past year. Commencing in the first quarter of 2008, this requirement was extended to cover the unused credit limit for credit card purchases on all credit card accounts, whether active or not, and in anticipation of such extension, we have made related allowances in 2007. As a result, these changes resulted in a significant increase in other allowances under Korean GAAP, and a corresponding decrease in our income before income tax under Korean GAAP, in 2007. See “Item 4. Information on the Company — Supervision and Regulation — Principal Regulations Applicable to Banks — Capital Adequacy.”profitability.
Also, in November 2004, the Financial Services Commission announced that it will implement new loan loss provisioning guidelines by the end of 2007 under which Korean banks will take into account “expected losses” with respect to credits in establishing their allowance for loan losses, instead of establishing such allowances based on the classification of credits under the current asset classification criteria. Under the new guidelines, all Korean banks were advised to establish systems to calculate their “expected losses” based on their historical losses during 2005. The Financial Services Commission also announced that Korean banks could voluntarily comply with the new loan loss provisioning guidelines commencing in 2005. Specifically, in the second half of 2005, banks that had implemented a credible internal system for evaluating “expected losses” could establish their allowance for loan losses based on their historical losses, so long as the total allowance for loan losses established exceeded the levels required under the asset classification-based provisioning guidelines. Similarly, in the first half of 2006, banks that had implemented a credible system for evaluating “expected losses” could establish their allowance for loan losses based on such expected losses, so long as the total allowance established exceeded required levels. We complied with the new guidelines and developed a system for evaluating “expected losses” in establishing our allowance for
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loan losses. However, the Financial Services Commission has not since released any further details regarding the new guidelines, and it is unclear when such new guidelines will be implemented in the future. Full compliance with the new guidelines may increase our provisions for loan losses under Korean GAAP compared to previous levels established under the asset classification-based provisioning guidelines.
Any future required increases in our provisions for loan losses under Korean GAAP could have an adverse effect on our reported results of operations and financial condition under Korean GAAP and our reported capital adequacy ratio, which in turn may adversely affect the market price of our common stock and ADSs.
Government regulation of the credit card business has increased significantly in recent years, which may hurt our credit card operations.
Due to the rapid growth of the credit card market and rising consumer debt levels in Korea in prior years, the Korean government has heightened its regulatory oversight of the credit card industry. From mid-2002 through 2005, the Ministry of Strategy and Finance (formerly the Ministry of Finance and Economy) and the Financial Services Commission adopted a variety of amendments to existing regulations governing the credit card industry. Among other things, these amendments increased minimum required provisioning levels applicable to credit card receivables, required the reduction in volumes for certain types of credit card loans, increased minimum capital ratios and allowed the imposition of new sanctions against credit card companies that failed to meet applicable requirements. The Financial Services Commission and the Financial Supervisory Service also implemented a number of stricter rules governing, among others, the risk management systems of credit card issuers, evaluation and reporting of credit card balances and delinquency ratios, the procedures governing which persons may receive credit cards and the scope of permitted deductions for income tax purposes, the level of including securitized assets in calculation of capital adequacy. For more details relating to these regulations, see “Item 4. Information on the Company — Supervision and Regulation — Principal Regulations Applicable to the Credit Card Business.”
The Korean government may adopt further regulatory changes in the future that affect the credit card industry. Depending on their nature, such changes may adversely affect our credit card operations, by restricting its growth or scope, subjecting it to stricter requirements and potential sanctions or greater competition, constraining its profitability or otherwise.
Structural reforms in the Korean economy and its financial sector may have a substantial impact on our business, and the recently enacted financial Investment Services and Capital Market Act may intensify competition in the Korean financial industry.
From time to time, generally in response to the financial and economic crisis in Korea and elsewhere, the Korean government announces and implements a series of comprehensive policy packages to address structural weaknesses in the Korean economy and its financial sector. A recent policy announcement involves the government’s intention to privatize the government-invested banks such as Korea Development Bank and Woori Financial Holdings with a view of creating globally competitive investment banks. While details of such measures are unavailable to-date, such privatization efforts may create additional competitive pressure in the banking sector and in turn have an adverse impact on our business, financial condition and results of operations.
In addition, in order to promote integration and rationalization of the Korean capital markets and financial investment products industry, in July 2007, the National Assembly of Korea enacted the Financial Investment Services and Capital Market Act. When this new law becomes effective in February 2009, we and other banks in Korea may face greater competition in the Korean financial services market from securities companies and other non-bank financial institutions. For example, securities companies currently are not permitted to accept deposits other than for purposes of securities investment by customers and may not provide secondary services in connection with securities investments such as settlement and remittance relating to such deposits. However, under the new law, financial investment companies, which will replace the current securities companies, among others, will be able to provide such secondary services. See “Item 4. Information on the Company — Supervision and Regulation — The Financial Investment Services and Capital Market Act.” Accordingly, we and other banks in Korea may experience a loss of customer deposits (which in turn may create further need to seek alternative funding sources and an increase in our funding costs), as well as a decrease in our settlement and remittance service fee income.
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The Korean government may encourage targeted lending to and investment in certain types of borrowerssectors in furtherance of governmentpolicy initiatives, and we may take this factor into account.
The Korean governmentGovernment has encouraged and may in the future encourage lending to or investment in the securities of certain types of borrowers and other financial institutions in furtherance of government initiatives. The Korean government,Government, through its regulatory bodies such as the Financial Services Commission, has in the past announced lending policies to encourage Korean banks and financial institutions to lend to or invest in particular industries or customer segments, and, in certain cases, has provided lower cost funding through loans made by the Bank of Korea for further lending to specific customer segments, such as the small- and medium-sized enterprises.segments. While all of our loans or securities investments will beare reviewed in accordance with our credit review policies or internal investment guidelines and regulations, we, on a voluntary basis, may factor the existence of such policies and encouragements into consideration in making loans or securities investments. In addition, while the ultimate decision whether to make loans or securities investments remains with us and is made based on our internal credit approval procedures and our risk management system,systems independently of governmentGovernment policies, the Korean governmentGovernment may in the future request financial institutions in Korea, including us, to make investments in or provide other forms of financial support to particular sectors of the Korean economy as a matter of policy, which financial institutions, including us, may be required to make or may otherwise decide to accept. For example, the Government took various initiatives to support small- and medium-sized enterprises, which were disproportionately affected by the recent downturn in the Korean and global economy. As part of such initiatives, Shinhan Bank, like other commercial banks in Korea, entered into a memorandum of understanding in April 2009 with the Government under which Shinhan Bank would make efforts, among others, to provide greater liquidity into the general economy by extending a sizable volume of loans to small- to medium-sized enterprises. We may incur costs or losses as a result of providing such financial support.
The level and scope of government oversight of our lending business, particularly regarding home equity and mortgage loans, may change depending on the economic or political climate.
Curtailing excessive speculation in the real estate market has historically been a key policy initiative for the Government, and it has in the past adopted several regulatory measures, including in relation to retail banking, to effect such policy. Some of the measures undertaken in the past include requiring financial institutions to impose stricterdebt-to-income ratio andloan-to-value ratio requirements for mortgage loans for real property located in areas deemed to have engaged in high speculation, raising property tax on real estate transactions for owners of multiple residential units, adopting a ceiling on the sale price of newly constructed housing units and recommending that commercial banks restrain from making further mortgage and home equity lending, among others.
In light of the deepening slump in the housing market, the Government took or considered taking various initiatives to support the economy, such as deregulating the real estate sector and lowering tax rates. However, if the housing market shows signs of recovery, the Government may from time to time take measures to regulate the housing market in order to preempt undue speculation, including by way of imposing restrictions on retail lending, including mortgage and home equity lending. For example, in September 2009, in light of the growing concerns about the rising level of household debt in Korea, which is in large part secured by residential property, the Financial Supervisory Service announced that it will apply stricterdebt-to-income ratios for mortgage and home equity lending. Any measures by the Government that is designed to stimulate or curb growth in the real property sector may be premature, result in unintended consequences or contribute to substantial future declines in real estate prices in Korea, which will reduce the value of the collateral securing our mortgage and home equity loans. See “— Risks Relating to Our Banking Business — A decline in the value of the collateral securing our loans or our inability to fully realize the collateral value may adversely affect our credit portfolio.” Such measures may also have the effect
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of limiting the growth and profitability of our retail banking business, especially in the area of mortgage and home equity lending.
Korea’s legislation allowing class action suits related to securities transactions may expose us to additional litigation risk.
The Act concerning Protectionon Class Actions regarding Securities allows class action suits to be brought by shareholders of Fixed Termcompanies listed on the Korea Exchange, including ours, for losses incurred in connection with the purchase and sale of securities and other securities transactions arising from (i) false or Part Time Employees mayinaccurate statements provided in registration statements, prospectuses and business reports; (ii) insider trading and (iii) market manipulation. This law permits 50 or more shareholders who collectively hold 0.01% or more of the shares of a company at the time when the cause of such damages occurred to bring a class action suit against, us and our subsidiaries and its and their respective directors and officers. It is uncertain how the courts will apply this law, however, as this law has been enacted only recently and there are few precedents. Litigation can be time-consuming and expensive to resolve, and can divert valuable management time and attention from the operation of a business. We are not aware of any basis for such suit being brought against us, nor, to our knowledge, are there any such suits pending or threatened. Any such litigation brought against us could have ana material adverse effect on our operations.
On December 21, 2006, the Act concerning Protectionbusiness, financial condition and results of Fixed Term or Part Time Employees (the “Non-regular Employee Act”) was enacted and became effective on July 1, 2007. Under the Non-regular Employee Act, non-regular employees, who are hired under fixed-term employment contracts, must not be discriminated against by employers, compared to regular employees performing the same or similar duties as those of the fixed-term employees in wages and other labor conditions, without justifiable grounds. The Non-regular Employee Act also provides that, if a fixed-term employee remains employed under a fixed-term employment contract for a period exceeding two years, the fixed-term employee will be deemed to be a regular employee and the employer will not be able to terminate the employment of such fixed-term employee without justifiable grounds, even after the expiration of the fixed-term employment contract, provided that this provision shall apply only to fixed-term employees to be hired under fixed-term employment contracts to be newly entered into or renewed or extended after the effective date of the Non-regular Employee Act. As of December 31, 2007, we had a total of 16,434 regular employees and 4,699 non-regular employees who are employed on a temporary basis.operations.
Risks Relating to Korea and the Global Economy
Unfavorable financial and economic conditions in Korea and worldwideglobally may have a material adverse impact on our asset quality, liquidity and financial performance.
We are incorporated in Korea, and substantially allwhere most of our operationsassets are located in Korea.and most of our income is generated. As a result, we are subject to political, economic, legal and regulatory risks specific to Korea. Financial turmoil in Asia in the late 1990’s adversely affectedKorea, and our business, results of operation and financial condition are substantially dependent on developments relating to the Korean economy. As Korea’s economy is highly dependent on the health and direction of the global economy, and in turn Korean financial institutions. In addition, investors’investor��s reactions to developments in one country can have adverse effects on the securities price of companies in other countries, including Korea.we are also subject to the fluctuations of the global economy and financial markets. Factors that determine economic and business cycles in Korea and globally are for the most part beyond our control and inherently uncertain. In addition to discussions of recent developments regarding the global economic indicatorsand market uncertainties and the risks relating to us as provided elsewhere in the years from 2003 to 2007 have shown mixed signs of recovery and uncertainty, and future recovery or growth of the economy is subject to manythis section, factors beyond our control.
Developments that could hurt Korea’s economy in the future include, among other things:others:
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| | • | volatility in foreign currency reserve levels, commodity prices (including oil prices), exchange rates (including continued weakness of the(particularly against U.S. dollarand/or the appreciation of the Korean Won against foreign currencies)dollar), interest rates and stock markets; |
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| | • | increased reliance on exports to service foreign currency debts, which could cause friction with Korea’s trading partners; |
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| | • | adverse developments in the economies of countries to which Korea exports goods and services (such as the United States, China and Japan), or in emerging market economies in Asia or elsewhere that could result in a loss of confidence in the Korean economy; |
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| | • | the continued emergence of China, to the extent its benefits (such as increased exports to China) are outweighed by its costs (such as competition in export markets or for foreign investment and relocation of the manufacturing base from Korea to China); |
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| | • | social and labor unrest or declining consumer confidence or spending resulting from lay-offs, increasing unemployment and lower levels of income; |
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| | • | uncertainty and volatility in real estate prices arising, in part, from the Korean government’sGovernment’s policy-driven tax and other regulatory measures; |
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| | • | a decrease in tax revenues and a substantial increase in the Korean government’sGovernment’s expenditures for unemployment compensation and other social programs that together could lead to an increased governmentGovernment budget deficit; |
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| | • | political uncertainty or increasing strife among or within political parties in Korea, including as a result of the increasing polarization of the positions of the ruling progressiveconservative party and the conservativeprogressive opposition; |
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| | • | a deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including such deterioration resulting from trade disputes or disagreements in foreign policy; and |
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| | • | any other developments that has a material adverse effect in the failure by the legislative bodyglobal economy, such as an act of the United Stateswar, a terrorist act or Korea to approve the Free Trade Agreementa breakout of an epidemic such as SARS, avian flu or the failure by Korean economy to achieve the desired economic benefits from such Free Trade Agreement.swine flu. |
Deterioration in the Korean economy can also occur as a result of deterioration in the global economic conditions. Recent developments in the Middle East, including the military and political struggle in Iraq , higher oil prices and the continued weakness of the economy in parts of the world have increased the uncertainty of world economic prospects in general and continue to have an adverse effect on the Korean economy. Any future deterioration of the Korean economy could have an adverse effect on usour business, financial condition and the market priceresults of our common shares or our American depositary shares.operation.
Tensions with North Korea could have an adverse effect on us, and the price of our common stock and our American depositary shares.
Relations between Korea and North Korea have been tense over most ofthroughout Korea’s modern history. The level of tension between Korea and North Koreathe two Koreas has fluctuated and may increase or change abruptly as a result of current and future events, including ongoing contacts atevents. In recent years, there have been heightened security concerns stemming from North Korea’s nuclear weapons and long-range missile programs and uncertainty regarding North Korea’s actions and possible responses from the highest levels ofinternational community. In April 2009, after launching a long-range rocket over the governments of Korea and North Korea and increased hostility between North Korea andPacific Ocean which led to protests from the United States. In February 2005,international community, North Korea announced that it possessed nuclear weapons, and after a series of failed negotiations with five nations consisting of China, Japan, Korea, Russia andwould permanently withdraw from the United States,six-party talks that began in July 2006,2003 to discuss Pyongyang’s path to denuclearization. On May 25, 2009, North Korea conducted its second nuclear testing by launching several missile tests.short-ranged missiles. In response to such actions, the Republic decided to join the Proliferation Security Initiative, an international campaign aimed at stopping the trafficking of weapons of mass destruction, over Pyongyang’s harsh rebuke and threat of war. After the United Nations Security Council passed a resolution condemningon June 12, 2009, to condemn North Korea’s second nuclear test and impose tougher sanctions such missile tests and banning any United Nations member state from conducting transactions with North Korea in connection with material or technology related to missile development or weapons of mass destruction. In October 2006,as a mandatory ban on arms exports, North Korea announced that it had successfully conductedwould produce nuclear weapons and take “resolute military actions” against the international community. In addition, the military and political tension in the Korean peninsula may further escalate as a nuclear test.result of allegations of a covert involvement by a North Korean submarine in the sinking of a Korean navy ship in March 2010.
There recently has been increased uncertainty about the future of North Korea’s political leadership and its implications for the economic and political stability of the region. In response,June 2009, American and South Korean officials announced that Kim Jong-il, the United Nations Security Council passedNorth Korean ruler who reportedly suffered a resolutionstroke in August 2008, designated his third son, who is reportedly to be in his twenties, to become his successor. The succession plan, however, remains uncertain. In addition, North Korea’s economy faces severe challenges. For example, on November 30, 2009, the North Korean government redenominated its currency at a ratio of 100 to 1 in an attempt to control inflation and reduce income gaps. In tandem with the currency redenomination, the North Korean government banned the use or possession of foreign currency by its residents and closed down privately run markets, which prohibits any United Nations member state from conducting transactions with North Korea in connection with any large-scale armsled to severe inflation and material or technology related to missile development or weapons of mass destruction, providing luxury goods tofood shortages. Such developments may further aggravate social and political tensions within North Korea, and imposes freezingin turn the entire Korean peninsula.
There can be no assurance that the level of assetstension and an international travel ban on persons associated with North Korea’s weapons programs, and calls upon all United Nations member states to take cooperative action, including through inspection of cargo toinstability in the Korean peninsula will not escalate in the future, or from North Korea. In February 2007,that the six nations reached an accord under whichpolitical regime in North Korea would beginmay not suddenly collapse. Any further increase in tension or uncertainty relating to disable its nuclear facilitiesthe military or economic stability in return for fuel oil and aid. In August 2007, North Korea completed implementing the first phaseKorean peninsula, including a breakdown of the accord by closing down and sealing the relevant nuclear facility. In September 2007, the six nations entered into an agreement to dismantlediplomatic negotiations over the North Korean nuclear armament by the endprogram, occurrence of 2007, which North Korea failed to comply. Subsequently, in April 2008, North Korea and the United Sates agreed on procedures through which North Korea would declare its nuclear programs. Making
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such declaration is the next step toward dismantling the North Korean nuclear armament. Once the declaration is made, the United States may remove North Korea from the list of state sponsors of terrorism and end sanctions imposed under certain U.S. law. It is uncertain, however, whether North Korea would eventually declare its nuclear programs in accordance with theagreed-upon procedures, or whether the North Korean nuclear armament will eventually be dismantled. In addition, there is no guarantee that the new administration in Korea, which took office in February 2008, will continue to pursue the engagement policy of the previous administration with respect to North Korea or that high-level contacts between Korea and North Korea will continue.
We are currently not engaged in any business activities in North Korea. However, any further increase in tensions, resulting for example from a break-down in contacts, further tests of long-range nuclear missiles, coupled with continuing nuclear programs by North Korea or an outbreak in military hostilities could adversely affect our business, prospects, financial condition and resultsor heightened concerns about the stability of operations and could lead to a decline in the market value of our ADSs.
North Korea’s legislation allowing class action suits related to securities transactions may expose us to additional litigation risk.
Enacted on January 20, 2004 and effective January 1, 2005, the Act on Class Actions regarding Securities allows class action suits to be brought by shareholders of companies listed on the Korea Exchange, including ours, for losses incurred in connection with the purchase and sale of securities and other securities transactions arising from (i) false or inaccurate statements provided in registration statements, prospectuses, business reports and audit reports; (ii) insider trading and (iii) market manipulation. This law permits 50 or more shareholders who collectively hold 0.01% or more of the shares of a company at the time when the cause of such damages occurred to bring a class action suit against, among others, Shinhan Financial Group, its subsidiaries and its and their respective directors and officers. It is uncertain how the courts will apply this law, however, as this law has been enacted only recently. Litigation can be time-consuming and expensive to resolve, and can divert valuable management time and attention from the operation of a business. We are not aware of any basis for such suit being brought against us, nor, to our knowledge, are there any such suits pending or threatened. Any such litigation brought against uspolitical leadership, could have a material adverse effect on our business, financial condition and results of operations.operation and could lead to a decline in the market value of our common shares and our American depositary shares.
Labor unrest may adversely affect the Korean economy and our operations.
Any significant labor unrest in the Korean financial industry or other sectors of Korean economy could adversely affect our operations, as well as the operations of many of our customers and their ability to repay their loans, and could affect the financial conditions of Korean companies in general, and depress the prices of securities on the Korea Exchange, the value of unlisted securities and the value of the Won relative to other currencies. Such developments would likely have an adverse effect on our financial condition, results of operations and capital adequacy.
Risks Relating to Our American Depositary Shares
There are restrictions on withdrawal and deposit of common shares under the depositary facility.
Under the deposit agreement, holders of shares of our common stock may deposit those shares with the depositary bank’s custodian in Korea and obtain American depositary shares, and holders of American depositary shares may surrender American depositary shares to the depositary bank and receive shares of our common stock.
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However, under current Korean laws and regulations, the depositary bank is required to obtain our prior consent for the number of shares to be deposited in any given proposed deposit which exceeds the difference between (1) the aggregate number of shares deposited by us for the issuance of American depositary shares (including deposits in connection with the initial and all subsequent offerings of American depositary shares and stock dividends or other distributions related to these American depositary shares) and (2) the number of shares on deposit with the depositary bank at the time of such proposed deposit. We have consented to the deposit of outstanding shares of common stock as long as the number of American depositary shares outstanding at any time does not exceed
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20,216,314. As a result, if you surrender American depositary shares and withdraw shares of common stock, you may not be able to deposit the shares again to obtain American depositary shares.
The value of your investment may be reduced by future conversion of our redeemable convertible preferred shares.
As part of the financing for the LG Card acquisition, we issued to 12 entities in Korea an aggregate of 14,721,000 redeemable convertible preferred shares, which are convertible into 3.71%3.01% of our total issued common shares on a fully diluted basis. These redeemable convertible preferred shares may be converted into our common shares at any time from January 26, 2008 through January 25, 2012.
Currently, we do not know when or what percentage of our redeemable convertible preferred shares will be converted, or disposed of following the conversion. Accordingly, we cannot currently predict the impact of such conversion or disposal.
Ownership of our shares is restricted under Korean law.
Under the Financial Holding Companies Act, any single shareholder (together with certain persons in a special relationship with such shareholder) may acquire beneficial ownership of up to 10% of the total issued and outstanding shares with voting rights of a bank holding company controlling national banks such as us. In addition, any person, except for a “non-financial business group company” (as defined below), may acquire in excess of 10% of the total voting shares issued and outstanding of a financial holding company which controls a national bank, provided that a prior approval from the Financial Services Commission is obtained each time such person’s aggregate holdings exceed 10% (or 15% in the case of a financial holding company controlling regional banks only), 25% or 33% of the total voting shares issued and outstanding of such financial holding company. The Korean governmentGovernment and the Korea Deposit Insurance Corporation are exempt from this limit. Furthermore, certain non-financial business group companies (i.e., (i) any same shareholder group with aggregate net assets of all non-financial business companies belonging to such group of not less than 25% of the aggregate net assets of all members of such group; (ii) any same shareholder group with aggregate assets of all non-financial business companies belonging to such group of not less than W2 trillion; or (iii) any mutual fund in which a same shareholder group identified in (i) or (ii) above owns more than 4% of the total shares issued and outstanding of such mutual fund) may not acquire beneficial ownership in us in excess of 4% of our outstanding voting shares, provided that such non-financial business group companies may acquire beneficial ownership of up to 10% of our outstanding voting shares with the approval of the Financial Services Commission under the condition that such non-financial business group companies will not exercise voting rights in respect of such shares in excess of the 4% limit. See “Item 4. Information on the Company4.B. Business Overview — Supervision and Regulation — Principal Regulations Applicable to Financial Holding Companies — RestrictionRestrictions on Financial Holding Company Ownership.” To the extent that the total number of shares of our common stock that you and your affiliates own together exceeds these limits, you will not be entitled to exercise the voting rights for the excess shares, and the Financial Services Commission may order you to dispose of the excess shares within a period of up to six months. Failure to comply with such an order would result in a fine of up to W50 million, plus an additional charge of up to 0.03% of the book value of such shares per day until the date of disposal.
Holders of American depositary sharesour ADSs will not have preemptive rights in certain circumstances.
The Korean Commercial Code and our articles of incorporation require us, with some exceptions, to offer shareholders the right to subscribe for new shares in proportion to their existing ownership percentage whenever new shares are issued. If we offer any rights to subscribe for additional shares of our common stock or any rights of any other nature, the depositary bank, after consultation with us, may make the rights available to you or use
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reasonable efforts to dispose of the rights on your behalf and make the net proceeds available to you. The depositary bank, however, is not required to make available to you any rights to purchase any additional shares unless it deems that doing so is lawful and feasible and:
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| | • | a registration statement filed by us under the USU.S. Securities Act of 1933, as amended, is in effect with respect to those shares; or |
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| | • | the offering and sale of those shares is exempt from or is not subject to the registration requirements of the USU.S. Securities Act. |
We are under no obligation to file any registration statement with the U.S. Securities and Exchange Commission. If a registration statement is required for you to exercise preemptive rights but is not filed by us, you will not be able to exercise your preemptive rights for additional shares and you will suffer dilution of your equity interest in us.
The market value of your investment in our ADSs may fluctuate due to the volatility of the Korean securities market.
Our common stock is listed on the KRX KOSPI Division of the Korea Exchange, which has a smaller market capitalization and is more volatile than the securities markets in the United States and many European countries. The market value of ADSs may fluctuate in response to the fluctuation of the trading price of shares of our common stock on the Stock Market Division of the Korea Exchange. The Stock Market Division of the Korea Exchange has experienced substantial fluctuations in the prices and volumes of sales of listed securities and the Stock Market Division of the Korea Exchange has prescribed a fixed range in which share prices are permitted to move on a daily basis. Like other securities markets, including those in developed markets, the Korean securities market has experienced problems including market manipulation, insider trading and settlement failures. The recurrence of these or similar problems could have a material adverse effect on the market price and liquidity of the securities of Korean companies, including our common stock and ADSs, in both the domestic and the international markets.
The Korean government has the potential ability to exert substantial influence over many aspects of the private sector business community, and in the past has exerted that influence from time to time. For example, the Korean government has promoted mergers to reduce what it considers excess capacity in a particular industry and has also encouraged private companies to publicly offer their securities. Similar actions in the future could have the effect of depressing or boosting the Korean securities market, whether or not intended to do so. Accordingly, actions by the government, or the perception that such actions are taking place, may take place or has ceased, may cause sudden movements in the market prices of the securities of Korean companies in the future, which may affect the market price and liquidity of our common stock and ADSs.
Your dividend payments and the amount you may realize upon a sale of your American depositary sharesADSs will be affected by fluctuations in the exchange rate between the Dollar and the Won.
Investors who purchase the American depositary shares will be required to pay for them in U.S. dollars. Our outstanding shares are listed on the Korea Exchange and are quoted and traded in Won. Cash dividends, if any, in respect of the shares represented by the American depositary shares will be paid to the depositary bank in Won and then converted by the depositary bank into Dollars, subject to certain conditions. Accordingly, fluctuations in the exchange rate between the Won and the Dollar will affect, among other things, the amounts a registered holder or beneficial owner of the American depositary shares will receive from the depositary bank in respect of dividends, the Dollar value of the proceeds which a holder or owner would receive upon sale in Korea of the shares obtained upon surrender of American depositary shares and the secondary market price of the American depositary shares.
If the government deems that certain emergency circumstances are likely to occur, it may restrict the depositary bank from converting and remitting dividends in Dollars.
If the governmentGovernment deems that certain emergency circumstances are likely to occur, it may impose restrictions such as requiring foreign investors to obtain prior governmentGovernment approval for the acquisition of Korean securities or
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for the repatriation of interest or dividends arising from Korean securities or sales proceeds from disposition of such securities. These emergency circumstances include any or all of the following:
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| | • | sudden fluctuations in interest rates or exchange rates; |
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| | • | extreme difficulty in stabilizing the balance of payments; and |
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| | • | a substantial disturbance in the Korean financial and capital markets. |
The depositary bank may not be able to secure such prior approval from the government for the payment of dividends to foreign investors when the governmentGovernment deems that there are emergency circumstances in the Korean financial markets.
Holders of American depositary shares may be required to pay a Korean securities transaction tax upon withdrawal of underlying common shares or the transfer of American depositary shares.
Under Korean tax law, a securities transaction tax (including an agriculturalagriculture and fisheriesfishery special surtax) is imposed on transfers of shares listed on the Korea Exchange, including our common shares, at the rate of 0.3% of the sales price if traded on the Korea Exchange. According to a tax ruling issued by Korean tax authorities, securities transaction tax of 0.5% of the sales price could be imposed on the transfer of American depositary shares unless American depositary shares are listed or registered on the New York Stock Exchange, NASDAQ National Market or other foreign exchanges that may be designated by the Ministry of Strategy and Finance, and transfer of American Depositary shares takes place on such exchange.shares. In May 2007, the Seoul Administrative Court held that depositary receipts do not constitute share certificates subject to the securities transaction tax. However, the decision madeThe case was upheld by the Seoul AdministrativeHigh Court, is not necessarily final and a higher court may issue a different ruling from that ofthe Supreme Court in 2008 dismissed the tax authorities’ appeal against the Seoul AdministrativeHigh Court upon further appeal. Dependingdecision, rendering the Seoul High Court’s decision final. However, having dismissed the tax authorities’ appeal without ruling on the outcomesubstantive law, it is unclear how much precedential value the Supreme Court’s ruling will have on this subject. Even if depositary receipts, including the ADSs, constitute share certificates subject to securities transaction tax under the Securities Transaction Tax Law, capital gains from a transfer of such appeal, there may be different tax consequences of transfers of American depository shares.depositary receipts listed on the New York Stock Exchange, the NASDAQ National Market or other qualified foreign exchanges are exempt from the securities transaction tax. See “Item 10. Additional Information —10.E. Taxation — Korean Taxation.”
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Other Risks
We do not prepare interim financial information on a U.S. GAAP basis.
We, including our subsidiaries such as Shinhan Bank and Shinhan Card, are not required to and do not prepare interim financial information on a U.S. GAAP basis. U.S. GAAP differs in significant respects from Korean GAAP, particularly with respect to the establishment of provisions and loan loss allowance and determination of the scope of consolidation. See “Item 5. Operating5.B. Liquidity and Financial Review and ProspectsCapital Resources — Selected Financial Information under Korean GAAP” and “— Reconciliation with Korean Generally Accepted Accounting Principles.” As a result, provision and allowance levels reflected under Korean GAAP in our results for the three months ended March 31, 2007 and 2008 may differ significantly from comparable figures under U.S. GAAP for these and future periods.
We are generally subject to Korean corporate governance and disclosure standards, which differ in significant respects from those in other countries.
Companies in Korea, including us, are subject to corporate governance standards applicable to Korean public companies which differ in many respects from standards applicable in other countries, including the United States. As a reporting company registered with the Securities and Exchange Commission and listed on the New York Stock Exchange, we are, and in the future will be, subject to certain corporate governance standards as mandated by the Sarbanes-Oxley Act of 2002. However, foreign private issuers, including us, are exempt from certain corporate governance requirements under the Sarbanes-Oxley Act or under the rules of the New York Stock Exchange. For significant differences, see “Item 6. Directors, Senior Management and Employees —16G. Corporate Governance.” There may also be less publicly available information about Korean companies, such as us, than is regularly made available by public or non-public companies in other countries. Such differences in corporate governance standards and less public information could result in less than satisfactory corporate governance practices or disclosure to investors in certain countries.
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You may not be able to enforce a judgment of a foreign court against us.
We are corporationsa corporation with limited liability organized under the laws of Korea. Substantially all of our directors and officers and other persons named in this documentannual report reside in Korea, and all or a significant portion of the assets of our directors and officers and other persons named in this documentannual report and substantially all of our assets are located in Korea. As a result, it may not be possible for holders of the American depository shares to effect service of process within the United States, or to enforce against them or us in the United States judgments obtained in United States courts based on the civil liability provisions of the federal securities laws of the United States. There is doubt as to the enforceability in Korea, either in original actions or in actions for enforcement of judgments of United States courts, of civil liabilities predicated on the United States federal securities laws.
We may become a passive foreign investment company (“PFIC”), which could result in adverse U.S. tax consequences to U.S. investors.
Based upon the past and projected composition of our income and valuation of our assets, we do not believe that we were a PFIC for 2009, and we do not expect to be a PFIC in 2010 or to become one in the foreseeable future, although there can be no assurance in this regard. If, however, we become a PFIC, such characterization could result in adverse U.S. tax consequences to you if you are a U.S. investor. For example, if we become a PFIC, our U.S. investors will become subject to increased tax liabilities under U.S. tax laws and regulations and will become subject to burdensome reporting requirements. Our PFIC status is determined on an annual basis and depends on the composition of our income and assets. Specifically, we will be classified as a PFIC for U.S. tax purposes if either: (i) 75% or more of our gross income in a taxable year is passive income, or (ii) the average percentage of our assets by value in a taxable year which produce or are held for the production of passive income (which generally includes cash) is at least 50%. Special rules treat certain income earned by anon-U.S. corporation engaged in the active conduct of a banking business as non-passive income. We cannot assure you that we will not be a PFIC for 2010 or any future taxable year.
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| ITEM 4. | INFORMATION ON THE COMPANY |
HISTORY AND DEVELOPMENT OF SHINHAN FINANCIAL GROUP
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| ITEM 4.A. | History and Development of the Company |
Introduction
Incorporated on September 1, 2001, Shinhan Financial Group wasis the first privately-held financial holding company to be established in Korea. Since inception, we have developed and introduced a wide range of financial products and services in Korea and aimaimed to deliver a comprehensive financial solutions to clients through a convenient one-portal network. According to reports by the Financial Supervisory Services,Service, we are one of the secondthree largest financial holding companyservices providers in Korea as measured by total assets as of December 31, 20072009 and operate the third largest banking operationsbusiness (as measured by total assets as of December 31, 2007)2009) and the largest credit card business (as measured by the total credit purchase volume as of December 31, 2007)2009) in Korea.
We have experienced substantial growth through several mergers and acquisitions. Most notably, our acquisition of Chohung Bank in 2003 has enabled us to have one of the secondthree largest banking operations in Korea and enhanced our banking client base by adding Chohung Bank’s large corporate clients to our traditional client base of small- toand medium-sized enterprises. In addition, our acquisition in March 2007 of LG Card, the then and now
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largest credit card company in Korea, has significantly expanded our non-banking business capacity and helped us to achieve a balanced business portfolio, with non-banking activities accounting for 35% of our net income in 2007.portfolio.
We currently have 12 direct subsidiaries offeringsand 20 indirect subsidiaries offering a wide range of financial products and services, including commercial banking, corporate banking, private banking, credit card, asset management, brokerage and insurance services. We believe that such breadth of services will help us to meet the diversified needs of our present and potential clients. We currently serve approximately 13.516.5 million active customers, which we believe is the largest customer base through approximately 17,00017,300 employees at more thanapproximately 1,400 network branches groupwide. While substantially all of our revenues have been historically derived from Korea, we aim to serve the needs of our clients through a global network of our 3652 offices in the United States, Canada, the United
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Kingdom, Japan, the People’s Republic of China, Germany, India, Hong Kong, Vietnam, Cambodia, Kazakhstan and Singapore.
History and Organization
On September 1, 2001, we were formed as a financial holding company under the Financial Holding Companies Act, by acquiring all of the issued shares of the following companies from the former shareholders in exchange for shares of our common stock:
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| • | Shinhan Bank, a nationwide commercial bank; |
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| • | Shinhan Securities Co., Ltd., a securities brokerage company; |
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| • | Shinhan Capital Co., Ltd., a leasing company; and |
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| • | Shinhan Investment Trust Management Co., Ltd., an investment trust management company. |
Shinhan Bank and Shinhan Securities were previously listed on the Korea Stock Exchange and Shinhan Capital was previously registered with Korea Securities Dealers Association Automated Quotation, or KOSDAQ, whereas Shinhan Investment Trust Management was privately held. On September 10, 2001, we listed the common stock of our holding company on the Korea Stock Exchange See “Item 9. — The Offer and Listing — Market Price Information and Trading Market — The Korean Securities Market.”
In December 2001, we concluded an agreement with our strategic partner and our largest shareholder, the BNP Paribas Group, pursuant to which BNP Paribas purchased a 4.00% equity interest in us. In September 2003, BNP Paribas increased its equity interest in us to 4.61%. As a result of the issuance of additional shares of our common stock in connection with transactions involving our acquisition of minority shares in our subsidiaries and the additional over-the-counter acquisition by BNP Paribas of 20,124,272 shares of our common stock from Korea Deposit Insurance Corporation in April 2006, BNP Paribas is our largest shareholder with ownership of 8.50% of our total issued common shares as of December 31, 2007.
In April 2002 and July 2002, we acquired an aggregate of 62.4% equity stake in Jeju Bank, a regional bank incorporated in 1969 to engage in commercial banking and trust businesses.
During 2002, through a series of transactions, we acquired the controlling equity interest in Good Morning Securities, merged Shinhan Securities into Good Morning Securities and renamed it Good Morning Shinhan Securities Co., Ltd. We subsequently acquired the remaining interest in Good Morning Shinhan Securities and it was subsequently delisted from the Korea Exchange in January 2005.
Shinhan Credit Information Co., Ltd., which was established on July 8, 2002 as our wholly-owned subsidiary, is engaged in the business of debt collection and credit reporting.
On August 9, 2002, we signed a joint venture agreement with BNP Paribas Asset Management, the asset management arm of BNP Paribas, in respect of Shinhan Investment Trust Management. On October 24, 2002, we sold to BNP Paribas Asset Management 3,999,999 shares of Shinhan Investment Trust Management, representing 50% less one share, which was subsequently renamed Shinhan BNP Paribas Investment Trust Management Co., Ltd.
On October 1, 2002, SH&C Life Insurance Co., Ltd., a bancassurance joint venture, was established under a related joint venture agreement with Cardif S.A., the bancassurance subsidiary of BNP Paribas.
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On August 19, 2003, we acquired 80.04% of common shares of Chohung Bank, a nationwide commercial bank in Korea. We subsequently acquired the remaining interest in Chohung Bank through a series of transactions and delisted Chohung Bank from the Korea Exchange on July 2, 2004. We merged Shinhan Bank and Chohung Bank on April 3, 2006, with Chohung Bank becoming the legal surviving entity. The newly merged bank then changed its name to “Shinhan Bank.”
In December 2005, we acquired 100% of Shinhan Life Insurance, an insurance company, through a “small scale share exchange” mechanism provided under applicable Korean law.
On June 4, 2002, the credit card division of Shinhan Bank was split off and established as our wholly-owned subsidiary, Shinhan Card Co., Ltd. On April 3, 2006, the date of the merger of Shinhan Bank and Chohung Bank, we also split off Chohung Bank’s credit card business and merged it into the former Shinhan Card.
On March 23, 2007, we acquired from the creditor committee and other shareholders of LG Card the controlling equity interest in LG Card following a public tender offer. After our further acquisition of shares on July 6, 2007 following a second public tender offer and a share swap with shares of Shinhan Financial Group on September 21, 2007, LG Card became our wholly-owned subsidiary. On October 1, 2007, LG Card assumed all of the assets and liabilities of former Shinhan Card, and changed its name to Shinhan Card. On the same date, former Shinhan Card changed its name to SHC Management and currently survives under that name with no significant assets and liabilities. For more information, see “— Acquisition of LG Card.”
On December 12, 2007, the respective shareholders of Shinhan Card and Shinhan Capital approved the business transfer of corporate finance leasing operations of Shinhan Card to Shinhan Capital. The total transfer amount was approximately W6.0 billion under Korean GAAP. Following the business transfer of the corporate leasing operations completed on January 1, 2008, Shinhan Card’s leasing operation is limited to retail customers, such as auto leasing.
We also own the following subsidiaries that were subsidiaries of Chohung Bank and whose names were changed as of April 3, 2006, the date of the merger of Shinhan Bank and Chohung Bank.
SH Asset Management, previously known as Chohung Investment Trust Management Co., Ltd., was established in 1988 and engages in investment management services. In 1997, the company changed its name from Chohung Investment Management Co., Ltd. to Chohung Investment Trust Management Co., Ltd. and, on April 3, 2006, to SH Asset Management Co., Ltd. As of December 31, 2007, its capital stock amounted to W45 billion of which Shinhan Bank owned 100%.
Shinhan Asia Limited, formerly known as Chohung Finance Ltd., is engaged in various merchant banking activities in Hong Kong. As of December 31, 2007, its capital stock amounted to US$50 million, of which Shinhan Bank owns 100.0%.
Shinhan Bank America was formerly known as CHB America Bank, a wholly-owned subsidiary of Chohung Bank in the United States. On April 3, 2006, it became a wholly-owned subsidiary of Shinhan Bank in connection with the merger of Shinhan Bank and Chohung Bank. It offers full banking services to Korean residents in New York and in California. As of December 31, 2007, Shinhan Bank America’s capital stock amounted to US$43 million.
Shinhan Bank Europe GmbH, formerly known as Chohung Bank (Deutschland) GmbH was established in 1994 as a wholly-owned subsidiary of Chohung Bank in Germany. On April 3, 2006, it became a wholly-owned subsidiary of Shinhan Bank. As of December 31, 2007, its capital stock amounted to EUR15.3 million.
Shinhan Vina Bank, formerly known as Chohung Vina Bank, was established in November 2000 as a joint venture between Chohung Bank and Vietcom Bank, and engages in banking activities in Vietnam. Its capital stock as of December 31, 2007 was US$20 million, of which Shinhan Bank currently owns 50.0%.
In December 2004, we established Shinhan Private Equity Inc. as our wholly-owned subsidiary with initialpaid-in-capital of W10 billion. In August 2005, Shinhan Private Equity established a private equity fund named Shinhan NPS PEF 1st. Shinhan Private Equity owns 5.0% and other subsidiaries of Shinhan Financial Group own 31.7% of Shinhan NPS PEF 1st.
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The following represent subsidiaries that have been recently established overseas:
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| • | Shinhan Khmer Bank Limited, a wholly-owned subsidiary of Shinhan Bank, established on June 26, 2007 with apaid-in-capital of US$13 million and based in Khmer; |
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| • | Shinhan Bank Kazakhstan Limited, a wholly-owned subsidiary of Shinhan Bank, established on February 25, 2008 with apaid-in-capital of US$20 million and based in Kazakhstan; |
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| • | Shinhan Bank (China) Limited, a wholly-owned subsidiary of Shinhan Bank, established on April 30, 2008 with apaid-in-capital of RMB 2 billion and based in Beijing, the People’s Republic of China; and |
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| • | Good Morning Shinhan Securities Asia Limited, a wholly-owned subsidiary of Good Morning Shinhan Securities established on May 25, 2007, with apaid-in-capital of US$13 million and based in Hong Kong. |
On June 2, 2008, Shinhan Card established Shinhan KTF Mobile Card Co., Ltd. as a joint venture with KTF, a mobile telephone company in Korea, to promote joint marketing between its credit card operations and KTF’s mobile telephone services. The joint venture’s capital stock as of December 31, 2007 was W20 billion, of which Shinhan Card owned 50%.
On June 2, 2008, Shinhan Bank acquired a 55.9% equity interest in AITAS Co., Ltd. for W36 billion. This entity provides administration services to mutual funds and other trust investment companies. Other commercial banks and employees of AITAS own the remaining equity.
In addition, there are three special purpose entities established in 2001 and 2002 in connection with the asset backed securitization of non-performing loans of Chohung Bank, which are classified as our subsidiaries for purposes of Korean anticompetition laws.
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As of the date hereof, we have 12 direct and 16 indirect subsidiaries (not including the special purpose entities). The following diagram shows our organization structure as of the date hereof:
Notes:
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(1) | | Currently in liquidation proceedings. |
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(2) | | We and our subsidiaries currently own an additional 31.7%. |
All of our subsidiaries are incorporated in Korea, except for the following:
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| • | Shinhan Asia Limited (incorporated in Hong Kong); |
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| • | Shinhan Bank America (incorporated in the United States); |
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| • | Shinhan Bank (China) Limited (incorporated in the People’s Republic of China); |
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| • | Shinhan Bank EuropeGmbH (incorporated in Germany); |
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| • | Shinhan Bank Kazakhstan Limited (incorporated in Kazakhstan); |
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| • | Shinhan Khmer Bank Limited (incorporated in Cambodia); |
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| • | Shinhan Vina Bank (incorporated in Vietnam); |
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| • | Shinhan Finance Ltd., Hong Kong (incorporated in Hong Kong); |
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| • | Good Morning Shinhan Securities Europe Ltd. (incorporated in United Kingdom); |
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| • | Good Morning Shinhan Securities USA Inc. (incorporated in the United States); and |
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| • | Good Morning Shinhan Securities Asia Limited (incorporated in Hong Kong). |
Our legal name is Shinhan Financial Group Co., Ltd. and our commercial name is Shinhan Financial Group. Our registered office and principal executive officescorporate headquarters are located at 120, 2-Ga, Taepyung-Ro, Jung-gu,Jung-Gu, Seoul100-102, Korea. OurKorea, and our telephone number is82-2-6360-3000. Our agent in the United States, Shinhan Bank, New York branch, is located at 32nd Floor, 800 Third Avenue, New York, NY 10022, U.S.A. Our agent’s telephone number is(212) 371-8000. +822 6360 3000.
Our Strategy
SincePrior to the recent global financial crisis, we primarily focused on increasing our establishmentmarket share in the domestic financial services industry and achieving an economy of scale in our major business operations, including through acquisition of Chohung Bank and LG Card, and seeking synergy opportunities therefrom. However, in the face of the recent global financial crisis, we adopted a more conservative“back-to-basics” approach by strengthening our business fundamentals and competitive sustainability, primarily through enhanced risk management and programs designed to heighten customer retention.
We believe that the preemptive steps we undertook at the outset of the recent global financial crisis have been instrumental to our successfully overcoming the immediate challenges created by the crisis. However, significant uncertainties remain in the aftermath of the recent global financial crisis. While Korean economy has experienced a relatively speedy recovery, there is significant risk for another worldwide recession, including as a holding companyresult of the ongoing fiscal crisis in 2001 until 2007, we actively realignedselect European countries. On the regulatory front, the recent global financial crisis is likely to usher in heightened regulatory scrutiny over key operational aspects of the financial sector as well as and expanded our business lines in order to establish a leading market positionmore stringent capital adequacy and liquidity requirements. Furthermore, competition in the Korean financial industry. To this end,services sector may intensify as a result of further industry consolidation and privatization in the acquisitionbanking sector and the introduction of Chohung Bank has helped us to magnify the scale of our banking operations, while the acquisition of LG Card added a sizable non-banking business and helped us to achieve significant diversificationmobile phone payment services by leading telecommunication companies in our business lines.Korea, which services, if widely adopted, may potentially replace existing credit card services.
As the Korean financial industry is rapidly maturing,Notwithstanding these and other challenges, we believe that we currently face a new set of challenges, such as the shifting emphasis among the financial services customers from savingsmust cautiously realign our strategic priorities in order to investment with greater focus on financial products that promise higher returns at the expense of higher risks, as well as the needcapture available opportunities and strengthen our platform for a more global service platform. In recognition of these new challenges, our current objective in the medium to long term is to further enhance our competitivenesssustained future growth so that we can propel ourselves intomay attain our long-term objectives of becoming the number-one leading financial brand in Korea and a world-class financial group that ranks amongservice provider in terms of customer value creation. More specifically, our realigned strategic priorities include the leaders of the financial industry globally and in Asia. We aim to achieve such objective by implementing the following strategies:
Gain a differentiated competitive edge for each core business line. In recognition of the different set of challenges facing each of our core business lines, we intend to focus on the following objectives and initiatives:following:
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| | • | Secure the leading position in commercial banking, our primary objective is to leverage our extensive banking network to serve as our main distribution channel. Accordingly, wecore businesses. We plan to emphasize cross-selling non-banking products atincrease our market share and otherwise achieve quantitative growth in our banking network, as well as offering total financialand credit card businesses through quality customer service packages. We also intendthat is tailored to fully leveragemeet the scalevarying needs of our banking operation to enhance brand recognitiondiverse customer segments and offer customer-tailored products and services and thereby upgrade as well as expandis differentiated from that offered by our customer base. We also seek to establish a leading market position in promising new businesses by enhancing our investment banking, private banking and other fee business services, closely monitoring the latest developments in bancassurance regulation, venturing into the retirement pension market, and offering differentiated wealth management strategies and portfolios. In addition, we plan to selectively engage in globalization and other growth strategies, including through mergers and acquisitions.competitors. |
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| | • | in credit card business, our primary objective is to further consolidate our market position as the largest credit card service provider in Korea. To that end,Strengthen non-interest income generating businesses. While we seek towill continue to focus on our core, interest-income generating businesses of banking and credit card services, in order to attain a more balanced overall business portfolio we plan to strengthen our non-interest income generating businesses such as asset management, insurance and securities investment by enhancing brand awareness, economy of scale and product innovations, refining individualized marketingdevelopment and maximizing opportunities for further synergy effects, including through utilizingdistribution capabilities with respect to these businesses. We believe that this approach will help us to generate our groupwide customer relations management (“CRM”) systemsoverall revenues and leveragingearnings more consistently by reducing our capabilityinterest rate exposure and we believe that such approach is timely in light of the anticipated impending end of the low interest rate environment as part of the Government’s exit strategy, which development is likely to issue both bank cards and monoline cards.drive up funding costs in general. |
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| | • | in securities and asset management business, our primary objective is to establish a solid platform for launching a leading financial investment company inEnhance groupwide synergy with focus on the customer. In light of the impending deregulationswide range of financial services offered by our many subsidiaries, we believe a key driver to our future growth is to provide our customers with enhanced access to our diverse product offerings and greater incentives to use them through a more customer-friendly, one-portal financial service platform. To that end, we are developing a groupwide customer relationship management system tailored to the lifestyle and spending patterns of each customer, in order to facilitate the sharing of customer data and product distribution channels among our member companies and further strengthen our groupwide product recommendation systems for the securitiescross-selling and asset management businesses in Korea. We aim to develop competitive business models for, and enter into, promising businessup-selling opportunities includingsuch as wealth management, alternative investment, principal investment, emerging markets, structured products and investment advisory services.management. We also aimseek to leveragereduce cost at a groupwide level by encouraging our brand name by fostering funds of funds bearing our group name.operating subsidiaries to share a common platform for general and administrative services. |
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| | • | Gain competitiveness in strategic growth areas. We intend to seek new business opportunities by sharing management and other resources groupwide to identify and develop potential strategic growth areas. We also plan to enhance our competitiveness in the investment banking business by redefining its business strategy at the group level. To further strengthen our foundation to become a leading global financial institution, we plan to increase our presence in select Asian markets. |
In order to achieve the foregoing strategic objectives, we plan to continue to enhance our business fundamentals in the following areas:
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| • | Operational management system. We plan to optimize the use of our groupwide resources by streamlining our corporate governance and organizational structure and enhancing our operational management system, establishing of a fairer and more accurate performance-based compensation system and further encouraging collaboration among our various business units. |
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| • | Employee training. In order to attract highly qualified new recruits which are vital to sharpening our competitive edge, we plan to enhance groupwide training programs and introduce other career development programs such as the accelerated promotion of local hires in our overseas offices. |
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| • | Brand promotion and corporate culture. In order to further upgrade our brand image and foster a culture of unity among our employees and synergy across our various business units in servicing our common customers, we plan to introduce a centralized brand management system, reinforce our social responsibility initiatives and encourage greater interaction and communication among staffs of our different business units. |
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| • | Balanced risk-return management. In a continuing effort to attain a healthy and balanced risk-return profile, we will promote growth within the pre-defined risk tolerance level by further fine-tuning our risk management system, selectively seeking further business opportunities and strengthening our capital adequacy and liquidity groupwide. |
At the subsidiary level, the following outlines in greater detail our specific strategies for our core business lines:
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| • | in commercial banking,our primary objective is to strengthen our competitive position and become the leading bank in Korea through enhancing customer satisfaction, locking in the loyalty of our existing banking customers and further enlarging our customer base. To this end, we plan to fully leverage the scale of our banking operation afforded by our extensive branch network, emphasize cross-selling non-banking products at our banking network, offer total financial service packages, bolster our brand image and further upgrade our customer service infrastructure, risk management systems and other operating processes. We also intend to enter, on a selective basis, into promising new businesses by strengthening our investment banking, private banking and other fee-based businesses, making significant inroads into the retirement pension market, and offering differentiated wealth management strategies and portfolios. |
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| • | in credit card business,our primary objective is to further solidify our market leadership as the largest credit card service provider in Korea through differentiated and tailored customer service based on a strategy that emphasizes “soft” and “smart” aspects of enhancing customer loyalty, brand recognition and revenue expansion. We will also emphasize further optimizing our risk management through preemptive risk prevention, creating new synergy opportunities through collaboration with our other Shinhan affiliates and enhanced use of the groupwide customer relationship management system, and identifying and developing new potential growth areas. |
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| • | in securities and asset management business,our primary objective is to establish a solid platform for providing leading brokerage, financial advisory and asset management services in Korea in light of the recent deregulations of the securities and asset management industries in Korea. We aim to selectively develop competitive business models and capture promising business opportunities, including wealth management and investment advisory services. We have recently merged our investment advisory affiliates to promote economy of scale and solidify our brand recognition in this market. Our near-term strategic objective is to promote cross-selling, and in order to achieve this end, we have implemented strategies to |
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| | enhance our research and preemptive risk management capabilities and maximize our groupwide synergy base. |
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| • | in insurance business,our primary objective is to enhance our market position as one of the leading insurers in Korea. To that end, we aim to maximize the use of our groupwide distribution channels, particularly in banking and credit card businesses, in order to promote greater face-to-facefoster direct interaction with customers and closely monitor regulatory developments related to bancassurance liberalization.customers. We also aim to train specialists and offer differentiated products targeting the fast-growing senior citizenrycitizen population in Korea. |
Our History and Development
On September 1, 2001, we were formed as a financial holding company under the Financial Holding Companies Act, as a result of acquiring all of the issued shares of the following four entities from their former shareholders in exchange for shares of our common stock: (i) Shinhan Bank, a nationwide commercial bank listed on the Korea Exchange, (ii) Shinhan Securities Co., Ltd., a securities brokerage company listed on the Korea Exchange, (iii) Shinhan Capital Co., Ltd., a leasing company listed on the Korea Exchange Korean Securities Dealers Automated Quotations (“KRX KOSDAQ”), and (iv) Shinhan Investment Trust Management Co., Ltd., a privately held investment trust management company. On September 10, 2001, the common stock of our holding company was listed on what is currently the KRX KOSPI Market.
Since our inception, we have expanded our operations, in large part, through strategic acquisitions or formation of joint ventures. Our key acquisitions and joint venture formations are described as below:
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| | | | Principal
| | Method of
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| Date of Acquisition | | Entity | | Activities | | Establishment |
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| April 2002 | | Jeju Bank | | Regional banking | | Acquisition from Korea Deposit Insurance Corporation |
| July 2002 | | Shinhan Investment Corp.(1) | | Securities and investment | | Acquisition from the SsangYong Group |
| August 2002 | | Shinhan BNP Paribas Investment Trust
Management Co., Ltd.(2) | | Investment advisory | | 50:50 joint venture with
BNP Paribas |
| August 2003 | | Chohung Bank(3) | | Commercial banking | | Acquisition from creditors |
| December 2005 | | Shinhan Life Insurance | | Life insurance services | | Acquisition from shareholders |
| March 2007 | | LG Card(4) | | Credit card services | | Acquisition from creditors |
Notes:
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| (1) | | Renamed as well as strengthenShinhan Investment Corp. from Goodmorning Shinhan Securities Co., Ltd. effective August 2009. |
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| (2) | | In August 2002, we signed a joint venture agreement with BNP Paribas Asset Management, the asset management capabilities.arm of BNP Paribas, in respect of Shinhan Investment Trust Management. In October 2002, we sold to BNP Paribas Asset Management 3,999,999 shares of Shinhan Investment Trust Management, representing 50% less one share, which was subsequently renamed as Shinhan BNP Paribas Investment Trust Management Co., Ltd. (“Shinhan BNP Paribas Investment Trust Management”). In January 2009, SH Asset Management Co., Ltd. (“SH Asset Management”) and Shinhan BNP Paribas Investment Trust Management merged to form Shinhan BNP Paribas Asset Management Co., Ltd. (“Shinhan BNP Paribas Asset Management”). |
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| (3) | | In August 2003, we acquired 80.04% of common shares of Chohung Bank, a nationwide commercial bank in Korea. We subsequently acquired the remaining interest in Chohung Bank through a series of transactions and delisted Chohung Bank from the Korea Exchange in July 2004. We merged former Shinhan Bank and Chohung Bank in April 2006, with Chohung Bank becoming the legal surviving entity. The newly merged bank then changed its name to “Shinhan Bank.” |
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| (4) | | In June 2002, the credit card division of Shinhan Bank was split off and established as our wholly-owned subsidiary, Shinhan Card Co., Ltd. In April 2006, concurrently with the merger of former Shinhan Bank and Chohung Bank, we also split off Chohung Bank’s credit card business and merged it into the former Shinhan |
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| | Card. In March 2007, we acquired from the creditor committee and other shareholders of LG Card the controlling equity interest in LG Card following a public tender offer. After our further acquisition of shares in July 2007 following a second public tender offer and a share swap with our shares in September 2007, LG Card became our wholly-owned subsidiary. On October 1, 2007, LG Card assumed all of the assets and liabilities of former Shinhan Card, and changed its name to Shinhan Card. On the same date, former Shinhan Card changed its name to SHC Management Co., Ltd. and commenced its liquidation process on October 1, 2009. |
We list below some of the recent developments relating to our organizational structure.
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| • | In January 2009, Shinhan BNP Paribas Investment Trust Management Co., Ltd. and SH Asset Management, two our asset management subsidiaries, were merged, with Shinhan BNP Paribas Investment Trust Management Co., Ltd. Being the surviving legal entity and renamed as Shinhan BNP Paribas Asset Management Co., Ltd. Shinhan BNP Paribas Investment Trust Management was a 50:50 joint venture with BNP Paribas S.A., and SH Asset Management was our wholly-owned subsidiary. Following the merger, we and BNP Paribas own 65% and 35% equity interest in Shinhan BNP Paribas Asset Management, respectively. |
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| • | In June 2009, we sold 3,290,002 common shares, or approximately 35%, of Cardif Life Insurance Company (formerly SH&C Life Insurance Co., Ltd.), a 50:50 joint venture with BNP Paribas Assurance (formerly known as Cardif S.A.), to BNP Paribas Assurance for W23 billion. Following this transaction, BNP Paribas Assurance owns approximately 85% equity interest in Cardif Life Insurance Company. In consideration of our extensive business partnership with BNP Paribas and Shinhan Bank’s role in selling the bancassurance products, we transferred a 15% equity interest in Cardif Life Insurance Company to Shinhan Bank for W7.26 billion. Following this transaction, Cardif Life Insurance Company is no longer our subsidiary. |
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| • | In September 2009, Shinhan Bank established Shinhan Bank Japan as its wholly-owned subsidiary to provide banking services in Japan, which were formerly provided at a branch level. |
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| • | In October 2009, Shinhan Bank established Shinhan Vietnam Bank as its wholly-owned subsidiary to provide banking services in Vietnam, which were formerly provided at a branch level. |
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| • | In December, 2009, Shinhan Capital made a capital contribution of W10 billion to form Petra PEF, a private equity fund specializing in equity investments, in which Shinhan Capital holds a 23.8% equity interest. |
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| • | In January 2010, Shinhan Data System, an information technology service provider which was formerly a subsidiary of Shinhan Bank, became a direct subsidiary of Shinhan Financial Group in order to expand our insurance business, we may also selectively engageintegrate and promote efficiency in mergers and acquisitions based on our further assessment for such needs.information technology operations at the groupwide level. |
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| • | On June 4, 2010, CHB Valuemeet 2001 First SPC, a special purpose company wholly owned by Shinhan Bank, was disaffiliated from Shinhan Financial Group. CHB Valuemeet 2001 First SPC was established by Shinhan Bank to securitize its impaired loan assets. |
Rights Offering
On February 2, 2009, our board of directors decided to issue 78,000,000 new common shares, or approximately 19.7% of our then outstanding common shares, to our existing shareholders in order to, among others, enhance our capital position to prepare for potential contingencies that might result from the prevailing economic environment, notwithstanding that we and our subsidiaries had fully satisfied (as also is the case now) the capital adequacy ratios required under applicable laws and regulations and were not (as also is the case now) facing any significant liquidity constraints or financial distress. The subscription price per share was determined as W16,800 based on a pricing formula prescribed by the rules of the Financial Services Commission. On March 19, 2009, the offering was completed with substantially all of the rights shares subscribed by our existing shareholders, and following settlement on March 24, 2009, the newly issued shares were listed on the Korea Exchange on March 30, 2009. The aggregate proceeds from the rights offering was approximately W1,310,400,000,000 (prior to adjustments for underwriting commissions and other offering expenses). The rights offering resulted in a capital increase by approximately 16.4%. The proceeds from the rights offering were used to support our existing business operations and other general corporate purposes.
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| ITEM 4.B. | Business Overview |
Maximize synergy generation to presentUnless otherwise specifically mentioned, the following business overview is presented on a seamless one-portalconsolidated basis under U.S. GAAP.
Our Principal Activities
We provide comprehensive financial services, platform.principally consisting of the following:
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| • | commercial banking services, consisting of: |
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| • | retail banking services; |
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| • | corporate banking services, primarily consisting of: |
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| | small- and medium-sized enterprises banking; and |
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| | large corporate banking; |
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| • | treasury and securities investment; |
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| • | other banking services, including trust account management services provided by Shinhan Bank; |
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| • | credit card services; |
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| • | securities brokerage services; |
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| • | insurance services, primarily consisting of: |
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| • | life insurance services; and |
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| • | bancassurance; |
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| • | asset management services, including brokerage and trading of various securities, related margin lending and deposit and trust services, and other asset management services; and |
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| • | other services, including leasing and equipment financing, investment trust management, regional banking, investment banking advisory and loan collection and credit reporting. |
In addition to the above-mentioned business activities, we have a corporate center at the holding company level whose primary function is to support the cross-divisional management of our organization.
Our principal business activities are not subject to any material seasonal trends. While we have a number of overseas branches and subsidiaries, substantially all of our assets are located, and substantially all of our revenues are generated, in Korea.
Deposit-Taking Activities
Principally through Shinhan Bank, we offer many deposit products that target different customer segments with features tailored to each segment’s financial and other profile. Our deposit products consist principally of the following:
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| • | Demand deposits. Demand deposits do not accrue interest or accrue interest at a lower rate than time or savings deposits and allow the customer to deposit and withdraw funds at any time. If interest-bearing, demand deposits have interest accruing at a fixed or variable rate depending on the period and the amount of deposit. Demand deposits constituted approximately 7.8% and 7.3% of our total deposits as of December 31, 2008 and 2009, respectively. Our demand deposits paid average interest of 0.78% and 0.45% in 2008 and 2009, respectively. |
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| • | Savings deposits. Savings deposits allow the customer to deposit and withdraw funds at any time and accrue interest at an adjustable interest rate, which is typically lower than the rate applicable to time or installment deposits. In 2009, the interest rate on savings deposits ranged from zero to 3.31%. Saving deposits constituted approximately 25.6% of our total deposits as of December 31, 2008 and paid average |
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| | interest of 2.32% in 2008, and approximately 26.1% of our total deposits as of December 31, 2009 and paid average interest of 1.22% in 2009. |
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| • | Certificates of deposit. Certificates of deposit typically have maturities from 30 days to five years. Interest rates on certificates of deposit are determined based on the length of the deposit and prevailing market interest rates. Certificates of deposit are sold at a discount to their face value, reflecting the interest payable on the certificates of deposit. Certificates of deposit constituted approximately 11.3% and 5.4% of our total deposits as of December 31, 2008 and 2009, respectively. Our certificates of deposit paid average interest of 5.94% and 5.48% in 2008 and 2009, respectively. |
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| • | Other time deposits. Other time deposits generally require the customer to maintain a deposit for a fixed term during which the deposit accrues interest at a fixed rate or a variable rate based on certain financial indexes, including the Korea Composite Stock Price Index (KOSPI). If the deposit is withdrawn prior to the end of the fixed term, the customer is paid a lower interest rate than that originally offered. The term typically ranges from one month to five years. Other time deposits constituted approximately 55.1% and 61.1% of our total deposits as of December 31, 2008 and 2009, respectively, and paid average interest of 4.94% and 3.91% in 2008 and 2009, respectively. |
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| • | Mutual installment deposits. Mutual installment deposits generally require the customer to make periodic deposits of a fixed amount over a fixed term (usually six months to five years) during which the deposit accrues interest at a fixed rate. If the deposit is withdrawn prior to the end of the fixed term, the customers are paid a lower interest rate than that originally offered. Mutual installment deposits constituted approximately 0.2% and 0.1% of our total deposits as of December 31, 2008 and 2009, respectively, and paid average interest of 3.78% and 3.70% in 2008 and 2009, respectively. |
We also offer deposits which provide the customer with preferential rights to housing subscriptions under the Housing Construction Promotion Law, and eligibility for mortgage loans. These products include:
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| • | Housing subscription time deposits. These deposit products are special purpose time deposits providing the customer with a preferential right to subscribe for new private apartment units under the Housing Construction Promotion Law. This law provides various measures supporting the purchase of houses and the supply of such houses by construction companies. Under this law, if a potential home-buyer subscribes for these deposit products and holds them for a certain period of time set forth in the Housing Construction Promotion Law, such customer obtains the right to subscribe for new private apartment units on a priority basis. Such preferential rights are neither transferable nor marketable in the open market. These products accrue interest at a fixed rate for one year and at an adjustable rate after one year, which are consistent with other time deposits. Required deposit amounts per account range from W2 million to W15 million depending on the size and location of the dwelling unit. These deposit products target high- and middle-income households as customers. |
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| • | Housing subscription installment savings deposits. These deposit products are monthly installment savings products providing the customer with a preferential subscription right for new private apartment units under the Housing Construction Promotion Law. Such preferential rights are neither transferable nor marketable in the open market. These deposits require monthly installments of W50,000 to W500,000, have maturities between three and five years and accrue interest at fixed rates depending on the term, which are consistent with other installment savings deposits. These deposit products target low- and middle -income households as customers. For information on our deposits in Korean Won based on the principal types of deposit products we offer, see “— Description of Assets and Liabilities — Funding — Deposits.” |
We offer a range of interest rates on our deposit products depending on the rate of return on our interest-earning assets, average funding costs and interest rates offered by other major commercial banks.
We also offer court deposit services for litigants in Korean courts, which involve providing effectively an escrow service for litigants involved in certain types of legal or other proceedings. Chohung Bank historically was a dominant provider of such services since 1958, and following the acquisition of Chohung Bank, we continue to hold a dominant market share in these services. Such deposits typically carry interest rates lower than the market rates
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(by approximately 1% per annum) and amounted to W5,167 billion, W5,100 billion and W5,706 billion as of December 31, 2007, 2008 and 2009, respectively.
The Monetary Policy Committee of the Bank of Korea imposes a reserve requirement on Won currency deposits of commercial banks which ranges from 0% to 7%, based generally on the term to maturity and the type of deposit instrument. See “— Supervision and Regulation — Principal Regulations Applicable to Banks — Liquidity.”
The Depositor Protection Act provides for a deposit insurance system where the Korea Deposit Insurance Corporation guarantees to depositors the repayment of their eligible bank deposits. The deposit insurance system insures up to a total of W50 million per depositor per bank. See “— Supervision and Regulation — Principal Regulations Applicable to Banks — Deposit Insurance System.”
Retail Banking Services
Overview
We provide retail banking services primarily through Shinhan Bank, and, to a significantly lesser extent, through Jeju Bank, a regional commercial bank. The retail loans, excluding credit card receivables, amounted to W63,329 billion as of December 31, 2009.
Retail banking services include mortgage and retail lending as well as demand, savings and fixed deposit-taking, checking account services, electronic banking and ATM services, bill paying services, payroll and check-cashing services, currency exchange and wire fund transfer. We believe that enhancingproviding modern and efficient retail banking services is important to maintaining our public profile and as a one-portal channelsource of fee-based income. We believe that our retail banking services and products will become increasingly important in the coming years as the domestic banking sector further develops and becomes more complex.
Retail banking has been and will continue to remain one of our core businesses. Our strategy in retail banking is to provide prompt and comprehensive services to retail customers through increased automation and improved customer service, as well as a streamlined branch network. The retail segment places an emphasis on targeting high net worth individuals.
Retail Lending Activities
We offer various retail loan products, consisting principally of household loans, which target different segments of the population with features tailored to each segment’s financial profile and other characteristics, including each customer’s profession, age, loan purpose, collateral requirements and the duration of the customer’s relationship with Shinhan Bank. Household loans consist principally of the following:
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| • | Mortgage and home equity loans,which are mostly comprised of mortgage loans that are used to finance home purchases and are generally secured by the home being purchased; and |
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| • | Other retail loans,which are loans made to customers for any purpose other than mortgage and home equity loans and the terms of which vary based primarily upon the characteristics of the borrower and which are either unsecured or secured, or guaranteed by deposits or a third party. |
As of December 31, 2009, our mortgage and home-equity loans and other retail loans accounted for 63.2% and 36.8%, respectively, of our retail loans (excluding credit card loans).
For secured loans, including mortgage and home equity loans, our policy is to lend up to 40% to 60% of the appraisal value of the collateral, after taking into account the value of any lien or other security interest (other than petty claims) that is prior to our security interest. As of December 31, 2009, theloan-to-value ratio of mortgage and home equity loans, under Korean GAAP, of Shinhan Bank was approximately 13.546.3%. As of December 31, 2009, substantially all of our mortgage and home equity loans were secured by residential property.
Due to the rapid increase in mortgage and home equity loans in Korea, in 2005 and 2006, the Financial Services Commission implemented stringent regulations and guidelines that are designed to suppress the increase of loans secured by housing. These regulations include restrictions on banks’ maximumloan-to-value ratios,
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evaluation of the borrower’sdebt-to-income ratio, guidelines with respect to appraisal of collateral, internal control and credit approval policy requirements with regard to housing loans as well as provisions designed to discourage commercial banks or other financial institutions from instituting incentive-based marketing and promotion of housing loans. In addition to the existing regulations and guidelines, from the second half of 2005 to the first quarter of 2007, the Financial Services Commission implemented additional guidelines to reduce mortgage and home equity loans and stabilize the real estate market, including (i) restricting the number of extensions on loans secured by the borrower’s apartment to one, (ii) reducing the maximumloan-to-value ratio for loans secured by the borrower’s apartment in highly speculated areas, (iii) forbidding to extend mortgage or home equity loans to minors and (iv) lowering the minimumloan-to-value ratio to 40% in respect of loans by banks and insurance companies for the purpose of assisting the purchase of apartments located in highly speculated areas with a purchase price of less than W600 million. Following the onset of the new administration of President Lee Myung Bak, whose campaign platform included promises of market-oriented deregulation, and in response to the ongoing recession in the housing market, the Government has rolled back some of the restrictive regulatory initiatives, including raising theloan-to-value ratio to 60% except in three designated highly speculative areas. However, in the second half of 2009 amid concerns about the rising level of household debt, of which a substantial majority is secured by residential properties, the Government has expanded the application of the restrictivedebt-to-income ratio and theloan-to-value ratio to all metropolitan areas.
The following table sets forth the portfolio of our retail loans.
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| | | As of December 31, | |
| | | 2007 | | | 2008 | | | 2009 | |
| | | (In billions of Won, except percentages) | |
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| Retail loans(1) | | | | | | | | | | | | |
| Mortgage and home-equity(2) | | W | 31,495 | | | W | 36,183 | | | W | 40,022 | |
| Other consumer(2) | | | 25,475 | | | | 25,026 | | | | 23,307 | |
| Percentage of retail loans to total gross loans | | | 37.5 | % | | | 35.9 | % | | | 37.4 | % |
Notes:
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| (1) | | Before allowance for loan losses and excludes credit card accounts. |
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| (2) | | In Korea, construction companies typically require buyers of new homes (including apartment units) to make installment payments of the purchase price well in advance of the title transfer. Commercial banks, including Shinhan Bank, provide advance loans, on an unsecured basis for the time being, to retail borrowers where the use of proceeds is restricted to financing of home purchases. A significant portion of these loans are guaranteed by third parties, which may include the construction company receiving the installment payment, until construction of the home is completed. Once construction is completed and the titles to the homes are transferred to the borrowers, which may take several years, these loans become secured by the new homes purchased by these borrowers. In recognition of the unsecured nature of such loans, we classify such loans as other consumer loans. |
Pricing
The interest rates on retail loans made by Shinhan Bank are either floating rates (which are periodically reset based on a base rate determined for three-month, six-month or twelve-month periods derived using an internal transfer price system, which reflects the cost of funding in the market, expenses related to lending and the profit margin) or fixed rates that reflect the cost of funding, expenses related to lending and the profit margin. Fixed rate loans currently have maturities of three years or less and offered only on a limited basis. For unsecured loans, we incorporate into the offered rates a margin based on, among other things, the borrower’s credit score as determined during our loan approval process. For secured loans, the credit limit is based on the type of collateral, priority with respect to the collateral and the loan to value ratio. We can adjust the pricing of these loans to reflect the borrower’s currentand/or expected future contribution to our profitability. The applicable interest rate is determined at the time a loan is extended. If a loan is terminated prior to its maturity, the borrower is obligated to pay us an early termination fee of approximately 0.5% to 2.0% of the loan amount in addition to the accrued interest, depending on the timing, the nature of the credit and the amount.
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As of December 31, 2009, Shinhan Bank’s three-month, six-month and twelve-month base rates were approximately 2.85%, 3.49% and 4.05%, respectively. As of December 31, 2009, Shinhan Bank’s fixed rates for mortgage and home equity loans with a maturity of one year, two years and three years were 6.60%, 7.10% and 7.20%, respectively, and Shinhan Bank’s fixed rates for other retail loans with a maturity of one year were from 9.00% to 13.50%, depending on the retail credit scores of its customers.
As of December 31, 2009, approximately 85.9% of Shinhan Bank’s total retail loans were priced based on floating rates and approximately 14.1% were priced based on fixed rates. As of the same date, approximately 96.9% of Shinhan Bank’s retail loans with maturity of more than one year were priced based on floating rates and approximately 3.1% were priced based on fixed rates.
Prior to February 2010, major commercial banks in Korea, including Shinhan Bank, principally used the certificate of deposit, or CD, rates set by Bank of Korea, in determining the base rate for secured housing loans, which represent the bulk of retail loans. However, amid concerns that the CD rates do not accurately represent the banks’ cost of capital as certificates of deposit constitute relatively a minor fraction of the banks’ assets and in light of the substantial variance in recent periods between the CD rates and the actual market rates, in February 2010 the Korean Federation of Banks began to publish the “cost of funding index”, or COFIX, which is computed based on the weighted average interest of select funding products (including time deposits, housing and other installment savings deposits, repos, discounted bills and senior non-convertible financial debentures) of nine major Korean banks (comprised of Kookmin Bank, Shinhan Bank, Woori Bank, Hana Bank, Korea Exchange Bank, NH Bank, Industrial Bank of Korea, Citibank Korea and Standard Chartered Korea First Bank). Each bank can then independently determine the interest rate applicable to the end customer by adding a spread to the COFIX based on the difference between the COFIX and such bank’s general funding costs, administration fees, the customer’s credit score, the maturity of the loan and other customer-specific premiums and discounts based on the customer relationship with such bank. In the case of floating rate notes, the end-user interest rates are adjusted on every three months, six months and 12 months, depending on the reset period of the base rate.
Private Banking
Historically, we have focused on customers with high net worth. Our retail banking services include providing private banking services to high net worth customers who seek personal advice in complex financial matters. Our aim in private banking is to help enhance wealth accumulation by, and increase the financial sophistication of, our high net-worth clients by offering them portfolio and fund management, tax consulting and real estate management services, among others.
As of December 31, 2009, Shinhan Bank operated 19 private banking centers nationwide, including 15 in the greater Seoul metropolitan area, which serviced approximately 4,000 private banking customers. Our private banking customers are typically required to have W500 million active customers groupwide,in deposit with us to qualify for private banking services.
Corporate Banking Services
Overview
We provide corporate banking services, primarily through Shinhan Bank, to small- and medium-sized enterprises, including enterprises known as “small office, home office” (“SOHO”), which are small enterprises operated by individuals or households, and, to a lesser extent, to large corporations, including corporations that are affiliated withchaebols. We also lend to government-controlled enterprises.
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The following table sets forth the balances and percentage of our total lending attributable to each category of our corporate lending business as of the dates indicated.
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| | | As of December 31, | |
| | | 2007 | | | 2008 | | | 2009 | |
| | | (In billions of Won, except percentages) | |
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| Small- and medium-sized enterprises loans(1) | | W | 62,296 | | | | 41.0 | % | | W | 71,212 | | | | 41.8 | % | | W | 69,571 | | | | 41.1 | % |
| Large corporate loans(2) | | | 17,871 | | | | 11.8 | % | | | 23,483 | | | | 13.7 | % | | | 21,238 | | | | 12.5 | % |
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| Total corporate loans | | W | 80,167 | | | | 52.8 | % | | W | 94,695 | | | | 55.5 | % | | W | 90,809 | | | | 53.6 | % |
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Notes:
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| (1) | | Represents the principal amount of loans extended to corporations meeting the definition of small- and medium-sized enterprises under the Basic Act on Small- and Medium-sized Enterprises and its Presidential Decree. |
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| (2) | | Includes loans to government-controlled companies. |
Small- and Medium-sized Enterprises Banking
Under the Basic Act on Small- and Medium-sized Enterprises and its Presidential Decree, small- and medium-sized enterprises are defined as companies which (i) do not have employees, sales, paid-in capital or assets exceeding the number or the amount, as the case may be, specified in the Presidential Decree in accordance with their types of businesses and (ii) do not belong to a conglomerate as defined in the Monopoly Regulations and Fair Trade Act. In order to qualify as a small- and medium-sized enterprise, none of its shareholders holding 30% or more of its total issued and outstanding voting shares can have (i) full-time employees of 1,000 or more and (ii) assets of W500 billion or more as of the end of the immediately preceding fiscal year. As of December 31, 2009, we made loans to 186,003 small- and medium-sized enterprises for an aggregate amount W69,571 billion.
Our small- and medium-sized enterprises banking business has traditionally been and is expected to remain one of our core businesses, subject to prevailing market conditions. For example, as a result of the adoption of restrictive regulatory measures in 2005 to 2007 designed to curb speculation in the housing market, lending to the small- and medium-sized enterprises was an area of intense competition among the commercial banks in Korea as opportunities to expand home and mortgage loans diminished. However, since the onset of the global financial crisis and economic downturns in Korea starting in the second half of 2008, we have sharply reduced new lending to the small- and medium-sized enterprises and are currently focusing on maintaining the asset quality of existing loans to these enterprises. Depending on the level and scope of economic recovery, we may seek to focus on asset growth on a selective basis.
We believe that Shinhan Bank, which has traditionally focused on small- and medium-sized enterprises lending, is well-positioned to succeed in the small- and medium-sized enterprises market in light of its marketing capabilities (which we believe is the largest customer base amonghave provided Shinhan Bank with significant brand loyalty) and its prudent risk management practices, including conservative credit rating system for credit approval. To maintain or increase its market share of small- and medium-sized enterprises lending, Shinhan Bank:
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| • | has positioned itself based on accumulated expertise. We believe Shinhan Bank has a good understanding of the credit risks embedded in this market segment and to develop loan and other products specifically tailored to the needs of this market segment; |
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| • | operates a relationship management system to provide targeted and tailored customer service to small-and medium-sized enterprises. Shinhan Bank currently has relationship management teams in 142 corporate banking branches, of which 38 are corporate banking branches and 104 are hybrid banking branches designed to serve retail as well as small-business corporate customers. These relationship management teams market products and review and approve smaller loans that pose less credit risks; and |
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| • | continues to focus on cross-selling loan products with other products. For example, when Shinhan Bank lends to small- and medium-sized enterprises, it also explores opportunities to cross-sell retail loans or deposit products to the employees of those companies or to provide financial advisory services. |
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Large Corporate Banking
Large corporate customers consist primarily of member companies ofchaebolsand financial institutionsinstitutions. Our large corporate loans amounted to W21,238 billion as of December 31, 2009.
Shinhan Bank aims to be a one-stop financial solution provider and partner with its corporate clients in Korea, is a critical element to ourtheir corporate expansion and growth as an integrated financial services provider.endeavors. To this end and in order to leveragetake advantage of the potential synergy among our various business lines, we plan to enhance our groupwide integrated CRM system, which would facilitate the sharing of customer data and product distribution channels among our member companies and further strengthen our groupwide product recommendation systems for cross-selling and up-selling our various financial products and services. Other plans include enhancing and upgrading our existing resources available groupwide, such as our call centers and telemarketing networks, public relations teams, internet banking systems and integrated reward programs.
Take a strong initiativerecent deregulation in the investment banking business. In lightKorean financial industry as a result of the adoption of the Financial Investment Services and Capital MarketMarkets Act, which will take effect on February 4, 2009, which aims, among others, to promote theShinhan Bank provides investment banking services, including real estate financing, overseas real estate project financing, large development project financing, infrastructure financing, structured financing, equity investments/venture investments, mergers and acquisitions financing, ship and aircraft financing, corporate finance and asset securitization. Shinhan Bank, through Shinhan Asia Limited, a subsidiary in Hong Kong, also arranges financing for, and offer consulting services to, Korean companies expanding their business among domestic financial institutionsoverseas, particularly in Korea, we aim to develop a leading investment banking business based on our brand power, substantial investment in human resources and equity capital, and systematic risk management. We also seek to enhance the market recognition of our asset management business and strengthen our private equity and alternative investment business divisions in conjunction with the debt financing division of Shinhan Bank.Asia.
Build momentumElectronic Corporate Banking
Shinhan Bank offers to corporate customers a web-based total cash management service through “Shinhan Bizbank.” Shinhan Bizbank supports all types of banking transactions from basic transaction history inquiries and fund transfers to opening letters of credit, trade finance, payment management, collection management, sales settlement service, acquisition settlement service, B2B settlement service, sweeping and pooling.
Corporate Lending Activities
Our principal corporate loan products are working capital loans and facilities loans. Working capital loans, which include discounted notes and trade financing, are generally loans used for general working capital purposes. Facilities loans are provided to finance the purchase of equipment and construction of manufacturing plants. As of December 31, 2009, working capital loans and facilities loans amounted to W45,960 billion and W14,754 billion, respectively, representing 75.7% and 24.3% of Shinhan Bank’s total Won-denominated corporate loans under Korean GAAP. Working capital loans generally have a successful global business. In lightmaturity of one year, but may be extended on an annual basis for an aggregate term of three years in the case of unsecured loans and five years in the case of secured loans. Facilities loans, which are generally secured, have a maximum maturity of ten years.
Corporate loans may be unsecured or secured by real estate, deposits or guaranty certificates. As of December 31, 2009, under Korean GAAP, secured loans and guaranteed loans (including loans secured by guaranty certificates issued by credit guarantee insurance funds) accounted for 44.8% and 10.2%, respectively, of Shinhan Bank’s Won-denominated loans to small- and medium-sized enterprises. Among total corporate loans, approximately 40% were secured by real estate.
When evaluating the extension of loans to corporate customers, Shinhan Bank reviews their creditworthiness, credit scoring, value of any collateral or third party guarantee. The value of collateral is defined using a formula that takes into account the appraised value of the increasingly globalized naturecollateral, any prior liens or other claims against the collateral and an adjustment factor based on a number of considerations including the businessaverage value of our customersany nearby property sold in a court-supervised auction during the previous year. Shinhan Bank revalues any collateral when a secured loan is renewed or if a trigger event occurs with respect to the underlying loan.
Pricing
Shinhan Bank prices its corporate loan products based principally on the cost of funding and in order to exploit potential business opportunities in emerging markets around the world, we plan to strengthen our groundworkexpected loss rate based on the borrower’s credit risk. As of December 31, 2009, 80.2% of Shinhan Bank’s corporate loans with outstanding maturities of one year or more had variable interest rates.
Shinhan Bank determines the interest rate charged for becomingits corporate loans as the sum of (i) Shinhan Bank’s periodic market floating rate or reference rate, (ii) transaction cost, (iii) credit spread and (iv) risk premium, as adjusted by (v) a global financial institution in the future. As part of such effort, we have recently made equity investments in several financial institutions in emerging markets and are actively pursuing fee-based transactions through our investment banking center in Hong Kong. In the future, we may selectively pursue opportunities to acquire overseas retail banks and, as part of diversifying our investment banking portfolio, increase investments in non-financial companies.discretionary adjustment rate.
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Depending on the market condition and the agreement with the borrower, Shinhan Bank may use either its periodic market floating rate or the reference rate as the base rate in calculating its pricing. As of December 31, 2009, Shinhan Bank’s periodic market floating rates (which are based on a base rate determined for three-month, six-month, one-year, two-year, three-year or five-year periods derived using Shinhan Bank’s market rate system) were 2.85% for three months, 3.49% for six months, 4.05% for one year, 4.85% for two years, 5.16% for three years and 5.70% for five years. As of the same date, Shinhan Bank’s reference rate was 8.75%.
Transaction cost is added to reflect the standardized transaction cost assigned to each loan product and other miscellaneous costs, including contributions to the Credit Guarantee Fund, and education taxes. The Credit Guarantee Fund is a statutorily created entity that provides credit guarantees to loans made by commercial banks and is funded by mandatory contributions from commercial banks in the amount of approximately 0.2% of all loans made by them.
The credit spread is added to the periodic floating rate to reflect the expected loss based on the borrower’s credit rating and the value of any collateral or payment guarantee. In addition, Shinhan Bank adds a risk premium that is measured by an unexpected loss that exceeds the expected loss from the credit rating assigned to a particular borrower.
A discretionary adjustment rate is added or subtracted to reflect the borrower’s currentand/or future contribution to Shinhan Bank’s profitability. In the event of additional credit provided by way of a guarantee of another loan, a subtraction is made by the amount of the adjustment rate in order to reflect such change in the credit spread. In addition, depending on the price and other terms set by competing banks for similar borrowers, Shinhan Bank may reduce the interest rate charged in order to compete more effectively with other banks.
ACQUISITION OF LG CARDTreasury and Securities Investment
OnShinhan Bank engages in treasury and securities investment business, which involves, among other things, the following activities:
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| • | treasury; |
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| • | securities investment and trading; |
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| • | derivatives trading; and |
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| • | international business. |
Treasury
Shinhan Bank’s treasury division provides funds to all of Shinhan Bank’s business operations and ensures the liquidity of its operation. To secure stable long-term funds, Shinhan Bank uses fixed and floating rate notes, debentures, structured financing, and other advanced funding methods. As for overseas funding, Shinhan Bank closely monitors the feasibility of raising funds in currencies other than the U.S. dollar, such as Japanese Yen and Euro. In addition, Shinhan Bank makes call loans and borrows call money in the short-term money market. Call loans are short-term lending among banks and financial institutions in either Korean Won or foreign currencies with minimum transaction amounts of W100 million and maturities of typically one day.
Securities Investment and Trading
Shinhan Bank invests in and trades securities for its own accounts in order to maintain adequate sources of liquidity and generate interest and dividend income and capital gains. Shinhan Bank’s trading and investment portfolios consist primarily of Korean treasury securities and debt securities issued by Korean government agencies, local governments or certain government-invested enterprises and debt securities issued by financial institutions, and equity securities listed in the KRX KOSPI Market and KRX KOSDAQ Market of the Korea Exchange. For a detailed description of our securities investment portfolio, see “— Description of Assets and Liabilities — Investment Portfolio.”
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Derivatives Trading
Shinhan Bank provides and trades a range of derivatives products, including:
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| • | interest rate swaps, options, and futures relating to Korean Won interest rate risks and LIBOR risks, respectively; |
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| • | cross-currency swaps largely for Korean Won against U.S. dollars, Japanese Yen and Euros; |
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| • | equity and equity-linked options; |
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| • | foreign currency forwards, swaps and options; |
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| • | commodity forwards, options and swaps; |
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| • | credit derivatives; and |
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| • | KOSPI 200 indexed equity options. |
Shinhan Bank’s trading volume in notional amount was W395,015 billion and W621,776 billion, in 2008 and 2009, respectively. Such derivative operations generally focus on addressing the needs of Shinhan Bank’s corporate clients to hedge their risk exposure andback-to-back derivatives entered into to hedge Shinhan Bank’s risk exposure that results from such client contracts.
Shinhan Bank also enters into derivative contracts to hedge the interest rate and foreign currency risk exposures related to its own assets and liabilities. In addition, to a limited extent, Shinhan Bank engages in proprietary trading of derivatives within our regulated open position limits. See “— Description of Assets and Liabilities — Derivatives.”
International Business
Shinhan Bank also engages in treasury and investment activities in international capital markets, principally including foreign currency-denominated securities trading, foreign exchange trading and services, trade-related financial services, international factoring services and foreign retail banking operations through its overseas branches and subsidiaries. Shinhan Bank aims to become a leading bank in Asia and expand its international business and by focusing on further bolstering its overseas network, localizing its overseas operations and diversifying its product offerings, particularly in terms of asset management, in order to meet the various financing needs of its current and potential customers overseas.
Trust Account Management Services
Overview
Shinhan Bank’s trust account management services include management of trust accounts, primarily in the form of money trusts. Trust account customers are typically individuals seeking higher rates of return than those offered by bank account deposits. Because deposit reserve requirements do not apply to deposits held in trust accounts as opposed to deposits held in bank accounts, and regulations over trust accounts tend to be less strict, Shinhan Bank is generally able to offer higher rates of return on trust account products than on bank deposit products. However, due to the ongoing low interest environment, in recent years, Shinhan Bank has not been able to offer attractive rates of return on its trust account products.
Trust account products generally require higher minimum deposit amounts than those required by comparable bank account deposit products. Unlike bank deposit products, deposits in trust accounts are invested primarily in securities and, to a lesser extent, in loans, as the relative shortage of funding sources require that trust accounts be invested in a higher percentage of liquid assets.
Under the Banking Act of 1950, as amended, assets in trust accounts are required to be segregated from other assets of the trustee bank and are not available to satisfy the claims of the depositors or other creditors of such bank. Accordingly, trust accounts are accounted for and reported separately from the bank accounts. See “— Supervision and Regulation.” Trust accounts are regulated by the Trust Act and the Financial Investment Services and Capital
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Markets Act, and most national commercial banks offer similar trust account products. Shinhan Bank earns income from trust account management services, which is recorded as net trust management fees. See “Item 5.A. Operating Results — Results of Operation — 2009 Compared to 2008 — Non-interest Income.”
As of December 31, 2008 and 2009, under Korean GAAP, Shinhan Bank had total trust assets of W37,123 billion and W32,537 billion, respectively, comprised principally of real property investments of W9,942 billion and W10,030 billion, respectively, securities investments of W10,628 billion and W7,208 billion, respectively, and loans in the principal amount of W744 billion and W623 billion, respectively. Securities investments consisted of corporate bonds, government-related bonds and other securities, primarily commercial paper. As of December 31, 2007, 2008 and 2009, equity securities constituted 3.4%, 3.0% and 3.1%, respectively, of Shinhan Bank’s total trust assets under Korean GAAP. Loans made by trust accounts are similar in type to those made by bank accounts, except that they are made only in Korean Won. As of December 31, 2007, 2008 and 2009, under Korean GAAP, approximately 60.4%, 64.4% and 61.6%, respectively, of the amount of loans from the trust accounts were collateralized or guaranteed. In making investment from funds received for each trust account, each trust product maintains investment guidelines applicable to each such product which sets forth, among other things, company-, industry- and security-type limitations.
Trust Products
Money trusts managed by Shinhan Bank’s trust account business amounted to W12,822 billion and W9,905 billion as of December 31, 2008 and 2009, under Korean GAAP. In Korea, a money trust is a discretionary trust over which (except in the case of a specified money trust) we have investment discretion subject to applicable law and is commingled and managed jointly for each type of trust account. The specified money trusts are established on behalf of customers who give specific directions as to the investment of trust assets.
Shinhan Bank offers primarily two types of money trust accounts through its retail branch network: guaranteed fixed rate trusts and variable rate trusts.
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| • | variable rate trust accounts. Variable rate trust accounts are not entitled to a guaranteed return on the deposits, except in the limited cases of principal guaranteed variable rate trust accounts, for which payment of the principal amount is guaranteed. As of December 31, 2008 and 2009, under Korean GAAP, Shinhan Bank’s variable rate trust accounts amounted to W9,311 billion and W6,425 billion, respectively, and its principal guaranteed variable rate trust accounts amounted to W3,510 billion and W3,479 billion, respectively. Shinhan Bank charges a lump sum or a fixed percentage of the assets held in such trusts as a management fee, and, depending on the trust products, is also entitled to additional fees in the event of early termination of the trusts by the customer. Korean banks, including Shinhan Bank, are currently allowed to guarantee the principal of the following types of variable rate trust account products: (i) existing individual pension trusts, (ii) new individual pension trusts, (iii) existing retirement pension trusts, (iv) new retirement pension trusts, (v) pension trusts and (vi) employee retirement benefit trusts. |
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| • | guaranteed fixed rate trust accounts. Guaranteed fixed rate trust accounts are entitled to a guaranteed return of the principal as well as an additional fixed rate of return. Upon termination of these trusts, Shinhan Bank is entitled to investment returns from the management of these trusts, net of the guaranteed returns paid to customers and any related expenses. In the past, Korean commercial banks, including Shinhan Bank, offered two types of guaranteed fixed rate trust products: general unspecified money trusts and development money trusts. However, since January 1999, banks in Korea have been prohibited from offering new guaranteed fixed rate trust products, and the guaranteed fixed rate trust products currently serviced are carryovers from the past and have been dwindling in volume as the products mature. As of December 31, 2008 and 2009, the guaranteed fixed rate trust products maintained by Shinhan Bank amounted to W1.0 billion and W1.0 billion, respectively, under Korean GAAP. If income from a guaranteed fixed rate trust account is insufficient to pay the guaranteed amount, such deficiency must be satisfied from (i) first, special reserves maintained in such trust accounts, (ii) secondly, trust fees and (iii) lastly, funds transferred from the bank accounts of Shinhan Bank. |
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Credit Card Services
Overview
We currently provide credit card services through our credit card subsidiary, Shinhan Card.
Former Shinhan Card was originally formed as a result of the spin-off of Shinhan Bank’s credit card business in June 2002. In April 2006, the credit card division of Chohung Bank was split and merged into former Shinhan Card concurrently with the merger of Chohung Bank and Shinhan Bank. Following such split-merger, former Shinhan Card had, as of April 3, 2006, W3.4 trillion (reported basis) or W3.8 trillion (managed basis) in assets, in each case, under Korean GAAP. Prior to the merger of former Shinhan Bank and Chohung Bank in April 2006, Chohung Bank had an active credit card business division. Chohung Bank was a member of BC Card Co., Ltd. (“BC Card”), which is owned by consortium banks. Shinhan Card currently holds 14.85% equity interest in BC Card. BC Card issues credit cards under the names of the member banks, substantially all of which are licensed to use MasterCard, Visa or JCB. This enables holders of BC Card to use their cards at any establishment which accepts MasterCard, Visa or JCB, as the case may be.
In March 23, 2007, we acquired the controlling interest in LG Card, one of Korea’s largest credit card companies, and LG Card became one of our subsidiaries. The following provides a summary of the background of the acquisition.
Starting in 2003, LG Card experienced significant liquidity problems. After a series of rescue efforts, in August 2005 the creditors of LG Card resolved to sell the controlling equity interest in LG Card. In August 2006, we were selected as the preferred bidder, and in December 2006, we and the creditors of LG Card entered into a stock purchase agreement, pursuant to which we made a public tender offer held from February 28, 2007 to March 19, 2007, as a result of which we acquired 98,517,316 shares, or 78.6%, of the common stock of LG Card at the price of W67,770 per share, or an aggregate price of W6,676 billion. This was in addition to 8,960,005 shares, or 7.1%, of the common stock of LG Card held by Shinhan Bank prior to the public tender offer. Through a second public tender offer held from June 14, 2007 to July 3, 2007, we acquired an additional 9,624,218 shares (including 8,960,005 shares purchased from Shinhan Bank), or 7.68%, of the common stock of LG Card, at the price of W46,392 per share, or an aggregate price of W446 billion. On September 21, 2007, we acquired the remaining 17,227,869 shares, or 13.74%, of the common stock of LG Card, through a stock swap at the exchange ratio of 0.84932 common share of Shinhan Financial Group per common share of LG Card. LG Card was delisted from the Korea Exchange on October 10, 2007.
On October 1, 2007, LG Card assumed all of the assets and liabilities of former Shinhan Card and changed its name to Shinhan Card, and on the same date, former Shinhan Card changed its name to SHC Management. The consideration paid for the assumption by LG Card of all of the assets and liabilities of former Shinhan Card was W1,055 billion.
We believe that the integration of LG Card into our group has been successful to-date. After our acquisition in March 2007, a committee made up of members of senior management of us, LG Card and former Shinhan Card oversaw the integration of operations to ensure a smooth transition. The integration of IT systems of LG Card and former Shinhan Card is expected to be completed in the third quarter of 2008. While there remain two labor unions respectively representing the employees formerly employed by LG Card and former Shinhan Card, the labor unions are currently in discussion for a merger, and we believe our relationship with the two labor unions is good.
Card. We believe that the acquisition of LG Card, which was the largest credit card company in Korea in terms of the number of cardholders, has had,contributed to our having the largest market share in the Korean credit card industry and will continue to have, substantial synergy effects, including an expanded customer base, cost savingsdiversifying our revenue sources from shared infrastructures and bulk purchases, greater opportunities for cross-selling and diversified revenue streams fromour non-banking businesses.operations.
LiquidityProducts and Capital ResourcesServices
As consideration for the first public tender offer for the sharesShinhan Card offers a wide range of LG Card held from February 28, 2007 to March 19, 2007, we paid W6,676 billion in cash. In January 2007, we raised W3,750 billion in cash through private placements of 28,990,000 redeemable preferred shares at the purchase price of W100,000 per sharecredit card and 14,721,000 redeemable convertible preferred shares at the purchase price of W57,806 per share to institutional investors and governmental entities in Korea. These preferred shares may be redeemed at our option from the fifth anniversaryother services, principally consisting of the datefollowing:
| | |
| • | credit card services, which involve providing cardholders with limited credit to purchase products and services. Cardholders can repay either (i) on a lump-sum basis in full at the end of a monthly billing cycle or (ii) to a lesser extent, on a revolving basis subject to a minimum monthly payment which is the lesser of (x) 5.0% of the amount outstanding or (y) W30,000. Currently, the outstanding credit card balance generally accrues interest at an annual rate of approximately 9.8% to 26.9%, depending on the credit profile of the cardholder. |
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| • | cash advances, for which cardholders can repay either on a lump-sum basis or a revolving basis. Currently, the lump-sum cash advances generally accrue interest at an annual rate of approximately 9.8% to 26.6% and the revolving cash advances generally accrue interest at a minimum rate of 5.0% of the outstanding balance. Cash advances may be obtained from ATM machines and bank branches. |
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| • | installment purchases, which provides customers with an option to purchase products and services from select merchants on an equal principal installment basis over a fixed term, which ranges from three months to a maximum of 60 months. Currently, the outstanding installment purchase balances generally accrue interest at an annual rate of approximately 5.5% to 26.0%. |
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| • | card loans, which may be unsecured, and which cardholders must repay on an equal principal installment basis over an initial fixed term of two to 24 months or in full at maturity. Currently, the outstanding principal amount of card loans accrue interest at an annual rate of approximately 7.6% to 25.8% and an upfront fee of up to 1.0% is charged on the principal amount of the loan. For delinquent cardholders, outstanding credit card receivables can also be restructured into loan, which are recorded as card loans and payment for which is made on an installment basis over a maximum term of 60 months. |
Shinhan Card also derives fee income in the form of issuance untillump-sum fees, installment purchase fees and cash advance fees and, to a lesser extent, annual membership fees and penalty interest on late and deferred payments and fees paid by merchants. Shinhan Card passes onto its customers the twentieth anniversarytransaction fees charged by financial institutions (other than Shinhan Bank) for cash advances made through ATMs of such financial institutions. Any accounts that are unpaid when due are deemed to be delinquent accounts, for which Shinhan Card charges a penalty interest in the range of 25.0% to 29.9% per annum in lieu of the date of issuance. The redeemable convertible shares may be converted into our common shares at a conversion ratio of one-to-one from the first anniversary of the issue dateinterest rates applicable prior to the fifth anniversary of the issue date. The dividend ratios on the redeemable preferred shares and the redeemable convertible preferred shares are initially 7.00% and 3.25%, respectively, per annum subject to certain adjustments. These preferred shares have terms that are different from the preferred shares issued previously. See Item 10 “Additional Information — Articles of Incorporation — Description of Capital Stock — Description of Redeemable Preferred Stock — Series 10 Redeemable Preferred Stock” and “— Description of Redeemable Convertible Preferred Stock — Series 11 Redeemable Convertible Preferred Stock.”default.
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The annual membership fees for credit cards vary depending on the type of the card and the benefits offered for such card. For our standard cards, we charge an annual membership fee ranging from W3,000 to W1,000,000 per card, depending on the type of the credit card and the cardholder profile. Annual membership fees for various affinity and co-branded cards are higher and vary from W5,000 to W500,000.
Merchant discount fees, which are processing fees Shinhan Card charges to the merchants, can be up to 4.5% of the purchased amount depending on the merchant used, with the average charge being 2.15% in 2009.
Although making payments on a revolving basis is quite common in many other countries, this payment method is still in its early stages of implementation in Korea. Cardholders in Korea are generally required to repay their purchases within approximately 15 to 45 days of purchase depending on their payment cycle, except in the case of installment purchases. Installment purchases typically have a repayment term of three to six months and charge different rates depending on the duration of the repayment term.
In addition as part of obtaining the funding for the LGto credit card services, Shinhan Card acquisition, from November 2006also offers check cards, which are similar to February 2007, we issued corporate bondsdebit cards in the aggregate principalUnited States, to its retail customers as well as corporate customers. A check card can be used at any of the merchants that accept credit cards issued by Shinhan Card and the amount of W2,550 billion and commercial papers in the aggregate principal amount of W380 billion. The corporate bonds have maturity ranging from 2.5 yearscharged to seven yearsa check card is directly debited from the issue date. The amounts due under the corporate bondscardholder’s designated bank account. Although Shinhan Card does not charge annual membership fees on check cards, merchants are W1,050 billion in 2009, W500 billion in 2010, W200 billion in each of 2011 and 2012 and W300 billion in each of 2013 and 2014. The commercial paper maturescharged fees on the first anniversaryamount purchased using check cards at a rate similar to those used for credit card purchases.
Customers and Merchants
In addition to internal growth through cross-selling, we also seek to enhance our market position by selectively targeting new customers with high net worth and solid credit quality through the use of a sophisticated and market-oriented risk management system. Shinhan Card screens its credit card applicants and sets individualized credit limits for such applicants according to internal guidelines based on a comprehensive credit scoring system.
The following table sets forth the number of customers and merchants of Shinhan Card as of the issue date. In June 2007, as part of obtaining additional funding for the LG Card acquisition, we also issued corporate bonds in the aggregate principal amount of W550 billion. The amounts due under these corporate bonds are W200 billion in June, 2010, W250 billion in June 2012 and W100 billion in June 2014.dates indicated.
| | | | | | | | | | | | | |
| | | As of December 31, | |
| | | 2007 | | | 2008 | | | 2009 | |
| | | (In thousands, except percentages) | |
| |
Shinhan Card: | | | | | | | | | | | | |
| Number of credit card holders(1) | | | 13,425 | | | | 13,718 | | | | 14,435 | |
| Personal accounts | | | 13,346 | | | | 13,617 | | | | 14,324 | |
| Corporate accounts | | | 79 | | | | 101 | | | | 111 | |
| Active ratio(2) | | | 69.7 | % | | | 74.9 | % | | | 73.7 | % |
| Number of merchants | | | 2,154 | | | | 2,268 | | | | 2,425 | |
Notes:
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| (1) | | Represents the number of cardholders not subject to suspension or termination as of the relevant date. |
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| (2) | | Represents the ratio of accounts used at least once within the last six months to the total accounts as of yearend. |
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Financial and Statistical Information
The following table sets forth certain financial and statistical information relating to the credit card, installment sales and leasing operations of Shinhan Card as of the dates or for the period indicated.
| | | | | | | | | | | | | |
| | | As of or for the Year Ended December 31, | |
| | | 2007 | | | 2008 | | | 2009 | |
| | | Shinhan Card(1) | | | Shinhan Card(1) | | | Shinhan Card(1) | |
| | | (In billions of Won, except percentages) | |
| |
| Interest income: | | | | | | | | | | | | |
| Installments | | W | 260 | | | W | 326 | | | W | 311 | |
| Cash advances | | | 547 | | | | 639 | | | | 524 | |
| Card loans(2) | | | 488 | | | | 548 | | | | 506 | |
| Revolving | | | 227 | | | | 240 | | | | 214 | |
| Late payments | | | 8 | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Total | | W | 1,530 | | | W | 1,753 | | | W | 1,555 | |
| | | | | | | | | | | | | |
| Credit card fees: | | | | | | | | | | | | |
| Merchant fees(3) | | W | 1,179 | | | W | 1,309 | | | W | 1,422 | |
| Other fees | | | 2 | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Total | | W | 1,181 | | | W | 1,309 | | | W | 1,422 | |
| | | | | | | | | | | | | |
| Charge volume:(4) | | | | | | | | | | | | |
| General purchases | | W | 45,912 | | | W | 45,624 | | | W | 51,784 | |
| Installment purchases | | | 14,269 | | | | 17,682 | | | | 17,814 | |
| Cash advances | | | 20,704 | | | | 23,945 | | | | 21,143 | |
| | | | | | | | | | | | | |
| Total | | W | 80,885 | | | W | 87,251 | | | W | 90,741 | |
| | | | | | | | | | | | | |
| Outstanding balance (at year end)(5): | | | | | | | | | | | | |
| General purchases | | W | 3,018 | | | W | 3,046 | | | W | 3,636 | |
| Installment purchases | | | 3,833 | | | | 4,037 | | | | 4,433 | |
| Cash advances | | | 3,086 | | | | 3,111 | | | | 2,606 | |
| Revolving purchases | | | 1,361 | | | | 1,410 | | | | 1,339 | |
| Card loans(2) | | | 2,556 | | | | 2,524 | | | | 2,672 | |
| Others | | | 791 | | | | 470 | | | | 391 | |
| | | | | | | | | | | | | |
| Total | | W | 14,645 | | | W | 14,598 | | | W | 15,077 | |
| | | | | | | | | | | | | |
| Average balance | | W | 12,106 | | | W | 14,458 | | | W | 13,585 | |
| Delinquent balances(6): | | | | | | | | | | | | |
| From 1 day to 1 month | | W | 790 | | | W | 663 | | | W | 404 | |
| Over 1 month: | | | | | | | | | | | | |
| From 1 month to 3 months | | W | 244 | | | W | 244 | | | W | 113 | |
| From 3 months to 6 months | | | 165 | | | | 171 | | | | 111 | |
| Over 6 months | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Sub-total | | | 409 | | | | 415 | | | | 224 | |
| | | | | | | | | | | | | |
| Total | | W | 1,199 | | | W | 1,078 | | | W | 628 | |
| | | | | | | | | | | | | |
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| | | | | | | | | | | | | |
| | | As of or for the Year Ended December 31, | |
| | | 2007 | | | 2008 | | | 2009 | |
| | | Shinhan Card(1) | | | Shinhan Card(1) | | | Shinhan Card(1) | |
| | | (In billions of Won, except percentages) | |
| |
| Delinquency ratios(7): | | | | | | | | | | | | |
| From 1 day to 1 month | | | 5.4 | % | | | 4.5 | % | | | 2.7 | % |
| Over 1 month: | | | | | | | | | | | | |
| From 1 month to 3 months | | | 1.7 | % | | | 1.7 | % | | | 0.7 | % |
| From 3 months to 6 months | | | 1.1 | % | | | 1.2 | % | | | 0.7 | % |
| Over 6 months(8) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Sub-total | | | 2.8 | % | | | 2.9 | % | | | 1.5 | % |
| | | | | | | | | | | | | |
| Total | | | 8.2 | % | | | 7.4 | % | | | 4.2 | % |
| | | | | | | | | | | | | |
| Rewritten loans(9) | | W | 350 | | | W | 220 | | | W | 194 | |
| Gross charge-offs | | W | 436 | | | W | 521 | | | W | 597 | |
| Recoveries | | | 459 | | | | 509 | | | | 394 | |
| | | | | | | | | | | | | |
| Net charge-offs | | W | (23 | ) | | W | 12 | | | W | 203 | |
| | | | | | | | | | | | | |
| Gross charge-off ratio(10) | | | 3.60 | % | | | 3.60 | % | | | 4.39 | % |
| Net charge-off ratio(11) | | | (0.19 | )% | | | 0.08 | % | | | 1.49 | % |
| Non-performing loan ratio(12) : | | | | | | | | | | | | |
| Reported | | | 3.71 | % | | | 2.91 | % | | | 3.08 | % |
| Managed | | | 2.98 | % | | | 2.42 | % | | | 2.53 | % |
| Asset securitization(13) | | W | 5,762 | | | W | 5,666 | | | W | 3,734 | |
| Ratio of total assets securitized to total managed assets | | | 29.4 | % | | | 29.4 | % | | | 19.2 | % |
Notes:
| | |
| (1) | | The information of Shinhan Card for 2007 includes that of LG Card (renamed as Shinhan Card on October 1, 2007) for the period from March 1, 2007 through December 31, 2007 (including that for the assets and liabilities of former Shinhan Card assumed by LG Card on October 1, 2007) and that of former Shinhan Card for the period from January 1, 2007 through September 30, 2007, presented on an aggregated basis. |
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| (2) | | Card loans consist of loans that are provided on either a secured or unsecured basis to cardholders according to prior agreement. Payment of principal, fees and interest on such a loan can be due either in one payment or in installments over a fixed period following a grace period. |
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| (3) | | Merchant fees consist of merchant membership and maintenance fees, charges associated with prepayment by Shinhan Card (on behalf of customers) of sales proceeds to merchants, processing fees relating to sales and membership applications. |
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| (4) | | Represents the aggregate cumulative amount charged during the year. |
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| (5) | | Represents amounts before allowance for loan losses. |
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| (6) | | Includes the unbilled balances of installment purchases. |
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| (7) | | Represents the ratio of delinquent balances to outstanding balances for the year. |
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| (8) | | The charge-off policy is generally to charge off credit card balances which are 180 days past due following internal review. |
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| (9) | | Represents the delinquent credit card balances for credit card purchase and cash advances which are rewritten as credit card loans, thereby reducing the balance of delinquent accounts before the application of Accounting Standard Codification (“ASC”)310-30, (formerlySOP 03-3) relating to the acquisition of LG Card, which reduced the outstanding balances by W322 billion, W165 billion and W84 billion as of December 31, 2007, 2008 and 2009, respectively. |
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| (10) | | Represents the ratio of gross charge-offs for the year to the average balance for the year. |
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| | |
| (11) | | Represents the ratio of net charge-offs for the year to the average balances for the year. |
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| (12) | | The reported information is presented on the Korean GAAP basis. The managed information includes, subject to certain adjustments, financial receivables that Shinhan Card has sold in asset-backed securitizations. |
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| (13) | | Represents credit card balances that were transferred in asset securitization transactions as presented on the Korean GAAP basis. Under U.S. GAAP, most of these transfers are not recognized as sales but are recognized as secured borrowings. |
Presentation of Managed Data for Shinhan Card’s Asset Securitization transactions
Shinhan Card periodically securitizes and sells credit card receivables to diversify its funding sources. The effect of these transactions under Korean GAAP is to remove such receivables from Shinhan Card’s balance sheet although Shinhan Card retains recourse liabilities for ineligible receivables and generally repurchases the securitized receivables upon their maturity. However, under U.S. GAAP, such securitization transactions can be accounted for as sales transactions and be removed from our balance sheet only if certain specific criteria are met. Most of the transactions do not meet those criteria, and thus the removal treatment performed under Korean GAAP is reversed and those receivables are included in our balance sheet. Shinhan Card continues to manage such securitized and sold receivables including billing and payment as well as record keeping, and receives service fees from the securitization vehicles for servicing such receivables. We believe that the disclosure of the credit experience of Shinhan Card’s managed portfolio presents a more complete presentation of our credit exposure because the managed data reflects not only on-balance sheet receivables but also securitized assets as to which Shinhan Card retains a risk of loss in the underlying assets, primarily in the form of subordinated retained interests. In addition, because Shinhan Card tends to transfer to securitization vehicles assets which generally are in the higher asset qualification categories, the managed basis figures generally tend to exhibit higher net interest spreads and net interest margins and lower delinquency ratios. The managed financial information and operating data are not audited and are not presented or prepared in accordance with Korean GAAP or on the same basis as the audited financial information included in this offering circular. Managed financial data is derived from an arithmetic summation of Shinhan Card’s on-balance sheet receivables together with receivables sold in off-balance sheet transactions subject to certain adjustments. As a result of these adjustments, managed financial data is not the simple sum of the reported accounts and Shinhan Card’s off-balance sheet transactions. Accordingly, the financial information contained in the reported accounts and the managed financial data are not directly comparable and should not be so compared. While Shinhan Card prepares managed financial data based upon assumptions and methods it deems reasonable, the managed financial data do not accurately represent its financial condition or results of operations as if it had not conducted any ABS transactions and the managed operating data do not accurately reflect its results of operations.
BUSINESS OVERVIEWSecurities Brokerage Services
Unless otherwise specifically mentioned,Overview
Through Shinhan Investment, we provide a wide range of financial investment services to our diversified customer base including corporations, institutional investors, governments and individuals. Financial investment services offered by Shinhan Investment range from securities brokerage to our retail and institutional customers, investment advice and financial planning services to our retail customers, as well as investment banking services such as underwriting and M&A advisory services to our institutional customers.
As of December 31, 2009, according to internal data, Shinhan Investment’s annual market share of Korean equity brokerage market was 5.39% (consisting of 4.38% in the retail segment, 0.52% in the institutional segment and 0.49% in the international segment) in terms of total brokerage volume, ranking fourth among securities firms in Korea, excluding discount brokers such as Mirae Asset Securities and Kiwoom Securities. As of the same date, according to internal data, Shinhan Investment held the largest annual market shares in the Kospi200 futures and options brokerage segments of 8.30% and 9.45%, respectively, in terms of total brokerage volume with respect to these products, which we believe will enable Shinhan Investment to further solidify its market position in its futures trading and brokerage services as it expands these services.
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Following the implementation of the Financial Investment Services and Capital Markets Act in February 2009, Shinhan Investment has obtained requisite approvals for its existing businesses in investment banking services, securities brokerage services, trust services, investment advisory service and discretionary account asset management services. In November 2009, Shinhan Investment also obtained the requisite approval for existing and new derivatives businesses, which enables Shinhan Investment to provide not only its existing services in equity- and stock index-linked derivatives sales and brokerage, but also proprietary trading and brokerage services for futures involving interest rates, currency and commodities as well as foreign exchange margin trading. Shinhan Investment currently provides all of the foregoing services, subject to prevailing market conditions, and is currently preparing to submit a license application to engage in collective investment development businesses.
Products and Services
Shinhan Investment provides principally the following services:
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| • | retail client services. These services include equity and bond brokerage, investment advisory and financial planning services to retail customers, with a focus on high net worth individuals. The fees generated include brokerage commissions for the purchase and sale of securities, asset management fees, interest income from credit extensions, including in the form of stock subscription loans, margin transaction loans and loans secured by deposited securities. |
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| • | institutional client services: |
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| • | brokerage services. These services include brokerage of stocks, corporate bonds, futures and options provided to Shinhan Investment’s institutional and international customers and sale of institutional financial products. These services are currently supported by a team of 62 research analysts that specialize in equity, bonds and derivatives research. |
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| • | investment banking services. These services include a wide array of investment banking services to Shinhan Investment’s corporate customers, such as domestic and international initial public offerings, M&A advisory services, bond issuances, underwriting, capital increase, asset-backed securitizations, issuance of convertible bonds and bonds with warrants, structured financing, issuance of asset-backed commercial papers, mergers and acquisitions advisory services and project financings involving infrastructure, real estate and shipbuilding. |
Shinhan Investment also engages, to a limited extent, in proprietary trading in equity and debt securities, derivative products andover-the-counter market products.
With respect to brokerage services, in the face of intense competition in the domestic brokerage industry, Shinhan Investment primarily focuses on strengthening profitability through service differentiation and efficient management of its distribution network rather than enlarging its market share indiscriminately through lowering fees and commissions. Shinhan Investment’s service differentiation efforts include offerings its customers opportunities to purchase stocks in a wide range of countries (currently more than 20 countries), leveraging synergy opportunities afforded by affiliation with other Shinhan entities such as offering brokerage accounts maintained at Shinhan Bank and Shinhan Capital.
With respect to investment banking services, Shinhan Investment provides such services through four divisions consisting of equity capital markets, corporate finance, project finance and mergers and acquisitions, as well as two overseas service centers in Hong Kong and Shanghai
Insurance Services
Life Insurance
We provide life insurance products and services primarily through Shinhan Life Insurance. Shinhan Life Insurance provides its services through diversified distribution channels consisting of financial planners, telemarketers, agency marketers and bancassurance specialists. As of the end of fiscal years ended March 31, 2009 and March 31, 2010, under Korean GAAP, Shinhan Life Insurance had total assets of W8,816.8 billion and W10,437 billion and net profits of W134.2 billion and W190 billion, respectively. During its fiscal year 2009,
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among 22 life insurance companies in Korea, Shinhan Life Insurance ranked second in terms of net profit and sixth in terms of insurance premium received, principally due to increased sales of health insurance policies, stable asset portfolio management and prudent risk management. We expect the insurance premium received by Shinhan Life Insurance to increase as a result of growing demands for both investment and annuity products and potential synergy effects from cross-selling between Shinhan Life Insurance and our banking and other subsidiaries
Asset Management Services
In addition to personalized wealth management services provided as part of our private banking and securities brokerage services, we also provide asset management services through Shinhan BNP Paribas Asset Management, a joint venture with BNP Paribas Investment Partners, of which we and BNP Paribas Investment Partners hold 65:35 interests, respectively. Shinhan BNP Paribas Asset Management was formed on January 1, 2009 through the merger of Shinhan BNP Paribas Investment Trust Management, our 50:50 joint venture with BNP Paribas Investment Partners, and SH Asset Management, our wholly-owned subsidiary, in order to streamline our asset management services capabilities. Shinhan BNP Paribas Asset Management ranked third among asset managers in Korea in terms of assets under management as of December 31, 2009, and provides a wide range of investment products, including traditional equity/fixed income funds as well as alternative investment products, to retail and institutional clients. As a joint venture with BNP Paribas Investment Partners, we believe Shinhan BNP Paribas Asset Management has significantly benefited from BNP Paribas’s global network of investment professionals and expertise in the asset management industry. On January 1, 2010, Shinhan BNP Paribas Asset Management had assets under management amounting to approximately W32.4 trillion. To a limited extent, Shinhan Investment also provide asset management services for discretionary accounts See “— Securities Brokerage Services.”
We expect that competition will intensify in the asset management industry as a result of the Financial Investment Services and Capital Markets Act, which became effective in February 2009. Under this Act, a “financial investment company”, which formerly included securities companies, asset management companies, futures companies and other entities previously engaged in what is currently characterized as financial investment businesses, is now permitted to provide asset management services by obtaining new licenses under the new Act. For more information on the Act, see “— Supervision and Regulation — Financial Investment Services and Capital Markets Act.”
Other Services
Through our other subsidiaries, we also provide leasing and equipment financing, regional banking and investment banking and advisory services.
Leasing and Equipment Financing
We provide leasing and equipment financing services to our corporate customers mainly through Shinhan Capital. Established as a leasing company in 1991, Shinhan Capital provides customers with leasing, installment financing and new technology financing, equipment leasing, and corporate credit financing. Shinhan Capital’s strength has traditionally been in leasing of ships, printing machines, automobiles and other specialty items, but also offers other leasing and financing services, such as corporate restructuring services for financially troubled companies and financing provided to real estate development projects and infrastructure investments, and following a business overview is presented ontransfer from Shinhan Card in November 2007, corporate leasing and equipment financing.
Regional Banking Services
We provide regionally focused commercial banking services, primarily in Jeju Island of Korea, through a consolidated basis under U.S. GAAP.majority-owned banking subsidiary, Jeju Bank. Jeju Bank provides retail banking, corporate banking, treasury and trust account management services, and has a network of 40 branches as of December 31, 2009.
Investment Banking and Advisory Services
In addition to the overviewinvestment banking services provided by Shinhan Bank and Shinhan Investment, we also provide a variety of investment banking and advisory services through Shinhan Macquarie Financial Advisory, a
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51:49 joint venture with Macquarie Bank of Australia. The advisory services offered by Shinhan Macquarie Financial Advisory include project and infrastructure finance, capital and debt raisings, corporate finance advisory, structured finance, mergers and acquisitions, cross-border leasing and infrastructure and specialized fund management advisory services. Since its inception Shinhan Macquarie Financial Advisory has grown to become one of the leading infrastructure-related financial advisory companies in Korea.
Loan Collection and Credit Reporting
We centralize credit collection and credit reporting operations for our business that follows, we provide you with information regarding our branch networksubsidiaries through Shinhan Credit Information Co. Ltd., which also provides similar services to third party customers. We plan to expand Shinhan Credit Information’s services to other areas such as credit inquiry, credit card rating, civil application/petition services, lease and other distribution channelsrental research and a detailed look at our principal group activities.advisory and consulting services related to non-performing loan management.
Our BranchDistribution Network and Distribution Channels
Through branches maintained at various levels of our subsidiaries, weWe offer a varietywide range of financial services to retail and corporate customers.customers through a variety of distribution networks and channels established by our subsidiaries. The following table presents the geographical distribution of our domesticdistribution network based on the branch network, according tooffices and other distribution channels of our principal subsidiaries, with branch networks, as of December 31, 2007.2009.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Shinhan Bank | | | | Shinhan
| | Good Morning Shinhan Securities | | Shinhan Life
| | |
| | | Retail | | Corporate | | Jeju Bank | | Card(1) | | Branches | | BIB, etc. | | Insurance | | Total |
| |
| Seoul and metropolitan | | | 348 | | | | 118 | | | | 2 | | | | 15 | | | | 39 | | | | 22 | | | | 59 | | | | 603 | |
| Kyunggi Province | | | 155 | | | | 51 | | | | — | | | | 19 | | | | 12 | | | | 7 | | | | 14 | | | | 258 | |
| Six major cities: | | | 124 | | | | 65 | | | | 1 | | | | 22 | | | | 18 | | | | 4 | | | | 32 | | | | 266 | |
| Incheon | | | 32 | | | | 29 | | | | — | | | | 3 | | | | 2 | | | | 1 | | | | 9 | | | | 76 | |
| Busan | | | 36 | | | | 12 | | | | 1 | | | | 6 | | | | 5 | | | | 2 | | | | 9 | | | | 71 | |
| Kwangju | | | 11 | | | | 5 | | | | — | | | | 3 | | | | 2 | | | | 1 | | | | 4 | | | | 26 | |
| Taegu | | | 19 | | | | 7 | | | | — | | | | 4 | | | | 4 | | | | — | | | | 6 | | | | 40 | |
| Ulsan | | | 10 | | | | 4 | | | | — | | | | 3 | | | | 2 | | | | — | | | | 1 | | | | 20 | |
| Taejon | | | 16 | | | | 8 | | | | — | | | | 3 | | | | 3 | | | | — | | | | 3 | | | | 33 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sub-total | | | 627 | | | | 234 | | | | 3 | | | | 56 | | | | 69 | | | | 33 | | | | 105 | | | | 1,127 | |
| Others | | | 93 | | | | 81 | | | | 35 | | | | 36 | | | | 15 | | | | 1 | | | | 36 | | | | 297 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | 720 | | | | 315 | | | | 38 | | | | 92 | | | | 84 | | | | 34 | | | | 141 | | | | 1,424 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Distribution Channels in Korea
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Shinhan
| | | | |
| | | | | | | | | Shinhan
| | | Shinhan Investment Corp. | | | Life
| | | | |
| | | Shinhan Bank | | | Jeju Bank | | | Card(1) | | | Branches | | | Insurance | | | Total | |
| |
| Seoul metropolitan | | | 410 | | | | 2 | | | | 12 | | | | 59 | | | | 55 | | | | 538 | |
| Kyunggi Province | | | 195 | | | | — | | | | 12 | | | | 18 | | | | 18 | | | | 243 | |
| Six major cities: | | | 172 | | | | 1 | | | | 17 | | | | 21 | | | | 37 | | | | 248 | |
| Incheon | | | 57 | | | | — | | | | 3 | | | | 3 | | | | 12 | | | | 75 | |
| Busan | | | 41 | | | | 1 | | | | 4 | | | | 7 | | | | 11 | | | | 64 | |
| Kwangju | | | 13 | | | | — | | | | 3 | | | | 3 | | | | 4 | | | | 23 | |
| Taegu | | | 27 | | | | — | | | | 3 | | | | 4 | | | | 6 | | | | 40 | |
| Ulsan | | | 13 | | | | — | | | | 1 | | | | 2 | | | | 1 | | | | 17 | |
| Taejon | | | 21 | | | | — | | | | 3 | | | | 3 | | | | 3 | | | | 30 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Sub-total | | | 777 | | | | 3 | | | | 41 | | | | 98 | | | | 110 | | | | 1,029 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Others | | | 148 | | | | 37 | | | | 28 | | | | 20 | | | | 50 | | | | 283 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | 925 | | | | 40 | | | | 69 | | | | 118 | | | | 160 | | | | 1,312 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Note:Notes:
| | |
| (1) | | Includes 32 depots, 3012 card sales branches, 3211 installment sales branches, 10 collection branches and 30 debt collection15 combined operating branches. |
Banking Branch NetworkService Channels
Our banking services are primarily provided through an extensive branch network, complemented with self-service terminals and electronic banking.
As of December 31, 2007, Shinhan Bank had 1,035 branches in Korea.30, 2009, Shinhan Bank’s branch network isin Korea currently comprised of 925 service centers, consisting of 783 retail banking service centers, 38 corporate banking service centers primarily designed to focus on providing one-stop banking services tailored to one of the three customer categories: retail customers, small- and medium-sized enterprises
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serve large corporate customers and large104 hybrid banking branches designed to serve retail as well as small-business corporate customers. Under the customer oriented branch network, branch officers operate under the sole and independent supervision of their respective division profit centers, providingShinhan Bank’s banking branches are designed to provide one-stop banking services tailored to their respective customer groups. Of the 1,035 total domestic branches, 11 specialize in serving large corporations, 136 concentrate on small- and medium-sized enterprises, 706 focus on retail customers, 168 focus on institutional banking and 14 branches focus on private banking.
We believe that targeting specific service areas and offering differentiated services to each group of customers will improve our profitability and productivity.target customers.
Retail Banking BranchesChannels
In Korea, many retail transactions are conducted in cash or with credit cards, and conventional checking accounts are generally not offered or used as widely as in other countries.countries such as the United States. As a result, an extensive retail branch network plays an important role for Korean banks as customers generally handle most transactions through bank branches.
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As Recently, one of March 31, 2008,the key initiatives at Shinhan Bank had 348 retail branches located near Seoul and its metropolitan area targeting and servicinghas been to target high net worth individuals.
individuals through private banking. Our private banking services are provided principally through private banking relationship managers are representatives who, within target customer groups, assist clients in developing individual investment strategies. We believe that oursuch relationship managers help us foster enduring relationships with our clients. Private banking customers also have access to ourShinhan Bank’s retail branch network and other general banking products we offerShinhan Bank offers through ourits retail banking operations.
Corporate Banking BranchesChannels
In orderShinhan Bank currently provides corporate banking services through corporate banking service centers primarily designed to serviceserve large corporate customers and attract high-quality borrowers, in particular from the small-and medium-sized enterprises sector,hybrid banking branches designed to serve retail as well as small-business corporate customers. Prior to 2009, Shinhan Bank has developed amaintained within certain of its retail banking branches corporate relationship management system within its domestic branch network and strengthened its marketing capability. Shinhan Bank’s relationship managers help us foster enduring relationships with our corporate customers, the small- and medium-sized enterprises in particular. As of December 31, 2007, Shinhan Bank had 136teams (which counted as separate corporate banking branches with these relationship management teams focusing on servingfor classification purposes) in order to serve its small-and medium-sized enterprises customers.customers though its extensive retail banking branch network. In 2009, Shinhan Bank expects its headquartersundertook an organizational restructuring to be muchconvert such retail banking branches with corporate banking functionalities into hybrid banking branches with the aim that this will help it to better positioned to effect policies andservice the small business strategies throughout its branch network. This should lead to greater efficiency and better services being provided to thesecorporate customers. Small-and medium-sized enterprises have traditionally been Shinhan Bank has nine corporate branches solely dedicated to largeBank’s core corporate customers all of which are located in Seoul, Korea.and we plan to continue to maintain Shinhan Bank’s strength vis-à-vis these customers.
Self-Service Terminals
In order to complement ourits banking branch network, we have establishedShinhan Bank maintains an extensive network of automated banking machines, which are located in branches and in unmanned outlets. These automated banking machines consist of ATMs, cash dispensers and passbook printers. As of December 31, 2007,2009, Shinhan Bank had 1,284942 cash dispensers and 5,8166,264 ATMs. We haveShinhan Bank actively promotedpromotes the use of these distribution outlets in order to provide convenient service to customers, as well as to maximize the marketing and sales functions at the branch level, reduce employee costs and improve profitability. We believe that the use of our automated banking machines has increased in recent years. In 2007,2009, automated banking machine transactions accounted for approximately 29.88%27.8% and 53.2% of total deposit and withdrawal transactions of Shinhan Bank.
The following table sets forth information, for the periods indicated, regardingBank in terms of the number of transactions and the fee revenue of our ATMs and cash dispensers.generated, respectively.
| | | | | | | | | | | | | |
| | | 2005 | | 2006(1) | | 2007 |
| |
Shinhan Bank: | | | | | | | | | | | | |
| ATMs and cash dispensers | | | 2,751 | | | | 6,985 | | | | 7,100 | |
| Number of transactions (millions) | | | 111 | | | | 324 | | | | 345 | |
| Fee revenue (billions of Won) | | W | 20 | | | W | 56 | | | W | 59 | |
Chohung Bank: | | | | | | | | | | | | |
| ATMs and cash dispensers | | | 4,395 | | | | N/A | | | | N/A | |
| Number of transactions (millions) | | | 205 | | | | N/A | | | | N/A | |
| Fee revenue (billions of Won) | | W | 33 | | | | N/A | | | | N/A | |
N/A = Not applicable
Note:
| | |
(1) | | The information for Chohung Bank is not available for 2006 and 2007 as it merged with Shinhan Bank in April 2006. For 2006, the information for Shinhan Bank reflects the information of Shinhan Bank and Chohung Bank presented on a combined basis. |
Electronic Banking
Since launching Korea’s first internet banking service in July 1999, Shinhan Bank has been widely acknowledged in the print and electronic media as the internet banking leader among Korean commercial banks.
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Shinhan Bank’s internet banking services are more comprehensive than those available at the counter, including such services as 24 hour account balance posting, real-time account transfer, overseas remittance and loan requests. Consistent with the fact that Korea has the highest internet supply rate in the world and an activee-business market, internet banking has continued to grow at a rapid pace. In 2007, internet banking transactions made up approximately 44% of total banking transactions of Shinhan Bank. In the case of loans, in particular, an average of approximately 13,000 requests are made per month. Among the electronic banking service customers of Shinhan Bank as of December 31, 2007, approximately 4,098,000 were retail customers and approximately 286,000 were corporate customers.
In March 2004, we launchedalso provides the Mobile Banking service, which enables customers to make speedy, convenient and secure banking transactions using mobile phones. As of December 31, 2007, Shinhan Bank had 158,823 Mobile Banking subscribers who used the service for approximately 13.5 million transactions per year amounting to approximately W2.1 trillion.
The following table sets forth information, for the periods indicated, on the number of users and transactions and the fee revenue of the above services provided to our retail and corporate customers.
| | | | | | | | | | | | | |
| | | 2005 | | 2006(4) | | 2007 |
| |
Shinhan Bank: | | | | | | | | | | | | |
Telephone banking(1): | | | | | | | | | | | | |
| Number of users(2) | | | 1,685,031 | | | | 2,665,538 | | | | 3,286,375 | |
| Number of transactions (in thousands) | | | 41,608 | | | | 130,889 | | | | 43,236 | |
Internet banking(1): | | | | | | | | | | | | |
| Number of users(2) | | | 1,656,196 | | | | 3,338,174 | | | | 4,383,865 | |
| Number of transactions (in thousands)(3) | | | 403,869 | | | | 814,092 | | | | 1,145,218 | |
| Total fee revenue (millions of Won) | | W | 26,693 | | | W | 63,924 | | | W | 28,353 | |
Chohung Bank: | | | | | | | | | | | | |
Telephone banking(1): | | | | | | | | | | | | |
| Number of users(2) | | | 976,606 | | | | N/A | | | | N/A | |
| Number of transactions (in thousands)(3) | | | 82,349 | | | | N/A | | | | N/A | |
Internet banking(1): | | | | | | | | | | | | |
| Number of users | | | 1,395,770 | | | | N/A | | | | N/A | |
| Number of transactions (in thousands)(3) | | | 298,452 | | | | N/A | | | | N/A | |
| Total fee revenue (millions of Won) | | W | 43,953 | | | | N/A | | | | N/A | |
N/A = Not applicable
Notes:
| | |
(1) | | Includes customers simultaneously using both telephone banking and internet banking. |
|
(2) | | Includes customers using services of both Shinhan Bank and Chohung Bank. |
|
(3) | | Includes balance transfers. |
|
(4) | | The information for Chohung Bank is not available for 2006 and 2007 as it merged with Shinhan Bank in April 2006. For 2006, the information for Shinhan Bank reflects the information of Shinhan Bank and Chohung Bank presented on a combined basis. |
The purpose ofe-banking electronic banking is primarily cost-saving rather than profit generation. Accordingly, substantially allgeneration, the substantial majority of Shinhan Bank’s electronic banking transactions do not generate fee income as many transactions, such as balance inquiries, consultations with customer representatives or transfers of money within our banking institutions, are not charged fees. This is especially the case for phone banking services where a majority of the transactions are balance inquiries or consultations with customer representatives. Firm banking services, which are electronic banking services offered to corporate customers, have also contributed to reducing expenditures on operations and administrative costs.income.
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In line with our strategy to provide high quality and comprehensive customer service, we are in the process of establishing a group-wide integrated call center designed to provide comprehensive customer service and marketing.
Overseas BranchDistribution Network
The table below sets forth Shinhan Bank’s overseas banking subsidiaries and branches (including those acquired from Chohung Bank) as of December 31, 2007.2009.
| | | | | |
| | |
Business Unit
| | Location
| | Year Established or
|
| Business Unit | | Location | | Acquired |
| |
Subsidiaries | | | | |
| | | | |
| Shinhan Asia Ltd. | | Hong Kong SAR, China | | | 1982 | |
| Shinhan Bank Europe GmbH | | Germany | | | 1994 | |
| Shinhan Bank America | | New York, U.S.A. | | | 2003 | |
| Shinhan Vina Bank | | Vietnam | | | 2000 | |
| Shinhan Bank (China) Limited | | Beijing, China | | | 2007 | 2008 |
| Shinhan Khmer Bank Limited | | Cambodia | | | 2007 | |
| Shinhan Bank Kazakhstan Limited | | Kazakhstan | | 2008 |
| Shinhan Bank Canada | 2007 | Toronto, Canada | | 2009 |
| Shinhan Bank Japan(1) | | Tokyo, Japan | | 2009 |
| Shinhan Bank Vietnam(2) | | Ho Chi Minh City,
Vietnam | | 2009 |
| | | | |
Branches | | | | | | |
Tokyo | | Japan | | | 1988 | |
Osaka | | Japan | | | 1986 | |
Fukuoka | | Japan | | | 1997 | |
| New York | | U.S.A. | | | 1989 | |
| Singapore | | Singapore | | | 1990 | |
| London | | United Kingdom | | | 1991 | |
Tianjin | | China | | | 1994 | |
Ho Chi Minh City | | Vietnam | | | 1995 | |
Mumbai(5)Mumbai | | India | | | 1996 | |
Shanghai | | China | | | 2003 | |
Qingdao | | China | | | 2005 | |
| Hong Kong | | China | | | 2006 | |
| New Delhi | | India | | | 2006 | |
Binhai | | China | | | 2005 | |
Beijing | | ChinaRepresentative Office | | | 2007 | |
| | | | |
| Mexico Representative Office | | Mexico City, Mexico | | 2008 |
| Uzbekistan Representative Office | | Tashkent, Uzbekistan | | 2009 |
The principal activities of these
Notes:
| | |
| (1) | | While Shinhan Bank established the subsidiary in Japan in 2009, Shinhan Bank provided banking services in Japan through a branch structure since 1986. |
|
| (2) | | While Shinhan Bank established the subsidiary in Vietnam in 2009, Shinhan Bank provided banking services in Vietnam through a branch structure since 1995. |
Currently, our overseas subsidiaries and branches and subsidiaries are providing trade financing and local currency funding forprimarily engaged in servicing Korean companies and Korean nationals in the overseas markets in the areas of trade financing and local currency funding services as well as providing foreign exchange services in conjunction with our headquarters. OnShinhan Bank’s headquarters and , to a limited basis, these overseas branches and subsidiaries also engage inextent, investment and trading of securities of foreign issuers. Going forward, as part of our “globalization” efforts, we plan to expand our coverage of local customers in the overseas markets by providing a wider range of services in retail and corporate banking, and to that end, we have increasingly established subsidiaries in lieu of branches in select markets, Japan being among the recent examples, in order to make our presence more prominent and enable a greater flexibility in our service offerings in these markets.
Credit Card Distribution ChannelsDeposit-Taking Activities
Principally through Shinhan Bank, we offer many deposit products that target different customer segments with features tailored to each segment’s financial and other profile. Our deposit products consist principally of the following:
| | |
| • | Demand deposits. Demand deposits do not accrue interest or accrue interest at a lower rate than time or savings deposits and allow the customer to deposit and withdraw funds at any time. If interest-bearing, demand deposits have interest accruing at a fixed or variable rate depending on the period and the amount of deposit. Demand deposits constituted approximately 7.8% and 7.3% of our total deposits as of December 31, 2008 and 2009, respectively. Our demand deposits paid average interest of 0.78% and 0.45% in 2008 and 2009, respectively. |
|
| • | Savings deposits. Savings deposits allow the customer to deposit and withdraw funds at any time and accrue interest at an adjustable interest rate, which is typically lower than the rate applicable to time or installment deposits. In 2009, the interest rate on savings deposits ranged from zero to 3.31%. Saving deposits constituted approximately 25.6% of our total deposits as of December 31, 2008 and paid average |
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| | |
| | interest of 2.32% in 2008, and approximately 26.1% of our total deposits as of December 31, 2009 and paid average interest of 1.22% in 2009. |
| | |
| • | Certificates of deposit. Certificates of deposit typically have maturities from 30 days to five years. Interest rates on certificates of deposit are determined based on the length of the deposit and prevailing market interest rates. Certificates of deposit are sold at a discount to their face value, reflecting the interest payable on the certificates of deposit. Certificates of deposit constituted approximately 11.3% and 5.4% of our total deposits as of December 31, 2008 and 2009, respectively. Our certificates of deposit paid average interest of 5.94% and 5.48% in 2008 and 2009, respectively. |
|
| • | Other time deposits. Other time deposits generally require the customer to maintain a deposit for a fixed term during which the deposit accrues interest at a fixed rate or a variable rate based on certain financial indexes, including the Korea Composite Stock Price Index (KOSPI). If the deposit is withdrawn prior to the end of the fixed term, the customer is paid a lower interest rate than that originally offered. The term typically ranges from one month to five years. Other time deposits constituted approximately 55.1% and 61.1% of our total deposits as of December 31, 2008 and 2009, respectively, and paid average interest of 4.94% and 3.91% in 2008 and 2009, respectively. |
|
| • | Mutual installment deposits. Mutual installment deposits generally require the customer to make periodic deposits of a fixed amount over a fixed term (usually six months to five years) during which the deposit accrues interest at a fixed rate. If the deposit is withdrawn prior to the end of the fixed term, the customers are paid a lower interest rate than that originally offered. Mutual installment deposits constituted approximately 0.2% and 0.1% of our total deposits as of December 31, 2008 and 2009, respectively, and paid average interest of 3.78% and 3.70% in 2008 and 2009, respectively. |
We also offer deposits which provide the customer with preferential rights to housing subscriptions under the Housing Construction Promotion Law, and eligibility for mortgage loans. These products include:
| | |
| • | Housing subscription time deposits. These deposit products are special purpose time deposits providing the customer with a preferential right to subscribe for new private apartment units under the Housing Construction Promotion Law. This law provides various measures supporting the purchase of houses and the supply of such houses by construction companies. Under this law, if a potential home-buyer subscribes for these deposit products and holds them for a certain period of time set forth in the Housing Construction Promotion Law, such customer obtains the right to subscribe for new private apartment units on a priority basis. Such preferential rights are neither transferable nor marketable in the open market. These products accrue interest at a fixed rate for one year and at an adjustable rate after one year, which are consistent with other time deposits. Required deposit amounts per account range from W2 million to W15 million depending on the size and location of the dwelling unit. These deposit products target high- and middle-income households as customers. |
|
| • | Housing subscription installment savings deposits. These deposit products are monthly installment savings products providing the customer with a preferential subscription right for new private apartment units under the Housing Construction Promotion Law. Such preferential rights are neither transferable nor marketable in the open market. These deposits require monthly installments of W50,000 to W500,000, have maturities between three and five years and accrue interest at fixed rates depending on the term, which are consistent with other installment savings deposits. These deposit products target low- and middle -income households as customers. For information on our deposits in Korean Won based on the principal types of deposit products we offer, see “— Description of Assets and Liabilities — Funding — Deposits.” |
We offer a range of interest rates on our deposit products depending on the rate of return on our interest-earning assets, average funding costs and interest rates offered by other major commercial banks.
We also offer court deposit services for litigants in Korean courts, which involve providing effectively an escrow service for litigants involved in certain types of legal or other proceedings. Chohung Bank historically was a dominant provider of such services since 1958, and following the acquisition of Chohung Bank, we continue to hold a dominant market share in these services. Such deposits typically carry interest rates lower than the market rates
36
(by approximately 1% per annum) and amounted to W5,167 billion, W5,100 billion and W5,706 billion as of December 31, 2007, 2008 and 2009, respectively.
The Monetary Policy Committee of the Bank of Korea imposes a reserve requirement on Won currency deposits of commercial banks which ranges from 0% to 7%, based generally on the term to maturity and the type of deposit instrument. See “— Supervision and Regulation — Principal Regulations Applicable to Banks — Liquidity.”
The Depositor Protection Act provides for a deposit insurance system where the Korea Deposit Insurance Corporation guarantees to depositors the repayment of their eligible bank deposits. The deposit insurance system insures up to a total of W50 million per depositor per bank. See “— Supervision and Regulation — Principal Regulations Applicable to Banks — Deposit Insurance System.”
Retail Banking Services
Overview
We provide retail banking services primarily use three distribution channelsthrough Shinhan Bank, and, to attract newa significantly lesser extent, through Jeju Bank, a regional commercial bank. The retail loans, excluding credit card receivables, amounted to W63,329 billion as of December 31, 2009.
Retail banking services include mortgage and retail lending as well as demand, savings and fixed deposit-taking, checking account services, electronic banking and ATM services, bill paying services, payroll and check-cashing services, currency exchange and wire fund transfer. We believe that providing modern and efficient retail banking services is important to maintaining our public profile and as a source of fee-based income. We believe that our retail banking services and products will become increasingly important in the coming years as the domestic banking sector further develops and becomes more complex.
Retail banking has been and will continue to remain one of our core businesses. Our strategy in retail banking is to provide prompt and comprehensive services to retail customers through increased automation and improved customer service, as well as a streamlined branch network. The retail segment places an emphasis on targeting high net worth individuals.
Retail Lending Activities
We offer various retail loan products, consisting principally of household loans, which target different segments of the population with features tailored to each segment’s financial profile and other characteristics, including each customer’s profession, age, loan purpose, collateral requirements and the duration of the customer’s relationship with Shinhan Bank. Household loans consist principally of the following:
| | |
| • | Mortgage and home equity loans,which are mostly comprised of mortgage loans that are used to finance home purchases and are generally secured by the home being purchased; and |
|
| • | Other retail loans,which are loans made to customers for any purpose other than mortgage and home equity loans and the terms of which vary based primarily upon the characteristics of the borrower and which are either unsecured or secured, or guaranteed by deposits or a third party. |
As of December 31, 2009, our mortgage and home-equity loans and other retail loans accounted for 63.2% and 36.8%, respectively, of our retail loans (excluding credit card loans).
For secured loans, including mortgage and home equity loans, our policy is to lend up to 40% to 60% of the appraisal value of the collateral, after taking into account the value of any lien or other security interest (other than petty claims) that is prior to our security interest. As of December 31, 2009, theloan-to-value ratio of mortgage and home equity loans, under Korean GAAP, of Shinhan Card:Bank was approximately 46.3%. As of December 31, 2009, substantially all of our mortgage and home equity loans were secured by residential property.
Due to the rapid increase in mortgage and home equity loans in Korea, in 2005 and 2006, the Financial Services Commission implemented stringent regulations and guidelines that are designed to suppress the increase of loans secured by housing. These regulations include restrictions on banks’ maximumloan-to-value ratios,
37
evaluation of the borrower’sdebt-to-income ratio, guidelines with respect to appraisal of collateral, internal control and credit approval policy requirements with regard to housing loans as well as provisions designed to discourage commercial banks or other financial institutions from instituting incentive-based marketing and promotion of housing loans. In addition to the existing regulations and guidelines, from the second half of 2005 to the first quarter of 2007, the Financial Services Commission implemented additional guidelines to reduce mortgage and home equity loans and stabilize the real estate market, including (i) restricting the branch network,number of extensions on loans secured by the borrower’s apartment to one, (ii) reducing the maximumloan-to-value ratio for loans secured by the borrower’s apartment in highly speculated areas, (iii) forbidding to extend mortgage or home equity loans to minors and (iv) lowering the minimumloan-to-value ratio to 40% in respect of loans by banks and insurance companies for the purpose of assisting the purchase of apartments located in highly speculated areas with a purchase price of less than W600 million. Following the onset of the new administration of President Lee Myung Bak, whose campaign platform included promises of market-oriented deregulation, and in response to the ongoing recession in the housing market, the Government has rolled back some of the restrictive regulatory initiatives, including raising theloan-to-value ratio to 60% except in three designated highly speculative areas. However, in the second half of 2009 amid concerns about the rising level of household debt, of which a substantial majority is secured by residential properties, the Government has expanded the application of the restrictivedebt-to-income ratio and theloan-to-value ratio to all metropolitan areas.
The following table sets forth the portfolio of our retail loans.
| | | | | | | | | | | | | |
| | | As of December 31, | |
| | | 2007 | | | 2008 | | | 2009 | |
| | | (In billions of Won, except percentages) | |
| |
| Retail loans(1) | | | | | | | | | | | | |
| Mortgage and home-equity(2) | | W | 31,495 | | | W | 36,183 | | | W | 40,022 | |
| Other consumer(2) | | | 25,475 | | | | 25,026 | | | | 23,307 | |
| Percentage of retail loans to total gross loans | | | 37.5 | % | | | 35.9 | % | | | 37.4 | % |
Notes:
| | |
| (1) | | Before allowance for loan losses and excludes credit card accounts. |
|
| (2) | | In Korea, construction companies typically require buyers of new homes (including apartment units) to make installment payments of the purchase price well in advance of the title transfer. Commercial banks, including Shinhan Bank, provide advance loans, on an unsecured basis for the time being, to retail borrowers where the use of proceeds is restricted to financing of home purchases. A significant portion of these loans are guaranteed by third parties, which may include the construction company receiving the installment payment, until construction of the home is completed. Once construction is completed and the titles to the homes are transferred to the borrowers, which may take several years, these loans become secured by the new homes purchased by these borrowers. In recognition of the unsecured nature of such loans, we classify such loans as other consumer loans. |
Pricing
The interest rates on retail loans made by Shinhan Bank are either floating rates (which are periodically reset based on a base rate determined for three-month, six-month or twelve-month periods derived using an internal transfer price system, which reflects the cost of funding in the market, expenses related to lending and the profit margin) or fixed rates that reflect the cost of funding, expenses related to lending and the profit margin. Fixed rate loans currently have maturities of three years or less and offered only on a limited basis. For unsecured loans, we incorporate into the offered rates a margin based on, among other things, the borrower’s credit score as determined during our loan approval process. For secured loans, the credit limit is based on the type of collateral, priority with respect to the collateral and the loan to value ratio. We can adjust the pricing of these loans to reflect the borrower’s currentand/or expected future contribution to our profitability. The applicable interest rate is determined at the time a loan is extended. If a loan is terminated prior to its maturity, the borrower is obligated to pay us an early termination fee of approximately 0.5% to 2.0% of the loan amount in addition to the accrued interest, depending on the timing, the nature of the credit and the amount.
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As of December 31, 2009, Shinhan Bank’s three-month, six-month and twelve-month base rates were approximately 2.85%, 3.49% and 4.05%, respectively. As of December 31, 2009, Shinhan Bank’s fixed rates for mortgage and home equity loans with a maturity of one year, two years and three years were 6.60%, 7.10% and 7.20%, respectively, and Shinhan Bank’s fixed rates for other retail loans with a maturity of one year were from 9.00% to 13.50%, depending on the retail credit scores of its customers.
As of December 31, 2009, approximately 85.9% of Shinhan Bank’s total retail loans were priced based on floating rates and approximately 14.1% were priced based on fixed rates. As of the same date, approximately 96.9% of Shinhan Bank’s retail loans with maturity of more than one year were priced based on floating rates and approximately 3.1% were priced based on fixed rates.
Prior to February 2010, major commercial banks in Korea, including Shinhan Bank, principally used the certificate of deposit, or CD, rates set by Bank of Korea, in determining the base rate for secured housing loans, which represent the bulk of retail loans. However, amid concerns that the CD rates do not accurately represent the banks’ cost of capital as certificates of deposit constitute relatively a minor fraction of the banks’ assets and in light of the substantial variance in recent periods between the CD rates and the actual market rates, in February 2010 the Korean Federation of Banks began to publish the “cost of funding index”, or COFIX, which is computed based on the weighted average interest of select funding products (including time deposits, housing and other installment savings deposits, repos, discounted bills and senior non-convertible financial debentures) of nine major Korean banks (comprised of Kookmin Bank, Shinhan Bank, Woori Bank, Hana Bank, Korea Exchange Bank, NH Bank, Industrial Bank of Korea, Citibank Korea and Standard Chartered Korea First Bank). Each bank can then independently determine the interest rate applicable to the end customer by adding a spread to the COFIX based on the difference between the COFIX and such bank’s general funding costs, administration fees, the customer’s credit score, the maturity of the loan and other customer-specific premiums and discounts based on the customer relationship with such bank. In the case of floating rate notes, the end-user interest rates are adjusted on every three months, six months and 12 months, depending on the reset period of the base rate.
Private Banking
Historically, we have focused on customers with high net worth. Our retail banking services include providing private banking services to high net worth customers who seek personal advice in complex financial matters. Our aim in private banking is to help enhance wealth accumulation by, and increase the financial sophistication of, our high net-worth clients by offering them portfolio and fund management, tax consulting and real estate management services, among others.
As of December 31, 2009, Shinhan Bank operated 19 private banking centers nationwide, including 15 in the greater Seoul metropolitan area, which serviced approximately 4,000 private banking customers. Our private banking customers are typically required to have W500 million in deposit with us to qualify for private banking services.
Corporate Banking Services
Overview
We provide corporate banking services, primarily through Shinhan Bank, to small- and medium-sized enterprises, including enterprises known as “small office, home office” (“SOHO”), which are small enterprises operated by individuals or households, and, to a lesser extent, to large corporations, including corporations that are affiliated withchaebols. We also lend to government-controlled enterprises.
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The following table sets forth the balances and percentage of our total lending attributable to each category of our corporate lending business as of the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | |
| | | 2007 | | | 2008 | | | 2009 | |
| | | (In billions of Won, except percentages) | |
| |
| Small- and medium-sized enterprises loans(1) | | W | 62,296 | | | | 41.0 | % | | W | 71,212 | | | | 41.8 | % | | W | 69,571 | | | | 41.1 | % |
| Large corporate loans(2) | | | 17,871 | | | | 11.8 | % | | | 23,483 | | | | 13.7 | % | | | 21,238 | | | | 12.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total corporate loans | | W | 80,167 | | | | 52.8 | % | | W | 94,695 | | | | 55.5 | % | | W | 90,809 | | | | 53.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Notes:
| | |
| (1) | | Represents the principal amount of loans extended to corporations meeting the definition of small- and medium-sized enterprises under the Basic Act on Small- and Medium-sized Enterprises and its Presidential Decree. |
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| (2) | | Includes loans to government-controlled companies. |
Small- and Medium-sized Enterprises Banking
Under the Basic Act on Small- and Medium-sized Enterprises and its Presidential Decree, small- and medium-sized enterprises are defined as companies which (i) do not have employees, sales, agents,paid-in capital or assets exceeding the number or the amount, as the case may be, specified in the Presidential Decree in accordance with their types of businesses and (iii) business partnerships(ii) do not belong to a conglomerate as defined in the Monopoly Regulations and affiliations with vendors.Fair Trade Act. In order to qualify as a small- and medium-sized enterprise, none of its shareholders holding 30% or more of its total issued and outstanding voting shares can have (i) full-time employees of 1,000 or more and (ii) assets of W500 billion or more as of the end of the immediately preceding fiscal year. As of December 31, 2009, we made loans to 186,003 small- and medium-sized enterprises for an aggregate amount W69,571 billion.
Our branch network consistssmall- and medium-sized enterprises banking business has traditionally been and is expected to remain one of 1,035 retail and corporate banking branches of Shinhan Bank and 30 card sales branches of Shinhan Card. The useour core businesses, subject to prevailing market conditions. For example, as a result of the established branch networkadoption of Shinhan Bank is partrestrictive regulatory measures in 2005 to 2007 designed to curb speculation in the housing market, lending to the small- and medium-sized enterprises was an area of intense competition among the commercial banks in Korea as opportunities to expand home and mortgage loans diminished. However, since the onset of the groupwide cross-selling effortsglobal financial crisis and economic downturns in Korea starting in the second half of selling credit card products2008, we have sharply reduced new lending to the small- and medium-sized enterprises and are currently focusing on maintaining the asset quality of existing banking customers. In 2007,loans to these enterprises. Depending on the numberlevel and scope of new cardholders acquired through our branch network accounted for approximately 23.2% of the total number of new cardholders. economic recovery, we may seek to focus on asset growth on a selective basis.
We believe that Shinhan Bank, which has traditionally focused on small- and medium-sized enterprises lending, is well-positioned to succeed in the banking branch network will continue to provide a stablesmall- and low-cost venuemedium-sized enterprises market in light of its marketing capabilities (which we believe have provided Shinhan Bank with significant brand loyalty) and its prudent risk management practices, including conservative credit rating system for acquiring high-quality credit cardholders.approval. To maintain or increase its market share of small- and medium-sized enterprises lending, Shinhan Bank:
| | |
| • | has positioned itself based on accumulated expertise. We believe Shinhan Bank has a good understanding of the credit risks embedded in this market segment and to develop loan and other products specifically tailored to the needs of this market segment; |
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| • | operates a relationship management system to provide targeted and tailored customer service to small-and medium-sized enterprises. Shinhan Bank currently has relationship management teams in 142 corporate banking branches, of which 38 are corporate banking branches and 104 are hybrid banking branches designed to serve retail as well as small-business corporate customers. These relationship management teams market products and review and approve smaller loans that pose less credit risks; and |
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| • | continues to focus on cross-selling loan products with other products. For example, when Shinhan Bank lends to small- and medium-sized enterprises, it also explores opportunities to cross-sell retail loans or deposit products to the employees of those companies or to provide financial advisory services. |
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Large Corporate Banking
Large corporate customers consist primarily of member companies ofchaebolsand financial institutions. Our large corporate loans amounted to W21,238 billion as of December 31, 2009.
Shinhan Bank aims to be a one-stop financial solution provider and partner with its corporate clients in their corporate expansion and growth endeavors. To this end and in order to take advantage of the recent deregulation in the Korean financial industry as a result of the adoption of the Financial Investment Services and Capital Markets Act, Shinhan Bank provides investment banking services, including real estate financing, overseas real estate project financing, large development project financing, infrastructure financing, structured financing, equity investments/venture investments, mergers and acquisitions financing, ship and aircraft financing, corporate finance and asset securitization. Shinhan Bank, through Shinhan Asia Limited, a subsidiary in Hong Kong, also arranges financing for, and offer consulting services to, Korean companies expanding their business overseas, particularly in Asia.
Electronic Corporate Banking
Shinhan Bank offers to corporate customers a web-based total cash management service through “Shinhan Bizbank.” Shinhan Bizbank supports all types of banking transactions from basic transaction history inquiries and fund transfers to opening letters of credit, trade finance, payment management, collection management, sales settlement service, acquisition settlement service, B2B settlement service, sweeping and pooling.
Corporate Lending Activities
Our principal corporate loan products are working capital loans and facilities loans. Working capital loans, which include discounted notes and trade financing, are generally loans used for general working capital purposes. Facilities loans are provided to finance the purchase of equipment and construction of manufacturing plants. As of December 31, 2009, working capital loans and facilities loans amounted to W45,960 billion and W14,754 billion, respectively, representing 75.7% and 24.3% of Shinhan Bank’s total Won-denominated corporate loans under Korean GAAP. Working capital loans generally have a maturity of one year, but may be extended on an annual basis for an aggregate term of three years in the case of unsecured loans and five years in the case of secured loans. Facilities loans, which are generally secured, have a maximum maturity of ten years.
Corporate loans may be unsecured or secured by real estate, deposits or guaranty certificates. As of December 31, 2009, under Korean GAAP, secured loans and guaranteed loans (including loans secured by guaranty certificates issued by credit guarantee insurance funds) accounted for 44.8% and 10.2%, respectively, of Shinhan Bank’s Won-denominated loans to small- and medium-sized enterprises. Among total corporate loans, approximately 40% were secured by real estate.
When evaluating the extension of loans to corporate customers, Shinhan Bank reviews their creditworthiness, credit scoring, value of any collateral or third party guarantee. The sales agents representedvalue of collateral is defined using a formula that takes into account the most significant sourceappraised value of new cardholdersthe collateral, any prior liens or other claims against the collateral and an adjustment factor based on a number of considerations including the average value of any nearby property sold in 2007,a court-supervised auction during the previous year. Shinhan Bank revalues any collateral when a secured loan is renewed or if a trigger event occurs with respect to the underlying loan.
Pricing
Shinhan Bank prices its corporate loan products based principally on the cost of funding and the numberexpected loss rate based on the borrower’s credit risk. As of December 31, 2009, 80.2% of Shinhan Bank’s corporate loans with outstanding maturities of one year or more had variable interest rates.
Shinhan Bank determines the interest rate charged for its corporate loans as the sum of (i) Shinhan Bank’s periodic market floating rate or reference rate, (ii) transaction cost, (iii) credit spread and (iv) risk premium, as adjusted by (v) a discretionary adjustment rate.
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Depending on the market condition and the agreement with the borrower, Shinhan Bank may use either its periodic market floating rate or the reference rate as the base rate in calculating its pricing. As of December 31, 2009, Shinhan Bank’s periodic market floating rates (which are based on a base rate determined for three-month, six-month, one-year, two-year, three-year or five-year periods derived using Shinhan Bank’s market rate system) were 2.85% for three months, 3.49% for six months, 4.05% for one year, 4.85% for two years, 5.16% for three years and 5.70% for five years. As of the same date, Shinhan Bank’s reference rate was 8.75%.
Transaction cost is added to reflect the standardized transaction cost assigned to each loan product and other miscellaneous costs, including contributions to the Credit Guarantee Fund, and education taxes. The Credit Guarantee Fund is a statutorily created entity that provides credit guarantees to loans made by commercial banks and is funded by mandatory contributions from commercial banks in the amount of approximately 0.2% of all loans made by them.
The credit spread is added to the periodic floating rate to reflect the expected loss based on the borrower’s credit rating and the value of any collateral or payment guarantee. In addition, Shinhan Bank adds a risk premium that is measured by an unexpected loss that exceeds the expected loss from the credit rating assigned to a particular borrower.
A discretionary adjustment rate is added or subtracted to reflect the borrower’s currentand/or future contribution to Shinhan Bank’s profitability. In the event of additional credit provided by way of a guarantee of another loan, a subtraction is made by the amount of the adjustment rate in order to reflect such change in the credit spread. In addition, depending on the price and other terms set by competing banks for similar borrowers, Shinhan Bank may reduce the interest rate charged in order to compete more effectively with other banks.
Treasury and Securities Investment
Shinhan Bank engages in treasury and securities investment business, which involves, among other things, the following activities:
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| • | treasury; |
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| • | securities investment and trading; |
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| • | derivatives trading; and |
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| • | international business. |
Treasury
Shinhan Bank’s treasury division provides funds to all of Shinhan Bank’s business operations and ensures the liquidity of its operation. To secure stable long-term funds, Shinhan Bank uses fixed and floating rate notes, debentures, structured financing, and other advanced funding methods. As for overseas funding, Shinhan Bank closely monitors the feasibility of raising funds in currencies other than the U.S. dollar, such as Japanese Yen and Euro. In addition, Shinhan Bank makes call loans and borrows call money in the short-term money market. Call loans are short-term lending among banks and financial institutions in either Korean Won or foreign currencies with minimum transaction amounts of W100 million and maturities of typically one day.
Securities Investment and Trading
Shinhan Bank invests in and trades securities for its own accounts in order to maintain adequate sources of liquidity and generate interest and dividend income and capital gains. Shinhan Bank’s trading and investment portfolios consist primarily of Korean treasury securities and debt securities issued by Korean government agencies, local governments or certain government-invested enterprises and debt securities issued by financial institutions, and equity securities listed in the KRX KOSPI Market and KRX KOSDAQ Market of the Korea Exchange. For a detailed description of our new cardholders acquiredsecurities investment portfolio, see “— Description of Assets and Liabilities — Investment Portfolio.”
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Derivatives Trading
Shinhan Bank provides and trades a range of derivatives products, including:
| | |
| • | interest rate swaps, options, and futures relating to Korean Won interest rate risks and LIBOR risks, respectively; |
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| • | cross-currency swaps largely for Korean Won against U.S. dollars, Japanese Yen and Euros; |
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| • | equity and equity-linked options; |
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| • | foreign currency forwards, swaps and options; |
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| • | commodity forwards, options and swaps; |
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| • | credit derivatives; and |
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| • | KOSPI 200 indexed equity options. |
Shinhan Bank’s trading volume in notional amount was W395,015 billion and W621,776 billion, in 2008 and 2009, respectively. Such derivative operations generally focus on addressing the needs of Shinhan Bank’s corporate clients to hedge their risk exposure andback-to-back derivatives entered into to hedge Shinhan Bank’s risk exposure that results from such client contracts.
Shinhan Bank also enters into derivative contracts to hedge the interest rate and foreign currency risk exposures related to its own assets and liabilities. In addition, to a limited extent, Shinhan Bank engages in proprietary trading of derivatives within our regulated open position limits. See “— Description of Assets and Liabilities — Derivatives.”
International Business
Shinhan Bank also engages in treasury and investment activities in international capital markets, principally including foreign currency-denominated securities trading, foreign exchange trading and services, trade-related financial services, international factoring services and foreign retail banking operations through sales agentsits overseas branches and subsidiaries. Shinhan Bank aims to become a leading bank in Asia and expand its international business and by focusing on further bolstering its overseas network, localizing its overseas operations and diversifying its product offerings, particularly in terms of asset management, in order to meet the various financing needs of its current and potential customers overseas.
Trust Account Management Services
Overview
Shinhan Bank’s trust account management services include management of trust accounts, primarily in the form of money trusts. Trust account customers are typically individuals seeking higher rates of return than those offered by bank account deposits. Because deposit reserve requirements do not apply to deposits held in trust accounts as opposed to deposits held in bank accounts, and regulations over trust accounts tend to be less strict, Shinhan Bank is generally able to offer higher rates of return on trust account products than on bank deposit products. However, due to the ongoing low interest environment, in recent years, Shinhan Bank has not been able to offer attractive rates of return on its trust account products.
Trust account products generally require higher minimum deposit amounts than those required by comparable bank account deposit products. Unlike bank deposit products, deposits in trust accounts are invested primarily in securities and, to a lesser extent, in loans, as the relative shortage of funding sources require that trust accounts be invested in a higher percentage of liquid assets.
Under the Banking Act of 1950, as amended, assets in trust accounts are required to be segregated from other assets of the trustee bank and are not available to satisfy the claims of the depositors or other creditors of such bank. Accordingly, trust accounts are accounted for approximately 52.6%and reported separately from the bank accounts. See “— Supervision and Regulation.” Trust accounts are regulated by the Trust Act and the Financial Investment Services and Capital
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Markets Act, and most national commercial banks offer similar trust account products. Shinhan Bank earns income from trust account management services, which is recorded as net trust management fees. See “Item 5.A. Operating Results — Results of Operation — 2009 Compared to 2008 — Non-interest Income.”
As of December 31, 2008 and 2009, under Korean GAAP, Shinhan Bank had total trust assets of W37,123 billion and W32,537 billion, respectively, comprised principally of real property investments of W9,942 billion and W10,030 billion, respectively, securities investments of W10,628 billion and W7,208 billion, respectively, and loans in the total numberprincipal amount of new cardholders in 2007.W744 billion and W623 billion, respectively. Securities investments consisted of corporate bonds, government-related bonds and other securities, primarily commercial paper. As of December 31, 2007, 2008 and 2009, equity securities constituted 3.4%, 3.0% and 3.1%, respectively, of Shinhan Bank’s total trust assets under Korean GAAP. Loans made by trust accounts are similar in type to those made by bank accounts, except that they are made only in Korean Won. As of December 31, 2007, 2008 and 2009, under Korean GAAP, approximately 60.4%, 64.4% and 61.6%, respectively, of the amount of loans from the trust accounts were collateralized or guaranteed. In making investment from funds received for each trust account, each trust product maintains investment guidelines applicable to each such product which sets forth, among other things, company-, industry- and security-type limitations.
Trust Products
Money trusts managed by Shinhan Bank’s trust account business amounted to W12,822 billion and W9,905 billion as of December 31, 2008 and 2009, under Korean GAAP. In Korea, a money trust is a discretionary trust over which (except in the case of a specified money trust) we have investment discretion subject to applicable law and is commingled and managed jointly for each type of trust account. The specified money trusts are established on behalf of customers who give specific directions as to the investment of trust assets.
Shinhan Bank offers primarily two types of money trust accounts through its retail branch network: guaranteed fixed rate trusts and variable rate trusts.
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| • | variable rate trust accounts. Variable rate trust accounts are not entitled to a guaranteed return on the deposits, except in the limited cases of principal guaranteed variable rate trust accounts, for which payment of the principal amount is guaranteed. As of December 31, 2008 and 2009, under Korean GAAP, Shinhan Bank’s variable rate trust accounts amounted to W9,311 billion and W6,425 billion, respectively, and its principal guaranteed variable rate trust accounts amounted to W3,510 billion and W3,479 billion, respectively. Shinhan Bank charges a lump sum or a fixed percentage of the assets held in such trusts as a management fee, and, depending on the trust products, is also entitled to additional fees in the event of early termination of the trusts by the customer. Korean banks, including Shinhan Bank, are currently allowed to guarantee the principal of the following types of variable rate trust account products: (i) existing individual pension trusts, (ii) new individual pension trusts, (iii) existing retirement pension trusts, (iv) new retirement pension trusts, (v) pension trusts and (vi) employee retirement benefit trusts. |
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| • | guaranteed fixed rate trust accounts. Guaranteed fixed rate trust accounts are entitled to a guaranteed return of the principal as well as an additional fixed rate of return. Upon termination of these trusts, Shinhan Bank is entitled to investment returns from the management of these trusts, net of the guaranteed returns paid to customers and any related expenses. In the past, Korean commercial banks, including Shinhan Bank, offered two types of guaranteed fixed rate trust products: general unspecified money trusts and development money trusts. However, since January 1999, banks in Korea have been prohibited from offering new guaranteed fixed rate trust products, and the guaranteed fixed rate trust products currently serviced are carryovers from the past and have been dwindling in volume as the products mature. As of December 31, 2008 and 2009, the guaranteed fixed rate trust products maintained by Shinhan Bank amounted to W1.0 billion and W1.0 billion, respectively, under Korean GAAP. If income from a guaranteed fixed rate trust account is insufficient to pay the guaranteed amount, such deficiency must be satisfied from (i) first, special reserves maintained in such trust accounts, (ii) secondly, trust fees and (iii) lastly, funds transferred from the bank accounts of Shinhan Bank. |
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Credit Card Services
Overview
We currently provide credit card services through our credit card subsidiary, Shinhan Card.
Former Shinhan Card was originally formed as a result of the spin-off of Shinhan Bank’s credit card business in June 2002. In April 2006, the credit card division of Chohung Bank was split and merged into former Shinhan Card concurrently with the merger of Chohung Bank and Shinhan Bank. Following such split-merger, former Shinhan Card had, 9,691 sales agents,as of April 3, 2006, W3.4 trillion (reported basis) or W3.8 trillion (managed basis) in assets, in each case, under Korean GAAP. Prior to the merger of former Shinhan Bank and Chohung Bank in April 2006, Chohung Bank had an active credit card business division. Chohung Bank was a member of BC Card Co., Ltd. (“BC Card”), which is owned by consortium banks. Shinhan Card currently holds 14.85% equity interest in BC Card. BC Card issues credit cards under the names of the member banks, substantially all of which 9,022 were independent contractorsare licensed to use MasterCard, Visa or JCB. This enables holders of BC Card to use their cards at any establishment which accepts MasterCard, Visa or JCB, as the case may be.
In March 2007, we acquired the controlling equity interest in LG Card. On October 1, 2007, LG Card assumed all of the assets and 669 were affiliate partner’s sales agents. These sales agents assist prospectsliabilities of former Shinhan Card and changed its name to complete formsShinhan Card. We believe that the acquisition of LG Card, which was the largest credit card company in Korea in terms of the number of cardholders, has contributed to our having the largest market share in the Korean credit card industry and applicationsdiversifying our revenue sources from our non-banking operations.
Products and Services
Shinhan Card offers a wide range of credit card and other services, principally consisting of the following:
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| • | credit card services, which involve providing cardholders with limited credit to purchase products and services. Cardholders can repay either (i) on a lump-sum basis in full at the end of a monthly billing cycle or (ii) to a lesser extent, on a revolving basis subject to a minimum monthly payment which is the lesser of (x) 5.0% of the amount outstanding or (y) W30,000. Currently, the outstanding credit card balance generally accrues interest at an annual rate of approximately 9.8% to 26.9%, depending on the credit profile of the cardholder. |
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| • | cash advances, for which cardholders can repay either on a lump-sum basis or a revolving basis. Currently, the lump-sum cash advances generally accrue interest at an annual rate of approximately 9.8% to 26.6% and the revolving cash advances generally accrue interest at a minimum rate of 5.0% of the outstanding balance. Cash advances may be obtained from ATM machines and bank branches. |
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| • | installment purchases, which provides customers with an option to purchase products and services from select merchants on an equal principal installment basis over a fixed term, which ranges from three months to a maximum of 60 months. Currently, the outstanding installment purchase balances generally accrue interest at an annual rate of approximately 5.5% to 26.0%. |
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| • | card loans, which may be unsecured, and which cardholders must repay on an equal principal installment basis over an initial fixed term of two to 24 months or in full at maturity. Currently, the outstanding principal amount of card loans accrue interest at an annual rate of approximately 7.6% to 25.8% and an upfront fee of up to 1.0% is charged on the principal amount of the loan. For delinquent cardholders, outstanding credit card receivables can also be restructured into loan, which are recorded as card loans and payment for which is made on an installment basis over a maximum term of 60 months. |
Shinhan Card also derives fee income in the form of lump-sum fees, installment purchase fees and cash advance fees and, to a lesser extent, annual membership fees and penalty interest on late and deferred payments and fees paid by merchants. Shinhan Card passes onto its customers the transaction fees charged by financial institutions (other than Shinhan Bank) for cash advances made through ATMs of such financial institutions. Any accounts that are unpaid when due are deemed to be delinquent accounts, for which Shinhan Card charges a penalty interest in the range of 25.0% to 29.9% per annum in lieu of the interest rates applicable prior to default.
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The annual membership fees for credit cards vary depending on the type of the card and the benefits offered for such card. For our standard cards, we charge an annual membership fee ranging from W3,000 to W1,000,000 per card, depending on the type of the credit card and the cardholder profile. Annual membership fees for various affinity and co-branded cards are higher and vary from W5,000 to W500,000.
Merchant discount fees, which are processing fees Shinhan Card charges to the merchants, can be up to 4.5% of the purchased amount depending on the merchant used, with the average charge being 2.15% in 2009.
Although making payments on a revolving basis is quite common in many other countries, this payment method is still in its early stages of implementation in Korea. Cardholders in Korea are generally required to repay their purchases within approximately 15 to 45 days of purchase depending on their payment cycle, except in the case of installment purchases. Installment purchases typically have a repayment term of three to six months and charge different rates depending on the duration of the repayment term.
In addition to credit card services, Shinhan Card also offers check cards, which are similar to debit cards in the United States, to its retail customers as well as provide customer service subsequentcorporate customers. A check card can be used at any of the merchants that accept credit cards issued by Shinhan Card and the amount charged to a check card is directly debited from the cardholder’s designated bank account. Although Shinhan Card does not charge annual membership fees on check cards, merchants are charged fees on the amount purchased using check cards at a rate similar to those used for credit card purchases.
Customers and Merchants
In addition to internal growth through cross-selling, we also seek to enhance our market position by selectively targeting new customers with high net worth and solid credit quality through the use of a sophisticated and market-oriented risk management system. Shinhan Card screens its credit card applicants and sets individualized credit limits for such applicants according to internal guidelines based on a comprehensive credit scoring system.
The following table sets forth the number of customers and merchants of Shinhan Card as of the dates indicated.
| | | | | | | | | | | | | |
| | | As of December 31, | |
| | | 2007 | | | 2008 | | | 2009 | |
| | | (In thousands, except percentages) | |
| |
Shinhan Card: | | | | | | | | | | | | |
| Number of credit card holders(1) | | | 13,425 | | | | 13,718 | | | | 14,435 | |
| Personal accounts | | | 13,346 | | | | 13,617 | | | | 14,324 | |
| Corporate accounts | | | 79 | | | | 101 | | | | 111 | |
| Active ratio(2) | | | 69.7 | % | | | 74.9 | % | | | 73.7 | % |
| Number of merchants | | | 2,154 | | | | 2,268 | | | | 2,425 | |
Notes:
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| (1) | | Represents the number of cardholders not subject to suspension or termination as of the relevant date. |
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| (2) | | Represents the ratio of accounts used at least once within the last six months to the total accounts as of yearend. |
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Financial and Statistical Information
The following table sets forth certain financial and statistical information relating to the issuancecredit card, installment sales and leasing operations of a credit card. The compensation to these sales agents is tied to the transaction volume and repayment behaviorShinhan Card as of the dates or for the period indicated.
| | | | | | | | | | | | | |
| | | As of or for the Year Ended December 31, | |
| | | 2007 | | | 2008 | | | 2009 | |
| | | Shinhan Card(1) | | | Shinhan Card(1) | | | Shinhan Card(1) | |
| | | (In billions of Won, except percentages) | |
| |
| Interest income: | | | | | | | | | | | | |
| Installments | | W | 260 | | | W | 326 | | | W | 311 | |
| Cash advances | | | 547 | | | | 639 | | | | 524 | |
| Card loans(2) | | | 488 | | | | 548 | | | | 506 | |
| Revolving | | | 227 | | | | 240 | | | | 214 | |
| Late payments | | | 8 | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Total | | W | 1,530 | | | W | 1,753 | | | W | 1,555 | |
| | | | | | | | | | | | | |
| Credit card fees: | | | | | | | | | | | | |
| Merchant fees(3) | | W | 1,179 | | | W | 1,309 | | | W | 1,422 | |
| Other fees | | | 2 | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Total | | W | 1,181 | | | W | 1,309 | | | W | 1,422 | |
| | | | | | | | | | | | | |
| Charge volume:(4) | | | | | | | | | | | | |
| General purchases | | W | 45,912 | | | W | 45,624 | | | W | 51,784 | |
| Installment purchases | | | 14,269 | | | | 17,682 | | | | 17,814 | |
| Cash advances | | | 20,704 | | | | 23,945 | | | | 21,143 | |
| | | | | | | | | | | | | |
| Total | | W | 80,885 | | | W | 87,251 | | | W | 90,741 | |
| | | | | | | | | | | | | |
| Outstanding balance (at year end)(5): | | | | | | | | | | | | |
| General purchases | | W | 3,018 | | | W | 3,046 | | | W | 3,636 | |
| Installment purchases | | | 3,833 | | | | 4,037 | | | | 4,433 | |
| Cash advances | | | 3,086 | | | | 3,111 | | | | 2,606 | |
| Revolving purchases | | | 1,361 | | | | 1,410 | | | | 1,339 | |
| Card loans(2) | | | 2,556 | | | | 2,524 | | | | 2,672 | |
| Others | | | 791 | | | | 470 | | | | 391 | |
| | | | | | | | | | | | | |
| Total | | W | 14,645 | | | W | 14,598 | | | W | 15,077 | |
| | | | | | | | | | | | | |
| Average balance | | W | 12,106 | | | W | 14,458 | | | W | 13,585 | |
| Delinquent balances(6): | | | | | | | | | | | | |
| From 1 day to 1 month | | W | 790 | | | W | 663 | | | W | 404 | |
| Over 1 month: | | | | | | | | | | | | |
| From 1 month to 3 months | | W | 244 | | | W | 244 | | | W | 113 | |
| From 3 months to 6 months | | | 165 | | | | 171 | | | | 111 | |
| Over 6 months | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Sub-total | | | 409 | | | | 415 | | | | 224 | |
| | | | | | | | | | | | | |
| Total | | W | 1,199 | | | W | 1,078 | | | W | 628 | |
| | | | | | | | | | | | | |
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| | | | | | | | | | | | | |
| | | As of or for the Year Ended December 31, | |
| | | 2007 | | | 2008 | | | 2009 | |
| | | Shinhan Card(1) | | | Shinhan Card(1) | | | Shinhan Card(1) | |
| | | (In billions of Won, except percentages) | |
| |
| Delinquency ratios(7): | | | | | | | | | | | | |
| From 1 day to 1 month | | | 5.4 | % | | | 4.5 | % | | | 2.7 | % |
| Over 1 month: | | | | | | | | | | | | |
| From 1 month to 3 months | | | 1.7 | % | | | 1.7 | % | | | 0.7 | % |
| From 3 months to 6 months | | | 1.1 | % | | | 1.2 | % | | | 0.7 | % |
| Over 6 months(8) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Sub-total | | | 2.8 | % | | | 2.9 | % | | | 1.5 | % |
| | | | | | | | | | | | | |
| Total | | | 8.2 | % | | | 7.4 | % | | | 4.2 | % |
| | | | | | | | | | | | | |
| Rewritten loans(9) | | W | 350 | | | W | 220 | | | W | 194 | |
| Gross charge-offs | | W | 436 | | | W | 521 | | | W | 597 | |
| Recoveries | | | 459 | | | | 509 | | | | 394 | |
| | | | | | | | | | | | | |
| Net charge-offs | | W | (23 | ) | | W | 12 | | | W | 203 | |
| | | | | | | | | | | | | |
| Gross charge-off ratio(10) | | | 3.60 | % | | | 3.60 | % | | | 4.39 | % |
| Net charge-off ratio(11) | | | (0.19 | )% | | | 0.08 | % | | | 1.49 | % |
| Non-performing loan ratio(12) : | | | | | | | | | | | | |
| Reported | | | 3.71 | % | | | 2.91 | % | | | 3.08 | % |
| Managed | | | 2.98 | % | | | 2.42 | % | | | 2.53 | % |
| Asset securitization(13) | | W | 5,762 | | | W | 5,666 | | | W | 3,734 | |
| Ratio of total assets securitized to total managed assets | | | 29.4 | % | | | 29.4 | % | | | 19.2 | % |
Notes:
| | |
| (1) | | The information of Shinhan Card for 2007 includes that of LG Card (renamed as Shinhan Card on October 1, 2007) for the period from March 1, 2007 through December 31, 2007 (including that for the assets and liabilities of former Shinhan Card assumed by LG Card on October 1, 2007) and that of former Shinhan Card for the period from January 1, 2007 through September 30, 2007, presented on an aggregated basis. |
|
| (2) | | Card loans consist of loans that are provided on either a secured or unsecured basis to cardholders according to prior agreement. Payment of principal, fees and interest on such a loan can be due either in one payment or in installments over a fixed period following a grace period. |
|
| (3) | | Merchant fees consist of merchant membership and maintenance fees, charges associated with prepayment by Shinhan Card (on behalf of customers) of sales proceeds to merchants, processing fees relating to sales and membership applications. |
|
| (4) | | Represents the aggregate cumulative amount charged during the year. |
|
| (5) | | Represents amounts before allowance for loan losses. |
|
| (6) | | Includes the unbilled balances of installment purchases. |
|
| (7) | | Represents the ratio of delinquent balances to outstanding balances for the year. |
|
| (8) | | The charge-off policy is generally to charge off credit card balances which are 180 days past due following internal review. |
|
| (9) | | Represents the delinquent credit card balances for credit card purchase and cash advances which are rewritten as credit card loans, thereby reducing the balance of delinquent accounts before the application of Accounting Standard Codification (“ASC”)310-30, (formerlySOP 03-3) relating to the acquisition of LG Card, which reduced the outstanding balances by W322 billion, W165 billion and W84 billion as of December 31, 2007, 2008 and 2009, respectively. |
|
| (10) | | Represents the ratio of gross charge-offs for the year to the average balance for the year. |
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| | |
| (11) | | Represents the ratio of net charge-offs for the year to the average balances for the year. |
|
| (12) | | The reported information is presented on the Korean GAAP basis. The managed information includes, subject to certain adjustments, financial receivables that Shinhan Card has sold in asset-backed securitizations. |
|
| (13) | | Represents credit card balances that were transferred in asset securitization transactions as presented on the Korean GAAP basis. Under U.S. GAAP, most of these transfers are not recognized as sales but are recognized as secured borrowings. |
Presentation of Managed Data for Shinhan Card’s Asset Securitization transactions
Shinhan Card periodically securitizes and sells credit card receivables to diversify its funding sources. The effect of these transactions under Korean GAAP is to remove such receivables from Shinhan Card’s balance sheet although Shinhan Card retains recourse liabilities for ineligible receivables and generally repurchases the securitized receivables upon their maturity. However, under U.S. GAAP, such securitization transactions can be accounted for as sales transactions and be removed from our balance sheet only if certain specific criteria are met. Most of the transactions do not meet those criteria, and thus the removal treatment performed under Korean GAAP is reversed and those receivables are included in our balance sheet. Shinhan Card continues to manage such securitized and sold receivables including billing and payment as well as record keeping, and receives service fees from the securitization vehicles for servicing such receivables. We believe that the disclosure of the credit experience of Shinhan Card’s managed portfolio presents a more complete presentation of our credit exposure because the managed data reflects not only on-balance sheet receivables but also securitized assets as to which Shinhan Card retains a risk of loss in the underlying assets, primarily in the form of subordinated retained interests. In addition, because Shinhan Card tends to transfer to securitization vehicles assets which generally are in the higher asset qualification categories, the managed basis figures generally tend to exhibit higher net interest spreads and net interest margins and lower delinquency ratios. The managed financial information and operating data are not audited and are not presented or prepared in accordance with Korean GAAP or on the same basis as the audited financial information included in this offering circular. Managed financial data is derived from an arithmetic summation of Shinhan Card’s on-balance sheet receivables together with receivables sold in off-balance sheet transactions subject to certain adjustments. As a result of these adjustments, managed financial data is not the simple sum of the reported accounts and Shinhan Card’s off-balance sheet transactions. Accordingly, the financial information contained in the reported accounts and the managed financial data are not directly comparable and should not be so compared. While Shinhan Card prepares managed financial data based upon assumptions and methods it deems reasonable, the managed financial data do not accurately represent its financial condition or results of operations as if it had not conducted any ABS transactions and the managed operating data do not accurately reflect its results of operations.
Securities Brokerage Services
Overview
Through Shinhan Investment, we provide a wide range of financial investment services to our diversified customer base including corporations, institutional investors, governments and individuals. Financial investment services offered by Shinhan Investment range from securities brokerage to our retail and institutional customers, introduced by them,investment advice and we believe this system helps usfinancial planning services to minimize credit riskour retail customers, as well as investment banking services such as underwriting and M&A advisory services to enhance profitability.our institutional customers.
As of December 31, 2009, according to internal data, Shinhan Investment’s annual market share of Korean equity brokerage market was 5.39% (consisting of 4.38% in the retail segment, 0.52% in the institutional segment and 0.49% in the international segment) in terms of total brokerage volume, ranking fourth among securities firms in Korea, excluding discount brokers such as Mirae Asset Securities and Kiwoom Securities. As of the same date, according to internal data, Shinhan Investment held the largest annual market shares in the Kospi200 futures and options brokerage segments of 8.30% and 9.45%, respectively, in terms of total brokerage volume with respect to these products, which we believe will enable Shinhan Investment to further solidify its market position in its futures trading and brokerage services as it expands these services.
49
Following the implementation of the Financial Investment Services and Capital Markets Act in February 2009, Shinhan Investment has obtained requisite approvals for its existing businesses in investment banking services, securities brokerage services, trust services, investment advisory service and discretionary account asset management services. In November 2009, Shinhan Investment also obtained the requisite approval for existing and new derivatives businesses, which enables Shinhan Investment to provide not only its existing services in equity- and stock index-linked derivatives sales and brokerage, but also proprietary trading and brokerage services for futures involving interest rates, currency and commodities as well as foreign exchange margin trading. Shinhan Investment currently provides all of the foregoing services, subject to prevailing market conditions, and is currently preparing to submit a waylicense application to engage in collective investment development businesses.
Products and Services
Shinhan Investment provides principally the following services:
| | |
| • | retail client services. These services include equity and bond brokerage, investment advisory and financial planning services to retail customers, with a focus on high net worth individuals. The fees generated include brokerage commissions for the purchase and sale of securities, asset management fees, interest income from credit extensions, including in the form of stock subscription loans, margin transaction loans and loans secured by deposited securities. |
|
| • | institutional client services: |
| | |
| • | brokerage services. These services include brokerage of stocks, corporate bonds, futures and options provided to Shinhan Investment’s institutional and international customers and sale of institutional financial products. These services are currently supported by a team of 62 research analysts that specialize in equity, bonds and derivatives research. |
|
| • | investment banking services. These services include a wide array of investment banking services to Shinhan Investment’s corporate customers, such as domestic and international initial public offerings, M&A advisory services, bond issuances, underwriting, capital increase, asset-backed securitizations, issuance of convertible bonds and bonds with warrants, structured financing, issuance of asset-backed commercial papers, mergers and acquisitions advisory services and project financings involving infrastructure, real estate and shipbuilding. |
Shinhan Investment also engages, to a limited extent, in proprietary trading in equity and debt securities, derivative products andover-the-counter market products.
With respect to brokerage services, in the face of acquiring new cardholders,intense competition in the domestic brokerage industry, Shinhan Investment primarily focuses on strengthening profitability through service differentiation and efficient management of its distribution network rather than enlarging its market share indiscriminately through lowering fees and commissions. Shinhan Investment’s service differentiation efforts include offerings its customers opportunities to purchase stocks in a wide range of countries (currently more than 20 countries), leveraging synergy opportunities afforded by affiliation with other Shinhan entities such as offering brokerage accounts maintained at Shinhan Bank and Shinhan Capital.
With respect to investment banking services, Shinhan Investment provides such services through four divisions consisting of equity capital markets, corporate finance, project finance and mergers and acquisitions, as well as two overseas service centers in Hong Kong and Shanghai
Insurance Services
Life Insurance
We provide life insurance products and services primarily through Shinhan Life Insurance. Shinhan Life Insurance provides its services through diversified distribution channels consisting of financial planners, telemarketers, agency marketers and bancassurance specialists. As of the end of fiscal years ended March 31, 2009 and March 31, 2010, under Korean GAAP, Shinhan Life Insurance had total assets of W8,816.8 billion and W10,437 billion and net profits of W134.2 billion and W190 billion, respectively. During its fiscal year 2009,
50
among 22 life insurance companies in Korea, Shinhan Life Insurance ranked second in terms of net profit and sixth in terms of insurance premium received, principally due to increased sales of health insurance policies, stable asset portfolio management and prudent risk management. We expect the insurance premium received by Shinhan Life Insurance to increase as a result of growing demands for both investment and annuity products and potential synergy effects from cross-selling between Shinhan Life Insurance and our banking and other subsidiaries
Asset Management Services
In addition to personalized wealth management services provided as part of our private banking and securities brokerage services, we also have business partnershipprovide asset management services through Shinhan BNP Paribas Asset Management, a joint venture with BNP Paribas Investment Partners, of which we and affiliation arrangementsBNP Paribas Investment Partners hold 65:35 interests, respectively. Shinhan BNP Paribas Asset Management was formed on January 1, 2009 through the merger of Shinhan BNP Paribas Investment Trust Management, our 50:50 joint venture with BNP Paribas Investment Partners, and SH Asset Management, our wholly-owned subsidiary, in order to streamline our asset management services capabilities. Shinhan BNP Paribas Asset Management ranked third among asset managers in Korea in terms of assets under management as of December 31, 2009, and provides a wide range of vendors,investment products, including gas stations, major retailers, airlinestraditional equity/fixed income funds as well as alternative investment products, to retail and telecommunicationinstitutional clients. As a joint venture with BNP Paribas Investment Partners, we believe Shinhan BNP Paribas Asset Management has significantly benefited from BNP Paribas’s global network of investment professionals and Internetexpertise in the asset management industry. On January 1, 2010, Shinhan BNP Paribas Asset Management had assets under management amounting to approximately W32.4 trillion. To a limited extent, Shinhan Investment also provide asset management services for discretionary accounts See “— Securities Brokerage Services.”
We expect that competition will intensify in the asset management industry as a result of the Financial Investment Services and Capital Markets Act, which became effective in February 2009. Under this Act, a “financial investment company”, which formerly included securities companies, asset management companies, futures companies and other entities previously engaged in what is currently characterized as financial investment businesses, is now permitted to provide asset management services by obtaining new licenses under the new Act. For more information on the Act, see “— Supervision and Regulation — Financial Investment Services and Capital Markets Act.”
Other Services
Through our other subsidiaries, we also provide leasing and equipment financing, regional banking and investment banking and advisory services.
Leasing and Equipment Financing
We provide leasing and equipment financing services to our corporate customers mainly through Shinhan Capital. Established as a leasing company in 1991, Shinhan Capital provides customers with leasing, installment financing and new technology financing, equipment leasing, and corporate credit financing. Shinhan Capital’s strength has traditionally been in leasing of ships, printing machines, automobiles and other specialty items, but also offers other leasing and financing services, such as corporate restructuring services for financially troubled companies and financing provided to real estate development projects and infrastructure investments, and following a business transfer from Shinhan Card in November 2007, corporate leasing and equipment financing.
Regional Banking Services
We provide regionally focused commercial banking services, primarily in Jeju Island of Korea, through a majority-owned banking subsidiary, Jeju Bank. Jeju Bank provides retail banking, corporate banking, treasury and trust account management services, and has a network of 40 branches as of December 31, 2009.
Investment Banking and Advisory Services
In addition to the investment banking services provided by Shinhan Bank and Shinhan Investment, we also provide a variety of investment banking and advisory services through Shinhan Macquarie Financial Advisory, a
51
51:49 joint venture with Macquarie Bank of Australia. The advisory services offered by Shinhan Macquarie Financial Advisory include project and infrastructure finance, capital and debt raisings, corporate finance advisory, structured finance, mergers and acquisitions, cross-border leasing and infrastructure and specialized fund management advisory services. Since its inception Shinhan Macquarie Financial Advisory has grown to become one of the leading infrastructure-related financial advisory companies in Korea.
Loan Collection and Credit Reporting
We centralize credit collection and credit reporting operations for our subsidiaries through Shinhan Credit Information Co. Ltd., which also provides similar services to third party customers. We plan to expand Shinhan Credit Information’s services to other areas such as credit inquiry, credit card rating, civil application/petition services, lease and rental research and advisory and consulting services related to non-performing loan management.
Our Distribution Network
We offer a wide range of financial services to retail and corporate customers through a variety of distribution networks and channels established by our subsidiaries. The following table presents the geographical distribution of our distribution network based on the branch offices and other distribution channels of our principal subsidiaries, as of December 31, 2009.
Distribution Channels in Korea
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Shinhan
| | | | |
| | | | | | | | | Shinhan
| | | Shinhan Investment Corp. | | | Life
| | | | |
| | | Shinhan Bank | | | Jeju Bank | | | Card(1) | | | Branches | | | Insurance | | | Total | |
| |
| Seoul metropolitan | | | 410 | | | | 2 | | | | 12 | | | | 59 | | | | 55 | | | | 538 | |
| Kyunggi Province | | | 195 | | | | — | | | | 12 | | | | 18 | | | | 18 | | | | 243 | |
| Six major cities: | | | 172 | | | | 1 | | | | 17 | | | | 21 | | | | 37 | | | | 248 | |
| Incheon | | | 57 | | | | — | | | | 3 | | | | 3 | | | | 12 | | | | 75 | |
| Busan | | | 41 | | | | 1 | | | | 4 | | | | 7 | | | | 11 | | | | 64 | |
| Kwangju | | | 13 | | | | — | | | | 3 | | | | 3 | | | | 4 | | | | 23 | |
| Taegu | | | 27 | | | | — | | | | 3 | | | | 4 | | | | 6 | | | | 40 | |
| Ulsan | | | 13 | | | | — | | | | 1 | | | | 2 | | | | 1 | | | | 17 | |
| Taejon | | | 21 | | | | — | | | | 3 | | | | 3 | | | | 3 | | | | 30 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Sub-total | | | 777 | | | | 3 | | | | 41 | | | | 98 | | | | 110 | | | | 1,029 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Others | | | 148 | | | | 37 | | | | 28 | | | | 20 | | | | 50 | | | | 283 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | 925 | | | | 40 | | | | 69 | | | | 118 | | | | 160 | | | | 1,312 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Notes:
| | |
| (1) | | Includes 12 card sales branches, 11 installment sales branches, 10 collection branches and 15 combined operating branches. |
Banking Service Channels
Our banking services are primarily provided through an extensive branch network, complemented with self-service terminals and electronic banking.
As of December 30, 2009, Shinhan Bank’s branch network in Korea currently comprised of 925 service providerscenters, consisting of 783 retail banking service centers, 38 corporate banking service centers primarily designed to
52
serve large corporate customers and 104 hybrid banking branches designed to serve retail as well as small-business corporate customers. Shinhan Bank’s banking branches are designed to provide one-stop banking services tailored to their respective target customers.
Retail Banking Channels
In Korea, many retail transactions are conducted in cash or with credit cards, and conventional checking accounts are generally not offered or used as widely as in other countries such as the United States. As a result, an extensive retail branch network plays an important role for Korean banks as customers generally handle most transactions through bank branches. Recently, one of the key initiatives at Shinhan Bank has been to target high net worth individuals through private banking. Our private banking services are provided principally through private banking relationship managers who, within target customer groups, assist clients in developing individual investment strategies. We believe that such relationship managers help us foster enduring relationships with our clients. Private banking customers also have access to Shinhan Bank’s retail branch network and other general banking products Shinhan Bank offers through its retail banking operations.
Corporate Banking Channels
Shinhan Bank currently provides corporate banking services through corporate banking service centers primarily designed to serve large corporate customers and hybrid banking branches designed to serve retail as well as small-business corporate customers. Prior to 2009, Shinhan Bank maintained within certain of its retail banking branches corporate relationship management teams (which counted as separate corporate banking branches for classification purposes) in order to serve its small-and medium-sized enterprises customers though its extensive retail banking branch network. In 2009, Shinhan Bank undertook an organizational restructuring to convert such retail banking branches with corporate banking functionalities into hybrid banking branches with the aim that this will help it plansto better service the small business corporate customers. Small-and medium-sized enterprises have traditionally been Shinhan Bank’s core corporate customers and we plan to continue to leveragemaintain Shinhan Bank’s strength vis-à-vis these customers.
Self-Service Terminals
In order to complement its banking branch network, Shinhan Bank maintains an extensive network of automated banking machines, which are located in branches and in unmanned outlets. These automated banking machines consist of ATMs, cash dispensers and passbook printers. As of December 31, 2009, Shinhan Bank had 942 cash dispensers and 6,264 ATMs. Shinhan Bank actively promotes the use of these distribution outlets in order to provide convenient service to customers, as well as to maximize the marketing and sales alliances withfunctions at the increasingbranch level, reduce employee costs and improve profitability. In 2009, automated banking machine transactions accounted for approximately 27.8% and 53.2% of total deposit and withdrawal transactions of Shinhan Bank in terms of the number of vendorstransactions and fee revenue generated, respectively.
Electronic Banking
Shinhan Bank’s internet banking services are more comprehensive than those available at the counter, including such services as 24 hour account balance posting, real-time account transfer, overseas remittance and loan requests. Shinhan Bank also provides the Mobile Banking service, which enables customers to attract new cardholders.make speedy, convenient and secure banking transactions using mobile phones. As the purpose of electronic banking is primarily cost-saving rather than profit generation, the substantial majority of Shinhan Bank’s electronic banking transactions do not generate fee income.
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Overseas Distribution Network
The table below sets out the number of our new cardholders of attributable to each distribution channelforth Shinhan Bank’s overseas banking subsidiaries and branches as of December 31, 2007.2009.
| | | | | |
| | | | | (In thousands)Year Established or
|
| Business Unit | | Location | | Acquired |
| |
Branch networkSubsidiaries | | | 343 | |
Sales agents | | | 777 | |
Business partnerships/affiliationsShinhan Asia Ltd. | | Hong Kong SAR, China | | 1982 |
| Shinhan Bank Europe GmbH | | Germany | | 1994 |
| Shinhan Bank America | | New York, U.S.A. | | 2003 |
| Shinhan Vina Bank | | Vietnam | | 2000 |
| Shinhan Bank (China) Limited | | Beijing, China | | 2008 |
| Shinhan Khmer Bank Limited | | Cambodia | | 2007 |
| Shinhan Bank Kazakhstan Limited | | Kazakhstan | | 2008 |
| Shinhan Bank Canada | | Toronto, Canada | | 2009 |
| Shinhan Bank Japan(1) | | Tokyo, Japan | | 2009 |
| Shinhan Bank Vietnam(2) | | Ho Chi Minh City,
Vietnam | | 2009 |
| | | 221 | |
Others(1)Branches | | | 137 | |
Total | | | 1,478 | |
| New York | | U.S.A. | | 1989 |
| Singapore | | Singapore | | 1990 |
| London | | United Kingdom | | 1991 |
| Mumbai | | India | | 1996 |
| Hong Kong | | China | | 2006 |
| New Delhi | | India | | 2006 |
| | | | |
Representative Office | | | | |
| | | | |
| Mexico Representative Office | | Mexico City, Mexico | | 2008 |
| Uzbekistan Representative Office | | Tashkent, Uzbekistan | | 2009 |
Note:Notes:
| | |
| (1) | | Includes Internet and telemarketingWhile Shinhan Bank established the subsidiary in Japan in 2009, Shinhan Bank provided banking services in Japan through a branch structure since 1986. |
|
| (2) | | While Shinhan Bank established the subsidiary in Vietnam in 2009, Shinhan Bank provided banking services in Vietnam through a branch structure since 1995. |
Securities Brokerage Distribution Channels
Our securities brokerage services is conducted principally through Good Morning Shinhan Securities. As of December 31, 2007, Good Morning Shinhan Securities had 118 business offices nationwide, including 84 branches, 24branch-in-branch CBIBs, seven private banking centers and three Maestro Plazas, and had threeCurrently, our overseas subsidiaries basedand branches are primarily engaged in New York, Londonservicing Korean companies and Hong KongKorean nationals in the overseas markets in the areas of trade financing and local currency funding services as well as providing foreign exchange services in conjunction with Shinhan Bank’s headquarters and , to servicea limited extent, investment and trading of securities of foreign issuers. Going forward, as part of our “globalization” efforts, we plan to expand our coverage of local customers in business.
Approximately 61.9%the overseas markets by providing a wider range of our brokerage branches are locatedservices in the Seoul metropolitan area with a focus to attract high net worth individual customers and also to achieve synergy with our retail and corporate banking, branch network. Inand to that end, we have increasingly established subsidiaries in lieu of branches in select markets, Japan being among the corporate sectorrecent examples, in particular, we continueorder to explore new opportunities through cooperation between Good Morning Shinhan Securitiesmake our presence more prominent and Shinhan Bank.enable a greater flexibility in our service offerings in these markets.
Insurance Sales and Distribution Channels
We sell and provide our insurance services primarily through Shinhan Life Insurance and SH&C Life Insurance. SH&C Life Insurance specializes in bancassurance products, which it distributes solely through our bank branches. In contrast, Shinhan Life, in addition to distributing bancassurance products through our bank branches, also distributes a wide range of life insurance products through its own branch network, an agency network of financial planners and telemarketers as well as through the Internet. As of December 31, 2007, Shinhan Life Insurance had 141 branches and seven customer support centers. These branches are staffed by financial planners, telemarketers and account managers to meet the various needs of our insurance and lending customers. Our customer support centers provide lending services to our insurance customers as well as other customers, and also handle insurance payments.
Our Principal Activities
Our principal group activities consist of deposit-taking activities from our retail and corporate customers, which provide us with funding necessary to offer a variety of commercial banking, securities brokerage, investment banking and other financial services.
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The comprehensive financial services that we provide are:
| | |
| • | commercial banking services, consisting of the following: |
| | |
| • | retail banking services; |
|
| • | corporate banking services, primarily consisting of: |
| | |
| • | Small- and medium-sized enterprises banking; and |
|
| • | Large corporate banking; |
| | |
| • | treasury and securities investment |
| | |
| • | other banking services, such as trust account management services |
|
| • | credit card services |
|
| • | securities brokerage services |
|
| • | insurance services, primarily consisting of: |
| | |
| • | life insurance services; |
|
| • | bancassurance; |
|
| • | reinsurance for life insurance; and |
|
| • | other insurance services |
| | |
| • | asset management services, including brokerage and trading of various securities, related margin lending and deposit and trust services, and other asset management to the extent permitted by law |
|
| • | other services, including leasing and equipment financing, investment trust management, regional banking, investment banking advisory and loan collection and credit reporting. |
In addition to the above business activities, we have a corporate center at the holding company level to house those functions that support the cross-divisional management in our organization.
Our principal activities are not subject to any material seasonal trends. While we have a number of overseas branches and subsidiaries, substantially all of our revenues in 2005, 2006 and 2007 were generated in Korea.
Deposit-Taking Activities
WePrincipally through Shinhan Bank, we offer many deposit products that target different customer segments with features tailored to each segment’s financial profile and other characteristics.profile. Our deposit products consist principally includeof the following:
| | |
| | • | Demand deposits. Demand depositswhich either do not accrue interest or accrue interest at a lower rate than time or savings deposits. Demand deposits and allow the customer to deposit and withdraw funds at any time and, if they aretime. If interest-bearing, demand deposits have interest bearing, accrue interestaccruing at a fixed or variable rate depending on the period and the amount of deposit. Retail and corporate demandDemand deposits constituted approximately 7.7%7.8% and 7.3% of our total deposits as of December 31, 20062008 and 2009, respectively. Our demand deposits paid an average interest of 0.46%0.78% and 0.45% in 2006,2008 and 2009, respectively. |
|
| • | Savings deposits. Savings deposits allow the customer to deposit and withdraw funds at any time and accrue interest at an adjustable interest rate, which is typically lower than the rate applicable to time or installment deposits. In 2009, the interest rate on savings deposits ranged from zero to 3.31%. Saving deposits constituted approximately 6.9%25.6% of our total deposits as of December 31, 20072008 and paid average |
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| | |
| | interest of 2.32% in 2008, and approximately 26.1% of our total deposits as of December 31, 2009 and paid average interest of 0.41%1.22% in 2007.2009. |
| | |
| • | Certificates of deposit. Certificates of deposit typically have maturities from 30 days to five years. Interest rates on certificates of deposit are determined based on the length of the deposit and prevailing market interest rates. Certificates of deposit are sold at a discount to their face value, reflecting the interest payable on the certificates of deposit. Certificates of deposit constituted approximately 11.3% and 5.4% of our total deposits as of December 31, 2008 and 2009, respectively. Our certificates of deposit paid average interest of 5.94% and 5.48% in 2008 and 2009, respectively. |
| |
| | • | TimeOther time deposits. Other time depositswhich generally require the customer to maintain a deposit for a fixed term during which the deposit accrues interest at a fixed rate or a variable rate based on certain financial indexes, including the Korea Composite Stock Price Index (KOSPI). If the amount of the deposit is withdrawn prior to the end of the fixed term, the customer will beis paid a lower interest rate than that originally offered. The term for time deposits typically ranges from one month to five years. Retail and corporateOther time deposits constituted approximately 43.0%55.1% and 61.1% of our total deposits as of December 31, 20062008 and 2009, respectively, and paid average interest of 3.84%4.94% and 3.91% in 2006,2008 and approximately 46.6% of our total deposits as of December 31, 2007 and paid average interest of 4.55% in 2007.2009, respectively. |
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| | |
| | • | Mutual installment deposits. Mutual installment depositswhich generally require the customer to make periodic deposits of a fixed amount over a fixed term (usually six months to five years) during which the deposit accrues interest at a fixed rate. If the amount of the deposit is withdrawn prior to the end of the fixed term, the customer will becustomers are paid a lower interest rate than that originally offered. The term for installment deposits typically ranges from six months to five years. Mutual installment deposits constituted approximately 0.9% of our total deposits as December 31, 20060.2% and paid average interest of 3.80% in 2006, and approximately 0.3%0.1% of our total deposits as of December 31, 20072008 and 2009, respectively, and paid average interest of 3.88%3.78% and 3.70% in 2007. |
|
| • | Savings deposits,which allow the customer to deposit2008 and withdraw funds at any time and accrue interest at an adjustable interest rate, which is lower than time or installment deposits. Currently, interest on savings deposits ranges from zero to 5.54%. Saving deposits constituted approximately 30.4% of our total deposits as of December 31, 2006 and paid average interest of 2.12% in 2006, and approximately 28.2% of our total deposits as of December 31, 2007 and paid average interest of 2.05% in 2007. |
|
| • | Marketable deposits,consisting of certificates of deposit, cover bills and bonds sold under repurchase agreements that have maturities ranging from 30 days to two years. Interest rates on marketable deposits are determined based on the length of the deposit and prevailing market interest rates. Certificate of deposits are sold on a discount to their face value, reflecting the interest payable on the certificate of deposit. Under U.S. GAAP, cover bills sold are reflected as short-term borrowings and bonds sold under repurchase agreements are reflected under secured borrowings. |
|
| • | Foreign currency deposits,which accrue interest at an adjustable rate and are available to Korean residents, nonresidents and overseas immigrants. Shinhan Bank offers foreign currency demand and time deposits and checking and passbook accounts in 20 currencies. Deposits in foreign currency constituted approximately 4.4% of our total deposits as of December 31, 2006 and paid average interest of 3.46% in 2006, and approximately 5.0% of our total deposits as of December 31, 2007 and paid average interest of 3.18% in 2007.2009, respectively. |
We also offer deposits which provide the holdercustomer with preferential rights to housing subscriptions under the Housing Construction Promotion Law, and eligibility for mortgage loans. These products include:
| | |
| | • | Housing subscription time deposits,deposits.which These deposit products are special purpose time deposit accountsdeposits providing the holdercustomer with a preferential right to subscribe for new private apartment units under the Housing Construction Promotion Law. This law is the basic law setting forthprovides various measures supporting the purchase of houses and the supply of such houses by construction companies. IfUnder this law, if a potential home-buyer subscribes for these deposit products and holds them for a certain period of time as set forth in the Housing Construction Promotion Law, such deposit customers obtaincustomer obtains the right to subscribe for new private apartment units on a priority basis under this law.basis. Such preferential rights are neither transferable nor marketable in the open market. These products accrue interest at a fixed rate for one year and at an adjustable rate after one year, which are consistent with other time deposits. DepositRequired deposit amounts per account range from W2 million to W15 million depending on the size and location of the dwelling unit. These deposit products target highhigh- and middle income households.middle-income households as customers. |
| |
| | • | Housing subscription installment savings deposits,deposits.which These deposit products are monthly installment savings programsproducts providing the holdercustomer with a preferential subscription right for new private apartment units under the Housing Construction Promotion Law. Such preferential rights are neither transferable nor marketable in the open market. These deposits require monthly installments of W50,000 to W500,000, have maturities between three and five years and accrue interest at fixed rates depending on the term, which are consistent with other installment savings deposits. These deposit products target low- and middle-income households. |
For information on our deposits in Korean Won based on the principal types of deposit products we offer, see “Item 4. Information on the Company —middle -income households as customers. For information on our deposits in Korean Won based on the principal types of deposit products we offer, see “— Description of Assets and Liabilities — Funding — Deposits.”
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The following table sets forth the number of the deposit customers of Shinhan Bank and Chohung Bank by category as well as the number of domestic branches as of the dates indicated.
| | | | | | | | | | | | | |
| | | As of December 31, |
| | | 2005 | | 2006(4) | | 2007(4) |
| | | (In thousands, except branches) |
| |
Shinhan Bank: | | | | | | | | | | | | |
| Retail deposit customers(1) | | | 6,436 | | | | 12,760 | | | | 14,960 | |
| Active retail deposit customers(2) | | | 1,727 | | | | 3,523 | | | | 4,675 | |
| Corporate deposit customers | | | 121 | | | | 198 | | | | 217 | |
| Domestic branches | | | 402 | | | | 1,028 | | | | 1,035 | |
Chohung Bank: | | | | | | | | | | | | |
| Retail deposit customers(1) | | | 9,063 | | | | N/A | | | | N/A | |
| Active retail deposit customers(3) | | | 2,932 | | | | N/A | | | | N/A | |
| Corporate deposit customers | | | 145 | | | | N/A | | | | N/A | |
| Domestic branches | | | 537 | | | | N/A | | | | N/A | |
N/A = Not available
Notes:
| | |
(1) | | Based on the classification for the purpose of customer management, retail deposit customers include individual deposit customers, foreigners, sole proprietorships and certain small- and medium-sized enterprises deposit customers classified as retail customers depending on a number of factors, including those small- and medium-sized enterprises to whom a credit of less than W1 billion has been extended and who are sole proprietors. |
|
(2) | | For Shinhan Bank, represents customers (i) whose average monthly account balance is W300,000 or more or (ii) who is 20 years of age or more, has an average loan balance during the year, and accordingly is required to maintain a deposit account with Shinhan Bank to service payment of interest on, and principal of, such loans. |
|
(3) | | For Chohung Bank, represents customers whose aggregate of outstanding balances of all accounts as of December 31 of each year was W100,000 or more. |
|
(4) | | The information for Chohung Bank is not available for December 31, 2006 and 2007 as it merged with Shinhan Bank in April 2006. The information for Shinhan Bank for December 31, 2006 and 2007 includes the information for former Chohung Bank. |
We offer varyinga range of interest rates on our deposit products depending on the rate of return on our interest earninginterest-earning assets, average funding costs and interest rates offered by other nationwidemajor commercial banks.
We believe that, as of December 31, 2005, Chohung Bank held the largest amount of deposits made byalso offer court deposit services for litigants in connection with legal proceedings in Korean courts, or by personswhich involve providing effectively an escrow service for litigants involved in disputes. In Korea, a debtor may discharge his obligation by depositing the subjectcertain types of performance with the court for the creditor if a creditor refuses to accept payment of debtlegal or is unable to receive it, or if the debtor cannot ascertain without any negligence who is entitled to the payment. Also, in instances in which there has been a preliminary attachment of real property, the property owner may deposit in cash the amount being claimed by such preliminary attachment holder in escrow with the court, in which case the court will remove such lien or attachment.other proceedings. Chohung Bank performedhistorically was a dominant provider of such court deposit services since 1958, and developed an infrastructurefollowing the acquisition of equipment, software and personnel for such business. Following the merger, ShinhanChohung Bank, provides such court deposit services, which services may also be provided by other regional banks beginningwe continue to hold a dominant market share in July 2006.these services. Such deposits in the past have carriedtypically carry interest rates which were generally lower than the market rates (on average
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(by approximately 2%1% per annum). Such deposits totaled and amounted to W5,0025,167 billion, W5,3905,100 billion and W5,1365,706 billion as of December 31, 2005, 20062007, 2008 and 2007,2009, respectively.
The Monetary Policy Committee of the Bank of Korea imposes a reserve requirement on Won currency deposits of commercial banks which effective as of December 23, 2006, ranges from 0% to 7%, based generally on the term to maturity and the type of deposit instrument. See “Item 4. Information on the Company —“— Supervision and Regulation — Principal Regulations Applicable to Banks — Liquidity.” The Monetary Policy Committee also
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regulates maximum interest rates that can be paid on certain deposits. Under the Korean government’s finance reform plan issued in May 1993, controls on deposit interest rates have been gradually reduced. Currently, only maximum interest rates payable on demand deposits are subject to regulation by the Bank of Korea.
The Depositor Protection Act provides for a deposit insurance system where the Korea Deposit Insurance Corporation guarantees to depositors the repayment of their eligible bank deposits. The deposit insurance system insures up to a total of W50 million per depositor per bank. See “Item 4. Information on the Company —“— Supervision and Regulation — Principal Regulations Applicable to Banks — Deposit Insurance System.”
Retail Banking Services
Overview
We provide retail banking services primarily through Shinhan Bank, and, to a significantly lesser extent, through Jeju Bank, a regional commercial bank. The consumerretail loans, of Shinhan Bankexcluding credit card receivables, amounted to W52,16463,329 billion as of December 31, 2007.2009.
Retail banking services include mortgage small business and consumerretail lending as well as demand, savings and fixed deposit-taking, checking account services, electronic banking and ATM services, bill paying services, payroll and check-cashing services, currency exchange and wire fund transfer. We believe that the provision ofproviding modern and efficient retail banking services is important both into maintaining our public profile and as a source of fee-based income. We believe that our retail banking services and products will become increasingly important in the coming years as the domestic banking sector further develops and regional banking sectors further develop and becomebecomes more diverse.complex.
Retail banking of Shinhan Bank has been and will continue to remain one of our core businesses. Shinhan Bank’sOur strategy in retail banking is to provide prompt and comprehensive services to retail customers through increased automation and improved customer service, as well as a streamlined branch network focused on sales.network. The retail segment places an emphasis on targeting high net worth individuals. As of December 31, 2007, Shinhan Bank had approximately 3,554 high net worth individual customers with deposits of W1 billion or more.
ConsumerRetail Lending Activities
We offer various consumerretail loan products, consisting principally of household loans, which target different segments of the population with features tailored to each segment’s financial profile and other characteristics, including each customer’s profession, age, loan purpose, collateral requirements and the lengthduration of time a borrower has been our customer.the customer’s relationship with Shinhan Bank. Household loans consist principally of the following:
| | |
| | • | Mortgage and home equity loans,which are mostly comprised of mortgage loans whichthat are loansused to finance home purchases and are generally secured by the home being purchased; and |
| |
| | • | Other consumerretail loans,which are loans made to customers for any purpose (otherother than mortgage and home equity loans)loans and the terms of which vary based primarily upon the characteristics of the borrower and which are either unsecured or secured, or guaranteed by deposits or a third party. |
As of December 31, 2007,2009, our mortgage and home-equity loans and other consumerretail loans accounted for 55.28%63.2% and 44.72%36.8%, respectively, of our consumer loans.retail loans (excluding credit card loans).
For secured loans, including mortgage and home equity loans, Shinhan Bank’sour policy is to lend up to 40%-60% to 60% of the appraisal value of the collateral, byafter taking into account the value of any lien or other security interest (other than petty claims) that is prior to our security interest (other than petty claims).interest. As of December 31, 2007,2009, theloan-to-value ratio of mortgage and home equity loans, under Korean GAAP, of Shinhan Bank was approximately 44.74%46.3%. As of December 31, 2009, substantially all of our mortgage and home equity loans were secured by residential property.
Due to the rapid increase in mortgage and home equity loans in Korea, in 2005 and 2006, the Financial Services Commission implemented stringent regulations and guidelines that are designed to suppress the increase of loans secured by housing. These regulations include restrictions on banks’ maximumloan-to-value ratios,
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evaluation of the borrower’sdebt-to-income ratio, guidelines with respect to appraisal of collateral, internal control and credit approval policy requirements with regard to housing loans as well as provisions designed to discourage commercial banks or other financial institutions from instituting incentive-based marketing and promotion of housing loans. In addition to the existing
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regulations and guidelines, from the second half of 2005 to the first quarter of 2007, the Financial Services Commission implemented additional guidelines to reduce mortgage and home equity loans and stabilize the real estate market, including (i) restricting the number of extensions on loans secured by the borrower’s apartment to one, (ii) reducing the maximumloan-to-value ratio for loans secured by the borrower’s apartment in highly speculated areas, (iii) forbidding to extend mortgage or home equity loans to minors and (iv) expandinglowering the application of each of the debt-to-income ratio the minimumloan-to-value ratio to 40% in respect of loans by banks and insurance companies for the purpose of assisting the purchase of apartments located in highly speculated areas with a purchase price of less than W600 million. We believe thatFollowing the foregoing Government regulations relatingonset of the new administration of President Lee Myung Bak, whose campaign platform included promises of market-oriented deregulation, and in response to the real estate market will continue to have the effect of reducing the rate of growthongoing recession in the mortgage and home equity markets.
Ashousing market, the Government has rolled back some of December 31, 2007, substantially allthe restrictive regulatory initiatives, including raising theloan-to-value ratio to 60% except in three designated highly speculative areas. However, in the second half of our mortgage and home equity loans were2009 amid concerns about the rising level of household debt, of which a substantial majority is secured by residential property.
In Korea, contrary to general practices inproperties, the United States, it is a common practice in Korea for construction companies in Korea to require buyers of new homes (particularly apartments under construction) to make installment paymentsGovernment has expanded the application of the purchase price well in advance of the title transfer of the home being purchased. In connection with this common practice, we provide advance loans, on an unsecured basis for the time being, to retail borrowers where the use of proceeds is restricted to financing of home purchases. A significant portion of these loans are guaranteed by third parties, which may include the construction company receiving the installment payment, until construction of the home is completed. Once construction is completedrestrictivedebt-to-income ratio and the titlesloan-to-value ratio to the homes are transferred to the borrowers, which may take several years, these loans become secured by the new homes purchased by these borrowers. Beginning in December 31, 2004, recognizing the unsecured nature of such loans, we classified such loans as other consumer loans. As of December 31, 2005, 2006 and 2007, we had approximately W2,312 billion, W3,241 billion and W4,305 billion, respectively, of such unsecured loans to construction companies, classified as other consumer loans.all metropolitan areas.
The following table sets forth the portfolio of our consumerretail loans.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | | As of December 31, | |
| | | 2005 | | 2006 | | 2007 | | 2007 | | 2008 | | 2009 | |
| | | (In billions of Won, except percentages) | | (In billions of Won, except percentages) | |
| |
| Consumer loans(1) | | | | | | | | | | |
| Retail loans(1) | | | | | | | | | | | | | |
Mortgage and home-equity | | W | 25,840 | | | W | 30,097 | | | W | 31,495 | | | W | 31,495 | | | W | 36,183 | | | W | 40,022 | |
Other consumer | | | 17,874 | | | | 20,458 | | | | 25,475 | | | | 25,475 | | | | 25,026 | | | | 23,307 | |
| Percentage of consumer loans to total gross loans | | | 41.3 | % | | | 41.3 | % | | | 37.5 | % | |
| Percentage of retail loans to total gross loans | | | | 37.5 | % | | | 35.9 | % | | | 37.4 | % |
Note:Notes:
| | |
| (1) | | Before allowance for loansloan losses and excludes credit card accounts. |
|
| (2) | | In Korea, construction companies typically require buyers of new homes (including apartment units) to make installment payments of the purchase price well in advance of the title transfer. Commercial banks, including Shinhan Bank, provide advance loans, on an unsecured basis for the time being, to retail borrowers where the use of proceeds is restricted to financing of home purchases. A significant portion of these loans are guaranteed by third parties, which may include the construction company receiving the installment payment, until construction of the home is completed. Once construction is completed and the titles to the homes are transferred to the borrowers, which may take several years, these loans become secured by the new homes purchased by these borrowers. In recognition of the unsecured nature of such loans, we classify such loans as other consumer loans. |
Pricing
The interest rates on consumerretail loans made by Shinhan Bank are either periodic floating rates (which isare periodically reset based on a base rate determined for three-month, six-month or twelve-month periods derived using ouran internal transfer price system, which reflects ourthe cost of funding in the market, further adjusted to account for our expenses related to lending and the profit margin) or fixed rates that reflect ourthe cost of funding, as well as our expenses related to lending and the profit margin. Fixed rate loans are currently limited tohave maturities of three years or less and offered only on a limited basis. For unsecured loans, both types ofwe incorporate into the offered rates also incorporate a margin based on, among other things, the borrower’s credit score as determined during our loan approval process. For secured loans, the credit limit is based on the type of collateral, priority with respect to the collateral and the loan to value.value ratio. We can adjust the pricepricing of these loans to reflect the borrower’s currentand/or expected future contribution to our profitability. The applicable interest rate is determined at the time a loan is extended. If a loan is terminated prior to its maturity, the borrower is obligated to pay us an early termination fee of approximately 0.5% to 2.0% of the loan amount in addition to the accrued interest, depending on the timing, the nature of the credit and the amount.
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As of December 31, 2007,2009, Shinhan Bank’s three-month, six-month and twelve-month base rates were approximately 5.81%2.85%, 5.98%3.49% and 6.36%4.05%, respectively. As of December 31, 2007,2009, Shinhan Bank’s fixed rates for mortgage and home equity loans with a maturity of one year, two years and three years were 6.71%6.60%, 6.74%7.10% and 6.79%7.20%, respectively, and Shinhan Bank’s fixed rates for other consumerretail loans with a maturity of one year rangedwere from 8.75%9.00% to 13.25%13.50%, depending on the consumerretail credit scores of its customers.
As of December 31, 2007,2009, approximately 86.82%85.9% of Shinhan Bank’s consumertotal retail loans were priced based on a floating raterates and approximately 13.18%14.1% were priced based on a fixed rate.rates. As of the same date, approximately 99.83%96.9% of Shinhan Bank’s consumerretail loans with maturity of overmore than one year were priced based on a floating raterates and approximately 0.17%3.1% were priced based on fixed rates.
Prior to February 2010, major commercial banks in Korea, including Shinhan Bank, principally used the certificate of deposit, or CD, rates set by Bank of Korea, in determining the base rate for secured housing loans, which represent the bulk of retail loans. However, amid concerns that the CD rates do not accurately represent the banks’ cost of capital as certificates of deposit constitute relatively a fixedminor fraction of the banks’ assets and in light of the substantial variance in recent periods between the CD rates and the actual market rates, in February 2010 the Korean Federation of Banks began to publish the “cost of funding index”, or COFIX, which is computed based on the weighted average interest of select funding products (including time deposits, housing and other installment savings deposits, repos, discounted bills and senior non-convertible financial debentures) of nine major Korean banks (comprised of Kookmin Bank, Shinhan Bank, Woori Bank, Hana Bank, Korea Exchange Bank, NH Bank, Industrial Bank of Korea, Citibank Korea and Standard Chartered Korea First Bank). Each bank can then independently determine the interest rate applicable to the end customer by adding a spread to the COFIX based on the difference between the COFIX and such bank’s general funding costs, administration fees, the customer’s credit score, the maturity of the loan and other customer-specific premiums and discounts based on the customer relationship with such bank. In the case of floating rate notes, the end-user interest rates are adjusted on every three months, six months and 12 months, depending on the reset period of the base rate.
Private Banking
Historically, we have focused on customers with higherhigh net worth. Our retail banking services provide ainclude providing private banking serviceservices to our high net worth customers who seek personal advice in complex financial matters. Our aim in private banking is to help enhance the private wealth accumulation by, and increase the financial sophistication of, our high net-worth clients by offering them portfolio/portfolio and fund management, services, tax consulting services and real estate management service. To date, our fee revenues from these activities have not been significant.services, among others.
We believe that we were oneAs of the first banks to initiate private banking in Korea. We opened our first Private Banking Center in Seoul in 2002 to serve the needs of high net worth customers, in particular those customers with deposits of W1 billion or more, and we currently have sevenDecember 31, 2009, Shinhan Bank operated 19 private banking centers all of which are locatednationwide, including 15 in the greater Seoul metropolitan area. While we believe that the marketarea, which serviced approximately 4,000 private banking customers. Our private banking customers are typically required to have W500 million in deposit with us to qualify for private banking services in Korea is still at an early stage of development, in connection with our strategy to target high net worth retail customers, we established a separate private banking department in 2003 to further develop and improve our services in this area. With the launch of our “New Bank” initiative, our private banking department was spun off from its original organization and was elevated to the Private Banking Group. As of May 31, 2008, we operated 14 private banking centers nationwide, including nine in Seoul, two in the suburbs of Seoul and three in other cities located in other regions in Korea. Through these efforts, we believe that our private banking service marked the year 2006 with notable growth. The private banking customer base grew to 3,554 individuals and assets under management increased 24% from W7.9 trillion in 2006 to W9.8 trillion in 2007.services.
Corporate Banking Services
Overview
We provide corporate banking services, primarily through Shinhan Bank, to small- and medium-sized enterprises, including enterprises known as “small office, home office” (“SOHO”), which are small enterprises operated by individuals or households, and, to a lesser extent, to large corporations, including corporations that are affiliated with chaebols.chaebols. We also lend to government-controlled companies.enterprises.
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The following table sets forth the balances and percentage of our total lending attributable to each category of our corporate lending business as of the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | | | As of December 31, | |
| | | 2005 | | 2006 | | 2007 | | | 2007 | | 2008 | | 2009 | |
| | | (In billions of Won, except percentages) | | | (In billions of Won, except percentages) | |
| |
| Small- and medium-sized enterprises loans(1) | | W | 39,943 | | | | 37.7 | % | | W | 47,159 | | | | 38.5 | % | | W | 62,296 | | | | 41.0 | % | | W | 62,296 | | | | 41.0 | % | | W | 71,212 | | | | 41.8 | % | | W | 69,571 | | | | 41.1 | % |
| Large corporate loans(2) | | | 17,948 | | | | 16.9 | | | | 20,808 | | | | 17.0 | | | | 17,871 | | | | 11.8 | | | | 17,871 | | | | 11.8 | % | | | 23,483 | | | | 13.7 | % | | | 21,238 | | | | 12.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total corporate loans | | W | 57,891 | | | | 54.6 | % | | W | 67,967 | | | | 55.5 | % | | W | 80,167 | | | | 52.8 | % | | W | 80,167 | | | | 52.8 | % | | W | 94,695 | | | | 55.5 | % | | W | 90,809 | | | | 53.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Notes:
| | |
| (1) | | Represents the principal amount of loans extended to corporations meeting the definition of small- and medium-sized enterprises under the Basic Act on Small- and Medium-sized Enterprises and its Presidential Decree. Certain loans to sole proprietorships are included under retail lending. |
| |
| (2) | | Includes loans to government-controlled companies. |
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Small- and Medium-sized Enterprises Banking
The small- and medium-sized enterprise loans of Shinhan Bank amounted to W56,778 billion as of December 31, 2007. Under the Basic Act on Small- and Medium-sized Enterprises and its Presidential Decree, small- and medium-sized enterprises are defined as companies which (i) do not have employees, sales, paid-in capital or assets exceeding the number or the amount, as the case may be, specified in the Presidential Decree in accordance with their types of businesses in the Presidential Decree and (ii) do not belong to a conglomerate as defined in the Monopoly Regulations and Fair Trade Act. In order to qualify as a small- and medium-sized enterprise, none of its shareholders holding 30% or more of its total issued and outstanding voting shares can have (i) full-time employees of 1,000 or more and (ii) assets of W500 billion or more as of the end of the immediately preceding fiscal year. As of December 31, 2007,2009, we had approximately 187,207made loans to 186,003 small- and medium-sized enterprises loan customers.for an aggregate amount W69,571 billion.
Our small- and medium-sized enterprises banking business has traditionally been and willis expected to remain one of our core businesses. However,businesses, subject to prevailing market conditions. For example, as a result of the adoption of restrictive regulatory measures in 2005 to 2007 designed to curb speculation in the housing market, lending to the small- and medium-sized enterprise business is currently the focusenterprises was an area of intense competition among largethe commercial banks and thein Korea as opportunities for us to expand our business with more establishedhome and mortgage loans diminished. However, since the onset of the global financial crisis and economic downturns in Korea starting in the second half of 2008, we have sharply reduced new lending to the small- and medium-sized enterprises have been reduced. During recent years, mostand are currently focusing on maintaining the asset quality of existing loans to these enterprises. Depending on the nationwide banks have shifted theirlevel and scope of economic recovery, we may seek to focus to or increased their emphasis on this type of lending, as opportunities in the large corporate and retail sectors diminished. While we expect competition in this sector to intensify, we believe that our established customer base, quality brand image and experienced lending staff will provide an opportunity to maintain steadyasset growth in this environment.on a selective basis.
We believe that Shinhan Bank, which has traditionally focused on small- and medium-sized enterprises lending, possesses the necessary elementsis well-positioned to succeed in the small- and medium-sized enterprises market includingin light of its marketing capabilities (which we believe have provided Shinhan Bank with significant brand loyalty) and its prudent risk management practices, including conservative credit rating system for credit approval. To maintain or increase its market share of small- and medium-sized enterprises lending, Shinhan Bank has:Bank:
| | |
| | • | has positioned itself based on accumulated expertise.expertise. We believe Shinhan Bank has a good understanding of the credit risks embedded in this market segment and to develop loan and other products specifically tailored to the needs of this market segment; |
| |
| | • | begun operatingoperates a relationship management system to provide targeted and tailored customer service to small- andsmall-and medium-sized enterprises.enterprises. Shinhan Bank currently has 136relationship management teams in 142 corporate banking branches, with relationship management teams.of which 38 are corporate banking branches and 104 are hybrid banking branches designed to serve retail as well as small-business corporate customers. These relationship management teams market products and review and approve smaller loans that pose less credit risks; and |
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| | • | beguncontinues to focus on cross-selling loan products with other products.products. For example, when Shinhan Bank lends to small- and medium-sized enterprises, it also explores opportunities to cross-sell consumerretail loans or deposit products to the employees of those companies or to provide financial advisory services. |
Since 2005, the industry-wide delinquency ratios for loans to small- and medium-sized enterprises have been falling. According to data compiled by the Financial Supervisory Service, the delinquency ratio (net of charge-offs, which has also increased significantly) for Won-denominated loans by Korean banks to small- and medium-sized enterprises decreased from 1.5% as of December 31, 2005 to 1.1% as of December 31, 2006 and to 1.0% as of December 31, 2007. The delinquency ratio for loans to small- and medium-sized enterprise is calculated as the ratio of (1) the outstanding balance of such loans in respect of which either principal payments are overdue by one day or more or interest payments are over due by 14 days or more (if prior interest payments on a loan were made late on more than three occasions, in which case the loan is considered delinquent if interest payments are overdue by one day or more) to (2) the aggregate outstanding balance of such loans. Shinhan Bank’s delinquency ratio, calculated under Korean GAAP, for such loans decreased from 1.44% as of December 31, 2005 to 0.85% as of December 31, 2006 and to 1.10% as of December 31, 2007. Prior to the merger, Chohung Bank’s delinquency ratio, calculated under Korean GAAP, for such loans was 1.70% as of December 31, 2005. Shinhan Bank’s delinquency ratios, calculated under Korean GAAP, for Won-denominated loans to small- and medium-sized enterprises that do not prepare audited financial statements were 1.95% as of December 31, 2005, 0.90% as of December 31, 2006 and 1.11% as of December 31, 2007. Such delinquency ratio for Chohung Bank prior to the merger was 1.45% as of December 31, 2005. Shinhan Bank’s delinquency ratios for loans to small unincorporated businesses and sole
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proprietorships were 1.64% as of December 31, 2005, 0.99% as of December 31, 2006 and 1.04% as of December 31, 2007. Such delinquency ratio for Chohung Bank prior to the merger was 1.64% as of December 31, 2005. There is no assurance that these delinquencies will not rise in 2008. Our current focus in the small- and medium-sized enterprise lending business is to improve the asset quality and maintain the profitability of our loans to small-and medium-sized enterprises.
Large Corporate Banking
Large corporate customers consist primarily of member companies ofchaebolsand financial institutions. LargeOur large corporate loans of Shinhan Bank amounted to W16,81121,238 billion as of December 31, 2007. As2009.
Shinhan Bank aims to be a late entrant intoone-stop financial solution provider and partner with its corporate clients in their corporate expansion and growth endeavors. To this end and in order to take advantage of the recent deregulation in the Korean commercial bankingfinancial industry large corporate banking has not beenas a core businessresult of the adoption of the Financial Investment Services and Capital Markets Act, Shinhan Bank and its focus of business in this customer sector has been on investments in corporate debt securities and fee-based businesses rather than conventional lending activities. On the other hand, the former Chohung Bank traditionally focused on large corporate customers as its core corporate banking business.
In recent years, our Corporate & Investment Banking Group has begun providingprovides investment banking services. We provide services, as an arranger, trustee and liquidity provider for asset-backed securities. We also participate in and administer syndicated loans and project financings. We provide advisory services in the area of social overhead capital projects such as highway, port, power and water and sewage projects, as well as equity and venture financing,including real estate financing, andoverseas real estate project financing, large development project financing, infrastructure financing, structured financing, equity investments/venture investments, mergers and acquisitions advice.financing, ship and aircraft financing, corporate finance and asset securitization. Shinhan Bank, through Shinhan Asia Limited, a subsidiary in Hong Kong, also arranges financing for, and offer consulting services to, Korean companies expanding their business overseas, particularly in Asia.
Electronic Corporate Banking
Shinhan Bank offers to corporate customers a web-based total cash management service through “Shinhan Bizbank.” Shinhan Bizbank supports all types of banking transactions from basic transaction history inquiries and fund transfers to opening letters of credit, trade finance, payment management, collection management, sales settlement service, acquisition settlement service, B2B settlement service, sweeping and pooling.
Corporate Lending Activities
Our principal corporate loan products for corporate customers are working capital loans and facilities loans. Working capital loans, which include discounted notes and trade financing, are in general,generally loans used for general working capital purposes. Facilities loans are provided to finance the purchase of equipment and the establishmentconstruction of manufacturing Won-denominated plants. As of December 31, 2007,2009, working capital loans and facilities loans amounted to W41,42045,960 billion and W10,45614,754 billion, respectively, representing 79.84%75.7% and 20.16%24.3% of ourShinhan Bank’s total Won-denominated corporate loans under Korean GAAP. Working capital loans generally have a maturity of one year, but may be extended on an annual basis for an aggregate term of three years in the case of unsecured loans and five years in the case of secured loans. Facilities loans, which are generally secured, have a maximum maturity of ten years.
Loans to corporationsCorporate loans may be unsecured or secured by real estate, deposits or guaranty certificates. As of December 31, 2007,2009, under Korean GAAP, secured loans and guaranteed loans (including loans secured by guaranty certificates issued by credit guarantee insurance funds) accounted for 22.66%44.8% and 0.63%10.2%, respectively, of Shinhan Bank’s Won-denominated loans to small- and medium-sized enterprises. Among the securedtotal corporate loans, approximately 73.71%40% were secured by real estate.
When evaluating the extension of loans to corporate customers, we review the corporate customer’sShinhan Bank reviews their creditworthiness, credit scoring, value of any collateral or third party guarantee. The value of any collateral is defined using a formula that takes into account the appraised value of the property,collateral, any prior liens or other claims against the propertycollateral and an adjustment factor based on a number of considerations including with respect to property, the average value of any nearby property sold in a court-supervised auction during the previous year. We revalueShinhan Bank revalues any collateral when a secured loan is renewed or if a trigger event occurs with respect to the loan in question.
As of December 31, 2007, in terms of outstanding loan balance, 31.50% of our corporate loans were extended to borrowers in the manufacturing industry, 15.25% were to borrowers in the retail and wholesale industry, 21.28% were to the borrowers in the real estate, leasing and service industry, 7.15% were to borrowers in the construction industry, and 3.65% were extended to borrowers in the finance and insurance industry. Beginning in 2006, loans to corporate borrowers in the real estate leasing and service industry and the hotel and leisure industry, which are principally small- and medium-sized enterprises, began experiencing an increase in delinquencies as well as deterioration in credit quality. Under Korean GAAP, delinquency ratio for Won-denominate loans to the real estate leasing and service industry was 0.78% for Shinhan Bank as of December 31, 2007, net of charge-offs and loan sales. Under Korean GAAP, delinquency ratio for Won-denominated loans to the construction industry was 1.15% for Shinhan Bank as of December 31, 2007, net of charge-offs and loan sales. Shinhan Bank’s Won-denominated
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corporate loans classified as substandard or below under the guidelines of the Financial Services Commission was W587 billion, net of charge-offs and loan sales, as of December 31, 2007.underlying loan.
Pricing
We establish the price for ourShinhan Bank prices its corporate loan products of Shinhan Bank based principally on their respectivethe cost of funding and the expected loss rate based on athe borrower’s credit risk. As of December 31, 2007, 92.9%2009, 80.2% of Shinhan Bank’s corporate loans with outstanding maturities of one year or more had variable interest rates that were not fixed but were variable in reference to Shinhan Bank’s market rate.rates.
Shinhan Bank generally determines pricing ofthe interest rate charged for its corporate loans as follows:the sum of (i) Shinhan Bank’s periodic market floating rate or reference rate, (ii) transaction cost, (iii) credit spread and (iv) risk premium, as adjusted by (v) a discretionary adjustment rate.
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| Interest rate = | (Shinhan Bank’s periodic market floating rateorreference rate)plustransaction costplusa credit spreadplusrisk premiumplus or minusa discretionary adjustment rate. |
Depending on the situationmarket condition and Shinhan Bank’sthe agreement with the borrower, Shinhan Bank may use either its periodic market floating rate or the reference rate as the base rate in calculating its pricing. As of December 31, 2007,2009, Shinhan Bank’s periodic market floating rates (which are based on a base rate determined for three-month, six-month, one-year, two-year, three-year or five-year periods derived using Shinhan Bank’s market rate system) were 5.81%2.85% for three months, 5.98%3.49% for six months, 6.36%4.05% for one year, 6.71%4.85% for two years, 6.74%5.16% for three years and 6.79%5.70% for five years. As of the same date, Shinhan Bank’s reference rate was 8.75%.
Transaction cost is added to reflect the standardized transaction cost assigned to each loan product and other miscellaneous costs, including contributions to the Credit Guarantee Fund, and education taxes. The Credit Guarantee Fund is a statutorily created entity that provides credit guarantees to loans made by commercial banks and is funded by mandatory contributions from commercial banks in the amount of approximately 0.2% of all loans made by them.
The credit spread is added to the periodic floating rate to reflect the expected loss from abased on the borrower’s credit rating and the value of any collateral or payment guarantee. In addition, we addShinhan Bank adds a risk premium that is measured by thean unexpected loss that exceeds the expected loss from the credit rating assigned to a particular borrower.
A discretionary adjustment rate is added or subtracted to reflect the borrower’s currentand/or future contribution to Shinhan Bank’s profitability. In the event of additional credit provided by way of a guarantee of another loan, a subtraction is made by the amount of the adjustment rate is subtractedin order to reflect such change in the credit spread. In addition, depending on the price and other terms set by competing banks for similar borrowers, weShinhan Bank may reduce the interest rate Shinhan Bank chargescharged in order to compete more effectively with other banks.
Electronic Corporate Banking
Shinhan Bank launched its electronic corporate banking services connecting its corporate customers through dedicated subscriber lines in 1991. Shinhan Bank has since developed its electronic corporate banking services to offer to corporate customers a web-based total cash management service through “Shinhan Bizbank.” Shinhan Bizbank supports all types of banking transactions from basic transaction history inquiries and fund transfers to opening letters of credit and trade finance. Products and services related to cash management include payment management, collection management, sales settlement service, acquisition settlement service, B2B settlement service, sweeping and pooling. By offering such information technology-related products and services such as purchase cards, loans for purchasing goods,e-biz loans, and a B2B settlement service, Shinhan Bank is able to continue to reinforce its image as one of the leaders in electronic corporate banking. Through the enhancement of Shinhan Bizbank and its cash management service, we intend to improve the support service system related to customer cash management. Shinhan Bank’s electronic corporate banking services are being integrated with the services Chohung Bank had developed prior to the merger. Shinhan Bizbank’s services were being used by approximately 286,000 corporations as of December 31, 2007 and, in 2007, its number of transactions and aggregate transaction amount were approximately 37,246,000 and W1,175 billion, respectively.
Treasury and Securities Investment
Through relevant departments at the newly merged Shinhan Bank we engageengages in treasury and securities investment business, which involves, among other things, the following activities:
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| | • | securities investment and trading; |
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| | • | derivatives trading; and |
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| | • | international business. |
Recent Regulatory Changes
In April 2006, the Government amended the Presidential Decree of the Indirect Investment Asset Management Business Act and regulations thereunder in order to facilitate the formation and operation of private equity funds by lowering the required minimum equity investment, relaxing the mandatory investment ratio, allowing the value of the purchased shares of listed companies to be estimated by the purchase price of such shares reflecting control premium as well as its market price and allowing private equity funds to invest in non-performing loans. The key provisions of the Indirect Investment Asset Management Business Act relating to private equity funds are as follows:
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| • | A private equity fund is a limited partnership company that is incorporated in accordance with the Korean Commercial Code, which has not less than one general partner and not less than one limited partner. |
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| • | The minimum value of the equity investment by limited partners is W1 billion for an individual investor or W2 billion for a legal entity. |
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| • | Details of the private equity fund, such as its objective, name, location, term of existence, information concerning partners, a summary of the operation, shall be registered with the Financial Supervisory Service. |
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| • | A private equity fund shall apply 50% of its assets (provided that, if the Fund (as defined under the Framework Act on Fund Management) is a partner and its method of contribution is other than as capital commitment, such contribution shall be excluded from the calculation of assets), within two years after capital injection by the partners, to (1) an investment in excess of 10% of the total number of shares issued by the target company, (2) an investment that makes it possible for the private equity fund to exercisede factocontrol over major corporate governance matters including appointments and dismissals of officers, (3) an investment in Investment Securities (as defined under the Indirect Investment Asset Management Business Act) issued by SOC Investment Companies (as defined under the Promotion of Social Overhead Capital Investment Act) or (4) an investment in securities or equities of Investment Purpose Companies (as defined under the Indirect Investment Asset Management Business Act) under the Indirect Investment Asset Management Business Act. In addition, a private equity fund shall hold the acquired shares for at least six months following the date of investment. |
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| • | As a special rule, if a private equity fund meets the above requirements for investment, for ten years from the date on which such requirements are met, (1) the provisions governing holding companies as provided in the Monopoly Regulation and Fair Trade Act shall not apply and (2) the private equity fund shall not be deemed a financial holding company as provided in the Financial Holding Companies Act. |
Pursuant to the amendment of the Presidential Decree of the Indirect Investment Asset Management Business Act and regulations thereunder in April 2006, in an effort to relax the regulatory barriers to the business of operating indirect investment, when the asset management companies operate indirect investment assets, such companies are allowed to engage in trading certain derivatives or borrowing Investment Securities (as defined under the Indirect Investment Asset Management Business Act), and the maximum limit by such companies to invest in notes issued by government-invested organization and in foreign loans has increased.
Furthermore, in March 2007, the Supervisory Regulations of the Indirect Investment Asset Management Business Act was amended to ease the restrictions on the methods of computing the net capital ratio for overseas subsidiaries in which a Korean asset management company holds 50% or more equity interest and the investment limits on subordinated debts.
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Treasury
At Shinhan Bank, the Treasury DepartmentBank’s treasury division provides funds to all of itsShinhan Bank’s business operations and ensures the liquidity of Shinhan Bank’sits operation. To secure stable long-term stable funds, we useShinhan Bank uses fixed and floating rate notes, debentures, structured financing, and other advanced funding methods. As for overseas funding, we constantly exploreShinhan Bank closely monitors the feasibility of raising funds in currencies other than the U.S. dollar, such as Japanese Yen and the Euro. In addition, Shinhan Bank makes call loans and borrowborrows call money in the short-term money market. Call loans are short-term lending among banks and financial institutions in either Korean Won or foreign currencies inwith minimum transaction amounts exceedingof W100 million withand maturities of 30 days or less. Typically, call loans have maturities oftypically one day.
Securities Investment and Trading
We investShinhan Bank invests in and tradetrades securities for ourits own accountaccounts in order to maintain adequate sources of liquidity and generate interest and dividend income and capital gains. OurShinhan Bank’s trading and investment portfolios consist primarily of Korean treasury securities and debt securities issued by Korean government agencies, local governments or certain government-invested enterprises and debt securities issued by financial institutions. Ourinstitutions, and equity securities consist of equities listed onin the StockKRX KOSPI Market and KRX KOSDAQ Market of the Korea Exchange. For a detailed description of our securities investment portfolio, see “— Description of Assets and Liabilities — Investment Portfolio.”
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Derivatives Trading
We provideShinhan Bank provides and tradetrades a range of derivatives products. The derivatives products, that we offer, through Shinhan Bank, include:including:
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| | • | Interestinterest rate swaps, options, and futures relating to Korean Won interest rate risks and LIBOR risks, respectively; |
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| | • | Cross-currencycross-currency swaps largely for Korean Won against U.S. dollars, Japanese Yen and Euros; |
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| | • | Equityequity and equity-linked options; |
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| | • | Foreignforeign currency forwards, swaps and options; |
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| | • | Commoditycommodity forwards, options and swaps; |
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| | • | Creditcredit derivatives; and |
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| | • | KOSPI 200 indexed equity options. |
Shinhan Bank’s trading volume in terms of notional amount was W102,636395,015 billion and W216,566621,776 billion, in 20062008 and 2007,2009, respectively. Such derivative operations have focusedgenerally focus on addressing the needs of ourShinhan Bank’s corporate clients to hedge their risk exposure andback-to-back derivatives entered into to hedge ourShinhan Bank’s risk exposure that results from such client contracts.
WeShinhan Bank also enterenters into derivative trading contracts to hedge the interest rate and foreign currency risk exposure that arise from ourexposures related to its own assets and liabilities. Many of these non-trading derivative contracts, however, do not qualify for hedge accounting under U.S. GAAP and are accordingly accounted for as trading derivatives in the financial statements. In addition, onto a limited basis, we engageextent, Shinhan Bank engages in proprietary trading of derivatives within our regulated open position limits. See “— Description of Assets and Liabilities — Derivatives.”
International Business
We areShinhan Bank also engagedengages in treasury and trading and securities investment activities in international capital markets, principally engaged inincluding foreign currency denominatedcurrency-denominated securities trading, foreign exchange trading and services, trade-related financial services, international factoring services and foreign retail banking operations through ourits overseas branches and subsidiaries. DueShinhan Bank aims to become a leading bank in Asia and expand its international business and by focusing on further bolstering its overseas network, localizing its overseas operations and diversifying its product offerings, particularly in terms of asset management, in order to meet the volatility in the Asian capital markets since the economicvarious financing needs of its current and financial crisis of the late 1990’s, we had reduced our international capital markets activities and our international securities investment portfolio. We currently plan to resume these activities.
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Other Banking Servicespotential customers overseas.
The revenue-generating activities in other banking services of Shinhan Bank consist primarily of their respective trust account management services. As a result, our discussion in this subsection will focus on our trust account management services.
Trust Account Management Services
Overview
OurOverview
Shinhan Bank’s trust account management services offerinclude management of trust accounts, managed byprimarily in the banking operations of Shinhan Bank consisting primarilyform of money trusts. In Korea, a money trust is a discretionary trust over which (except in the case of a specified money trust) we have investment discretion (subject to applicable law) and is commingled and managed jointly for each type of trust account. The specified money trusts are established on behalf of customers who give us specific directions as to the investment of trust assets. Trust account customers are typically individuals seeking higher rates of return than those offered by bank account deposits. Because there are fewer regulatory restrictions on trust accounts than on bank account deposits, including no deposit reserve requirements we have historically beendo not apply to deposits held in trust accounts as opposed to deposits held in bank accounts, and regulations over trust accounts tend to be less strict, Shinhan Bank is generally able to offer higher rates of return on trust account products than on bank account deposits. Trust account products, however, generally require higher minimum deposit amounts compared with comparable bank account deposit products. Assets of the trust accounts are invested primarily in securities and loans, except that a greater percentage of the assets of the trust accounts are invested in securities comparedHowever, due to the bank accounts because trust accounts generally require more liquid assets due to their limited funding source compared to bank accounts. As a result of the recentongoing low interest environment, we havein recent years, Shinhan Bank has not been able to offer attractive rates of return on ourits trust account products.
Under Korean law, assets acceptedTrust account products generally require higher minimum deposit amounts than those required by comparable bank account deposit products. Unlike bank deposit products, deposits in trust accounts are invested primarily in securities and, to a lesser extent, in loans, as the relative shortage of funding sources require that trust accounts be invested in a higher percentage of liquid assets.
Under the Banking Act of 1950, as amended, assets in trust accounts are required to be segregated from other assets of the trustee bank and are not available to satisfy the claims of the depositors or other creditors of such bank. Accordingly, trust accounts are accounted for and reported separately from the bank accounts. See “— Supervision and Regulation.” Trust accounts are regulated by the Trust Act the Trust Business Act and the IndirectFinancial Investment Asset Management BusinessServices and Capital
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Markets Act, of Korea and most national commercial banks offer similar trust account products. We earnShinhan Bank earns income from trust account management services, which is reflected in our accountsrecorded as net trust management fees. See “Item 5. Operating and Financial Review and Prospects —5.A. Operating Results — 2007Results of Operation — 2009 Compared to 20062008 — NoninterestNon-interest Income.”
Under U.S. GAAP, generally, we have not consolidated trust accounts in our financial statements except for the Guaranteed Fixed Rate Trust Accounts or recognized the acquisition of such accounts in accordance with the purchase method of accounting due to the fact that these are not our assets but customer assets. As of December 31, 2005, 20062008 and 2007,2009, under Korean GAAP, Shinhan Bank had total trust assets of W15,386 billion, W23,75037,123 billion and W34,25932,537 billion, respectively, comprised principally of real property investments of W9,942 billion and W10,030 billion, respectively, securities investments of W5,422 billion, W10,13010,628 billion and W11,9037,208 billion, respectively, and loans in the principal amount of W291 billion, W391744 billion and W677623 billion, respectively. Securities investments consisted of corporate bonds, government-related bonds and other securities, primarily commercial paper. As of December 31, 2005, 20062007, 2008 and 2007, under Korean GAAP,2009, equity securities constituted 4.3%3.4%, 5.0%3.0% and 3.4%3.1%, respectively, of ourShinhan Bank’s total trust assets.assets under Korean GAAP. Loans made by trust accounts are similar in type to those made by our bank accounts, except that they are made only in Korean Won. As of December 31, 2005, 20062007, 2008 and 2007,2009, under Korean GAAP, approximately 68.5%60.4%, 89.8%64.4% and 60.4%61.6%, respectively, of the amount of loans from the trust accounts were collateralized or guaranteed. In making investment from funds received for each trust account, each trust product maintains investment guidelines applicable to each such product which sets forth, among other things, company, industrycompany-, industry- and security typesecurity-type limitations.
As of December 31, 2005, under Korean GAAP, Chohung Bank had total trust assets of W6,289 billion, comprised principally of securities investments of W3,455 billion, and loans in the principal amount of W86 billion. As of December 31, 2005, under Korean GAAP, equity securities constituted 7.0% of Chohung Bank’s total trust assets. As of December 31, 2005, under Korean GAAP, approximately 93.0% of the amount of loans from the trust accounts of Chohung Bank were collateralized or guaranteed.Trust Products
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The balance of the moneyMoney trusts managed by ourShinhan Bank’s trust account business wasamounted to W13,57412,822 billion and W9,905 billion as of December 31, 20072008 and 2009, under Korean GAAP, showing an increaseGAAP. In Korea, a money trust is a discretionary trust over which (except in the case of 11.3% compareda specified money trust) we have investment discretion subject to W12,192 billionapplicable law and is commingled and managed jointly for each type of trust account. The specified money trusts are established on behalf of customers who give specific directions as to the investment of December 31, 2006.trust assets.
Trust Products
Our trust account management services offer individualsShinhan Bank offers primarily two basic types of money trust accounts:accounts through its retail branch network: guaranteed fixed rate trusts and variable rate trusts.
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| | • | Guaranteed Fixed Rate Trust Accounts.variable rate trust accounts. Variable rate trust accounts are not entitled to a guaranteed return on the deposits, except in the limited cases of principal guaranteed variable rate trust accounts, for which payment of the principal amount is guaranteed. As of December 31, 2008 and 2009, under Korean GAAP, Shinhan Bank’s variable rate trust accounts amounted to W9,311 billion and W6,425 billion, respectively, and its principal guaranteed variable rate trust accounts amounted to W3,510 billion and W3,479 billion, respectively. Shinhan Bank charges a lump sum or a fixed percentage of the assets held in such trusts as a management fee, and, depending on the trust products, is also entitled to additional fees in the event of early termination of the trusts by the customer. Korean banks, including Shinhan Bank, are currently allowed to guarantee the principal of the following types of variable rate trust account products: (i) existing individual pension trusts, (ii) new individual pension trusts, (iii) existing retirement pension trusts, (iv) new retirement pension trusts, (v) pension trusts and (vi) employee retirement benefit trusts. |
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| • | guaranteed fixed rate trust accounts. Guaranteed fixed rate trust accounts offer customersare entitled to a fixed-rateguaranteed return of return and guaranteed principal. We receive any amounts remaining after taking into accountthe principal as well as an additional fixed rate of return. Upon termination of these trusts, Shinhan Bank is entitled to investment returns from the management of these trusts, net of the guaranteed returnreturns paid to customers and all expenses ofany related expenses. In the trust accounts,past, Korean commercial banks, including provisions for valuation losses on equity securities, loan losses and special reserves. We maintainShinhan Bank, offered two types of guaranteed fixed rate trust accounts:products: general unspecified money trusts and development money trusts. KoreanHowever, since January 1999, banks including Shinhan Bank,in Korea have been restrictedprohibited from establishingoffering new general unspecified money trusts since January 1, 1996,guaranteed fixed rate trust products, and development money trusts effective January 1, 1999. As a result, the size of general unspecified money trustsguaranteed fixed rate trust products currently serviced are carryovers from the past and development money trusts has decreased substantially and most of development money trusts matured byhave been dwindling in volume as the end of 2001 and most of general unspecified money trusts matured by the end of 2002.products mature. As of December 31, 2005, 20062008 and 2007, under Korean GAAP,2009, the guaranteed fixed rate trust products maintained by Shinhan Bank’s development money trustsBank amounted to W0.04 billion, W0.021.0 billion and W0.021.0 billion, respectively, and general unspecified money trusts amounted to an aggregate of W0.2 billion, W9.6 billion and W9.7 billion, respectively. As of December 31, 2005, under Korean GAAP, Chohung Bank’s development trusts had no outstanding balance and general unspecified money trusts amounted to an aggregate of W9.1 billion. See note 34 in the notes to our consolidated financial statements included in this annual report. |
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| • | Variable Rate Trust Accounts. VariableGAAP. If income from a guaranteed fixed rate trust accounts are trust accounts for which we do not guarantee the return on the trust account but, in certain instances described below, the principal of the trust account is guaranteed. In respect of variable rateinsufficient to pay the guaranteed amount, such deficiency must be satisfied from (i) first, special reserves maintained in such trust accounts, we are entitled to receive fixed rate(ii) secondly, trust fees and (iii) lastly, funds transferred from the bank accounts of trust fees. We also receive fees upon the termination of trust accounts prior to their stated maturities. However, the recent trend has been to offer products with stated maturities that are significantly shorter than those offered in the past, resulting in lower fees from early termination.Shinhan Bank. |
We are required to set aside allowances for trust assets which are not marked to market and provide special reserves under Korean GAAP for principal guaranteed variable rate trust accounts in addition to guaranteed fixed rate trust accounts. Provisions for variable rate trust assets that are not marked to market are reflected in the rate of return to customers, and thus, have no impact on our income while provisions for guaranteed fixed rate trust accounts could reduce our income in case of a deficiency in the payment of the guaranteed amount. We provide special reserves with respect to guaranteed fixed rate and principal-guaranteed variable rate trust account credits by deducting the required amounts from trust fees for such trust accounts in accordance with the Trust Act and Trust Business Act.
Korean banks are currently allowed to guarantee the principal of the following types of variable rate trust account products: (i) existing individual pension trusts, (ii) new individual pension trusts, (iii) existing retirement pension trusts, (iv) new retirement pension trusts, (v) pension trusts and (vi) employee retirement benefit trusts.
Payments from Bank Accounts to Guaranteed Fixed Rate Trust Accounts. If income from a guaranteed fixed rate trust account is insufficient to pay the guaranteed amount, such deficiency must be satisfied from (i) first, special reserves maintained in such trust accounts, (ii) secondly, trust fees and (iii) lastly, funds transferred from the bank accounts of Shinhan Bank, as the case may be. Chohung Bank recorded zero or a negligible amount of such obligations as of December 31, 2005. Shinhan Bank made no such payments from its bank accounts to cover such deficiencies during 2005 and recorded an obligation of W0.1 billion as of December 31, 2006, primarily due to a decrease in the balance of Shinhan Bank’s guaranteed fixed rate trust accounts, which resulted from the legal prohibition against providing such accounts beginning in 1996 with respect to general unspecified money trusts and beginning in 1999 for development money trusts, as well as the improving economic condition in Korea. The decrease in the balance of Shinhan Bank’s guaranteed fixed rate trust accounts, in turn, has generally translated into
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a decrease in non-performing credits. There can be no assurance, however, that such transfers will not be required in the future.
Distribution Channels and Marketing
We distribute our trust products primarily through the branch network of our retail banking services. See “Item 4. Information on the Company — Business Overview — Our Branch Network and Distribution Channels” above.
Recent Regulatory Developments
The Act on the Structural Improvement of the Financial Industry was amended in January 2007 and took effect in April 2007, which, among others, (i) permitted the ratification of a shareholding by a financial institution of a non-financial company’s shares beyond the prescribed limit under exceptional circumstances, such as capital reduction, (ii) specified the standards for approving such excessive shareholding and (iii) imposed a penalty on those who do not comply with the order by the Financial Supervisory Services as to the disposition of such excessive holdings.
Credit Card Services
Overview
As of December 31, 2007, our totalWe currently provide credit card balance outstandingservices through our credit card subsidiary, Shinhan Card.
Former Shinhan Card was W14,681 billion, or 9.67% of our total loans outstandingoriginally formed as a result of the same date.
On June 4, 2002,spin-off of Shinhan Bank spun-off itsBank’s credit card business in June 2002. In April 2006, the credit card division of Chohung Bank was split and merged into former Shinhan Card a “monoline” credit card subsidiary. Despiteconcurrently with the spin-off,merger of Chohung Bank and Shinhan Bank continues to manage a substantial portionBank. Following such split-merger, former Shinhan Card had, as of our credit card operations, including the collections and receiving and processing of applications, pursuant to an agency agreement between the two subsidiaries.
April 3, 2006, W3.4 trillion (reported basis) or W3.8 trillion (managed basis) in assets, in each case, under Korean GAAP. Prior to the merger of former Shinhan Bank and Chohung Bank in April 2006, Chohung Bank had an active credit card business division. Chohung Bank was a member of BC Card Co., Ltd. (“BC Card”), which is owned by 11 consortium banks with Chohung Bank holdingbanks. Shinhan Card currently holds 14.85% equity interest in BC Card. BC Card issues credit cards under the names of the member banks, substantially all of which are licensed to use MasterCard, Visa or JCB. This allowsenables holders of BC Card to use their cards at any establishment which accepts MasterCard, Visa or JCB, as the case may be.
Upon the merger of the two banks in April 2006, we split off the credit card services division of Chohung Bank and merged it into former Shinhan Card. Following such split-merger, former Shinhan Card had, as of April 3, 2006, W4 trillion in assets, W19 trillion in terms of the total credit purchase volume and 5.2 million customers.
In March 2007, we acquired the controlling equity interest in LG Card, the largest credit card company in Korea in terms of the number of cardholders. As of December 31, 2006, LG Card had W10.0 trillion in assets, W33 trillion in terms of the total credit purchase volume and approximately 10.5 million customers ranking first among credit card service providers (including banks) in terms of the total credit purchase volume.Card. On October 1, 2007, LG Card assumed all of the assets and liabilities of former Shinhan Card and changed its name to Shinhan Card.
We believe that the acquisition of LG Card, will helpwhich was the largest credit card company in Korea in terms of the number of cardholders, has contributed to significantly increase our having the largest market share in the Korean credit card industry and diversifydiversifying our revenue sources from our non-banking operations. In addition, in light of the improving credit quality of the cardholders in line with the general improvements of the Korean economy and the expanded opportunities for credit card use for payments of utilities, we believe that our credit card business will improve its profitability.
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Products and Services
General
We currently offer ourShinhan Card offers a wide range of credit card and other services, through Shinhan Card,principally consisting primarily of the following:
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| | • | credit card services, which involve providing the cardholders with limited credit to purchase products and services, for which payment must be madeservices. Cardholders can repay either (i) on a lumplump-sum basis (namely, in full at the end of a monthly billing cycle)cycle or (ii) to a lesser extent, on a revolving basis subject to a minimum monthly payment which is the lesser of (x) 5.0% of the amount outstanding or (y) W30,000. The remainingCurrently, the outstanding credit card balance generally accrues interest at the effectivean annual ratesrate of approximately 9.8% to 26.9%., depending on the credit profile of the cardholder. |
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| | • | cash advances from ATM machines and bank branches,, for which paymentcardholders can be maderepay either on a lump-sum basis or a revolving basis. TheCurrently, the lump-sum cash advances generally accrue interest at the effectivean annual ratesrate of approximately 9.8% to 26.9%26.6% and the revolving cash advances generally accrue interest at a minimum rate of 5.0% of the outstanding balance. In addition, for both types of cashCash advances we charge an upfront fee at the rate of 0.6% of the outstanding balance for operating expenses.may be obtained from ATM machines and bank branches. |
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| | • | installment purchases, which provides customers with an option to purchase products and services from specifiedselect merchants on an equal principal installment basis over a fixed term, which ranges from twothree months up to a maximum of two years. The60 months. Currently, the outstanding installment purchase balances for these services generally accrue interest at the effectivean annual ratesrate of approximately 10.9% and 21.9%5.5% to 26.0%. |
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| | • | cashcard loans, which may be unsecured, and for which paymentcardholders must be maderepay on an equal principal installment basis over an initial fixed term of 2two to 24 months or in full at maturity. TheCurrently, the outstanding principal amount of card loans currently accruesaccrue interest at the effectivean annual ratesrate of approximately 9.9%7.6% to 25.8% and an upfront fees arefee of up to 1.0% is charged aton the effective annual ratesprincipal amount of 0.3% to 4.0%.the loan. For delinquent cardholders, outstanding credit card receivables can also be restructured into loan, which are recorded as card loans payableand payment for which is made on an installment basis over a maximum term of 7260 months. The outstanding principal amount of restructured card loans currently accrue interest at the effective annual rates of approximately 15.0% to 27.8%. An upfront fee at the effective annual rates of 4.0% also apply to restructured card loans. |
Each new cardholder enters into one or more card use agreements with Shinhan Card which governs its account with Shinhan Cardalso derives fee income in the form of lump-sum fees, installment purchase fees and the issuance of credit cardsand/or check cardscash advance fees and, to the cardholder. The standard terms of each card use agreement may vary depending on the type of credit card to be issued to the cardholder. Shinhan Card may alter the terms of a card use agreement by giving 14 days’ notice to the cardholder.
Income from the credit card business consists oflesser extent, annual membership fees paid by cardholders, installment purchase fees, cash advance fees,and penalty interest on late and deferred payments and fees paid by merchants, with lump-sum and installment purchasemerchants. Shinhan Card passes onto its customers the transaction fees andcharged by financial institutions (other than Shinhan Bank) for cash advance fees constitutingadvances made through ATMs of such financial institutions. Any accounts that are unpaid when due are deemed to be delinquent accounts, for which Shinhan Card charges a penalty interest in the largest source.range of 25.0% to 29.9% per annum in lieu of the interest rates applicable prior to default.
45
The annual membership fees for credit cards vary depending on the type of the card and the benefits offered thereunder.for such card. For our standard cards, we charge an annual membership fee ofranging from W3,000 to W500,0001,000,000 per card.card, depending on the type of the credit card and the cardholder profile. Annual membership fees for various affinity and co-branded cards are higher and vary from W5,000 to W500,000. We also charge additional fees charged by financial institutions if cash advances are made through an ATM maintained by a financial institution other than Shinhan Bank.
Merchant discount fees, which are processing fees Shinhan Card charges onto the merchants, can be up to 4.5% of the purchased amount depending on the merchant used, with the average charge being 2.3%2.15% in 2007.2009.
Although themaking payments on a revolving basis is a relativelyquite common form of payment in many other countries, itthis payment method is still in its early stages of developmentimplementation in Korea. Cardholders in Korea are generally required to pay forrepay their purchases within approximately 15 to 45 days of purchase depending on their payment cycle, and, except in the case of installment purchases. Installment purchases where the charged amounts are repaid in installments, typically during the followinghave a repayment term of three to six months. Accounts that remain unpaid after this period are deemed to be delinquent accounts. Shinhan Card charges penalty interestmonths and charge different rates depending on delinquent accounts and closely monitors such accounts. For purchases made by installment, Shinhan Card charges interest on unpaid amounts at rates that vary according to the terms of repayment.
Cardholders are required to settle their outstanding balances in accordance with the termsduration of the credit cards that they hold. Cardholders may choose the monthly settlement date. Settlement dates around the end of each month
56
are the most popular since most salaries are paid at the end of the month. A cardholder is required to select a settlement date when the card account is opened. The cardholder may change the settlement date after the account has been opened but not more than once every two months.
If a cardholder is delinquent, we charge late payment interest instead of the periodic finance charge described above on the principal balance owed. The rate of late payment interest ranges from 25.0% to a maximum rate of 29.9%.repayment term.
In addition to the credit card services, Shinhan Card also offers check cards, which are similar to debit cards in the United States, and many other countries, to individualits retail customers andas well as corporate customers. A check card can be used at any of the merchants that accept credit cards issued by Shinhan Card and the amount charged to a check card is directly debited from the cardholder’s designated bank account. Although Shinhan Card does not charge annual membership fees on check cards, merchants are charged fees on the amount purchased amount using check cards at the rates applicablea rate similar to the purchase amount usingthose used for credit cards.card purchases.
Customers and Merchants
In addition to our efforts at internal growth through cross-selling, we also seek to enhance our market position by selectively targeting new customers with high net worth and good creditworthinesssolid credit quality through the use of a sophisticated and market-oriented risk management system. CreditShinhan Card screens its credit card applicants are screened and appropriatesets individualized credit limits are assessedfor such applicants according to internal guidelines based on oura comprehensive credit scoring system.
The following table sets forth the number of customers and merchants of Shinhan Card (including former Shinhan Card), the credit card division of Chohung Bank and LG Card as of the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | | As of December 31, | |
| | | 2005 | | 2006 | | 2007 | | 2007 | | 2008 | | 2009 | |
| | | (In thousands, except percentages) | | (In thousands, except percentages) | |
| |
Shinhan Card(1): | | | | | | | | | | |
Shinhan Card: | | | | | | | | | | | | | |
Number of credit card holders(2)(1) | | | 2,304 | | | | 4,840 | | | | 13,425 | | | | 13,425 | | | | 13,718 | | | | 14,435 | |
| Personal accounts | | | 2,281 | | | | 4,767 | | | | 13,346 | | | | 13,346 | | | | 13,617 | | | | 14,324 | |
| Corporate accounts | | | 23 | | | | 73 | | | | 79 | | | | 79 | | | | 101 | | | | 111 | |
| Active ratio(3) | | | 63.8 | % | | | 66.6 | % | | | 74.9 | % | |
| Active ratio(2) | | | | 69.7 | % | | | 74.9 | % | | | 73.7 | % |
| Number of merchants | | | 2,934 | | | | 3,107 | | | | 4,871 | | | | 2,154 | | | | 2,268 | | | | 2,425 | |
Chohung Bank: | | | | | | | | | | |
| Number of credit card holders | | | 2,494 | | | | N/A | | | | N/A | | |
| Personal accounts | | | 2,434 | | | | N/A | | | | N/A | | |
| Corporate accounts | | | 60 | | | | N/A | | | | N/A | | |
| Active ratio(3) | | | 56.4 | % | | | N/A | | | | N/A | | |
| Number of merchants(4) | | | 2,225 | | | | N/A | | | | N/A | | |
LG Card: | | | | | | | | | | |
| Number of credit card holders | | | 9,855 | | | | 10,459 | | | | N/A | | |
| Personal accounts | | | 9,835 | | | | 10,438 | | | | N/A | | |
| Corporate accounts | | | 20 | | | | 21 | | | | N/A | | |
| Active ratio(3) | | | 70.4 | % | | | 69.7 | % | | | N/A | | |
| Number of merchants | | | 3,930 | | | | 4,350 | | | | N/A | | |
N/A = Not applicable
Notes:
| | |
| (1) | | Information as of December 31, 2005 is for former Shinhan Card and does not include information for the credit card division of Chohung Bank. Information as of December 31, 2006 is for former Shinhan Card (including that for the credit card division of Chohung Bank to reflect the split-merger in April 2006). Information as of |
57
| | |
| | December 31, 2007 is for LG Card (renamed as Shinhan Card on October 1, 2007), including the assets and liabilities of former Shinhan Card assumed by LG Card on October 1, 2007. |
|
(2) | | Represents the number of holders of credit cards whose use wascardholders not suspendedsubject to suspension or terminatedtermination as of the relevant date. |
| |
(3)(2) | | Represents the ratio of accounts used at least once within the last six months to the total accounts as of year end. |
|
(4) | | Represents the number of merchants of BC Card’s merchant network.yearend. |
46
Financial and Statistical Information
The following table sets forth certain financial and statistical information relating to the credit card, installment sales and leasing operations of the former Shinhan Card, Chohung Bank, LG Card and Shinhan Card as of the dates or for the period indicated. LG Card became our subsidiary in March 2007.
| | | | | | | | | | | | | | | | | | |
| | | As of or for the Year Ended December 31, | | | | | | | | | | | | | |
| | | 2005 | | 2006 | | | | | As of or for the Year Ended December 31, | |
| | | Former Shinhan
| | | | Former Shinhan
| | 2007 | | | 2007 | | 2008 | | 2009 | |
| | | Card(1) | | Chohung Bank(2) | | Card(1) | | Shinhan Card(1) | | | Shinhan Card(1) | | Shinhan Card(1) | | Shinhan Card(1) | |
| | | (In billions of Won, except percentages) | | | (In billions of Won, except percentages) | |
| |
| Interest income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Installments | | W | 49 | | | W | 64 | | | W | 72 | | | W | 260 | | | W | 260 | | | W | 326 | | | W | 311 | |
| Cash advances | | | 111 | | | | 181 | | | | 189 | | | | 547 | | | | 547 | | | | 639 | | | | 524 | |
| Card loans(3) | | | 30 | | | | 60 | | | | 62 | | | | 488 | | |
| Annual membership | | | 9 | | | | 4 | | | | 9 | | | | — | | |
| Card loans(2) | | | | 488 | | | | 548 | | | | 506 | |
| Revolving | | | 6 | | | | 49 | | | | 33 | | | | 227 | | | | 227 | | | | 240 | | | | 214 | |
| Late payments | | | 18 | | | | 15 | | | | 14 | | | | 8 | | | | 8 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
| Total | | W | 223 | | | W | 373 | | | W | 379 | | | W | 1,530 | | | W | 1,530 | | | W | 1,753 | | | W | 1,555 | |
| | | | | | | | | | | | | | | | | |
| Credit card fees: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Merchant fees(4) | | W | 188 | | | W | 211 | | | W | 430 | | | W | 1,179 | | |
| Merchant fees(3) | | | W | 1,179 | | | W | 1,309 | | | W | 1,422 | |
| Other fees | | | 10 | | | | 5 | | | | 12 | | | | 2 | | | | 2 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
| Total | | W | 198 | | | W | 216 | | | W | 442 | | | W | 1,181 | | | W | 1,181 | | | W | 1,309 | | | W | 1,422 | |
| | | | | | | | | | | | | | | | | |
| Charge volume:(5) | | | | | | | | | | | | | | | | | |
| Charge volume:(4) | | | | | | | | | | | | | |
| General purchases | | W | 6,255 | | | W | 6,039 | | | W | 15,365 | | | W | 45,912 | | | W | 45,912 | | | W | 45,624 | | | W | 51,784 | |
| Installment purchases | | | 1,650 | | | | 2,003 | | | | 3,721 | | | | 14,269 | | | | 14,269 | | | | 17,682 | | | | 17,814 | |
| Cash advances | | | 3,488 | | | | 5,564 | | | | 8,296 | | | | 20,704 | | | | 20,704 | | | | 23,945 | | | | 21,143 | |
| | | | | | | | | | | | | | | | | |
| Total | | W | 11,393 | | | W | 13,606 | | | W | 27,382 | | | W | 80,885 | | | W | 80,885 | | | W | 87,251 | | | W | 90,741 | |
| | | | | | | | | | | | | | | | | |
| Outstanding balance (at year end)(6): | | | | | | | | | | | | | | | | | |
| Outstanding balance (at year end)(5): | | | | | | | | | | | | | |
| General purchases | | W | 539 | | | W | 528 | | | W | 1,128 | | | W | 3,018 | | | W | 3,018 | | | W | 3,046 | | | W | 3,636 | |
| Installment purchases | | | 333 | | | | 497 | | | | 869 | | | | 3,833 | | | | 3,833 | | | | 4,037 | | | | 4,433 | |
| Cash advances | | | 423 | | | | 575 | | | | 860 | | | | 3,086 | | | | 3,086 | | | | 3,111 | | | | 2,606 | |
| Revolving purchases | | | 89 | | | | 199 | | | | 294 | | | | 1,361 | | | | 1,361 | | | | 1,410 | | | | 1,339 | |
| Card loans(3) | | | 255 | | | | 289 | | | | 525 | | | | 2,556 | | |
| Card loans(2) | | | | 2,556 | | | | 2,524 | | | | 2,672 | |
| Others | | | 284 | | | | 190 | | | | 204 | | | | 791 | | | | 791 | | | | 470 | | | | 391 | |
| | | | | | | | | | | | | | | | | |
| Total | | W | 1,923 | | | W | 2,278 | | | W | 3,880 | | | W | 14,645 | | | W | 14,645 | | | W | 14,598 | | | W | 15,077 | |
| | | | | | | | | | | | | | | | | |
| Average balance | | W | 1,916 | | | W | 2,618 | | | W | 3,535 | | | W | 12,106 | | | W | 12,106 | | | W | 14,458 | | | W | 13,585 | |
| Delinquent balances(6): | | | | | | | | | | | | | |
| From 1 day to 1 month | | | W | 790 | | | W | 663 | | | W | 404 | |
| Over 1 month: | | | | | | | | | | | | | |
| From 1 month to 3 months | | | W | 244 | | | W | 244 | | | W | 113 | |
| From 3 months to 6 months | | | | 165 | | | | 171 | | | | 111 | |
| Over 6 months | | | | — | | | | — | | | | — | |
| | | | | | | | | |
| Sub-total | | | | 409 | | | | 415 | | | | 224 | |
| | | | | | | | | |
| Total | | | W | 1,199 | | | W | 1,078 | | | W | 628 | |
| | | | | | | | | |
5847
| | | | | | | | | | | | | | | | | |
| | | As of or for the Year Ended December 31, | |
| | | 2005 | | | 2006 | | | | |
| | | Former Shinhan
| | | | | | Former Shinhan
| | | 2007 | |
| | | Card(1) | | | Chohung Bank(2) | | | Card(1) | | | Shinhan Card(1) | |
| | | (In billions of Won, except percentages) | |
| |
| Delinquent balances(7): | | | | | | | | | | | | | | | | |
| From 1 day to 1 month | | W | 49 | | | W | 92 | | | W | 147 | | | W | 790 | |
| Over 1 month: | | | | | | | | | | | | | | | | |
| From 1 month to 3 months | | W | 17 | | | W | 31 | | | W | 36 | | | W | 244 | |
| From 3 months to 6 months | | | 18 | | | | 29 | | | | 42 | | | | 165 | |
| Over 6 months | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
| Sub-total | | | 35 | | | | 60 | | | | 78 | | | | 409 | |
| | | | | | | | | | | | | | | | | |
| Total | | W | 84 | | | W | 152 | | | W | 225 | | | W | 1,199 | |
| | | | | | | | | | | | | | | | | |
| Delinquency ratios(8): | | | | | | | | | | | | | | | | |
| From 1 day to 1 month | | | 2.53 | % | | | 4.04 | % | | | 3.79 | % | | | 5.4 | % |
| Over 1 month: | | | | | | | | | | | | | | | | |
| From 1 month to 3 months | | | 0.87 | % | | | 1.34 | % | | | 0.93 | % | | | 1.7 | % |
| From 3 months to 6 months | | | 0.95 | % | | | 1.30 | % | | | 1.08 | % | | | 1.1 | % |
| Over 6 months(9) | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
| Sub-total | | | 1.82 | % | | | 2.64 | % | | | 2.01 | % | | | 2.8 | % |
| | | | | | | | | | | | | | | | | |
| Total | | | 4.36 | % | | | 6.68 | % | | | 5.80 | % | | | 8.2 | % |
| | | | | | | | | | | | | | | | | |
| Rewritten loans(10) | | W | 4 | | | W | 269 | | | W | 98 | | | W | 350 | |
| Gross charge-offs | | W | 94 | | | W | 227 | | | W | 209 | | | W | 436 | |
| Recoveries | | | 25 | | | | 47 | | | | 69 | | | | 459 | |
| | | | | | | | | | | | | | | | | |
| Net charge-offs | | W | 69 | | | W | 180 | | | W | 140 | | | W | (23 | ) |
| | | | | | | | | | | | | | | | | |
| Gross charge-off ratio(11) | | | 4.92 | % | | | 8.66 | % | | | 5.91 | % | | | 3.61 | % |
| Net charge-off ratio(12) | | | 3.62 | % | | | 6.87 | % | | | 3.96 | % | | | (0.19 | )% |
| Non-performing loan ratio(13): | | | | | | | | | | | | | | | | |
| Reported | | | 2.71 | % | | | 4.10 | % | | | 3.50 | % | | | 3.71 | % |
| Managed | | | 2.54 | % | | | 4.10 | % | | | 3.17 | % | | | 2.98 | % |
| Asset securitization(14) | | W | 704 | | | W | — | | | W | 710 | | | W | 5,762 | |
| Ratio of total assets securitized to total managed assets | | | 36.3 | % | | | — | | | | 17.9 | % | | | 29.4 | % |
59
LG Card:
| | | | | | | | | |
| | | As of or for the Year Ended December 31, | |
| | | 2005 | | | 2006 | |
| | | (In billions of Won, except percentages) | |
| |
| Interest income: | | | | | | | | |
| Installments | | W | 294 | | | W | 331 | |
| Cash advances | | | 681 | | | | 550 | |
| Card loans(3) | | | 204 | | | | 277 | |
| Annual membership | | | — | | | | — | |
| Revolving | | | — | | | | — | |
| Late payments | | | 82 | | | | 63 | |
| | | | | | | | | |
| Total | | W | 1,261 | | | W | 1,221 | |
| | | | | | | | | |
| Credit card fees: | | | | | | | | |
| Merchant fees(4) | | W | 636 | | | W | 750 | |
| Other fees | | | 2 | | | | 1 | |
| | | | | | | | | |
| Total | | W | 638 | | | W | 751 | |
| | | | | | | | | |
| Charge volume:(5) | | | | | | | | |
| General purchases | | W | 19,971 | | | W | 23,125 | |
| Installment purchases | | | 7,584 | | | | 9,446 | |
| Cash advances | | | 20,619 | | | | 17,262 | |
| | | | | | | | | |
| Total | | W | 48,174 | | | W | 49,833 | |
| | | | | | | | | |
| Outstanding balance (at year end)(6): | | | | | | | | |
| General purchases | | W | 1,589 | | | W | 1,893 | |
| Installment purchases | | | 2,076 | | | | 2,278 | |
| Cash advances | | | 2,826 | | | | 2,650 | |
| Revolving purchases | | | 370 | | | | 574 | |
| Card loans(3) | | | 1,275 | | | | 1,573 | |
| Others | | | 1,792 | | | | 1,050 | |
| | | | | | | | | |
| Total | | W | 9,928 | | | W | 10,018 | |
| | | | | | | | | |
| Average balance | | W | 9,823 | | | W | 10,295 | |
| Delinquent balances(7): | | | | | | | | |
| From 1 day to 1 month | | W | 552 | | | W | 545 | |
| Over 1 month: | | | | | | | | |
| From 1 month to 3 months | | W | 280 | | | W | 227 | |
| From 3 months to 6 months | | | 231 | | | | 167 | |
| Over 6 months | | | — | | | | — | |
| | | | | | | | | |
| Sub-total | | | 511 | | | | 394 | |
| | | | | | | | | |
| Total | | W | 1,063 | | | W | 939 | |
| | | | | | | | | |
60
| | | | | | | | | | | | | | | | | | | | | |
| | | As of or for the Year Ended December 31, | | | As of or for the Year Ended December 31, | |
| | | 2005 | | 2006 | | | 2007 | | 2008 | | 2009 | |
| | | (In billions of Won, except percentages) | | | Shinhan Card(1) | | Shinhan Card(1) | | Shinhan Card(1) | |
| | | (In billions of Won, except percentages) | |
| Delinquency ratios(8): | | | | | | | | | |
| | |
| Delinquency ratios(7): | | | | | | | | | | | | | |
| From 1 day to 1 month | | | 5.6 | % | | | 5.4 | % | | | 5.4 | % | | | 4.5 | % | | | 2.7 | % |
| Over 1 month: | | | | | | | | | | | | | | | | | | | | |
| From 1 month to 3 months | | | 2.8 | % | | | 2.3 | % | | | 1.7 | % | | | 1.7 | % | | | 0.7 | % |
| From 3 months to 6 months | | | 2.3 | % | | | 1.7 | % | | | 1.1 | % | | | 1.2 | % | | | 0.7 | % |
| Over 6 months(9) | | | — | | | | — | | |
| Over 6 months(8) | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Sub-total | | | 5.1 | % | | | 4.0 | % | | | 2.8 | % | | | 2.9 | % | | | 1.5 | % |
| | | | | | | | | | | | | |
| Total | | | 10.7 | % | | | 9.4 | % | | | 8.2 | % | | | 7.4 | % | | | 4.2 | % |
| | | | | | | | | | | | | |
| Rewritten loans(10) | | W | 1,693 | | | W | 1,005 | | |
| Rewritten loans(9) | | | W | 350 | | | W | 220 | | | W | 194 | |
| Gross charge-offs | | W | 1,474 | | | W | 515 | | | W | 436 | | | W | 521 | | | W | 597 | |
| Recoveries | | | 311 | | | | 315 | | | | 459 | | | | 509 | | | | 394 | |
| | | | | | | | | | | | | |
| Net charge-offs | | W | 1,163 | | | W | 200 | | | W | (23 | ) | | W | 12 | | | W | 203 | |
| | | | | | | | | | | | | |
| Gross charge-off ratio(11) | | | 15.0 | % | | | 5.0 | % | |
| Net charge-off ratio(12) | | | 11.84 | % | | | 1.94 | % | |
| Non-performing loan ratio(13): | | | | | | | | | |
| Gross charge-off ratio(10) | | | | 3.60 | % | | | 3.60 | % | | | 4.39 | % |
| Net charge-off ratio(11) | | | | (0.19 | )% | | | 0.08 | % | | | 1.49 | % |
| Non-performing loan ratio(12) : | | | | | | | | | | | | | |
| Reported | | | 8.2 | % | | | 6.1 | % | | | 3.71 | % | | | 2.91 | % | | | 3.08 | % |
| Managed | | | 6.4 | % | | | 4.8 | % | | | 2.98 | % | | | 2.42 | % | | | 2.53 | % |
| Asset securitization(14) | | W | 5,625 | | | W | 4,300 | | |
| Asset securitization(13) | | | W | 5,762 | | | W | 5,666 | | | W | 3,734 | |
| Ratio of total assets securitized to total managed assets | | | 47.1 | % | | | 34.9 | % | | | 29.4 | % | | | 29.4 | % | | | 19.2 | % |
Notes:
| | |
| (1) | | The information of former Shinhan Card for 2005 does not include information for the credit card division of Chohung Bank. The information of former Shinhan Card for 2006 includes that for the credit card division of Chohung Bank from April 1, 2006 to December 31, 2006 to reflect the split-merger in April 2006. The information of Shinhan Card for 2007 includes that of LG Card (renamed as Shinhan Card on October 1, 2007) for the period from March 1, 2007 through December 31, 2007 (including that for the assets and liabilities of former Shinhan Card assumed by LG Card on October 1, 2007) and that of former Shinhan Card for the period from January 1, 2007 through September 30, 2007, presented on an aggregated basis. |
| |
| (2) | | Represents the credit card business of Chohung Bank, consisting of both BC Card and “Forever” Card, which we acquired in 2003. Effective as of April 3, 2006, the credit card division of Chohung Bank was split off and merged into former Shinhan Card. |
|
(3) | | Card loans consist of loans that are provided on either a secured or unsecured basis to cardholders uponaccording to prior agreement. Payment of principal, fees and interest on such a loan can be due either in one payment or in installments afterover a fixed period following a grace period. |
| |
(4)(3) | | Merchant discount fees consist of merchant membership and maintenance fees, charges associated with prepayment by Shinhan Card or Chohung Bank (on behalf of customers) of sales proceeds to merchants, processing fees relating to sales and membership applications. |
| |
(5)(4) | | Represents the aggregate cumulative amount charged during the year. |
| |
(6)(5) | | Represents amounts before allowance for loan losses, including W8 billion of receivables from other entities of Shinhan Financial Group.losses. |
| |
(7)(6) | | Includes the unbilled balances of installment purchases. |
| |
(8)(7) | | Represents the ratio of delinquent balances to outstanding balances for the year. |
61
| | |
(9)(8) | | The charge-off policy of former Shinhan Card, the credit card division of Chohung Bank, LG Card and Shinhan Card has beenis generally to charge off some of credit card balances which are 180 days past due. |
| | due following internal review. |
(10) |
| (9) | | Represents the delinquent credit card balances for credit card purchase and cash advanceadvances which have beenare rewritten as credit card loans, thereby reducing the balance of delinquent accounts before the application of Accounting Standard Codification (“ASC”)310-30, (formerlySOP 03-303-3) relating to the acquisition of LG Card, which reduced the outstanding balances by W322 billion.billion, W165 billion and W84 billion as of December 31, 2007, 2008 and 2009, respectively. |
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(11)(10) | | Represents the ratio of gross charge-offs for the year to the average balance for the year. |
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(12)(11) | | Represents the ratio of net charge-offs for the year to the average balances for the year. |
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(13)(12) | | The reported information is presented on the Korean GAAP basis. The difference of the delinquency ratio between Korean GAAP and U.S. GAAP is due to their respective charge-off policies. The managed information includes, subject to certain adjustments, financial receivables that Shinhan Card has sold in asset-backed securitizations. See “Explanatory Note.” |
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(14)(13) | | Represents credit card balances that were transferred in asset securitization transactions as presented on the Korean GAAP basis. Under U.S. GAAP, most of these transfers are not recognized as sales.sales but are recognized as secured borrowings. |
Personal Workout and Debt Forgiveness ProgramPresentation of Managed Data for Shinhan Card’s Asset Securitization transactions
As partShinhan Card periodically securitizes and sells credit card receivables to diversify its funding sources. The effect of a continuing effortthese transactions under Korean GAAP is to resolveremove such receivables from Shinhan Card’s balance sheet although Shinhan Card retains recourse liabilities for ineligible receivables and generally repurchases the problems caused by consumer credit delinquencies,securitized receivables upon their maturity. However, under U.S. GAAP, such securitization transactions can be accounted for as sales transactions and be removed from our balance sheet only if certain specific criteria are met. Most of the transactions do not meet those criteria, and thus the removal treatment performed under Korean government established a second bad bank knownGAAP is reversed and those receivables are included in our balance sheet. Shinhan Card continues to manage such securitized and sold receivables including billing and payment as “Himangmoah” in May 2005 to aid the delinquent consumers who did not benefitwell as record keeping, and receives service fees from the first bad bank despite being qualified to do so. The second bad bank provides relief by collecting 3%securitization vehicles for servicing such receivables. We believe that the disclosure of the debt amountcredit experience of Shinhan Card’s managed portfolio presents a more complete presentation of our credit exposure because the managed data reflects not only on-balance sheet receivables but also securitized assets as to which Shinhan Card retains a risk of loss in advance, allowing delinquent cardholdersthe underlying assets, primarily in the form of subordinated retained interests. In addition, because Shinhan Card tends to repay their delinquent debts within eight years.transfer to securitization vehicles assets which generally are in the higher asset qualification categories, the managed basis figures generally tend to exhibit higher net interest spreads and net interest margins and lower delinquency ratios. The second bad bank raises its fundsmanaged financial information and operating data are not audited and are not presented or prepared in accordance with Korean GAAP or on the same basis as the audited financial information included in this offering circular. Managed financial data is derived from an arithmetic summation of Shinhan Card’s on-balance sheet receivables together with receivables sold in off-balance sheet transactions subject to purchasecertain adjustments. As a result of these adjustments, managed financial data is not the delinquent debts from financial institutions through a special purpose company in an asset-backed securitization transaction. The second bad bank distributes the debt amount collected in excesssimple sum of the initial purchase price to the selling financial institutions. At this time, we cannot accurately predict the number of applicants and amounts subject to the second bad bank program. To the extent the second bad bank achieves less-than-expected level of collection of, and recovery on, non-performing assets, commercial banks and credit card companies, including Shinhan Bankreported accounts and Shinhan Card, may realize less gains from recoveries.
UnlikeCard’s off-balance sheet transactions. Accordingly, the “bad bank” program that provides loans directly to consumers,financial information contained in the Credit Counseling & Recovery Service, established in May 2004, has adopted an individual workout program. For delinquent consumers who are deemed to be capable of repaying their debts, the Credit Counseling & Recovery Service will, pursuant to an agreement with the creditor financial institution, provide opportunities to repay in installments, provide repayment grace periods, reduce debt amounts, or extend the maturity date of the debts. Currently, a substantial number of financial institutions, including banks and insurance companies, are parties to the Credit Recovery Support Agreement, pursuant to which such financial institutions, have agreed to provide such support described above to those consumers who meet the following qualifications: (i) income exceeding minimum living expenses promulgated by the Ministry of Health and Welfare of Korea, (ii) debt not exceeding W500 million in total amount, and (iii) official records being on file at Korea Federation of Banks as to the default status of debt. Each application for credit recovery is reviewed by the Credit Counseling & Recovery Service and approval of each application requires the approval by creditors representing at least one-half of the unsecured debt amount and at least two-thirds of the secured debt amount.
In September 2004, a court-administered individual workout program was adopted under the Individual Debtor Recovery Act. Under this program, a qualified individual debtor may file a petition for an individual workout program with a competent court. Subject to the court’s approval, the debtor may repay the debt over a period of less than five years (or from three to eight years for those debtors who filed before the effective date of the Debt Recovery and Bankruptcy Act and continue to be subject to the Individual Debtor Recovery Act) and will be exempted from other debts without declaring bankruptcy. To qualify, an individual delinquent debtor must have less than W500 million in debt (in the case of unsecured debt) or W1 billion in debt (in the case of secured debts), and must have regular and reliable income or have the potential to earn recurring income on an ongoing basis.
The Debtor Rehabilitation and Bankruptcy Act, which took effect on April 1, 2006, consolidated all existing bankruptcy-related laws in Korea, namely, the Corporate Reorganization Act, the Composition Act, the Bankruptcy
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Actreported accounts and the Individual Debtor Recovery Act. See “— Descriptionmanaged financial data are not directly comparable and should not be so compared. While Shinhan Card prepares managed financial data based upon assumptions and methods it deems reasonable, the managed financial data do not accurately represent its financial condition or results of Assetsoperations as if it had not conducted any ABS transactions and Liabilities — Loans — Credit Exposures to Companies in Workout, Court Receivership and Composition.”the managed operating data do not accurately reflect its results of operations.
Securities Brokerage Services
Overview
Through Good Morning Shinhan Securities, our securities brokerage subsidiary,Investment, we provide a fullwide range of financial investment services to our diversified customer base including corporations, institutional investors, governments and individuals. Financial investment services offered by Shinhan Investment range from securities brokerage services, includingto our retail and institutional customers, investment advice and financial planning services to our retail customers, as well as internationalinvestment banking services such as underwriting and institutional brokerageM&A advisory services to our corporateinstitutional customers.
As of December 31, 2007, our2009, according to internal data, Shinhan Investment’s annual market share was approximately 5.65% in theof Korean equity brokerage market was 5.39% (consisting of 4.38% in the retail segment, 0.52% in the institutional segment and is ranked fifth0.49% in the international segment) in terms of total brokerage volume, ranking fourth among securities firms in Korea, excluding discount brokers such as Mirae Asset Securities and Kiwoo Securities,Kiwoom Securities. As of the same date, according to internal data, Shinhan Investment held the largest annual market shares in the industryKospi200 futures and options brokerage segments of 8.30% and 9.45%, respectively, in terms of total brokerage volume.volume with respect to these products, which we believe will enable Shinhan Investment to further solidify its market position in its futures trading and brokerage services as it expands these services.
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Recent Regulatory Changes
On July 3, 2007,Following the National Assembly of Korea passed the Financial Services and Capital Market Act proposed by the then-Ministry of Finance and Economy (currently, the Ministry of Strategy and Finance). The Act is intended to consolidate six (6) different laws, including the Securities and Exchange Law and the Asset Management Business Act, regulating various aspectsimplementation of the capital markets. The Act will take effect as of February 4, 2009.
The Financial Services and Capital Market Act attempts to apply one uniform set of rules to various types of financial institutions which are currently subject to different licensing and ongoing regulatory requirements. To this end, the Act categorizes current capital market-related businesses into six (6) functions as follows: (i) dealing, (ii) brokerage, (iii) collective investment, (iv) investment advice, (v) discretionary investment management, and (vi) trust (collectively, the “Financial Investment Businesses”). Under the Act, securities companies, asset management companies, futures companies and other entities engaging in the Financial Investment Business are classified as financial investment companies (the “Financial Investment Companies”).
Each Financial Investment Company will be able to select what Financial Investment Business to engage in. In applying for requisite licenses, each Financial Investment Company will have to specify its desired (i) Financial Investment Business, (ii) financial investment products (for example, whether securities or derivatives) to be provided in such Financial Investment Business, and (iii) target customers (namely, whether institutions or individuals) with whom its respective Financial Investment Business may be conducted.
Financial institutions currently engaging in business activities equivalent to any of the Financial Investment Businesses are required to file an application with the Financial Services Commission between August 4, 2008 and October 3, 2008, in order to convert their existing licenses into new ones to be issued under the Act, as well as take certain other steps to continue engaging in such business activities after the Act becomes effective on February 4, 2009.
For more information on the Act, please see “Item 4. Information on the Company — Supervision and Regulation — Financial Investment Services and Capital Market Act.”Markets Act in February 2009, Shinhan Investment has obtained requisite approvals for its existing businesses in investment banking services, securities brokerage services, trust services, investment advisory service and discretionary account asset management services. In November 2009, Shinhan Investment also obtained the requisite approval for existing and new derivatives businesses, which enables Shinhan Investment to provide not only its existing services in equity- and stock index-linked derivatives sales and brokerage, but also proprietary trading and brokerage services for futures involving interest rates, currency and commodities as well as foreign exchange margin trading. Shinhan Investment currently provides all of the foregoing services, subject to prevailing market conditions, and is currently preparing to submit a license application to engage in collective investment development businesses.
Products and Services
We offer a variety of financial and advisory services through three main business groups of Good Morning Shinhan Securities, consisting ofInvestment provides principally the Retail Business Group, the Wholesale Business Group and the Trading/Derivative Business Group.following services:
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| | • | Retail Business Groupretail client services.provides These services include equity and bond brokerage, investment advisory and financial planning services to retail customers, with a focus on high net worth individuals. In 2007, revenuesThe fees generated by the Retail Business Division represented approximately 86% of total revenues of our Securities Brokerage Services in 2007. The Retail Business Division earns fees by managing client assets as well asinclude brokerage commissions as a broker for our clients in the purchase and sale of securities. In addition, we generate netsecurities, asset management fees, interest revenueincome from credit extensions, including in the form of stock subscription loans, margin transaction loans and loans secured by financing customers’ securities transactions and other borrowing needs through security-based lendingdeposited securities. |
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| | • | and also receive commissions and other sales and service revenues through the sale of proprietary and third-party mutual funds.institutional client services: |
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| | • | Wholesale Business Groupbrokerage services.offers a variety These services include brokerage of brokerage services, including brokerage ofstocks, corporate bonds, futures and options provided to ourShinhan Investment’s institutional and international customers. In addition, through our research center with more than 41customers and sale of institutional financial products. These services are currently supported by a team of 62 research analysts we producethat specialize in equity, bonds and derivatives research to serve both institutional and international investor clients. This group also provides research and investment banking services, including capital markets and mergers and acquisitions advisory services.research. |
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| | • | Trading/Derivative Business Groupinvestment banking services.offers These services include a wide array of investment banking services including selling institutional financial productsto Shinhan Investment’s corporate customers, such as domestic and trading equity and derivatives and, to a lesser extent,international initial public offerings, M&A advisory services, bond issuances, underwriting, capital increase, asset-backed securitizations, issuance of convertible bonds and underwriting, to our corporate customers.bonds with warrants, structured financing, issuance of asset-backed commercial papers, mergers and acquisitions advisory services and project financings involving infrastructure, real estate and shipbuilding. |
Shinhan Investment also engages, to a limited extent, in proprietary trading in equity and debt securities, derivative products andover-the-counter market products.
With respect to brokerage services, in the face of intense competition in the domestic brokerage industry, Shinhan Investment primarily focuses on strengthening profitability through service differentiation and efficient management of its distribution network rather than enlarging its market share indiscriminately through lowering fees and commissions. Shinhan Investment’s service differentiation efforts include offerings its customers opportunities to purchase stocks in a wide range of countries (currently more than 20 countries), leveraging synergy opportunities afforded by affiliation with other Shinhan entities such as offering brokerage accounts maintained at Shinhan Bank and Shinhan Capital.
With respect to investment banking services, Shinhan Investment provides such services through four divisions consisting of equity capital markets, corporate finance, project finance and mergers and acquisitions, as well as two overseas service centers in Hong Kong and Shanghai
Insurance Services
Life Insurance
We provide life insurance products and services primarily through Shinhan Life Insurance. Shinhan Life Insurance provides its services through diversified distribution channels consisting of financial planners, telemarketers, agency marketers and bancassurance specialists. As of the end of fiscal years ended March 31, 2009 and March 31, 2010, under Korean GAAP, Shinhan Life Insurance had total assets of W8,816.8 billion and W10,437 billion and net profits of W134.2 billion and W190 billion, respectively. During its fiscal year 2009,
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among 22 life insurance companies in Korea, Shinhan Life Insurance ranked second in terms of net profit and sixth in terms of insurance premium received, principally due to increased sales of health insurance policies, stable asset portfolio management and prudent risk management. We expect the insurance premium received by Shinhan Life Insurance to increase as a result of growing demands for both investment and annuity products and potential synergy effects from cross-selling between Shinhan Life Insurance and our banking and other subsidiaries
Asset Management Services
In addition to personalized wealth management services provided as part of our private banking and securities brokerage services, we also provide asset management services through Shinhan BNP Paribas Asset Management, a joint venture with BNP Paribas Investment Partners, of which we and BNP Paribas Investment Partners hold 65:35 interests, respectively. Shinhan BNP Paribas Asset Management was formed on January 1, 2009 through the merger of Shinhan BNP Paribas Investment Trust Management, our 50:50 joint venture with BNP Paribas Investment Partners, and SH Asset Management, our wholly-owned subsidiary, in order to streamline our asset management services capabilities. Shinhan BNP Paribas Asset Management ranked third among asset managers in Korea in terms of assets under management as of December 31, 2009, and provides a wide range of investment products, including traditional equity/fixed income funds as well as alternative investment products, to retail and institutional clients. As a joint venture with BNP Paribas Investment Partners, we believe Shinhan BNP Paribas Asset Management has significantly benefited from BNP Paribas’s global network of investment professionals and expertise in the asset management industry. On January 1, 2010, Shinhan BNP Paribas Asset Management had assets under management amounting to approximately W32.4 trillion. To a limited extent, Shinhan Investment also provide asset management services for discretionary accounts See “— Securities Brokerage Services.”
We expect that competition will intensify in the asset management industry as a result of the Financial Investment Services and Capital Markets Act, which became effective in February 2009. Under this Act, a “financial investment company”, which formerly included securities companies, asset management companies, futures companies and other entities previously engaged in what is currently characterized as financial investment businesses, is now permitted to provide asset management services by obtaining new licenses under the new Act. For more information on the Act, see “— Supervision and Regulation — Financial Investment Services and Capital Markets Act.”
Other Services
Through our other operating subsidiaries, we also provide leasing and equipment financing, investment trust management, regional banking and investment banking and advisory services. In addition, we have also established a bancassurance joint venture to offer life insurance and other insurance-related products and services following deregulation of this industry in September 2003. In December 2005, we also acquired an insurance company to offer a diversified range of life insurance products in addition to bancassurance services. See “— Life Insurance” below.
Leasing and Equipment FinancingLife Insurance
We provide leasinglife insurance products and equipment financing services to our corporate customers mainlyprimarily through Shinhan Capital. Established as a leasing company in 1991,Life Insurance. Shinhan CapitalLife Insurance provides customers with leasing, installment financingits services through diversified distribution channels consisting of financial planners, telemarketers, agency marketers and new technology financing.
bancassurance specialists. As of Decemberthe end of fiscal years ended March 31, 2007,2009 and March 31, 2010, under Korean GAAP, Shinhan Capital’sLife Insurance had total assets wereof W2,9638,816.8 billion showing a W1,015 billion increase from the previous year. In particular, our operating assets increased from W1,287 billion in 2005 to W1,840 billion in 2006 and to W2,759 billion in 2007 under Korean GAAP. We believe that our strength is in leasing of ships, printing machines, automobiles and other specialty items. We continue to diversify our revenue base from this business by expanding our services, as demonstrated by our acting as corporate restructuring company for financially troubled companies beginning in 2002 and financing provided to real estate projects and infrastructure investments. Shinhan Capital’s profitability continued to improve and stabilize gradually over the past few years. Under Korean GAAP, Shinhan Capital’s operating revenue decreased from W222 billion in 2005 to W200 billion in 2006 but increased to W265 billion in 2007, and its net income increased from W37 billion in 2005 to W48 billion in 2006 and W4910,437 billion in 2007. On November 23, 2007, we purchased 20,000,000 common shares of Shinhan Capital at an aggregate purchase priceand net profits of W100134.2 billion and W190 billion, respectively. During its fiscal year 2009,
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among 22 life insurance companies in orderKorea, Shinhan Life Insurance ranked second in terms of net profit and sixth in terms of insurance premium received, principally due to increased sales of health insurance policies, stable asset portfolio management and prudent risk management. We expect the insurance premium received by Shinhan Life Insurance to increase our adjusted net capital and thereby preemptively offset the downward adjustment in the capital adequacy ratio as a result of the increase ingrowing demands for both investment and annuity products and potential synergy effects from cross-selling between Shinhan Life Insurance and our total assets, as well as to ensure conditions for stable funding.banking and other subsidiaries
On January 1, 2008, the corporate finance leasing operations of Shinhan Card were transferred to Shinhan Capital. The total transfer amount under Korean GAAP was W6.3 billion. The transfer was made in order to increase the scale of operations for our corporate credit finance business and thereby enhance its competitiveness. Following the transfer, Shinhan Capital will specialize in equipment leasing and other corporate credit finance, while Shinhan Card will focus on retail credit, including credit cards, installment financing and auto leases.
Asset Management and Investment Trust Services
In addition to personalized wealth management services provided byas part of our private banking and securities brokerage services, we also engage two professionalprovide asset management companies,services through Shinhan BNP Paribas Asset Management, a joint venture with BNP Paribas Investment Partners, of which we and BNP Paribas Investment Partners hold 65:35 interests, respectively. Shinhan BNP Paribas Asset Management was formed on January 1, 2009 through the merger of Shinhan BNP Paribas Investment Trust Management, our 50:50 joint venture with BNP Paribas Investment Partners, and SH Asset Management, our wholly-owned subsidiary, in order to providestreamline our customers with fundasset management services capabilities. Shinhan BNP Paribas Asset Management ranked third among asset managers in Korea in terms of assets under management as of December 31, 2009, and offer them with new investment products. Theprovides a wide range of investment products, offered by these two companies include equity and equity-linkedincluding traditional equity/fixed income funds fixed-income funds andas well as alternative investment products.products, to retail and institutional clients. As a joint venture with BNP Paribas Asset Management,Investment Partners, we believe Shinhan BNP Paribas
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Investment Trust Management uses the expertise of BNP Paribas to offer local as well as international products while SH Asset Management focuses on traditional local market products.
The asset management industryhas significantly benefited from BNP Paribas’s global network of investment professionals and expertise in Korea is under transformation due to a number of regulatory and market factors. In 2004, the Korean government enacted the Act on the Business of Operating Indirect Investment and Asset, which removed and curtailed many existing restrictions on investment products and improved the corporate governance structure and operational transparency of the asset management companies for the benefit of the investors. Asindustry. On January 1, 2010, Shinhan BNP Paribas Asset Management had assets under management amounting to approximately W32.4 trillion. To a result, an increasing number of retail investors began to use the investmentlimited extent, Shinhan Investment also provide asset management services of the asset management companies. The Korean government continues to deregulate the financial industry in Korea, which has significantly broadened the scope of investment products that the asset management companies may offer to its customers. In addition, the recent proliferation of corporate pension plans in Korea has led to a greater infusion of funds to the asset management companies, which as a result have been able to benefit from economies of scale and offer a broader range of products at competitive returns. The continued low interest rate and the government policy to hold down real estate prices have also contributed to a growing interest among retail investors in the investment products offered by the asset management companies.for discretionary accounts See “— Securities Brokerage Services.”
We believe these trendsexpect that competition will contribute to the growth and improved profitability of our asset management affiliates, notwithstanding the growing competitionintensify in the asset management industry which has been driven in part by the entry into the industry by large overseas financial institutions with well-known global brands. In termsas a result of the size of assets managed. Shinhan BNP ParibasFinancial Investment Trust Management’s total assetsServices and Capital Markets Act, which became effective in February 2009. Under this Act, a “financial investment company”, which formerly included securities companies, asset management companies, futures companies and other entities previously engaged in what is currently characterized as financial investment businesses, is now permitted to provide asset management services by obtaining new licenses under management grew from W8,511 billion as of the end of 2006 to W15,091 billion as ofnew Act. For more information on the end of 2007Act, see “— Supervision and SH Asset Management from W11,041 billion as of the end of 2006 to W10,477 billion as of the end of 2007.Regulation — Financial Investment Services and Capital Markets Act.”
Regional BankingOther Services
In April 2002, pursuant to a stock purchase agreement with Korea Deposit Insurance Corporation, we acquired a majority interest in Jeju Bank, which is engaged in providing commercial banking services on a regional basis, primarily on Jeju Island of Korea, through its network of 32 branches. As of December 31, 2007, Jeju Bank had total assets, total liabilities and total stockholders’ equity of W2,754 billion, W2,629 billion and W125 billion, respectively.
Investment Banking and Advisory Services
In addition to the investment banking services provided by the Investment Banking Department of Shinhan Bank and the Capital Markets Division of Good Morning Shinhan Securities,Through our other subsidiaries, we also provide a variety ofleasing and equipment financing, regional banking and investment banking and advisory services through Shinhan Macquarie Financial Advisory, our 51:49 joint venture with Macquarie Bank of Australia. The advisory services offered by Shinhan Macquarie Financial Advisory (“SMFA”) include project and infrastructure finance, capital and debt raisings, corporate finance advisory, structured finance, mergers and acquisitions, cross-border leasing and infrastructure and specialized fund management advisory services. Since its inception SMFA has grown to become one of the leading infrastructure-related financial advisory companies. During the year ended December 31, 2007, we derived total revenues of W28 billion from advisory activities.
Bancassurance
Since its inception in September 2003, the Korean bancassurance market has grown significantly and has become a major distribution channel, together with the network of financial planners. Currently, 21 life insurance companies, 12 property insurance companies and 16 banks are engaged in the bancassurance business. The Korean government initially planned to introduce the bancassurance business in four phases, and the Korean bancassurance market is currently in the third phase as the transition to the final and fourth phase, originally scheduled for April 2008, has been cancelled for the time being. The bancassurance products currently available include annuities, insurance products with savings features and refundable medical insurance products. According to Korea Life Insurance Association, the estimated revenue generated by the Korean bancassurance market, as measured by initial premium, was W3,498 billion in 2007, which represents a 37% increase over the revenue in 2006. According to
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Korea Life Insurance Association, in 2007, the bancassurance market represented 36% of the life insurance market in Korea, in terms of revenues.
We offer bancassurance services primarily through SH&C Life Insurance, a 50:50 joint venture with Cardif S.A., an insurance arm of the BNP Paribas Group, which has developed various bancassurance products for our banking customers in part based on the expertise on the French bancassurance market provided by Cardif S.A. Largely due to synergy effects from our group-wide marketing and sales channels and its investment products focused on savings and investment rather than the traditional form of insurance only, SH&C Life Insurance’s total premium income grew from W48 billion in fiscal year 2005 and W47 billion in fiscal year 2006 to W62 billion in fiscal year 2007. The fiscal year of SH&C Life Insurance ends on March 31. In addition, SH&C Life Insurance offers bancassurance products at other institutions such as Standard Charter Bank, Prudential Securities and other regional banks and is also a leading provider of variable savings products in Korea.
Life Insurance
We provide life insurance products and services primarily through Shinhan Life Insurance. Shinhan Life Insurance a mid-tier insurance company withprovides its services through diversified distribution channels with balanced growth in the numberconsisting of financial planners, telemarketers, account managersagency marketers and bancassurance specialists, became our subsidiary on December 13, 2005. Shinhan Life Insurance has a leading telemarketing channel in the industry.
specialists. As of Decemberthe end of fiscal years ended March 31, 2007,2009 and March 31, 2010, under Korean GAAP, Shinhan Life Insurance’sInsurance had total assets wereof W7,4118,816.8 billion which increased from W6,226 billion as of December 31, 2006 and W5,12910,437 billion asand net profits of December 31, 2005. Based on the insurance premium received duringW134.2 billion and W190 billion, respectively. During its fiscal year 2007, Shinhan Life Insurance ranked eighth 2009,
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among the 22 life insurance companies in Korea.
Korea, Shinhan Life Insurance ranked second in terms of net profit and sixth in terms of insurance premium received, principally due to increased sales of health insurance policies, stable asset portfolio management and prudent risk management. We expect the insurance premium received by Shinhan Life Insurance to increase as a result of growing demands for both investment-typeinvestment and annuity-typeannuity products and potential synergy effects from interactionscross-selling between Shinhan Life Insurance and our banking and other subsidiaries.subsidiaries
Asset Management Services
In addition to personalized wealth management services provided as part of our private banking and securities brokerage services, we also provide asset management services through Shinhan BNP Paribas Asset Management, a joint venture with BNP Paribas Investment Partners, of which we and BNP Paribas Investment Partners hold 65:35 interests, respectively. Shinhan BNP Paribas Asset Management was formed on January 1, 2009 through the merger of Shinhan BNP Paribas Investment Trust Management, our 50:50 joint venture with BNP Paribas Investment Partners, and SH Asset Management, our wholly-owned subsidiary, in order to streamline our asset management services capabilities. Shinhan BNP Paribas Asset Management ranked third among asset managers in Korea in terms of assets under management as of December 31, 2009, and provides a wide range of investment products, including traditional equity/fixed income funds as well as alternative investment products, to retail and institutional clients. As a joint venture with BNP Paribas Investment Partners, we believe Shinhan BNP Paribas Asset Management has significantly benefited from BNP Paribas’s global network of investment professionals and expertise in the asset management industry. On January 1, 2010, Shinhan BNP Paribas Asset Management had assets under management amounting to approximately W32.4 trillion. To a limited extent, Shinhan Investment also provide asset management services for discretionary accounts See “— Securities Brokerage Services.”
We expect that competition will intensify in the asset management industry as a result of the Financial Investment Services and Capital Markets Act, which became effective in February 2009. Under this Act, a “financial investment company”, which formerly included securities companies, asset management companies, futures companies and other entities previously engaged in what is currently characterized as financial investment businesses, is now permitted to provide asset management services by obtaining new licenses under the new Act. For more information on the Act, see “— Supervision and Regulation — Financial Investment Services and Capital Markets Act.”
Other Services
Through our other subsidiaries, we also provide leasing and equipment financing, regional banking and investment banking and advisory services.
Leasing and Equipment Financing
We provide leasing and equipment financing services to our corporate customers mainly through Shinhan Capital. Established as a leasing company in 1991, Shinhan Capital provides customers with leasing, installment financing and new technology financing, equipment leasing, and corporate credit financing. Shinhan Capital’s strength has traditionally been in leasing of ships, printing machines, automobiles and other specialty items, but also offers other leasing and financing services, such as corporate restructuring services for financially troubled companies and financing provided to real estate development projects and infrastructure investments, and following a business transfer from Shinhan Card in November 2007, corporate leasing and equipment financing.
Regional Banking Services
We provide regionally focused commercial banking services, primarily in Jeju Island of Korea, through a majority-owned banking subsidiary, Jeju Bank. Jeju Bank provides retail banking, corporate banking, treasury and trust account management services, and has a network of 40 branches as of December 31, 2009.
Investment Banking and Advisory Services
In addition to the investment banking services provided by Shinhan Bank and Shinhan Investment, we also provide a variety of investment banking and advisory services through Shinhan Macquarie Financial Advisory, a
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51:49 joint venture with Macquarie Bank of Australia. The advisory services offered by Shinhan Macquarie Financial Advisory include project and infrastructure finance, capital and debt raisings, corporate finance advisory, structured finance, mergers and acquisitions, cross-border leasing and infrastructure and specialized fund management advisory services. Since its inception Shinhan Macquarie Financial Advisory has grown to become one of the leading infrastructure-related financial advisory companies in Korea.
Loan Collection and Credit Reporting
In order toWe centralize credit collection and credit reporting operations for our loan collection, on July 8, 2002, we establishedsubsidiaries through Shinhan Credit Information Co. Ltd., our wholly-owned subsidiary engaged in credit collection and credit reporting. Shinhan Credit Information is capable of managing and collecting bad loans generated by our subsidiarieswhich also provides similar services to improve our overall asset quality.third party customers. We plan to expand Shinhan Credit Information’s services to other areas such areas as credit reporting, credit inquiry, credit card rating, civil application/petition services, lease and rental research and advisory and consulting services related to non-performing loan management. For
Our Distribution Network
We offer a wide range of financial services to retail and corporate customers through a variety of distribution networks and channels established by our subsidiaries. The following table presents the year endedgeographical distribution of our distribution network based on the branch offices and other distribution channels of our principal subsidiaries, as of December 31, 2007,2009.
Distribution Channels in Korea
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Shinhan
| | | | |
| | | | | | | | | Shinhan
| | | Shinhan Investment Corp. | | | Life
| | | | |
| | | Shinhan Bank | | | Jeju Bank | | | Card(1) | | | Branches | | | Insurance | | | Total | |
| |
| Seoul metropolitan | | | 410 | | | | 2 | | | | 12 | | | | 59 | | | | 55 | | | | 538 | |
| Kyunggi Province | | | 195 | | | | — | | | | 12 | | | | 18 | | | | 18 | | | | 243 | |
| Six major cities: | | | 172 | | | | 1 | | | | 17 | | | | 21 | | | | 37 | | | | 248 | |
| Incheon | | | 57 | | | | — | | | | 3 | | | | 3 | | | | 12 | | | | 75 | |
| Busan | | | 41 | | | | 1 | | | | 4 | | | | 7 | | | | 11 | | | | 64 | |
| Kwangju | | | 13 | | | | — | | | | 3 | | | | 3 | | | | 4 | | | | 23 | |
| Taegu | | | 27 | | | | — | | | | 3 | | | | 4 | | | | 6 | | | | 40 | |
| Ulsan | | | 13 | | | | — | | | | 1 | | | | 2 | | | | 1 | | | | 17 | |
| Taejon | | | 21 | | | | — | | | | 3 | | | | 3 | | | | 3 | | | | 30 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Sub-total | | | 777 | | | | 3 | | | | 41 | | | | 98 | | | | 110 | | | | 1,029 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Others | | | 148 | | | | 37 | | | | 28 | | | | 20 | | | | 50 | | | | 283 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | 925 | | | | 40 | | | | 69 | | | | 118 | | | | 160 | | | | 1,312 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Notes:
| | |
| (1) | | Includes 12 card sales branches, 11 installment sales branches, 10 collection branches and 15 combined operating branches. |
Banking Service Channels
Our banking services are primarily provided through an extensive branch network, complemented with self-service terminals and electronic banking.
As of December 30, 2009, Shinhan Bank’s branch network in Korea currently comprised of 925 service centers, consisting of 783 retail banking service centers, 38 corporate banking service centers primarily designed to
52
serve large corporate customers and 104 hybrid banking branches designed to serve retail as well as small-business corporate customers. Shinhan Bank’s banking branches are designed to provide one-stop banking services tailored to their respective target customers.
Retail Banking Channels
In Korea, many retail transactions are conducted in cash or with credit cards, and conventional checking accounts are generally not offered or used as widely as in other countries such as the United States. As a result, an extensive retail branch network plays an important role for Korean banks as customers generally handle most transactions through bank branches. Recently, one of the key initiatives at Shinhan Bank has been to target high net worth individuals through private banking. Our private banking services are provided principally through private banking relationship managers who, within target customer groups, assist clients in developing individual investment strategies. We believe that such relationship managers help us foster enduring relationships with our clients. Private banking customers also have access to Shinhan Bank’s retail branch network and other general banking products Shinhan Bank offers through its retail banking operations.
Corporate Banking Channels
Shinhan Bank currently provides corporate banking services through corporate banking service centers primarily designed to serve large corporate customers and hybrid banking branches designed to serve retail as well as small-business corporate customers. Prior to 2009, Shinhan Bank maintained within certain of its retail banking branches corporate relationship management teams (which counted as separate corporate banking branches for classification purposes) in order to serve its small-and medium-sized enterprises customers though its extensive retail banking branch network. In 2009, Shinhan Bank undertook an organizational restructuring to convert such retail banking branches with corporate banking functionalities into hybrid banking branches with the aim that this will help it to better service the small business corporate customers. Small-and medium-sized enterprises have traditionally been Shinhan Bank’s core corporate customers and we plan to continue to maintain Shinhan Bank’s strength vis-à-vis these customers.
Self-Service Terminals
In order to complement its banking branch network, Shinhan Bank maintains an extensive network of automated banking machines, which are located in branches and in unmanned outlets. These automated banking machines consist of ATMs, cash dispensers and passbook printers. As of December 31, 2009, Shinhan Bank had 942 cash dispensers and 6,264 ATMs. Shinhan Bank actively promotes the use of these distribution outlets in order to provide convenient service to customers, as well as to maximize the marketing and sales functions at the branch level, reduce employee costs and improve profitability. In 2009, automated banking machine transactions accounted for approximately 27.8% and 53.2% of total revenues fromdeposit and withdrawal transactions of Shinhan Bank in terms of the number of transactions and fee revenue generated, respectively.
Electronic Banking
Shinhan Bank’s internet banking services are more comprehensive than those available at the counter, including such services as 24 hour account balance posting, real-time account transfer, overseas remittance and loan requests. Shinhan Bank also provides the Mobile Banking service, which enables customers to make speedy, convenient and secure banking transactions using mobile phones. As the purpose of electronic banking is primarily cost-saving rather than profit generation, the substantial majority of Shinhan Bank’s electronic banking transactions do not generate fee income.
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Overseas Distribution Network
The table below sets forth Shinhan Bank’s overseas banking subsidiaries and branches as of December 31, 2009.
| | | | |
| | | | Year Established or
|
| Business Unit | | Location | | Acquired |
|
Subsidiaries | | | | |
| | | | |
| Shinhan Asia Ltd. | | Hong Kong SAR, China | | 1982 |
| Shinhan Bank Europe GmbH | | Germany | | 1994 |
| Shinhan Bank America | | New York, U.S.A. | | 2003 |
| Shinhan Vina Bank | | Vietnam | | 2000 |
| Shinhan Bank (China) Limited | | Beijing, China | | 2008 |
| Shinhan Khmer Bank Limited | | Cambodia | | 2007 |
| Shinhan Bank Kazakhstan Limited | | Kazakhstan | | 2008 |
| Shinhan Bank Canada | | Toronto, Canada | | 2009 |
| Shinhan Bank Japan(1) | | Tokyo, Japan | | 2009 |
| Shinhan Bank Vietnam(2) | | Ho Chi Minh City,
Vietnam | | 2009 |
| | | | |
Branches | | | | |
| | | | |
| New York | | U.S.A. | | 1989 |
| Singapore | | Singapore | | 1990 |
| London | | United Kingdom | | 1991 |
| Mumbai | | India | | 1996 |
| Hong Kong | | China | | 2006 |
| New Delhi | | India | | 2006 |
| | | | |
Representative Office | | | | |
| | | | |
| Mexico Representative Office | | Mexico City, Mexico | | 2008 |
| Uzbekistan Representative Office | | Tashkent, Uzbekistan | | 2009 |
Notes:
| | |
| (1) | | While Shinhan Bank established the subsidiary in Japan in 2009, Shinhan Bank provided banking services in Japan through a branch structure since 1986. |
|
| (2) | | While Shinhan Bank established the subsidiary in Vietnam in 2009, Shinhan Bank provided banking services in Vietnam through a branch structure since 1995. |
Currently, our overseas subsidiaries and branches are primarily engaged in servicing Korean companies and Korean nationals in the overseas markets in the areas of trade financing and local currency funding services as well as providing foreign exchange services in conjunction with Shinhan Bank’s headquarters and , to a limited extent, investment and trading of securities of foreign issuers. Going forward, as part of our “globalization” efforts, we plan to expand our coverage of local customers in the overseas markets by providing a wider range of services in retail and corporate banking, and to that end, we have increasingly established subsidiaries in lieu of branches in select markets, Japan being among the recent examples, in order to make our presence more prominent and enable a greater flexibility in our service offerings in these markets.
Credit Card Distribution Channels
Shinhan Card primarily uses three distribution channels to attract new credit card customers: (i) the banking and credit card branch network, (ii) sales agents, and (iii) business partnerships and affiliations with vendors.
54
The branch network for our credit card operations consists of 925 banking branches of Shinhan Bank and 27 card sales branches of Shinhan Card. The use of the established branch network of Shinhan Bank is part of the groupwide cross-selling efforts of selling credit card products to the existing banking customers. In 2009, the number of new cardholders acquired through our banking branch network accounted for approximately 18.2% of the total number of new cardholders. We believe that the banking branch network will continue to provide a stable and low-cost venue for acquiring high-quality credit cardholders.
The sales agents represented the most significant source of new cardholders in 2009, and the number of our new cardholders acquired through sales agents accounted for approximately 54.3% of the total number of new cardholders in 2009. As of December 31, 2009, Shinhan Card had 7,339 sales agents, of which 6,454 were independent contractors and 885 were sales agents of Shinhan Card’s business partners and affiliates. These sales agents assist prospective customers with the application process and customer service. The compensation to these sales agents is tied to the transaction volume and repayment behavior of the customers introduced by them, and we believe this operation were W28 billion.system helps to minimize credit risk and enhance profitability.
As a way of acquiring new cardholders, Shinhan Card also has business partnership and affiliation arrangements with a number of vendors, including gas stations, major retailers, airlines and telecommunication and Internet service providers, and it plans to continue to leverage its alliances with such vendors to attract new cardholders.
Securities Brokerage Distribution Channels
Our securities brokerage services are conducted principally through Shinhan Investment. As of December 31, 2009, Shinhan Investment had 118 service centers nationwide, and three overseas subsidiaries based in New York, London and Hong Kong to service our corporate customers.
Approximately two-thirds of our brokerage branches are located in the Seoul metropolitan area with a focus on attracting high net worth individual customers as well as enhancing synergy with our retail and corporate banking branch network. We plan to continue to explore new business opportunities, particularly in the corporate customer segment, through further cooperation between Shinhan Investment and Shinhan Bank.
Insurance Sales and Distribution Channels
We sell and provide our insurance services primarily through Shinhan Life Insurance. Shinhan Life Insurance, in addition to distributing bancassurance products through our bank branches, also distributes a wide range of life insurance products through its own branch network, an agency network of financial planners and telemarketers as well as through the Internet. As of December 31, 2009, Shinhan Life Insurance had 160 branches and seven customer support centers. These branches are staffed by financial planners, telemarketers, agent marketers and bancassurance to meet the various needs of our insurance and lending customers. Our groupwide customer support centers arrange for policy loans (namely loans secured by the cash surrender value of the underlying insurance policy) for our insurance customers and, to a limited extent, other loans to other customers, and also handle insurance payments.
Information Technology
We believe thatdedicate substantial resources to maintaining a sophisticated information technology system is crucial in supportingto support our operations management and providingprovide high quality customer service. We employ a total of approximately 1,500 employees and plan to spend approximately W700 billion in connection with updating and integrating our information technology system by August 2008.
In order to maximize synergy among our subsidiaries, we are currently continuing to build and implement a single groupwide enterprise information technology system known as “enterprise data warehouse” for. The enterprise data warehouse, which is being continuously upgraded, serves as the foundation to our subsidiaries.enhanced customer relations management capabilities, our risk management system as well as our new data processing center currently under development. In addition, we are currently continuing to upgrade the information technology systems for each of our subsidiaries to enhance the quality of our customer service specific to such subsidiary. We are also currently in the planning stage forhave completed the implementation of improved systems for our other subsidiaries, including Good Morning Shinhan Securities, with 2009 as the target completion date, and Shinhan Life Insurance within November 2008 and Shinhan Investment in August 2009, and completed the end of 2008 asIT integration for LG Card and former Shinhan Card in August 2008. Since October 2009, we have operated our information and technology system at a groupwide level (rather than the target completion date.previous subsidiary-specific level) based on a comprehensive groupwide information collection and processing.
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We plan to continue our efforts to improve ourOur current information technology systems by takinginitiatives also include installing a financial reporting system meeting the following initiatives:IFRS standards starting the fiscal year 2011 and building a groupwide security management system to further ensure secure financial transactions for our customers. Specifically, we are currently developing a groupwide security monitoring system in order to counter external cyber invasions such as DDoS attacks.
| | |
| • | building a customer-oriented system to provide customers with diversified and customized financial services; |
|
| • | establishing a flexible platform which can quickly adapt to new financial products and services; |
|
| • | introducing a group-wide strategic enterprise management system designed to facilitate swift managerial response; |
|
| • | empowering the sales operation by a group-wide integrated enterprise data warehousing system and a group-wide integrated customer relationship management system, which are designed to provide us with comprehensive customer information, including transaction history, and thereby allow us to identify potential marketing and cross-marketing opportunities; |
|
| • | establishing and further upgrading management information systems for the holding company and its subsidiaries as part of our strategic initiatives to create groupwide synergy effects; |
|
| • | upgrading the information technology infrastructure to install a financial reporting system meeting the IFRS standards; and |
|
| • | building a groupwide security management system to ensure secure financial transactions for our customers. |
Our information technology system for each of our subsidiaries is currently backed up on a real timereal-time basis. We have established a completely duplicativeback-up IT system in different locations in Korea, depending on the subsidiary, to provide aback-up system in the event of any system failure of our primary information technology center located in the suburbs of Seoul. See “—“Item 4.D. — Properties.” Our information technology system at the group level is currently able to fully resume operation within an hour even in the case of a complete disruption of the information technology system at our headquarters.
Following the merger between LG Card and former Shinhan Card, we have commenced the integration of IT systems of LG Card and former Shinhan Card and the integration process is expected to be completed by August 2008. The integration process is intended to integrate not only the customer bases of LG Card and former Shinhan Card but also their respective operating processes. The integration work is being done based on LG Card’s IT system platform due to its advanced system infrastructure. As a part of the IT systems integration process, we relocated LG Card’s main system to former Shinhan Card’s main data center in Ilsan in February 2008. Former Shinhan Card’s disaster recovery centre in Yong-in is expected to be integrated to that of LG Card in Inchon by August 2008. On a real time basis, data in Shinhan Card’s main server, approval server and client management server will be stored at the data recovery centre and automated main centre. The disaster recovery system is capable of supporting all core functions of Shinhan Card’s business with only minor time lag to normal operations. The disaster recovery system is tested on a regular basis to ensure full coverage in a contingency situation.
We have devoted substantial resources to our technology platforms and has undertaken significant efforts to protect and manage our proprietary systems and the data collected and stored on its systems. For such purposes, we have continued to focus on ways to secure its systems from unauthorized users.
Competition
We competeCompetition in the Korean financial services industry is, and is likely to remain, intense. In the banking sector, Shinhan Bank competes principally with other nationalmajor Korean commercial banks in Korea, but also face competition from a number of additional entities, including branches and subsidiaries of foreignmajor global banks operating in Korea, regional banks, government-owned development banks and Korea’s specialized banks, such as Korea Development Bank and the National Association of Agriculture and Fisheries, as well as various other types of financial service institutions, including savings institutions (such as mutual savingsGovernment-run banks, specialized banks and finance companies and credit unions and credit cooperatives), investment institutions (such as securities brokerage firms, merchant banking corporations and asset management companies) and life insurance companies. As of December 31, 2007, Korea had five domestic commercial banks in Korea (including Citibank and Standard Charter First Bank, both of which acquired domestic commercial banks) and branches and subsidiaries of 39 foreignregional banks. We believe that foreign financial institutions,
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many of which have greater experiences and resources than we do, will continue to enter the Korean market and compete with us in providing financial products and services either by themselves or in partnership with existing Korean financial institutions, as evidenced by the acquisition of Korea First Bank by Standard Chartered Bank in 2005 and the currently pending acquisition of Korea Exchange Bank by HSBC. Furthermore, the Korean banking industry is undergoing consolidation as well as several other developments, such as the ongoing efforts by Kookmin Bank to convert itself into a financial holding company and the proposed privatization of the whole or part of Woori Financial Holding Company. Some of the financial institutions resulting from these developments may, by virtue of their increased size, expanded business scope and more efficient operations, provide greater competition for us.
Over the past several years, competition has been particularly fierce in our core banking business of small- to medium-enterprise lending, as most Korean banks have focused their business on this area after reducing their exposure to large corporations, which has contributed to, and may further intensify, lower profitability and asset quality problems in small- to medium-enterprise loans. Competition inIn the credit card and consumer finance businesses has also been intense in recent years asservices factor, Shinhan Card competes principally with existing “monoline” credit card companies, credit card divisions of commercial banks, consumer finance companies, and other financial institutions and recent even mobile telecommunications service providers in KoreaKorea. In other financial services sectors, our other subsidiaries also compete in a highly fragmented market. Some of our competitors, particularly the major global financial institutions, have greater experience and resources than we do.
In the small- and medium-sized enterprise and retail banking segments, which have been Shinhan Bank’s traditional core businesses, competition has increased significantly and is expected to increase further. Most Korean banks have been focusing on small- and medium-sized enterprises and retail customers in recent years through aggressive marketing campaigns although they have begun to increase their exposure to large corporate borrowers and focus on developing fee income businesses, including bancassurance and investment products, as increasingly important sources of revenue. The competition and market saturation resulting from this common focus may make it more difficult for Shinhan Bank to secure retail and small- and medium-sized customers with the credit quality and on credit terms necessary to maintain or increase its income and profitability. In particular, Shinhan Bank has been pursuing, and intends to continue to pursue, a strategy of maintaining or enhancing its margins where possible and avoid, to the extent possible, entering into price competition. If other banks and financial institutions adopt a strategy of expanding market share through interest rate competition, Shinhan Bank may suffer customer attrition due to rate sensitivity. In addition, Shinhan Bank may in the future decide to compete to a greater extent based on interest rates, which could lead to a decrease in its net interest margins. Any future decline in Shinhan Bank’s customer base or its net interest margins as a result of its future competition strategy could have an adverse effect on its results of operations and financial condition.
In the credit card sector, competition has been intensifying and the market has seen further signs of saturation as existing and new credit card service providers have made significant investments and engaged in aggressive marketing campaigns and promotions in these areas. Whileto acquire new customers and target customers with high credit quality. In addition, other credit card issuers may compete with Shinhan Card is currently Korea’s largestfor customers by offering lower interest rates and fees, higher credit limits and more attractive promotions and incentives. As a result, Shinhan Card may existing customers, or may lose service opportunities, to competing credit card companyissuersand/or incur higher marketing expenses. Customer attrition, together with any lowering of interest rates or feesand/or more extensive marketing and promotional campaigns that Shinhan Card might implement to acquire and retain customers, could reduce its revenues and earnings.
Potential consolidation among our rival institutions may make the competitive landscape more adverse to us. For example, in June 2008, the Government announced its plans to privatize Korea Development Bank, one of the Government’s key policy bank, and in January 2010, the Government announced its intent to sell its controlling stake in Woori Financial Group, one of the top three financial holding companies in Korea in terms of assets as of December 31, 2009 with a similarly ranked banking operation. If Woori Financial Group were to be acquired by a rival bank or financial holding company, the numberconsolidated entity will have a greater scale of cardholdersoperations, including a
56
larger customer base, and charge volume,financial resources than us, which may hurt our ability to compete effectively. Moreover, Lone Star Funds is seeking to sell its controlling stake in Korea Exchange Bank, potentially to a major domestic or international financial institution, and there is no guarantee that it will maintain its currentare market position inrumors related to a potential merger among our rival financial institutions. Any of these developments, if materialized, may place us at a competitive disadvantage.
Furthermore, as the future. Furthermore, there is a possibility thatchaebolsKorean economy further develops and new business opportunities arise, more competitors may enter the financial services industry. For example, in 2009, SK Telecom acquired an equity interest in Hana Card and Korea Telecom has expressed an interest in acquiring an equity interest in BC Card and both SK Telecom and Korea Telecom have begun to actively provide mobile phone payment services using advanced mobile phone technology. As these two companies are the two largest telecommunications service providers in Korea serving a substantial majority of the Korean population, a widespread consumer acceptance of mobile phone payment services in lieu of credit card business by way of their mobile telephone subsidiaries, such as SK Telecom or LG Telecom, and such entry, if it happens, mayservices could pose a serious competitive threat to us since such telecom subsidiaries have a large and loyal customer base that may find it more convenient to use the credit services offered by such companies through the use of mobile phones rather than theexisting credit card services offered byservice providers, including our credit card subsidiary. In addition, when
Competition in the newly enactedKorean financial services industry may also intensify as a result of deregulation. For example, the Financial Investment Services and Capital MarketMarkets Act takes effect(“FSCMA”), which became effective in February 2009, withpermits a wider range of financial services providers to engage in a broader sphere of financial activities, including depositary services, and has ,to a significant extent, removed the aimregulatory barriers between securities brokerage, asset management, derivative financial services and trust services in favor of promoting integration and rationalizationcreating financial investment companies that may engage in all of the Korean capital markets and financial investment products industry, this will likely further intensify competition amongforegoing activities. Accordingly, the FSCMA enables the creation of large financial institutions in Korea, including banks. See “Item 3. Risk Factors — Structural reformsthat can offer both commercial and investment banking services modeled after the major global financial institutions based in the United States and Europe. In addition, in 2008, the Korean economy and its financial sectorlegislature proposed an amendment to the Bank Act, which would permit certain qualified entities to provide online banking services as their primary business without being required to establish a branch network. Such amendment, if passed, may have a substantial impact on our business, and the recently enacted financial Investment Services and Capital Market Act mayfurther intensify competition in the Korean banking industry. Recently, in light of the recent global financial industry.” “Item 4. Informationcrisis, the Government has subjected Korean financial institutions to stricter regulatory requirements and guidelines in areas of asset quality, capital adequacy, liquidity and residential and other lending practices, which has had a dampening effect on the Company — Supervision and Regulation — The Financial Investment Services and Capital Market Act.”
There can becompetition. However, there is no assurance that these measures will continue to curb competition or that the Government will not reverse or reduce such measures or introduce other deregulatory measures, which may further intensify competition.
If we will be ableare unable to compete successfully with other domesticeffectively in the changing business and foreign financial institutions, and increased competitionregulatory environment, our profit margin and market saturation from any or all of the foregoing developmentsshare may result in a loss of market shareerode and declining margins for us,our further growth opportunities may become limited, which would have a material adverse effect oncould adversely affect our financial condition andbusiness, results of operation.operation and financial condition. See “Item 3. Key Information —3.D. Risk Factors — Risks Relating to CompetitionOur Overall Business — Competition in the Korean bankingfinancial services industry is intense, and we may experience a loss of market share and declining marginsfurther intensify as a result.”result of recent deregulation” and “Item 4.B. Business Overview — Supervision and Regulation — Financial Investment Services and Capital Markets Act.
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DESCRIPTION OF ASSETS AND LIABILITIESDescription of Assets and Liabilities
Unless otherwise specifically mentioned or the context otherwise requires, the following description of assets and liabilities is presented on a consolidated basis under U.S. GAAP.
Loans
As of December 31, 2007,2009, our total gross loan portfolio was W151,818169,255 billion, which represented an increasea decrease of 24.0%0.75% from W122,446170,541 billion at December 31, 2006.2008. The increasedecrease in the portfolio primarily reflects a 21.0% increase7.62% decrease in other commercial loans 274.1% increase in credit card loans and 24.5% increase6.87% decrease in other consumerconsumers loans.
Loan Types
The following table presents our loans by type for the periods indicated. Except where specified otherwise, all loan amounts stated below are before deduction for loan loss allowances. Total loans reflect our loan portfolio, including past due amounts.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | | | As of December 31, | |
| | | 2003 | | 2004 | | 2005 | | 2006 | | 2007 | | | 2005 | | 2006 | | 2007 | | 2008 | | 2009 | |
| | | (In billions of Won) | | | (In billions of Won) | |
| |
| Corporate | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and industrial(1) | | W | 35,617 | | | W | 35,653 | | | W | 35,728 | | | W | 40,063 | | | W | 48,485 | | | W | 35,728 | | | W | 40,063 | | | W | 48,485 | | | W | 55,466 | | | W | 54,479 | |
| Other commercial(2) | | | 17,378 | | | | 17,988 | | | | 21,409 | | | | 27,319 | | | | 30,312 | | | | 21,409 | | | | 27,319 | | | | 30,312 | | | | 37,637 | | | | 34,770 | |
| Lease financing | | | 1,091 | | | | 981 | | | | 754 | | | | 585 | | | | 1,370 | | | | 754 | | | | 585 | | | | 1,370 | | | | 1,592 | | | | 1,560 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total — Corporate | | | 54,086 | | | | 54,622 | | | | 57,891 | | | | 67,967 | | | | 80,167 | | | | 57,891 | | | | 67,967 | | | | 80,167 | | | | 94,695 | | | | 90,809 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Consumer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgages and home equity | | | 20,517 | | | | 22,180 | | | | 25,840 | | | | 30,097 | | | | 31,495 | | | | 25,840 | | | | 30,097 | | | | 31,495 | | | | 36,183 | | | | 40,022 | |
| Other consumer(3) | | | 14,580 | | | | 15,546 | | | | 17,875 | | | | 20,458 | | | | 25,475 | | | | 17,875 | | | | 20,458 | | | | 25,475 | | | | 25,026 | | | | 23,307 | |
| Credit cards | | | 6,112 | | | | 4,732 | | | | 4,242 | | | | 3,924 | | | | 14,681 | | | | 4,242 | | | | 3,924 | | | | 14,681 | | | | 14,637 | | | | 15,117 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total — Consumer | | | 41,209 | | | | 42,458 | | | | 47,957 | | | | 54,479 | | | | 71,651 | | | | 47,957 | | | | 54,479 | | | | 71,651 | | | | 75,846 | | | | 78,446 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total gross loans(4) | | W | 95,295 | | | W | 97,080 | | | W | 105,848 | | | W | 122,446 | | | W | 151,818 | | |
| Total loans(4) | | | W | 105,848 | | | W | 122,446 | | | W | 151,818 | | | W | 170,541 | | | W | 169,255 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Notes:
| | |
| (1) | | Consists primarily of working capital loans, general purpose loans, bills purchased, trade-related notes and inter-bank loans. |
| |
| (2) | | Consists primarily of privately placed bonds, credit facility drawdowns and purchases of commercial paper or notes at a discount from its customers with recourse. |
| |
| (3) | | Consists of general unsecured loans and loans secured by collateral other than housing to retail customers. |
| |
| (4) | | As of December 31, 2005, 20062007, 2008 and 2007,2009, approximately 90.6%, 89.8%90.4% and 90.6%94.4% of our total gross loans, respectively, were Won-denominated. |
Loan Portfolio
On a consolidated basis,The total exposure of us or our exposurebanking subsidiaries to any single borrower and exposure to any single group of companies belonging to the same conglomerate is limited by law to 20% and 25%, respectively, of the Net Total Equity Capital (as defined in “— Supervision and Regulation”) under Korean GAAP.GAAP on a consolidated basis.
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Twenty Largest Exposures by Borrower
As of December 31, 2007,2009, our 20 largest exposures, consisting of loans, securities and guarantees and acceptances, totaled W29,37340,211 billion and accounted for 14.2%16.1% of our total exposures. The following table sets forth our total exposures to these top twenty20 borrowers as of December 31, 2007.2009.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Impaired
| | | | | | | | | | | | | | | Impaired
| |
| | | | | | | | | | | | | | | Loans and
| | | | | | | | | | | | | | | Loans and
| |
| | | | | Loans in
| | | | | | Guarantees
| | | | Guarantees
| | | | | Loans in
| | | | | | Guarantees
| | | | Guarantees
| |
| | | Loans in
| | Foreign
| | Equity
| | Debt
| | and
| | Total
| | and
| | | Loans in
| | Foreign
| | Equity
| | Debt
| | and
| | Total
| | and
| |
| | | Won | | Currency | | Securities | | Securities | | Acceptances | | Exposure | | Acceptances | | | Won | | Currency | | Securities | | Securities | | Acceptances | | Exposure | | Acceptances | |
| | | (In billions of Won) | | | (In billions of Won) | |
| |
| Ministry of Strategy and Finance | | | W | — | | | W | — | | | W | — | | | W | 11,633 | | | W | — | | | W | 11,633 | | | W | — | |
| The Bank of Korea | | W | — | | | W | — | | | W | — | | | W | 6,789 | | | W | — | | | W | 6,789 | | | W | — | | | | — | | | | — | | | | — | | | | 5,498 | | | | — | | | | 5,498 | | | | — | |
| Ministry of Strategy and Finance | | | — | | | | — | | | | — | | | | 3,645 | | | | — | | | | 3,645 | | | | — | | |
| Korea Development Bank | | | — | | | | — | | | | — | | | | 1,737 | | | | — | | | | 1,737 | | | | — | | | | — | | | | — | | | | — | | | | 2,771 | | | | — | | | | 2,771 | | | | — | |
| Kookmin Bank | | | 76 | | | | — | | | | 8 | | | | 1,627 | | | | 19 | | | | 1,730 | | | | — | | |
| Korea Deposit Insurance Corporation | | | 33 | | | | — | | | | — | | | | 1,668 | | | | — | | | | 1,701 | | | | — | | | | — | | | | — | | | | — | | | | 2,582 | | | | — | | | | 2,582 | | | | — | |
| Industrial Bank of Korea | | | — | | | | — | | | | 1 | | | | 1,655 | | | | — | | | | 1,656 | | | | — | | | | — | | | | — | | | | 2 | | | | 1,805 | | | | — | | | | 1,807 | | | | — | |
| Samsung Electronics | | | 171 | | | | 640 | | | | 28 | | | | 13 | | | | 555 | | | | 1,407 | | | | — | | |
| Hyundai Samho Heavy Industries Co., Ltd. | | | — | | | | — | | | | — | | | | — | | | | 1,223 | | | | 1,223 | | | | — | | | | 19 | | | | 7 | | | | — | | | | — | | | | 1,497 | | | | 1,523 | | | | — | |
| Samsung Card | | | 100 | | | | 9 | | | | 3 | | | | 1,072 | | | | 2 | | | | 1,186 | | | | — | | |
| Hyundai Heavy Industries Co., Ltd. | | | | 3 | | | | 17 | | | | 10 | | | | 26 | | | | 1,392 | | | | 1,448 | | | | — | |
| Hana Bank | | | | — | | | | — | | | | — | | | | 1,419 | | | | — | | | | 1,419 | | | | — | |
| POSCO | | | | — | | | | — | | | | 1.248 | | | | 85 | | | | — | | | | 1,333 | | | | — | |
| Kookmin Bank | | | | — | | | | — | | | | — | | | | 1,325 | | | | — | | | | 1,325 | | | | — | |
| National Agricultural Cooperative Federation | | | | — | | | | — | | | | — | | | | 1,182 | | | | — | | | | 1,182 | | | | — | |
| Woori Bank | | | — | | | | 9 | | | | — | | | | 1,057 | | | | — | | | | 1,066 | | | | — | | | | — | | | | — | | | | — | | | | 1,074 | | | | — | | | | 1,074 | | | | — | |
| POSCO | | | — | | | | — | | | | 867 | | | | 60 | | | | 133 | | | | 1,060 | | | | — | | |
| Hana Bank | | | — | | | | — | | | | — | | | | 959 | | | | — | | | | 959 | | | | — | | |
| Samsung Heavy (Rongcheng) Industries Co., Ltd. | | | — | | | | 45 | | | | — | | | | — | | | | 820 | | | | 865 | | | | — | | |
| Hyundai Heavy Industries Co., Ltd. | | | — | | | | 6 | | | | 5 | | | | — | | | | 792 | | | | 803 | | | | — | | |
| STX Shipbuilding | | | — | | | | 1 | | | | — | | | | — | | | | 677 | | | | 678 | | | | — | | |
| New Songdo International City | | | 646 | | | | — | | | | — | | | | — | | | | — | | | | 646 | | | | — | | |
| SK Networks | | | 255 | | | | 63 | | | | 229 | | | | 2 | | | | 69 | | | | 618 | | | | — | | |
| National Agricultural Cooperative Federation | | | — | | | | — | | | | — | | | | 549 | | | | — | | | | 549 | | | | — | | |
| Samsung Heavy Industries Co., Ltd. | | | | 100 | | | | 10 | | | | 1 | | | | 1 | | | | 935 | | | | 1,047 | | | | — | |
| Hyundai Mipo Dockyard Co., Ltd. | | | — | | | | — | | | | 2 | | | | — | | | | 542 | | | | 544 | | | | — | | | | — | | | | — | | | | 2 | | | | — | | | | 1,002 | | | | 1,004 | | | | — | |
| Kia Motors | | | — | | | | 351 | | | | 28 | | | | 112 | | | | 20 | | | | 511 | | | | — | | |
| STX Offshore & Shipbuilding Co., Ltd. | | | | 20 | | | | — | | | | — | | | | — | | | | 895 | | | | 915 | | | | — | |
| SH Corporation | | | | 780 | | | | — | | | | — | | | | 86 | | | | — | | | | 866 | | | | — | |
| Songdo Cosmopolitan City Development Inc. | | | | 714 | | | | — | | | | — | | | | — | | | | — | | | | 714 | | | | — | |
| Korea Electronic Power Co. | | | | — | | | | — | | | | 34 | | | | 672 | | | | — | | | | 706 | | | | — | |
| Korea Land & Housing Co. | | | | — | | | | — | | | | — | | | | 683 | | | | — | | | | 683 | | | | — | |
| Samsung Electronics Co. Ltd. | | | | — | | | | 641 | | | | 40 | | | | — | | | | — | | | | 681 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | W | 1,281 | | | W | 1,124 | | | W | 1,171 | | | W | 20,945 | | | W | 4,852 | | | W | 29,373 | | | W | — | | | W | 1,636 | | | W | 675 | | | W | 1,337 | | | W | 30,842 | | | W | 5,721 | | | W | 40,211 | | | W | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
7059
Exposure to ChaebolsMain Debtor Groups
As of December 31, 2007, 11.0%2009, 9.1% of our total exposure was to the 4243 main debtor groups, which are largely comprised of chaebols.chaebols. The following table shows, as of December 31, 2007,2009, our total exposures to the tenchaebol main debtor groups to which we have the largest exposure.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Amounts of
| | | | | | | | | | | | | | | Amounts of
| |
| | | | | | | | | | | | | | | Impaired
| | | | | | | | | | | | | | | Impaired
| |
| | | | | | | | | | | | | | | Loans and
| | | | | | | | | | | | | | | Loans and
| |
| | | Loans in
| | Loans in
| | | | | | Guarantees
| | | | Guarantees
| | | | | Loans in
| | | | | | Guarantees
| | | | Guarantees
| |
| | | Won
| | Foreign
| | Equity
| | Debt
| | and
| | Total
| | and
| | | Loans in
| | Foreign
| | Equity
| | Debt
| | and
| | Total
| | and
| |
Chaebol | | Currency | | Currency | | Securities | | Securities | | Acceptances | | Exposure | | Acceptances | | |
| Main Debtor Groups | | | Won | | Currency | | Securities | | Securities | | Acceptances | | Exposure | | Acceptances | |
| | | (In billions of Won) | | | (In billions of Won) | |
| |
| Hyundai Heavy Industries | | | W | 22 | | | W | 24 | | | W | 10 | | | W | 27 | | | W | 3,891 | | | W | 3,974 | | | W | — | |
| Samsung | | W | 361 | | | W | 853 | | | W | 598 | | | W | 1,114 | | | W | 1,499 | | | W | 4,425 | | | W | — | | | | 695 | | | | 747 | | | | 237 | | | | 463 | | | | 1,279 | | | | 3,421 | | | | — | |
| Hyundai Heavy Industries | | | — | | | | 23 | | | | 7 | | | | — | | | | 2,557 | | | | 2,587 | | | | — | | |
| Hyundai Motors | | | 268 | | | | 705 | | | | 49 | | | | 1,081 | | | | 100 | | | | 2,203 | | | | — | | | | 522 | | | | 708 | | | | 482 | | | | 49 | | | | 339 | | | | 2,100 | | | | — | |
| SK | | | 589 | | | | 125 | | | | 399 | | | | 118 | | | | 101 | | | | 1,332 | | | | — | | | | 509 | | | | 58 | | | | 127 | | | | 254 | | | | 672 | | | | 1,620 | | | | — | |
| POSCO | | | 54 | | | | 6 | | | | 868 | | | | 60 | | | | 158 | | | | 1,146 | | | | — | | | | 69 | | | | 20 | | | | 85 | | | | 1,248 | | | | 133 | | | | 1,555 | | | | — | |
| STX | | | 91 | | | | 22 | | | | 141 | | | | — | | | | 743 | | | | 997 | | | | — | | | | 137 | | | | 27 | | | | — | | | | 32 | | | | 942 | | | | 1,138 | | | | — | |
| Aju | | | 237 | | | | 2 | | | | — | | | | 720 | | | | 18 | | | | 977 | | | | — | | |
| LG | | | | 152 | | | | 361 | | | | 117 | | | | 18 | | | | 166 | | | | 814 | | | | — | |
| Lotte | | | 352 | | | | 17 | | | | 2 | | | | 308 | | | | 140 | | | | 819 | | | | — | | | | 260 | | | | 6 | | | | 325 | | | | 19 | | | | 88 | | | | 698 | | | | — | |
| LG | | | 176 | | | | 456 | | | | 34 | | | | 33 | | | | 81 | | | | 780 | | | | — | | |
| Hynix | | | | 38 | | | | 274 | | | | 1 | | | | 139 | | | | 64 | | | | 516 | | | | — | |
| Doosan | | | 25 | | | | 150 | | | | 11 | | | | 195 | | | | 244 | | | | 625 | | | | — | | | | — | | | | 160 | | | | 48 | | | | 8 | | | | 268 | | | | 484 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | W | 2,153 | | | W | 2,359 | | | W | 2,109 | | | W | 3,629 | | | W | 5,641 | | | W | 15,891 | | | W | — | | | W | 2,404 | | | W | 2,385 | | | W | 1,432 | | | W | 2,257 | | | W | 7,842 | | | W | 16,320 | | | W | — | |
| | | | | | | | | | | | | | | | | |
Exposure to the Credit Card Industry
Following adverse developments in 2003 and 2004 including industry-wide increases in delinquencies and resulting increases in provisioning in loan losses as a result of aggressive marketing without adequate regard to credit risks, the credit card companies in general have substantially improved their asset quality and capital adequacy by reducing non-performing loans and the generally riskier card loans and limiting issuance of new credit cards to only customers meeting certain credit quality thresholds. As a result, according to a report issued by the Financial Services Commission in March 2008, the credit card companies have in general recorded profit for three consecutive years since 2005 and their overall asset quality and capital adequacy have also improved during this period.
The following table shows, as of December 31, 2007, the breakdown of our total exposure to credit card companies.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Securities
| | | | | | | | | | | | | | | | |
| | | | | | Issued
| | | | | | | | | | | | | | | | |
| | | | | | Through
| | | | | | | | | | | | | | | | |
| | | | | | Asset-
| | | | | | Loans in
| | | Guarantees
| | | Loans in
| | | | |
| | | Debt
| | | backed
| | | Equity
| | | Won
| | | and
| | | Foreign
| | | | |
Company | | Securities | | | Securitization(1) | | | Securities | | | Currency | | | Acceptances | | | Currency | | | Total | |
| | | (In billions of Won) | |
| |
| Samsung Card | | W | 607 | | | W | 465 | | | W | 3 | | | W | 100 | | | W | 2 | | | W | 9 | | | W | 1,186 | |
| Lotte Card | | | 69 | | | | 25 | | | | — | | | | — | | | | — | | | | — | | | | 94 | |
| Hyundai Card | | | 59 | | | | 400 | | | | — | | | | — | | | | — | | | | — | | | | 459 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | W | 735 | | | W | 890 | | | W | 3 | | | W | 100 | | | W | 2 | | | W | 9 | | | W | 1,739 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Note:
| | |
(1) | | Securities issued by special purpose vehicles of credit card companies, established with credit card receivables as underlying assets. In general, these special purpose vehicles are entitled to credit or collateral support from such credit card companies. |
71
As of December 31, 2007, we had loans outstanding to credit card companies in the aggregate principal amount of W109 billion. Because the improved financial conditions of the credit card companies have improved following their financial difficulties in general in 2003 and 2004, our loans to these credit card companies are considered performing in accordance with our internal credit rating methodology, and therefore we have not recognized a specific allowance for loan losses against these. In light of the improvement in the asset quality of the credit card companies in general, we have made minimal general allowance in the amount of W6 million as of December 31, 2007 against those loans to credit card company, which we believe is sufficient to cover any incurred losses within these specific loans.
In addition, our investment portfolio includes beneficiary certificates representing interests in investment trusts whose assets include securities issued by troubled credit card companies. Accordingly, to the extent that the value of securities issued by credit card companies declines as a result of their financial difficulties or otherwise, we may experience losses on our investment securities.
In the case of credit card companies that are in or in the future enter into workout, restructuring, reorganization or liquidation proceedings, our recoveries from those companies may be limited. We may, therefore, experience future losses with respect to these exposures.
Exposures to SK Group Companies
In the first quarter of 2003, accounting irregularities were discovered at SK Networks to which most commercial banks in Korea, including ourselves, had substantial exposure. These irregularities had concealed the weak financial condition of SK Networks over a period of several years. In March 2003, the principal creditor banks of SK Networks commenced formal workout procedures against SK Networks under the Corporate Restructuring Promotion Act of Korea. In October 2003, SK Networks and its overseas subsidiaries completed the final major step in the restructuring of indebtedness of SK Networks and its overseas subsidiaries by exchanging all of the indebtedness of SK Networks and its overseas subsidiaries held by Korean financial institution creditors into a combination of common shares, redeemable preferred shares and mandatory convertible bonds of SK Networks. Partly as a result of this corporate restructuring, as of December 31, 2007, we owned 9.62% of common shares of SK Networks (or 9.72% of total equity ownership in SK Networks including its redeemable preferred shares).
SK Networks graduated from the workout in April 2007. As of December 31, 2007, 0.7% of our total exposure was to the member companies of the SK Group. We currently classify loans and guarantees and acceptances to the member companies of SK Group companies, including SK Networks, as performing in accordance with our internal credit rating methodology and therefore no specific allowance is made against these loans or guarantees and acceptances. Our management believes the general allowance of W2 billion against the loans to member companies of the SK Group, including SK Networks, is sufficient to cover any incurred losses within this portfolio.
72
Loan Concentration by Industry
The following table shows the aggregate balance of our corporate loans by industry concentration as of December 31, 2007 under U.S. GAAP.2009.
| | | | | | | | | | |
| | | | | | | | | | | | | Percentage of Total
| |
| | | | | Percentage of Total
| | | Aggregate Loan
| | Corporate Loan
| |
Industry | | Aggregate Loan Balance | | Corporate Loan Balance | | | Balance | | Balance | |
| | | (In billions of Won) | | (Percentages) | | | (In billions of Won) | | (Percentages) | |
| |
| Manufacturing | | W | 25,248 | | | | 31.50 | % | | W | 29,820 | | | | 32.84 | % |
| Real estate leasing and service | | | 17,059 | | | | 21.28 | | |
| Retail and wholesale | | | 12,227 | | | | 15.25 | | | | 11,634 | | | | 12.81 | |
| Real estate, leasing and service | | | | 18,530 | | | | 20.41 | |
| Construction | | | 5,731 | | | | 7.15 | | | | 6,675 | | | | 7.35 | |
| Transportation, storage and communication | | | 4,772 | | | | 5.95 | | |
| Hotel and leisure(1) | | | 3,607 | | | | 4.50 | | | | 3,283 | | | | 3.61 | |
| Finance and insurance | | | 2,927 | | | | 3.65 | | | | 5,202 | | | | 5.73 | |
| Transportation, storage and communication | | | | 5,675 | | | | 6.25 | |
| Other service | | | 8,074 | | | | 10.07 | | | | 9,221 | | | | 10.15 | |
| Other | | | 522 | | | | 0.65 | | | | 769 | | | | 0.85 | |
| | | | | | | | | | | |
| Total | | W | 80,167 | | | | 100.00 | % | | W | 90,809 | | | | 100.00 | % |
| | | | | | | | | | �� | | |
Note:
| | |
| (1) | | Consists principally of hotels, motels and restaurants. |
60
Loan Concentration by Size of Loans
The following table shows the aggregate balances of our loans by outstanding loan amount as of December 31, 2007.2009.
| | | | | | | | | | | | | | | | | |
| | | Aggregate Loan
| | Percentage of Total
| | | Aggregate Loan
| | Percentage of Total
| |
| | | Balance | | Loan Balance | | | Balance | | Loan Balance | |
| | | (In billions of Won) | | (Percentages) | | | (In billions of Won) | | (Percentages) | |
| |
Commercial and industrial | | | | | | | | | | | | | | | | |
Up to W10 million | | W | 77 | | | | 0.05 | % | | W | 64 | | | | 0.04 | % |
Over W10 million to W50 million | | | 1,556 | | | | 1.02 | | | | 1,625 | | | | 0.96 | |
Over W50 million to W100 million | | | 2,302 | | | | 1.52 | | | | 2,458 | | | | 1.45 | |
Over W100 million to W500 million | | | 11,862 | | | | 7.81 | | | | 12,111 | | | | 7.16 | |
Over W500 million to W1 billion | | | 6,218 | | | | 4.10 | | | | 6,634 | | | | 3.92 | |
Over W1 billion to W5 billion | | | 13,067 | | | | 8.61 | | | | 14,887 | | | | 8.80 | |
Over W5 billion to W10 billion | | | 4,780 | | | | 3.15 | | | | 5,425 | | | | 3.21 | |
Over W10 billion to W50 billion | | | 6,587 | | | | 4.34 | | | | 8,525 | | | | 5.04 | |
Over W50 billion to W100 billion | | | 1,706 | | | | 1.12 | | | | 1,751 | | | | 1.03 | |
Over W100 billion | | | 330 | | | | 0.21 | | | | 999 | | | | 0.59 | |
| | | | | | | | | | | |
| Sub-total | | W | 48,485 | | | | 31.93 | % | | W | 54,479 | | | | 32.20 | % |
| | | | | | | | | | | |
Other commercial | | | | | | | | | |
Up to W10 million | | | W | 123 | | | | 0.07 | % |
Over W10 million to W50 million | | | | 1,007 | | | | 0.59 | |
Over W50 million to W100 million | | | | 860 | | | | 0.51 | |
Over W100 million to W500 million | | | | 3,611 | | | | 2.13 | |
Over W500 million to W1 billion | | | | 1,994 | | | | 1.18 | |
Over W1 billion to W5 billion | | | | 5,492 | | | | 3.24 | |
Over W5 billion to W10 billion | | | | 3,614 | | | | 2.14 | |
Over W10 billion to W50 billion | | | | 12,557 | | | | 7.42 | |
Over W50 billion to W100 billion | | | | 922 | | | | 0.54 | |
Over W100 billion | | | | 4,590 | | | | 2.71 | |
| | | | | | | |
| Sub-total | | | W | 34,770 | | | | 20.53 | % |
| | | | | | | |
Lease financing | | | | | | | | | |
Up to W10 million | | | W | 7 | | | | 0.00 | % |
Over W10 million to W50 million | | | | 368 | | | | 0.22 | |
Over W50 million to W100 million | | | | 226 | | | | 0.13 | |
Over W100 million to W500 million | | | | 122 | | | | 0.07 | |
Over W500 million to W1 billion | | | | 10 | | | | 0.01 | |
Over W1 billion to W5 billion | | | | 55 | | | | 0.03 | |
Over W5 billion to W10 billion | | | | 84 | | | | 0.05 | |
Over W10 billion to W50 billion | | | | 541 | | | | 0.32 | |
Over W50 billion to W100 billion | | | | 147 | | | | 0.09 | |
Over W100 billion | | | | 0 | | | | 0.00 | |
| | | | | | | |
| Sub-total | | | W | 1,560 | | | | 0.92 | % |
| | | | | | | |
7361
| | | | | | | | | |
| | | Aggregate Loan
| | | Percentage of Total
| |
| | | Balance | | | Loan Balance | |
| | | (In billions of Won) | | | (Percentages) | |
| |
Other commercial | | | | | | | | |
Up to W10 million | | W | 68 | | | | 0.05 | % |
Over W10 million to W50 million | | | 804 | | | | 0.53 | |
Over W50 million to W100 million | | | 801 | | | | 0.52 | |
Over W100 million to W500 million | | | 3,637 | | | | 2.40 | |
Over W500 million to W1 billion | | | 2,010 | | | | 1.32 | |
Over W1 billion to W5 billion | | | 5,969 | | | | 3.93 | |
Over W5 billion to W10 billion | | | 3,814 | | | | 2.51 | |
Over W10 billion to W50 billion | | | 8,250 | | | | 5.44 | |
Over W50 billion to W100 billion | | | 1,915 | | | | 1.26 | |
Over W100 billion | | | 3,044 | | | | 2.01 | |
| | | | | | | | | |
| Sub-total | | W | 30,312 | | | | 19.97 | % |
| | | | | | | | | |
Lease financing | | | | | | | | |
Up to W10 million | | W | 13 | | | | 0.01 | % |
Over W10 million to W50 million | | | 329 | | | | 0.22 | |
Over W50 million to W100 million | | | 287 | | | | 0.19 | |
Over W100 million to W500 million | | | 217 | | | | 0.14 | |
Over W500 million to W1 billion | | | 31 | | | | 0.02 | |
Over W1 billion to W5 billion | | | 163 | | | | 0.10 | |
Over W5 billion to W10 billion | | | 55 | | | | 0.04 | |
Over W10 billion to W50 billion | | | 223 | | | | 0.15 | |
Over W50 billion to W100 billion | | | 52 | | | | 0.03 | |
Over W100 billion | | | — | | | | — | |
| | | | | | | | | |
| Sub-total | | W | 1,370 | | | | 0.90 | % |
| | | | | | | | | |
Mortgage and home equity | | | | | | | | |
Up to W10 million | | W | 330 | | | | 0.22 | % |
Over W10 million to W50 million | | | 5,973 | | | | 3.93 | |
Over W50 million to W100 million | | | 7,995 | | | | 5.27 | |
Over W100 million to W500 million | | | 15,929 | | | | 10.49 | |
Over W500 million to W1 billion | | | 1,120 | | | | 0.74 | |
Over W1 billion to W5 billion | | | 148 | | | | 0.10 | |
Over W5 billion to W10 billion | | | — | | | | — | |
Over W10 billion to W50 billion | | | — | | | | — | |
Over W50 billion to W100 billion | | | — | | | | — | |
Over W100 billion | | | — | | | | — | |
| | | | | | | | | |
| Sub-total | | W | 31,495 | | | | 20.75 | % |
| | | | | | | | | |
74
| | | | | | | | | | | | | | | | | |
| | | Aggregate Loan
| | Percentage of Total
| | | Aggregate Loan
| | Percentage of Total
| |
| | | Balance | | Loan Balance | | | Balance | | Loan Balance | |
| | | (In billions of Won) | | (Percentages) | | | (In billions of Won) | | (Percentages) | |
| | |
Mortgage and home equity | | | | | | | | | |
Up to W10 million | | | W | 365 | | | | 0.22 | % |
Over W10 million to W50 million | | | | 6,617 | | | | 3.91 | |
Over W50 million to W100 million | | | | 9,248 | | | | 5.46 | |
Over W100 million to W500 million | | | | 22,106 | | | | 13.05 | |
Over W500 million to W1��billion | | | | 1,481 | | | | 0.88 | |
Over W1 billion to W5 billion | | | | 205 | | | | 0.12 | |
Over W5 billion to W10 billion | | | | 0 | | | | 0.00 | |
Over W10 billion to W50 billion | | | | 0 | | | | 0.00 | |
Over W50 billion to W100 billion | | | | 0 | | | | 0.00 | |
Over W100 billion | | | | 0 | | | | 0.00 | |
| | | | | | | |
| Sub-total | | | W | 40,022 | | | | 23.64 | % |
| | | | | | |
Other consumer | | | | | | | | | | | | | | | | |
Up to W10 million | | W | 4,064 | | | | 2.68 | % | | W | 4,184 | | | | 2.47 | % |
Over W10 million to W50 million | | | 7,617 | | | | 5.02 | | | | 7,424 | | | | 4.39 | |
Over W50 million to W100 million | | | 3,921 | | | | 2.58 | | | | 2,905 | | | | 1.72 | |
Over W100 million to W500 million | | | 8,123 | | | | 5.35 | | | | 7,139 | | | | 4.22 | |
Over W500 million to W1 billion | | | 944 | | | | 0.62 | | | | 893 | | | | 0.53 | |
Over W1 billion to W5 billion | | | 719 | | | | 0.47 | | | | 659 | | | | 0.39 | |
Over W5 billion to W10 billion | | | 69 | | | | 0.05 | | | | 53 | | | | 0.03 | |
Over W10 billion to W50 billion | | | 18 | | | | 0.01 | | | | 50 | | | | 0.03 | |
Over W50 billion | | | — | | | | — | | | | 0 | | | | 0.00 | |
Over W100 billion | | | — | | | | — | | | | 0 | | | | 0.00 | |
| | | | | | | | | | | |
| Sub-total | | W | 25,475 | | | | 16.78 | % | | W | 23,307 | | | | 13.78 | % |
| | | | | | | | | | | |
Credit cards(1) | | | | | | | | | |
Credit cards(1) | | | | | | | | | |
Up to W10 million | | W | 11,621 | | | | 7.65 | % | | W | 13,515 | | | | 7.98 | % |
Over W10 million to W50 million | | | 2,130 | | | | 1.40 | | | | 1,031 | | | | 0.61 | |
Over W50 million to W100 million | | | 68 | | | | 0.05 | | | | 40 | | | | 0.02 | |
Over W100 million to W500 million | | | 131 | | | | 0.09 | | | | 51 | | | | 0.03 | |
Over W500 million to W1 billion | | | 18 | | | | 0.01 | | | | 10 | | | | 0.01 | |
Over W1 billion to W5 billion | | | 25 | | | | 0.01 | | | | 27 | | | | 0.02 | |
Over W5 billion to W10 billion | | | 8 | | | | 0.01 | | | | 15 | | | | 0.01 | |
Over W10 billion to W50 billion | | | 27 | | | | 0.02 | | | | 41 | | | | 0.02 | |
Over W50 billion to W100 billion | | | 653 | | | | 0.43 | | | | 387 | | | | 0.23 | |
Over W100 billion | | | — | | | | — | | | | 0 | | | | 0.00 | |
| | | | | | | | | | | |
| Sub-total | | W | 14,681 | | | | 9.67 | % | | | 15,117 | | | | 8.93 | |
| | | | | | | | | | | |
Total | | W | 151,818 | | | | 100.00 | % | | W | 169,255 | | | | 100.00 | % |
| | | | | | | | | | | |
Note:
| | |
| (1) | | Includes corporate credit card purchases. |
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Maturity Analysis
The following table sets out the scheduled maturities (time remaining until maturity) of our loan portfolio as of December 31, 2007.2009. The amounts disclosed are before deduction of attributable loan loss reserves.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2007 | | | As of December 31, 2009 | |
| | | | | Over 1 Year but
| | | | | | | | | Over 1 Year
| | | | | |
| | | | | Not More Than
| | | | | | | | | but Not More
| | | | | |
| | | 1 Year or Less | | 5 Years | | Over 5 Years | | Total | | | 1 Year or Less | | Than 5 Years | | Over 5 Years | | Total | |
| | | (In billions of Won) | | | (In billions of Won) | |
| |
| Corporate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | | W | 39,861 | | | W | 7,908 | | | W | 716 | | | W | 48,485 | | | W | 47,212 | | | W | 6,194 | | | W | 1,073 | | | W | 54,479 | |
| Other commercial | | | 18,065 | | | | 9,863 | | | | 2,384 | | | | 30,312 | | | | 21,215 | | | | 8,622 | | | | 4,933 | | | | 34,770 | |
| Lease financing | | | 418 | | | | 894 | | | | 58 | | | | 1,370 | | | | 366 | | | | 1,116 | | | | 78 | | | | 1,560 | |
| | | | | | | | | | | | | | | | | | | |
| Total corporate | | W | 58,344 | | | W | 18,665 | | | W | 3,158 | | | W | 80,167 | | | W | 68,793 | | | W | 15,932 | | | W | 6,084 | | | W | 90,809 | |
| | | | | | | | | | | | | | | | | | | |
| Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage and home equity | | W | 7,720 | | | W | 7,531 | | | W | 16,244 | | | W | 31,495 | | | W | 8,393 | | | W | 7,627 | | | W | 24,002 | | | W | 40,022 | |
| Other consumer | | | 17,452 | | | | 6,418 | | | | 1,605 | | | | 25,475 | | | | 19,087 | | | | 3,057 | | | | 1,163 | | | | 23,307 | |
| Credit cards | | | 13,387 | | | | 1,062 | | | | 232 | | | | 14,681 | | | | 13,264 | | | | 1,294 | | | | 559 | | | | 15,117 | |
| | | | | | | | | | | | | | | | | | | |
| Total consumer | | W | 38,559 | | | W | 15,011 | | | W | 18,081 | | | W | 71,651 | | | W | 40,744 | | | W | 11,978 | | | W | 25,724 | | | W | 78,446 | |
| | | | | | | | | | | | | | | | | | | |
| Total gross loans | | W | 96,903 | | | W | 33,676 | | | W | 21,239 | | | W | 151,818 | | |
| Total domestic loans | | | W | 109,537 | | | W | 27,910 | | | W | 31,808 | | | W | 169,255 | |
| | | | | | | | | | | | | | | | | | | |
We may roll over our working capital loans and consumerretail loans (which are not payable in installments) after we conduct our normal loan reviewreviews in accordance with our loan review procedures. Working capital loans of Shinhan Bank may be extended on an annual basis for an aggregate term of three years for unsecured loans and five years for secured loans and consumerretail loans may be extended for additional terms of up to 12 months for an aggregate term of ten years for unsecured loans and secured loans.
Interest Rate Sensitivity
The following table shows our loans by interest rate sensitivity as of December 31, 2007.2009.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2007 | | | As of December 31, 2009 | |
| | | Due Within 1 Year | | Due After 1 Year | | Total | | | Due Within 1 Year | | Due After 1 Year | | Total | |
| | | (In billions of Won) | | | (In billions of Won) | |
| |
| Fixed rate loans(1) | | W | 27,978 | | | W | 6,168 | | | W | 34,146 | | | W | 40,611 | | | W | 10,898 | | | W | 51,509 | |
| Variable rate loans(2) | | | 68,925 | | | | 48,747 | | | | 117,672 | | | | 67,836 | | | | 49,910 | | | | 117,746 | |
| | | | | | | | | | | | | | | |
| Total gross loans | | W | 96,903 | | | W | 54,915 | | | W | 151,818 | | | W | 108,447 | | | W | 60,808 | | | W | 169,255 | |
| | | | | | | | | | | | | | | |
Notes:
| | |
| (1) | | Fixed rate loans are loans for which the interest rate is fixed for the entire term. Includes W9,709 billionterm of loans due within one year and W410 billion of loans due after one year, which are priced based on one or more reference rates which may vary at our discretion. However, it is not our practice to change such reference rates during the life of a loan. |
| |
| (2) | | Variable or adjustable rate loans are for which the interest rate is not fixed for the entire term.term of the loan. |
For additional information regarding our management of interest rate risk, see “— Risk Management.”
Nonaccrual Loans and Past Due Accruing Loans
Except in the case of repurchased loans, we generally do not recognize interest income on nonaccrual loans unless it is collected. Generally, the accrualwe discontinue accruing of interest is discontinued on loans (other than repurchased loans) when paymentspayment of interestand/or principal becomebecomes past due by one day. Interest is recognized on these loans on a cash
76
received basis from the date the loan is placed on nonaccrual status.reclassified as non-accruing. Loans (other than repurchased loans) are not reclassified as accruing until interest and principal payments are brought current.
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We generally do not generally request borrowers to make immediate repayment of the whole outstanding principal balances and related accrued interest on nonaccrual loans whose interest payments are past due for one to 14 days in case of commercial loans and 1 to 30 days in case of consumerretail loans. Except where specified otherwise, the amount of such past due loans within the repayment grace period is excluded from the amount of non-accrual loans disclosed in this documentannual report and from the basis forcalculation of related foregone interest calculation.interest.
Interest foregone is the interest due on nonaccrual loans that has not been accrued in our books of account. For the years ended December 31,In 2005, 2006, 2007, 2008 and 2007,2009, we would have recorded gross interest income of W186 billion, W140 billion, W155 billion, W202 billion and W155151 billion, respectively, on loans accounted for on a nonaccrual basis throughout the respective years, or since origination for loans held for part of the year, had the loans been current with respect to their original contractual terms. The amount of interest income on those loans that was included in our net income for the years ended December 31,in 2005, 2006, 2007, 2008 and 20072009 were W117 billion, W107 billion, W77 billion, W109 billion and W7790 billion, respectively.
The category “accruing but past due one day” includes loans which are still accruing interest but on which principal or interest payments are contractually past due one day or more. We continue to accrue interest on loans where the total amount of loan outstanding, including accrued interest, is fully secured by cash on deposits.
The following table shows, at the dates indicated, the amount of loans that are placed on a nonaccrual basis and accruing loans which are past due one day or more.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | | | As of December 31, | |
| | | 2003 | | 2004 | | 2005 | | 2006 | | 2007(3) | | | 2005 | | 2006(1) | | 2007(1) | | 2008(1) | | 2009(1) | |
| | | (In billions of Won) | | | (In billions of Won) | |
| |
| Loans accounted for on a nonaccrual basis | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate | | W | 1,536 | | | W | 1,681 | | | W | 1,475 | | | W | 1,187 | | | W | 1,181 | | | W | 1,475 | | | W | 1,187 | | | W | 1,181 | | | W | 1,457 | | | W | 1,231 | |
| Consumer | | | 580 | | | | 479 | | | | 367 | | | | 241 | | | | 174 | | | | 367 | | | | 241 | | | | 174 | | | | 148 | | | | 187 | |
| Credit cards | | | 1,016 | | | | 294 | | | | 210 | | | | 226 | | | | 409 | | | | 210 | | | | 226 | | | | 409 | | | | 416 | | | | 224 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Sub-total | | | 3,132 | | | | 2,454 | | | | 2,052 | | | | 1,654 | | | | 1,764 | | | | 2,052 | | | | 1,654 | | | | 1,764 | | | | 2,021 | | | | 1,642 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Accruing loans which are contractually past due one day or more as to principal or interest | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate(1)(2) | | | 196 | | | | 55 | | | | 32 | | | | 56 | | | | 98 | | | | 32 | | | | 56 | | | | 98 | | | | 122 | | | | 65 | |
Consumer(2)(3) | | | 27 | | | | 17 | | | | 32 | | | | 55 | | | | 67 | | | | 32 | | | | 55 | | | | 67 | | | | 46 | | | | 24 | |
| Credit cards | | | — | | | | 76 | | | | 3 | | | | — | | | | — | | | | 3 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Sub-total | | | 223 | | | | 148 | | | | 67 | | | | 111 | | | | 165 | | | | 67 | | | | 111 | | | | 165 | | | | 168 | | | | 89 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total | | W | 3,355 | | | W | 2,602 | | | W | 2,119 | | | W | 1,765 | | | W | 1,929 | | | W | 2,119 | | | W | 1,765 | | | W | 1,929 | | | W | 2,189 | | | W | 1,731 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Notes:
| | |
| (1) | | Includes accruing loans which are contractuallyExcludes past due 90 days or moreloans within the grace period in the amount of W113334 billion, W121,128 billion, W5 billion, W51,119 billion and W2823 billion of corporate loans as of December 31, 2003, 2004, 2005, 2006, 2007, 2008 and 2007,2009 respectively. |
| |
| (2) | | Includes accruing loans which are contractually past due 90 days or more in the amount of W75 billion, W65 billion,W2 billion, W10 billion and W8 billion that are corporate loans as of December 31, 2005, 2006, 2007, 2008 and 2009, respectively. |
|
| (3) | | Includes accruing loans which are contractually past due 90 days or more in the amount of W7 billion, W23 billion, and W27 billion, ofW13 billion and W8 billion that are consumer loans as of December 31, 2003, 2004, 2005, 2006, 2007, 2008 and 2007,2009, respectively. |
|
(3) | | For the years ended December 31, 2006 and 2007, nonaccrual loans, including the past due loans within the repayment grace period, totaled W2,099 billion and W3,057 billion respectively. In 2006, we changed the classification of the loans within the grace period from accruing loans to nonaccrued loans. |
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Troubled Debt Restructurings
The following table presents, at the dates indicated, our loans which are “troubled debt restructurings” as defined under U.S. GAAP. These loans mainly consist of corporate loans that have been restructured through the process of workout, court receivership and composition. See “— Credit Exposures to Companies in Workout, Court Receivership and Composition.” These loans accrue interest at rates lower than the original contractual terms, or involve the extension of the original contractual maturity as a result of a variation of terms upon restructuring.
| | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, |
| | | 2003 | | 2004 | | 2005 | | 2006 | | 2007 |
| | | | | (In billions of Won) | | |
| |
| Loans not included in “nonaccrual and past due loans” which are classified as “troubled debt restructurings” | | W | 1,179 | | | W | 916 | | | W | 735 | | | W | 111 | | | W | 124 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, |
| | | 2005 | | 2006 | | 2007 | | 2008 | | 2009 |
| | | | | (In billions of Won) | | |
| |
| Loans classified as “troubled debt restructurings” (excluding nonaccrual and past due loans) | | W | 735 | | | W | 111 | | | W | 124 | | | W | 557 | | | W | 932 | |
For the year ended December 31, 2005, 2006, 2007, 2008 and 2009, interest income that would have been recorded under the original contract terms of restructured loans amounted to W26 billion, W5 billion,W5 billion, W21 billion and W34 billion, respectively, out of which W1.522 billion, W4 billion, W2 billion, W18 billion and W22 billion was reflected as our interest income, during 2007.respectively.
Credit Exposures to Companies in Workout, Court Receivership andor Composition
Our credit exposures into restructuring are managed and collected by our Corporate Credit Collection Department. As of December 31, 2007, 0.21%2009, 0.65% of our total exposure,loans, or W4371,097 billion, was under restructuring. TheRestructuring of our credit exposures principally takes the legal form of our restructurings is principally either workout, court receivership or composition.
Workout
Under the Corporate Restructuring Promotion Act, which became effective in September 2001, abolished in December 2005 and reinstated in August 2007 to remain effective until December 31, 2010, all creditors to borrowers that are financial institutions wereare required to participate in a creditors’ committee. The Corporate Restructuring Promotion Act wasis mandatorily applicable to a wide range of financial institutions in Korea, which include commercial banks, insurance companies, asset management companies, securities companies, merchant banks, the Korea Deposit Insurance Corporation and the Korea Asset Management Corporation. Under this act, the approval of financial institution creditors holding not less than 75% of the total debt outstanding of a borrower approvedis required for such borrower’s restructuring plan, including debt restructuring and provision of additional funds, which plan would beis binding on all the financial institution creditors of the borrower, provided that any financial institution creditor that disagreeddisagrees with the final restructuring plan approved by the creditors’ committee would havehas the right to request the creditors’ committee to purchase its claims at a mutually agreed price. In the event that the creditors’ committee and the dissenting financial institution creditor failedfail to come to an agreement, a mediation committee consisting of seven experts would beis set up to resolve the matter. There wasis a risk that these procedures mightmay require us to participate in a plan we diddo not agree with or mightmay require us to sell our claims at prices that we diddo not believe wereare adequate. With respect to any workout for which the lead creditor bank calledcalls for a meeting of the creditors’ committee while the old Corporate Restructuring Promotion Act was still effective, the procedures applicable to such creditors’ committee and the related workout remain subject to the Corporate Restructuring Promotion Act until the suspension or conclusion of such workout, provided that such workout becomes subject to the procedures under the reinstated Corporate Restructuring Promotion Act as of its effective date, as opposed to the old Corporate Restructuring Promotion Act, even if such workout began while the old law was in effect. Under the reinstated Corporate Restructuring Promotion Act, if any of our borrowers becomes subject to corporate restructuring procedures, we canmay be forced to (i) restructure our credits pursuant to restructuring plans approved by other creditor financial institutions holding 75% or more of the total outstanding debt (and 75% or more of the total outstanding secured debt, if the restructuring plan includes the restructuring of existing secured debt) of the borrower or (ii) dispose of our credits to other creditors on unfavorable terms. This law will remain effective until December 31, 2010.
The total loan amount currently undergoing workout as of December 31, 20072009 was W152 billion, including W142 billion of loans and W10 billion of other exposures.866 billion.
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Court Receivership and Composition
The Debtor Rehabilitation and Bankruptcy Act, which took effect on April 1, 2006, wasis designed to consolidate all existing bankruptcy-related laws in Korea, namely the Corporate Reorganization Act, the Composition Act, the Bankruptcy Act and the Individual Debtor Recovery Act.
Under the Debtor Rehabilitation and Bankruptcy Act, composition proceedings arehave been abolished and recovery proceedings arehave been introduced to replace the court receiverships. In a recovery proceeding, unlike the previous court receivership proceedings where the management of the debtor company was assigned tovested in a court appointed receiver, the currentexisting chief executive officer of the debtor company may continue to manage the debtor company, provided, that (i) neither fraudulent conveyance nor concealment of assets existed, (ii) the financial failure of the debtor company was not due to the gross negligence of thesuch chief executive officer, and (iii) no creditors’ meeting was convened to request, based on reasonable cause, a court-appointed receiver to replace the existingsuch chief executive officer. While a court receivership proceeding was permitted only with respect to joint stock companies (chushik-hoesa), the recovery proceeding may be commenced by any insolvent debtor. In addition, in an effort to meet the global standards, international bankruptcy procedures are introduced in Korea, under which a receiver of a foreign bankruptcy proceeding may, upon receiving Korean court’s approval of the ongoing foreign bankruptcy proceeding, apply for or participate in a Korean bankruptcy proceedings conducted in a Korean court. Similarly, a receiver in a domestic recovery proceeding or a bankruptcy trustee is allowed to perform its duties in a foreign country where an asset of the debtor is located to the extent the applicable foreign law permits.
However, any composition, corporate reorganization, bankruptcy and rehabilitation proceedings for individual debtors pending as of April 1, 2006, the effective date of the Debtor Rehabilitation and Bankruptcy Act, continue to proceed in accordance with the respective applicable laws.
The total loan amount currently subject to court receivership as of December 31, 20072009 was W50 billion, including W8 billion of loans and W42 billion of other exposures.0.4 billion.
The total amount currently subject to composition proceedings as of December 31, 20072009 was W235 billion, including W235 billion of loans and W0.4 billion of other exposures.11 billion.
Loans in the process of workout, court receivership or composition continue to beare reported as loans on our balance sheet and are included as nonaccrual loans described in “— Nonaccrual Loans and Past Due Accruing Loans” above since they are generally past due more than one day and interest generally does not accrue on such loans. Restructured loans that meet the U.S. GAAP definition of a troubled debt restructuring are included within “— Troubled Debt Restructurings” described above. These are disclosed as loans or securities after the restructuring on our balance sheet depending on the type of instrument we receive.
Credit Rehabilitation Programs for Delinquent Consumer and Small- and Medium-sized Enterprise Borrowers
In light of the rapid increase in delinquencies in credit card and other consumer credit in recent years, and concerns regarding potential social issues posed by the growing number of individuals with bad credit, the Korean government has implemented a number of measures intended to support the rehabilitation of the credit of delinquent consumer borrowers. These measures may affect the amount and timing of our collections and recoveries on our delinquent consumer credits.
In 2002, the Financial Services Commission established the Credit Counseling and Recovery Service based upon an agreement among approximately 160 financial institutions in Korea. Upon application to the Credit Counseling and Recovery Service and approval of a majority of unsecured and two-thirds of secured creditor financial institutions, a qualified “credit delinquent person” with outstanding debts to two or more financial institutions in an aggregate amount not exceeding W500 million may participate in an individual work-out program designed to restructure such person’s debt and rehabilitate such person’s credit.
On April 1, 2006, the Law Concerning Credit Restoration and Bankruptcy took effect and replaced the Individual Debtor Rehabilitation Law. Under the Law Concerning Credit Restoration and Bankruptcy, a qualified individual debtor with outstanding debts in an aggregate amount not exceeding threshold amounts of W500 million of unsecured debtand/orW1 billion of secured debt may restructure his or her debts through a court-supervised debt restructuring that is binding on creditors.
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On September 2, 2008, to support consumer borrowers with low credit scores, the Financial Services Commission established the Credit Rehabilitation Fund to purchase from creditors the loans of such borrowers that are in default and to provide guarantees so that such loans may be refinanced at lower rates. The following table shows, asCredit Rehabilitation Fund provides support to (i) individuals with low credit scores who are in default on loans not exceeding W30 million in principal amount in the aggregate (which requirement will be waived for individuals who are “basic living welfare recipients”) for a period of December 31, 2007, our ten largest exposures that had been negotiatedthree months or more and (ii) individuals with low credit scores ranging from category 7 to 10 who are in workouts, compositiondefault on loans not exceeding W30 million in principal amount in the aggregate (which requirement will be waived for individuals who are basic living welfare recipients) and the interest rate of which is 20% or court receivership.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Loans in
| | | Loans in
| | | | | | | | | Guarantees
| | | | |
| | | Won
| | | Foreign
| | | Equity
| | | Debt
| | | and
| | | Total
| |
Company | | Currency | | | Currency | | | Securities | | | Securities | | | Acceptances | | | Exposure(1) | |
| | | | | | | | | (In billions of Won) | | | | | | | |
| |
| HK Corporation | | W | 81 | | | W | — | | | W | — | | | W | — | | | W | — | | | W | 81 | |
| Daewoo Electronics Corporation | | | 34 | | | | 9 | | | | 4 | | | | — | | | | 2 | | | | 49 | |
| Pantech Europe | | | 41 | | | | — | | | | — | | | | — | | | | — | | | | 41 | |
| Daewoo Electronics Co., Ltd. | | | 33 | | | | — | | | | — | | | | — | | | | — | | | | 33 | |
| Shinil Housing | | | 32 | | | | — | | | | — | | | | — | | | | — | | | | 32 | |
| Pantech & Curitel Communications, Inc. | | | 11 | | | | — | | | | 1 | | | | — | | | | — | | | | 12 | |
| Joeun Hyundai Hospital Medical Foundation | | | 10 | | | | — | | | | — | | | | — | | | | — | | | | 10 | |
| Jaeil GMB Co., Ltd. | | | 4 | | | | 3 | | | | — | | | | — | | | | — | | | | 7 | |
| Hyunki | | | 7 | | | | — | | | | — | | | | — | | | | — | | | | 7 | |
| Gimhae Central Medical Center — Pantech Europe | | | 7 | | | | — | | | | — | | | | — | | | | — | | | | 7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | W | 260 | | | W | 12 | | | W | 5 | | | W | — | | | W | 2 | | | W | 279 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
more.
In October 2008, the Financial Supervisory Service requested Korean banks, including us, to establish a “fast track” program to provide liquidity assistance to small- and medium-sized enterprises on an expedited basis. Under the fast track program we established, which is effective through June 30, 2009, we provide liquidity assistance to small- and medium-sized enterprise borrowers applying for such assistance, in the form of new short-term loans or maturity extensions or interest rate adjustments with respect to existing loans, after expedited credit review and approval by us.
Note:In March 2009, the Financial Services Commission requested Korean banks, including us, to establish a “pre-workout program,” including a credit counseling and recovery service, for retail borrowers with short-term outstanding debt. The pre-workout program is expected to be in operation from April 2009 to April 2011. Under the pre-workout program, maturity extensionsand/or interest rate adjustments are provided for retail borrowers with total loans of less than W500 million who are in arrears on their payments for more than 30 days but less than 90 days.
| | |
(1) | | Only includes the portion of total exposure identified by us as troubled debt restructuring and excludes amount of loans or other exposures to the same borrower that are not subject to workouts, composition or court receivership. |
Potential Problem Loans
As of December 31, 2007,2009, we had W105332 billion of loans rated as normal or precautious byunder the guidelines of the Financial Services Commission, which represent loans that are current as to payment of principal and interest but carriescarry serious doubt as to the ability of the borrower to comply with repayment termsrepay in the near future. These loans are classified as impaired and therefore included in ourthe calculation of loan loss allowance under U.S. GAAP.
We have certain other interest-earning assets which, if they wereare loans, would beare required to be disclosed as part of the nonaccrual, past due or troubled debt restructuring or potential problem loan disclosures providedloans as discussed above. As of December 31, 2007,2009, the book value of our debt securitiessuch interest-earning assets on which interest was past due was nil.W28.6 billion.
Provisioning Policy
We conduct periodic and systematic detailed reviews of our loan portfolios to identify credit risks and to evaluate the adequacy of the overall allowance for loan losses. Our management believes the allowance for loan losses reflects the best estimate of the probable loan losses incurred as of each balance sheet date.
Our loan loss allowance determined under U.S. GAAP consists of a specific allowance and a general allowance. The specific allowance is applied to corporate loans that are considered to be impaired and are either individually or collectively evaluated for impairment. The general allowance is applied to all other loans to reflect losses that have been incurred but not specifically identified.
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Loan Classifications
For Korean GAAP and regulatory reporting purposes, we base our provisioning on the following loan classifications that classify corporate and consumerretail loans as required by the Financial Services Commission.
| | | |
Loan Classification | | Loan Characteristics |
| |
| Normal | | Loans made to customers whose financial position, future cash flows and nature of business are deemed financially sound. No problems in recoverability are expected. |
| Precautionary | | Loans made to customers whose financial position, future cash flows and nature of business show potential weakness, although there is no immediate risk of nonrepayment. |
| Substandard | | Loans made to customers whose adverse financial position, future cash flows and nature of business have a direct effect on the repayment of the loan. |
| Doubtful | | Loans made to customers whose financial position, future cash flows and nature of business are so weak that significant risk exists in the recoverability of the loan, to the extent the outstanding amount exceeds any collateral pledged. |
| Estimated loss | | Loans where write-off is unavoidable. |
Corporate Loans
We review corporate loans annually for potential impairment through a formal credit review; however,review. In addition, our loan officers also consider the credits for impairment throughout the year if informationthere is presentedan indication that may indicate an impairment event has occurred.
Under U.S. GAAP, a loan is impaired when, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the agreement. We use our loan classifications as a basis to identifyfor identifying impaired loans. We consider the following loans to be impaired loans for the purpose of determining our specific allowance:
| | |
| | • | loans classified as “substandard” or below according to the asset classification guidelines of the Financial Services Commission; |
| |
| | • | loans that are more than 90 days past due; and |
| |
| | • | loans which are “troubled debt restructurings” as defined under U.S. GAAP. |
Specific loan loss allowances for corporate loans are established based on whether a particular loan is impaired. Smaller balance corporateCorporate loans with relatively small balances are evaluated collectively for impairment as these loansthey are managed collectively.
— Loans individually identified for review and considered impaired
Consistent with the internal credit risk monitoring policies, we evaluate larger-balance impaired loans (which are impaired loans in excess ofwith relatively large balances (typically more than W1 billion for all of our subsidiaries)3 billion) individually for impairment. Loan loss allowances for these loans are generally established by discounting the estimated future cash flows (both principal and interest) we expect to receive using the loan’s effective interest rate. We consider the likelihood of all possible outcomes in determining our best estimate of expected future cash flows. Management consults closely with individual loan officers and reviews the cash flow assumptions used to ensure these estimates are valid.
Alternatively, for impaired loans that are considered collateral dependent, the amount of impairment is determined by reference to the fair value of the collateral.collateral which is based on the present value of the appraisal value as indicated in third party valuation reports. We consider the reliability and timing of appraisals and determine the reasonableness of fair value estimates, taking into account the time to value the collateral, the cost incurred in selling the collateral and current market conditions. After the fair value of collateral is determined, an impairment charge is established as specific loan loss allowances for an amount equal to the excess of the carrying amount of the subject loan over the fair value of the collateral.
8168
For more details regarding determination of the fair value of collateral for collateral dependent loans, see “Item 5.A. Operating Results — Critical Accounting Policies” and Note 28 to our consolidated financial statements.
We may also measure impairment by reference to the loan’s observable market price, however the availability of this information is not commonplace in Korea.
We establish a specific allowance when the discounted cash flow (or collateral value) of the loan is lower than theits carrying amount of the loan.amount. The specific allowance is equal to the difference between the discounted cashflowcash flow (or collateral value) amount and the related carrying amount of the loan.loan and its carrying amount.
— Loans collectively evaluated for impairment
We also establish specific allowances for smaller-balance impaired corporate loans. These loans are managedwith relatively small balances (typically W3 billion or less). We manage these loans on a portfolio basis and are therefore collectively evaluatedevaluate for impairment since it is not practicalimpractical to analyze or provide for our smallereach such loans on an individual loan by loan basis. The specific allowance for such loans is determined based on loss factors taking into consideration past performance of the portfolio, previous loan loss history and charge-off information.
TheseWe identify loss factors are developed through a migration model, that iswhich uses a statistical tool used to monitor the progression of loans through different classifications over a specific time period. We adjust these loss factors developed forbased on other qualitative or quantitative factors that affect the collectibilitycollectability of the portfolio as of the evaluation date, including:
| | |
| | • | Prevailingprevailing economic and business conditions within Korea and foreign jurisdictions in which we operate; |
| |
| | • | Industryindustry concentrations; |
| |
| | • | Changeschanges in the size and composition of the relevant underlying portfolios; and |
| |
| | • | Changeschanges in lending policies and procedures, including underwriting standards and collection, charge-offs and recovery practices. |
The following table sets out, atas of the dates indicated, our loan loss allowances as a percentage of outstanding loans allocable to our impaired corporate borrowers based on their loan classification.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | | As of December 31, | |
| | | 2005 | | 2006 | | 2007 | | 2007 | | 2008 | | 2009 | |
| | | (Percentages) | | (Percentages) | |
| |
| Normal | | | 2.42 | % | | | 3.11 | % | | | 1.94 | % | | | 1.94 | % | | | 0.77 | % | | | 0.82 | % |
| Precautionary | | | 7.92 | | | | 32.12 | | | | 31.36 | | | | 31.36 | | | | 11.66 | | | | 8.78 | |
| Substandard | | | 22.41 | | | | 38.55 | | | | 37.28 | | | | 37.28 | | | | 23.27 | | | | 39.49 | |
| Doubtful | | | 47.60 | | | | 76.00 | | | | 83.78 | | | | 83.78 | | | | 81.97 | | | | 86.47 | |
| Estimated loss | | | 87.19 | | | | 90.60 | | | | 88.81 | | | | 88.81 | | | | 89.19 | | | | 86.55 | |
— Loans not specifically identified as impaired
We establish a general allowance for non-impaired corporate loans to reflect losses incurred within the portfolio which have not yet been specifically identified.identified as impaired. The general allowance is also determined based on loss factors developed through a migration model and are adjusted as appropriate using similar criteria as above.
Leases
For leases, we follow a similar approach to that used for corporate loans that are collectively evaluated for impairment and establish allowances based on loss factors developed through a migration model andas adjusted for specific circumstances related to individual borrowers of the leased asset.assets.
69
ConsumerRetail Loans
ConsumerRetail loans are segmented into the following product types for the purposes of evaluation of credit risk:risk evaluation:
| | |
| | • | Mortgagemortgage and home equity loans; and |
| |
| | • | Other consumerother retail loans (consisting of unsecured and secured consumerretail loans). |
82
— Mortgage and home equity loans and other consumer loans
For loan losses on mortgages, home equity loans and other consumerretail loans, we also establish allowances based on loss factors taking into consideration the historical performance of the portfolio, previous loan loss history and charge-off information.
We further adjust the loss factors derived from the migration analysis as appropriate to reflect thebased on factors that may impact of any current conditions on loss recognition that haswhich have not been adequately captured by our historical analysis. These factors include:
| | |
| | • | Changeschanges in economic and business conditions such as levels of unemployment and house prices;housing price; |
| |
| | • | Changechanges in the nature and volume of the portfolio, including any concentrationsconcentration of credits; and |
| |
| | • | The effect of external factors such as regulatory or government requirements. |
— Credit cards
We establish an allowance for the credit card portfolio using a roll-rate model. A roll-rate model is a statistical tool used to monitor the progression of loans based on aging of the balance and established loss rates. The actual loss rates derived from this model are used to project the percentage of losses within each aging category based on performance over an established period of time.
The expected percentage of loss reflects estimates of both default probability within each loan aging bucketcategory and severity of loss. AllGenerally, loans in excess ofthat are six months or more past due are charged off. We adjust our loan loss rate for severity of loss when considering historical recovery of charged off credits when establishing the allowance.
We further segment our credit card portfolio into several homogeneous product types and perform separate roll-rate analysis for such segmented groupsproduct types to reflect the different risks and characteristics of these portfolios.each such product type.
We further adjust the results from the roll-rate analysis as appropriate to reflect thebased on factors that may impact of any current conditions on loss recognition that haswhich have not been adequately captured by our historical analysis. These factors include:
| | |
| | • | Delinquencydelinquency levels of cardholders; |
| |
| | • | Current government involvement withinpolicies toward the credit card industry (such as the 2001 Government Amnesty Program);industry; and |
| |
| | • | Keykey retail performance indicators (such as ratios of household debt to disposable income and household liabilities to financial assets). |
The actual amount of incurred loan losses may vary from the estimate of incurred losses due to changingchanges in economic conditions or changes in industry or geographic concentrations. We have procedures in place toalso monitor differences between estimated and actual incurred loan losses which includethrough procedures including detailed periodic assessments by senior management of both individual loans and credit portfolios and the models used to estimate incurred loan losses in those portfolios.
We consider a credit card or card loan to be delinquent if payment on such balanceaccount is not received on the date on which such payment waswhen first due and the amount outstanding is greater than W10,000. Our general policy is to be proactive in its collection procedures. We believe that card accounts which are in early stages of delinquency are easier to collect than those accounts which have been delinquent for a longer period of time and, therefore, we emphasize collections of suchat an early stage accounts. However,of delinquency although we attempt to collect delinquent payments with increasedincrease the level of collection efforts as the number of days past due increases.delinquency period increases with respect to the relevant account. Efforts to collect from cardholders whose account balances are up to 30 days past due are generally made by our callcredit support centers at Shinhan Card. We use aOur credit support centers classify delinquent customers based upon three criteria: the expected level of difficulty in collection, scoring model which is intended to maximizes the cost efficiency of collection from delinquent cardholders by classifying cardholders into three categories based on their credit score. For a delinquent accountholder with credit score of 1 or 2, we notify the cardholdernature of the delinquency within calendar 10 dayscustomer and the customer’s contribution to Shinhan Card’s profitability. By implementing collection activities tailored to each such category of delinquency. For a delinquent cardholder with credit score of 3 or 4,customers, we notify the Accountholder of the delinquency within seven days of delinquency. For a delinquent cardholder with credit score of 5 or 6, we notify the cardholder of the delinquency within three days of delinquency. With theseek to maximize efficiency in our collection scoring model, we aim to minimize the number of cardefforts.
8370
accounts which have been delinquent for a long period of time by proactively managing those cardholders with lower credit quality.
For those card accounts with balances that are more than 30 days past due, we assign the collection efforts to our internal collection centers. In respect of delinquent cardholders with balances that are more than five days past due, we outsource the collection efforts to external collection centers such as Shinhan Credit Information, our subsidiary, and Solomon Credit Information. Forbranches. During the first two months of their appointment, these collection centersbranches rely on postal or telephone notice and take measures to locate and provisionally attach accounts receivables or other properties of the delinquent cardholders. After the initial two months period, the collection centersbranches commence compulsory execution procedures against the delinquent cardholders’ accounts receivables or other properties to secure the amount of outstanding balances. During the entire period managed by branches, we offer restructured card loan and reduction programs. For card accounts that are charged off, we outsource collection to external collection centers such as Shinhan Credit Information, which is our subsidiary, and Mirae Credit Information Services Corp.
For thosecard accounts with balances that are more than 180 days past due, and, if the total past due amount is less than W5.0 million, we review such accounts for charge-off, and, if the total past due amount is equal to or greater than W5.0 million, we charge off the past due amounts on a quarterly basis in accordance with the guidelines, or subject to the approval, of the Financial Supervisory Service.
Following the implementation of a policy by the Korean Fair Trade Commission effective April 2008 that prohibited a unilateral lowering by the credit card company of the credit card limit of a cardholder except in the case of an impairment in the cardholder’s ability to repay, we established additional allowance for unfunded credit card commitments with respect to the unused credit card limit as we no longer control the unfunded credit card commitments.
We also began to apply, with respect to the off-balance sheet unused credit card limits, the same methodology used in calculating probabilities of default (“PDs”) with respect to credit card receivables, considering the current unstable financial market conditions as well as increased gross charge offs in the fiscal year 2009 compared to the fiscal year 2008. Previously, we applied a lower set of PDs to off-balance sheet unused credit limits than to credit card receivables.
Loan Aging Schedule
The following table shows our loan aging schedule (excluding accrued interest) for all loans as of the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Past Due
| | Past Due
| | Past Due More
| | | | | | | | Past Due
| | Past Due
| | Past Due More
| | | |
| | | Current | | up to 3 Months | | 3-6 Months | | than 6 Months | | Total
| | Current | | Up to 3 Months | | 3-6 Months | | Than 6 Months | | Total
| |
As of December 31, | | Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % | | Amount | | Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % | | Amount | |
| | | (In billions of Won, except percentages) | | (In billions of Won, except percentages) | |
| |
| 2003 | | | 91,940 | | | | 96.48 | | | | 1,511 | | | | 1.59 | | | | 714 | | | | 0.75 | | | | 1,130 | | | | 1.18 | | | | 95,295 | | |
| 2004 | | | 94,480 | | | | 97.32 | | | | 855 | | | | 0.88 | | | | 431 | | | | 0.45 | | | | 1,314 | | | | 1.35 | | | | 97,080 | | |
| 2005 | | | 103,601 | | | | 97.87 | | | | 652 | | | | 0.62 | | | | 243 | | | | 0.23 | | | | 1,352 | | | | 1.28 | | | | 105,848 | | | | 103,601 | | | | 97.87 | | | | 652 | | | | 0.62 | | | | 243 | | | | 0.23 | | | | 1,352 | | | | 1.28 | | | | 105,848 | |
| 2006 | | | 120,222 | | | | 98.18 | | | | 971 | | | | 0.79 | | | | 172 | | | | 0.14 | | | | 1,081 | | | | 0.89 | | | | 122,446 | | | | 120,222 | | | | 98.18 | | | | 971 | | | | 0.79 | | | | 172 | | | | 0.14 | | | | 1,081 | | | | 0.89 | | | | 122,446 | |
| 2007 | | | 148,597 | | | | 97.88 | | | | 1,899 | | | | 1.25 | | | | 315 | | | | 0.21 | | | | 1,007 | | | | 0.66 | | | | 151,818 | | | | 148,597 | | | | 97.88 | | | | 1,899 | | | | 1.25 | | | | 315 | | | | 0.21 | | | | 1,007 | | | | 0.66 | | | | 151,818 | |
| 2008 | | | | 167,064 | | | | 97.96 | | | | 2,120 | | | | 1.24 | | | | 420 | | | | 0.25 | | | | 937 | | | | 0.55 | | | | 170,541 | |
| 2009 | | | | 166,620 | | | | 98.44 | | | | 1,220 | | | | 0.72 | | | | 245 | | | | 0.14 | | | | 1,170 | | | | 0.70 | | | | 169,255 | |
Non-Performing Loans
Non-performing loans are defined as loans past due by greatermore than 90 days. These loans are generally rated “substandard” or below.
below under the guidelines of the Financial Supervisory Service. The following table shows, as of the dates indicated, certain detailsthe amount of the total non-performing loan portfolio.portfolio and as a percentage of our total loans.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | | As of December 31, |
| | | 2003 | | 2004 | | 2005 | | 2006 | | 2007 | | 2005 | | 2006 | | 2007 | | 2008 | | 2009 |
| | | (In billions of Won, except percentages) | | (In billions of Won, except percentages) |
| |
| Total non-performing loans | | W | 1,844 | | | W | 1,750 | | | W | 1,594 | | | W | 1,253 | | | W | 1,322 | | | W | 1,594 | | | W | 1,253 | | | W | 1,322 | | | W | 1,357 | | | W | 1,415 | |
| As a percentage of total loans | | | 1.94 | % | | | 1.80 | % | | | 1.51 | % | | | 1.02 | % | | | 0.87 | % | | | 1.51 | % | | | 1.02 | % | | | 0.87 | % | | | 0.80 | % | | | 0.84 | % |
8471
Analysis of Non-Performing Loans
The following table sets forth, for the periods indicated, the total non-performing loans by type of borrower.the borrower type.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | | | As of December 31, | |
| | | 2003 | | 2004 | | 2005 | | 2006 | | 2007 | | | 2005 | | 2006 | | 2007 | | 2008 | | 2009 | |
| | | | | | | Ratio of
| | | | | | Ratio of
| | | | | | Ratio of
| | | | | | Ratio of
| | | | | | Ratio of
| | | | | | | Ratio of
| | | | | | Ratio of
| | | | | | Ratio of
| | | | | | Ratio of
| | | | | | Ratio of
| |
| | | | | Non-
| | Non-
| | | | Non-
| | Non-
| | | | Non-
| | Non-
| | | | Non-
| | Non-
| | | | Non-
| | Non-
| | | | | Non-
| | Non-
| | | | Non-
| | Non-
| | | | Non-
| | Non-
| | | | Non-
| | Non-
| | | | Non-
| | Non-
| |
| | | Total
| | Performing
| | Performing
| | Total
| | Performing
| | Performing
| | Total
| | Performing
| | Performing
| | Total
| | Performing
| | Performing
| | Total
| | Performing
| | Performing
| | | | | Performing
| | Performing
| | | | Performing
| | Performing
| | Total
| | Performing
| | Performing
| | | | Performing
| | Performing
| | | | Performing
| | Performing
| |
| | | Loans | | Loans | | Loans | | Loans | | Loans | | Loans | | Loans | | Loans | | Loans | | Loans | | Loans | | Loans | | Loans | | Loans | | Loans | | | Total Loans | | Loans | | Loans | | Total Loans | | Loans | | Loans | | Loans | | Loans | | Loans | | Total Loans | | Loans | | Loans | | Total Loans | | Loans | | Loans | |
| | | | | | | | | | | | | | | (In billions of Won, except percentages) | | | | | | | | | | �� | | | | | (In billions of Won, except percentages) | |
| |
Corporate | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | | W | 35,617 | | | W | 739 | | | | 2.07 | % | | W | 35,653 | | | W | 898 | | | | 2.52 | % | | W | 35,728 | | | W | 868 | | | | 2.43 | % | | W | 40,063 | | | W | 760 | | | | 1.90 | % | | W | 48,485 | | | W | 748 | | | | 1.54 | % | | W | 35,728 | | | W | 868 | | | | 2.43 | % | | W | 40,063 | | | W | 760 | | | | 1.90 | % | | W | 48,485 | | | W | 748 | | | | 1.54 | % | | W | 55,466 | | | W | 755 | | | | 1.36 | % | | W | 54,479 | | | W | 823 | | | | 1.51 | % |
| Other commercial | | | 17,378 | | | | 558 | | | | 3.21 | | | | 17,988 | | | | 468 | | | | 2.60 | | | | 21,409 | | | | 387 | | | | 1.81 | | | | 27,319 | | | | 256 | | | | 0.94 | | | | 30,312 | | | | 272 | | | | 0.90 | | | | 21,409 | | | | 387 | | | | 1.81 | | | | 27,319 | | | | 256 | | | | 0.94 | | | | 30,312 | | | | 272 | | | | 0.90 | | | | 37,637 | | | | 332 | | | | 0.88 | | | | 34,770 | | | | 337 | | | | 0.97 | |
| Lease financing | | | 1,091 | | | | 8 | | | | 0.73 | | | | 981 | | | | 19 | | | | 1.94 | | | | 754 | | | | 8 | | | | 1.06 | | | | 585 | | | | 8 | | | | 17 | | | | 1,370 | | | | 7 | | | | 0.51 | | | | 754 | | | | 8 | | | | 1.06 | | | | 585 | | | | 8 | | | | 1.37 | | | | 1,370 | | | | 7 | | | | 0.51 | | | | 1,592 | | | | 5 | | | | 0.31 | | | | 1,560 | | | | 4 | | | | 0.26 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total corporate | | | 54,086 | | | | 1,305 | | | | 2.41 | | | | 54,622 | | | | 1,385 | | | | 2.54 | | | | 57,891 | | | | 1,263 | | | | 2.18 | | | | 67,967 | | | | 1.024 | | | | 1.51 | | | | 80,167 | | | | 1,027 | | | | 1.28 | | | | 57,891 | | | | 1,263 | | | | 2.18 | | | | 67,967 | | | | 1.024 | | | | 1.51 | | | | 80,167 | | | | 1,027 | | | | 1.28 | | | | 94,695 | | | | 1,092 | | | | 1.15 | | | | 90,809 | | | | 1,164 | | | | 1.28 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage and home equity | | | 20,517 | | | | 133 | | | | 0.65 | | | | 22,180 | | | | 126 | | | | 0.57 | | | | 25,840 | | | | 111 | | | | 0.43 | | | | 30,097 | | | | 68 | | | | 0.23 | | | | 31,495 | | | | 45 | | | | 0.14 | | | | 25,840 | | | | 111 | | | | 0.43 | | | | 30,097 | | | | 68 | | | | 0.23 | | | | 31,495 | | | | 45 | | | | 0.14 | | | | 36,183 | | | | 40 | | | | 0.11 | | | | 40,022 | | | | 29 | | | | 0.07 | |
| Other consumer | | | 14,580 | | | | 232 | | | | 1.59 | | | | 15,546 | | | | 155 | | | | 1.00 | | | | 17,875 | | | | 172 | | | | 0.96 | | | | 20,458 | | | | 119 | | | | 0.58 | | | | 25,475 | | | | 85 | | | | 0.33 | | | | 17,875 | | | | 172 | | | | 0.96 | | | | 20,458 | | | | 119 | | | | 0.58 | | | | 25,475 | | | | 85 | | | | 0.33 | | | | 25,026 | | | | 54 | | | | 0.22 | | | | 23,307 | | | | 51 | | | | 0.22 | |
| Credit cards | | | 6,112 | | | | 174 | | | | 2.85 | | | | 4,732 | | | | 84 | | | | 1.78 | | | | 4,242 | | | | 48 | | | | 1.13 | | | | 3,924 | | | | 42 | | | | 1.07 | | | | 14,681 | | | | 165 | | | | 1.12 | | | | 4,242 | | | | 48 | | | | 1.13 | | | | 3,924 | | | | 42 | | | | 1.07 | | | | 14,681 | | | | 165 | | | | 1.12 | | | | 14,637 | | | | 171 | | | | 1.17 | | | | 15,117 | | | | 171 | | | | 1.13 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total consumer | | | 41,209 | | | | 539 | | | | 1.31 | | | | 42,458 | | | | 365 | | | | 0.86 | | | | 47,957 | | | | 331 | | | | 0.69 | | | | 54,479 | | | | 229 | | | | 0.42 | | | | 71,651 | | | | 295 | | | | 0.41 | | | | 47,957 | | | | 331 | | | | 0.69 | | | | 54,479 | | | | 229 | | | | 0.42 | | | | 71,651 | | | | 295 | | | | 0.41 | | | | 75,846 | | | | 265 | | | | 0.35 | | | | 78,446 | | | | 251 | | | | 0.32 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | W | 95,295 | | | W | 1,844 | | | | 1.94 | % | | W | 97,080 | | | W | 1,750 | | | | 1.80 | % | | W | 105,848 | | | W | 1,594 | | | | 1.51 | % | | W | 122,446 | | | W | 1,253 | | | | 1.02 | % | | W | 151,818 | | | W | 1,322 | | | | 0.87 | % | | W | 105,848 | | | W | 1,594 | | | | 1.51 | % | | W | 122,446 | | | W | 1,253 | | | | 1.02 | % | | W | 151,818 | | | W | 1,322 | | | | 0.87 | % | | W | 170,541 | | | W | 1,357 | | | | 0.80 | % | | W | 169,255 | | | W | 1,415 | | | | 0.84 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
8572
Top Twenty20 Non-Performing Loans
As of December 31, 2007,2009, our twenty20 largest non-performing loans accounted for 26.4%18% of our total non-performing loan portfolio. The following table shows, at the date indicated, certain information regarding our twenty20 largest non-performing loans.
| | | | | | | | | | | | | | | |
| | | | | | As of December 31, 2007 | |
| | | | | | | | Gross Principal
| | | Allowance for Loan
| |
| | | | | | Industry | | Outstanding | | | Losses | |
| | | | | | (In billions of Won) | |
| |
| | 1 | | | Borrower A | | Manufacturing | | W | 81 | | | W | 51 | |
| | 2 | | | Borrower B | | Manufacturing | | | 55 | | | | 55 | |
| | 3 | | | Borrower C | | Manufacturing | | | 33 | | | | 33 | |
| | 4 | | | Borrower D | | Real estate, leasing and service | | | 28 | | | | 28 | |
| | 5 | | | Borrower E | | Manufacturing | | | 27 | | | | 9 | |
| | 6 | | | Borrower F | | Real estate, leasing and service | | | 17 | | | | 17 | |
| | 7 | | | Borrower G | | Real estate, leasing and service | | | 12 | | | | 6 | |
| | 8 | | | Borrower H | | Other service | | | 10 | | | | 10 | |
| | 9 | | | Borrower I | | Other service | | | 10 | | | | 4 | |
| | 10 | | | Borrower J | | Real estate, leasing and service | | | 9 | | | | — | |
| | 11 | | | Borrower K | | Manufacturing | | | 8 | | | | — | |
| | 12 | | | Borrower L | | Manufacturing | | | 7 | | | | 7 | |
| | 13 | | | Borrower M | | Manufacturing | | | 7 | | | | 6 | |
| | 14 | | | Borrower N | | Manufacturing | | | 7 | | | | 7 | |
| | 15 | | | Borrower O | | Other service | | | 7 | | | | — | |
| | 16 | | | Borrower P | | Other service | | | 7 | | | | 2 | |
| | 17 | | | Borrower Q | | Manufacturing | | | 7 | | | | 2 | |
| | 18 | | | Borrower R | | Real estate, leasing and service | | | 6 | | | | — | |
| | 19 | | | Borrower S | | Manufacturing | | | 6 | | | | 5 | |
| | 20 | | | Borrower T | | Manufacturing | | | 5 | | | | 4 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | W | 349 | | | W | 246 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | (A) As of December 31, 2009 | |
| | | | | | | | Gross Principal
| | | Allowance for Loan
| |
| | | | | | Industry | | Outstanding | | | Losses | |
| | | | | | (In billions of Won) | |
| |
| | 1 | | | Borrower A | | Manufacturing | | W | 48 | | | W | 39 | |
| | 2 | | | Borrower B | | Manufacturing | | | 24 | | | | 11 | |
| | 3 | | | Borrower C | | Manufacturing | | | 23 | | | | 19 | |
| | 4 | | | Borrower D | | Other service | | | 18 | | | | 9 | |
| | 5 | | | Borrower E | | Manufacturing | | | 18 | | | | 9 | |
| | 6 | | | Borrower F | | Construction | | | 13 | | | | 6 | |
| | 7 | | | Borrower G | | Manufacturing | | | 12 | | | | 10 | |
| | 8 | | | Borrower H | | Real estate, leasing and service | | | 10 | | | | 9 | |
| | 9 | | | Borrower I | | Construction | | | 10 | | | | 5 | |
| | 10 | | | Borrower J | | Manufacturing | | | 9 | | | | 4 | |
| | 11 | | | Borrower K | | Real estate, leasing and service | | | 9 | | | | 4 | |
| | 12 | | | Borrower L | | Other service | | | 8 | | | | 4 | |
| | 13 | | | Borrower M | | Finance and insurance | | | 7 | | | | 1 | |
| | 14 | | | Borrower N | | Retail and wholesale | | | 7 | | | | 6 | |
| | 15 | | | Borrower O | | Manufacturing | | | 7 | | | | 4 | |
| | 16 | | | Borrower P | | Real estate, leasing, service | | | 7 | | | | 4 | |
| | 17 | | | Borrower Q | | Retail and wholesale | | | 6 | | | | 3 | |
| | 18 | | | Borrower R | | Manufacturing | | | 6 | | | | 5 | |
| | 19 | | | Borrower S | | Real estate, leasing, and service | | | 6 | | | | 1 | |
| | 20 | | | Borrower T | | Manufacturing | | | 6 | | | | 3 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | W | 254 | | | W | 156 | |
| | | | | | | | | | | | | | | |
Non-Performing Loan Strategy
One of our primary objectives is to prevent our loans from becoming non-performing. Through our corporate credit rating system we believe that we have reduced our credit risk relating to future non-performing loans. Our credit rating systemwhich is designed to prevent our loan officers from extending new loans to borrowers with high credit risks based on the borrower’s credit rating.rating, we seek to reduce credit risk related to future non-performing loans. Our early warning system is designed to bringalert any sudden increase in a borrower’s credit risk to the attention of our loan officers, who then closely monitor such loans.
Notwithstanding the above, ifIf a loan becomes non-performing notwithstanding such preventive mechanism, an officer at the branch level responsible for monitoring non-performing loans will commence due diligence ofon the borrower’s assets, send a notice demanding payment or a notice that we will take legal action or prepare for legal action.
At the same time, we also initiate our non-performing loan management process, which begins with:includes:
| | |
| | • | identifying loans subject to a proposed sale by assessing the estimated losses from such sale based on the estimated recovery value of collateral, if any, for such non-performing loans; |
| |
| | • | identifying loans subject to charge-off based on the estimated recovery value of collateral, if any, for such non-performing loans and the estimated rate of recovery of unsecured loans; and |
| |
| | • | onto a limited basis,extent, identifying commercial loans subject to normalization efforts based on the cash-flow situation of the borrower. |
8673
Once the details of a non-performing loan are identified, we pursue early solutions for recovery. Actual recovery efforts onfor non-performing loans are handled by several of our departments or units,the relevant department, depending on the nature of includingsuch loans and the borrower, such loans.
among others. The officers or agents of the responsible departments and units use a variety of methods to resolve non-performing loans, including:
| | |
| | • | making phone calls and paying visits to the borrower requestingto request payment; |
| |
| | • | continuing to assess and evaluate assets of our borrowers; and |
| |
| | • | if necessary, initiating legal action such as foreclosures, attachmentsattachment and litigation. |
In order to promote speedy recovery on loans subject to foreclosures and litigation, our policy is to permit the branch responsible for handling these loans tomay transfer them to the relevant unit at headquarters or regional headquarters.
Our policy is to commence legal action within one month after default on promissory note and fourthree months after delinquency of payment on loans. For loans to insolvent or bankrupt borrowers or when we conclude that it is not possible to recover through normal procedures, we take prompt legal action immediately.actions regardless of the grace period.
In addition to making efforts to collect on these non-performing loans, we also undertaketake other measures to reduce the level of our non-performing loans, which include:including:
| | |
| | • | selling non-performing loans to third parties including the Korea Asset Management Corporation; |
| |
| | • | entering into asset-backed securitization transactions with respect to non-performing loans; |
| |
| | • | managing consumer loans that are three months or more past due through Shinhan Credit Information under an agency agreement in the case of Shinhan Bank; and |
|
| • | using third-party collection agencies including the Solomon Credit Information.credit information companies. |
Allocation of Allowance for Loan Losses
The following table presents, as of the dates indicated, the allocation of our loan loss allowance by loan type.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | | | As of December 31, | |
| | | 2003 | | 2004 | | 2005 | | 2006 | | 2007 | | | 2005 | | 2006 | | 2007 | | 2008 | | 2009 | |
| | | | | Loans %
| | | | Loans %
| | | | Loans %
| | | | Loans %
| | | | Loans %
| | | | | Loans % of
| | | | Loans % of
| | | | Loans % of
| | | | Loans % of
| | | | Loans % of
| |
| | | | | of Total
| | | | of Total
| | | | of Total
| | | | of Total
| | | | of Total
| | | | | Total
| | | | Total
| | | | Total
| | | | Total
| | | | Total
| |
| | | Amt. | | Loans | | Amt. | | Loans | | Amt. | | Loans | | Amt. | | Loans | | Amt. | | Loans | | | Amt. | | Loans | | Amt. | | Loans | | Amt. | | Loans | | Amt. | | Loans | | Amt. | | Loans | |
| | | (In billions of Won, except percentages) | | | (In billions of Won, except percentages) | |
| |
| Corporate | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and Industrial | | W | 1,383 | | | | 37.38 | % | | W | 1,065 | | | | 36.72 | % | | W | 753 | | | | 33.75 | % | | W | 900 | | | | 32.72 | % | | W | 963 | | | | 31.94 | % | | W | 753 | | | | 33.75 | % | | W | 900 | | | | 32.72 | % | | W | 963 | | | | 31.94 | % | | W | 1,592 | | | | 32.53 | % | | W | 1,982 | | | | 32.19 | % |
| Other commercial | | | 626 | | | | 18.24 | | | | 410 | | | | 18.53 | | | | 305 | | | | 20.23 | | | | 359 | | | | 22.31 | | | | 427 | | | | 19.97 | | | | 305 | | | | 20.23 | | | | 359 | | | | 22.31 | | | | 427 | | | | 19.97 | | | | 846 | | | | 22.07 | | | | 987 | | | | 20.54 | |
| Lease financing | | | 45 | | | | 1.14 | | | | 24 | | | | 1.01 | | | | 16 | | | | 0.71 | | | | 10 | | | | 0.48 | | | | 16 | | | | 0.90 | | | | 16 | | | | 0.71 | | | | 10 | | | | 0.48 | | | | 16 | | | | 0.90 | | | | 11 | | | | 0.93 | | | | 13 | | | | 0.92 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total corporate | | | 2,054 | | | | 56.76 | | | | 1,499 | | | | 56.26 | | | | 1,074 | | | | 54.69 | | | | 1,269 | | | | 55.51 | | | | 1,406 | | | | 52.81 | | | | 1,074 | | | | 54.69 | | | | 1,269 | | | | 55.51 | | | | 1,406 | | | | 52.81 | | | | 2,449 | | | | 55.53 | | | | 2,982 | | | | 53.65 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgages and home equity | | | 53 | | | | 21.53 | | | | 36 | | | | 22.85 | | | | 19 | | | | 24.41 | | | | 4 | | | | 24.58 | | | | 4 | | | | 20.75 | | | | 19 | | | | 24.41 | | | | 4 | | | | 24.58 | | | | 4 | | | | 20.75 | | | | 8 | | | | 21.22 | | | | 11 | | | | 23.65 | |
| Other consumer | | | 659 | | | | 15.30 | | | | 368 | | | | 16.01 | | | | 183 | | | | 16.89 | | | | 175 | | | | 16.71 | | | | 150 | | | | 16.77 | | | | 183 | | | | 16.89 | | | | 175 | | | | 16.71 | | | | 150 | | | | 16.77 | | | | 149 | | | | 14.67 | | | | 170 | | | | 13.77 | |
| Credit cards | | | 865 | | | | 6.41 | | | | 408 | | | | 4.88 | | | | 236 | | | | 4.01 | | | | 127 | | | | 3.20 | | | | 539 | | | | 9.67 | | | | 236 | | | | 4.01 | | | | 127 | | | | 3.20 | | | | 539 | | | | 9.67 | | | | 595 | | | | 8.58 | | | | 475 | | | | 8.93 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total consumer | | | 1,577 | | | | 43.24 | | | | 812 | | | | 43.74 | | | | 438 | | | | 45.31 | | | | 306 | | | | 44.49 | | | | 693 | | | | 47.19 | | | | 438 | | | | 45.31 | | | | 306 | | | | 44.49 | | | | 693 | | | | 47.19 | | | | 752 | | | | 44.47 | | | | 656 | | | | 46.35 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total allowance for loan losses | | W | 3,631 | | | | 100.00 | % | | W | 2,311 | | | | 100.00 | % | | W | 1,512 | | | | 100.00 | % | | W | 1,575 | | | | 100.00 | % | | W | 2,099 | | | | 100.00 | % | | W | 1,512 | | | | 100.00 | % | | W | 1,575 | | | | 100.00 | % | | W | 2,099 | | | | 100.00 | % | | W | 3,201 | | | | 100.00 | % | | W | 3,638 | | | | 100.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Our total allowance for loan losses increased by W524437 billion, or 33.27%13.65%, to W2,0993,638 billion as of December 31, 20072009 from W1,5753,201 billion as of December 31, 2006.2008. During 2006,2009, the allowance for loan losses increased by
87
W63 billion primarily as a result of an increase in the amount of total loan balance. During 2007, the allowance for loan losses increased by W524 billion primarily as a result of an increase in the amount of total loan balance (W412 billion in credit card loans and W112 billion in other loans). The total loan balance increased by W29,372 billion in 2007, W10,757 billion, or 36.6%, of which was accounted for by the increase in credit card loans as a result of the acquisition of LG Card. The allowance of loan losses increased by W524 billion primarily as a result of an increase in the total loan volume and the acquisition of LG Card.
The allowance for corporate loan losses increased by W195 billion, or 18.2%, from W1,074 billion as of December 31, 2005 to W1,269 billion as of December 31, 2006, primarily due to a higher loss rate for impaired corporate loans and an increase in the amount of total corporate loans. The allowance for corporate loan losses increased by W137 billion, or 10.8%, from W1,269 billion as of December 31, 2006 to W1,406 billion as of December 31, 2007, primarily due to the increase in corporate loans, amounting to W12,200 billion despite the improvement in asset quality.loans.
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In the consumer sector, our allowance for loan losses decreased by W132 billion, or 30.1%, from W438 billion as of December 31, 2005 to W306 billion as of December 31, 2006, primarily due to improved quality of loans. The allowance for consumer loan losses increased by W387 billion, or 126.5%, from W306 billion as of December 31, 2006 to W693 billion as of December 31, 2007, primarily due to the acquisition of LG Card resulting in the increase in allowance for loan losses of W412 billion.
Analysis of the Allowance for Loan Losses
The following table presents an analysis of our loan loss experience for each of the years indicated.
| | | | | | | | | | | | | | | | | | | | | |
| | | 2003 | | | 2004 | | | 2005 | | | 2006 | | | 2007 | |
| | | (In billions of Won, except percentages) | |
| |
| Balance at the beginning of the period | | W | 996 | | | W | 3,631 | | | W | 2,311 | | | W | 1,512 | | | W | 1,575 | |
| Amounts charged against income | | | 1,011 | | | | 195 | | | | (255 | ) | | | 252 | | | | 40 | |
| Allowance relating to loans repurchased from the Korea Asset Management Corporation | | | 32 | | | | 2 | | | | — | | | | — | | | | — | |
| Gross charge-offs: | | | | | | | | | | | | | | | | | | | | |
| Corporate: | | | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | | | 255 | | | | 465 | | | | 297 | | | | 130 | | | | 89 | |
| Other commercial | | | 223 | | | | 26 | | | | 18 | | | | 76 | | | | 64 | |
| Lease financing | | | 6 | | | | — | | | | — | | | | — | | | | 9 | |
| Consumer: | | | | | | | | | | | | | | | | | | | | |
| Mortgage and home equity | | | 12 | | | | 18 | | | | 19 | | | | — | | | | (2 | ) |
| Other consumer | | | 135 | | | | 441 | | | | 296 | | | | 96 | | | | 123 | |
| Credit cards | | | 765 | | | | 872 | | | | 316 | | | | 211 | | | | 418 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total gross charge-offs | | | (1,396 | ) | | | (1,822 | ) | | | (946 | ) | | | (513 | ) | | | (701 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Recoveries: | | | | | | | | | | | | | | | | | | | | |
| Corporate: | | | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | | | 82 | | | | 105 | | | | 69 | | | | 47 | | | | 15 | |
| Other commercial | | | 73 | | | | 121 | | | | 217 | | | | 154 | | | | 104 | |
| Lease financing | | | — | | | | 2 | | | | 4 | | | | 5 | | | | — | |
| Consumer: | | | | | | | | | | | | | | | | | | | | |
| Mortgage and home equity | | | 1 | | | | 1 | | | | 3 | | | | 5 | | | | 3 | |
| Other consumer | | | 23 | | | | 22 | | | | 34 | | | | 43 | | | | 71 | |
| Credit cards | | | 69 | | | | 56 | | | | 72 | | | | 70 | | | | 451 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total recoveries | | | 248 | | | | 307 | | | | 399 | | | | 324 | | | | 644 | |
| | | | | | | | | | | | | | | | | | | | | |
88
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2003 | | 2004 | | 2005 | | 2006 | | 2007 | | | 2005 | | 2006 | | 2007 | | 2008 | | 2009 | |
| | | (In billions of Won, except percentages) | | | (In billions of Won, except percentages) | |
| |
| Balance at the beginning of the period | | | W | 2,311 | | | W | 1,512 | | | W | 1,575 | | | W | 2,099 | | | W | 3,201 | |
| Amounts charged against income | | | | (255 | ) | | | 252 | | | | 40 | | | | 1,319 | | | | 1,751 | |
| Gross charge-offs: | | | | | | | | | | | | | | | | | | | | | |
| Corporate: | | | | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | | | | 297 | | | | 130 | | | | 89 | | | | 144 | | | | 1,047 | |
| Other commercial | | | | 18 | | | | 76 | | | | 64 | | | | 142 | | | | 40 | |
| Lease financing | | | | — | | | | — | | | | 9 | | | | 6 | | | | (19 | ) |
| Consumer: | | | | | | | | | | | | | | | | | | | | | |
| Mortgage and home equity | | | | 19 | | | | — | | | | (2 | ) | | | 6 | | | | (1 | ) |
| Other consumer | | | | 296 | | | | 96 | | | | 123 | | | | 98 | | | | 227 | |
| Credit cards | | | | 316 | | | | 211 | | | | 418 | | | | 521 | | | | 597 | |
| | | | | | | | | | | | | |
| Total gross charge-offs | | | | (946 | ) | | | (513 | ) | | | (701 | ) | | | (917 | ) | | | (1,891 | ) |
| | | | | | | | | | | | | |
| Recoveries: | | | | | | | | | | | | | | | | | | | | | |
| Corporate: | | | | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | | | | 69 | | | | 47 | | | | 15 | | | | 16 | | | | 81 | |
| Other commercial | | | | 217 | | | | 154 | | | | 104 | | | | 27 | | | | 42 | |
| Lease financing | | | | 4 | | | | 5 | | | | — | | | | — | | | | 1 | |
| Consumer: | | | | | | | | | | | | | | | | | | | | | |
| Mortgage and home equity | | | | 3 | | | | 5 | | | | 3 | | | | 2 | | | | 1 | |
| Other consumer | | | | 34 | | | | 43 | | | | 71 | | | | 107 | | | | 59 | |
| Credit cards | | | | 72 | | | | 70 | | | | 451 | | | | 548 | | | | 393 | |
| | | | | | | | | | | | | |
| Total recoveries | | | | 399 | | | | 324 | | | | 644 | | | | 700 | | | | 577 | |
| | | | | | | | | | | | | |
| Net charge-offs | | | (1,148 | ) | | | (1,515 | ) | | | (547 | ) | | | (189 | ) | | | (57 | ) | | | (547 | ) | | | (189 | ) | | | (57 | ) | | | (217 | ) | | | (1,314 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Acquisition of Chohung Bank | | | 2,740 | | | | — | | | | — | | | | — | | | | — | | |
| Acquisition of Jeju Bank | | | — | | | | — | | | | — | | | | — | | | | — | | |
| Acquisition of Good Morning Securities | | | — | | | | — | | | | — | | | | — | | | | — | | |
| Acquisition of Shinhan Securities | | | — | | | | — | | | | — | | | | — | | | | — | | |
| Acquisition of Shinhan Life Insurance | | | — | | | | — | | | | 3 | | | | — | | | | — | | | | 3 | | | | — | | | | — | | | | — | | | | — | |
| Acquisition of LG Card | | | — | | | | — | | | | — | | | | — | | | | 541 | | | | — | | | | — | | | | 541 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance at the end of the period | | W | 3,631 | | | W | 2,311 | | | W | 1,512 | | | W | 1,575 | | | W | 2,099 | | | W | 1,512 | | | W | 1,575 | | | W | 2,099 | | | W | 3,201 | | | W | 3,638 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Ratio of net charge-offs during the period to average loans outstanding during the period | | | 1.74 | % | | | 1.52 | % | | | 0.53 | % | | | 0.17 | % | | | 0.04 | % | | | 0.53 | % | | | 0.17 | % | | | 0.04 | % | | | 0.13 | % | | | 0.78 | % |
Loan Charge-Offs
Our level of gross charge-offs increased from W1,396701 billion in 20032007 to W1,822917 billion in 20042008 primarily due to an increase in charge-offs of marketing scoring systemcharge-off for corporate loans which are loans offered to certain of our customers primarily based on the number of transactions such customers make with us rather than the credit rating of such customers. Our level of gross charge-offs decreased from W1,822 billion in 2004 to W946 billion in 2005 primarily due to a decrease inand credit card charge-offs in 2005 compared to 2004, when charge-offs were aggressively made. Our level of gross charge-offs decreased from W946 billion in 2005 to W513 billion in 2006 primarily due to a decrease in consumer loan charge-offs in 2006 compared to 2005.loans. Our level of gross charge-offs increased from W513917 billion in 20062008 to W7011,891 billion in 20072009 primarily due to an increase in credit card charge-offscharge-off for corporate and consumer loans, primarily as a result of the prudent charge-off policy undertaken by us in 2007.response to the recent global financial crisis.
Basic Principles
We attempt to minimize loans to be charged off, by practicing a sound credit approval process based on credit risk analysis prior to extending loans and a systematic management of outstanding loans.
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Loans To Be Charged-Off
Loans are charged-off if they are deemed to be uncollectible by falling under any of the following categories:
| | |
| | • | loans for which collection is not foreseeable due to insolvency or bankruptcy, dissolution or the shutting downtermination of the business of the debtor;debtor’s business; |
| |
| | • | loans for which collection is not foreseeable due to the death or disappearance of debtors; |
| |
| | • | loans for which collection expenses of collection exceed the collectable amount; |
| |
| | • | loans onfor which collection is not possible through legal or any other means; |
| |
| | • | payments in arrears in respect of credit cards whichthat are overdue for more than six months; |
| |
| | • | payments outstanding on unsecured consumerretail loans which have beenthat are overdue for more than six months; |
| |
| | • | payments in arrears in respect of leases which have beenthat are overdue for more than twelve12 months; or |
| |
| | • | the portion of loans classified as “estimated loss,” net of any recovery from collateral, which is deemed to be uncollectible. |
Procedure for Charge-off Approval
An application for Shinhan Bank’s loans to be charged-off is submitted by a branch to the Corporate Credit Collection Department in the case of corporate loans and foreign branches, and Consumer Credit Collection Department in the case of individual loans. An application for charge off must be submitted four months prior toby a deadline set by the
89
date of the write-off, which is the end of every quarter. applicable departments. The General Manager in charge of review evaluates the application. The General Manager of Audit and Examination Department conducts review of compliance with our internal procedures for charge-offs. The General Manager in charge of review gets approval from the President of Shinhan Bank. As for Shinhan Card, it generally charges off receivables that are 180 days past due following internal review.
Treatment of Loans Charged-Off
Once loans are charged-off, they are derecognized from our balance sheet. We still continue our collection efforts in respect of these loans through third-party collection agencies including the Korea Asset Management Corporation and Shinhan Credit Information.
Treatment of Collateral
When we determine that a loan collateralized by real estate cannot be recovered through normal collection channels, then we willgenerally petition a court to foreclose and sell the collateral through a court-supervised auction within one month after default and insolvency and within four months after delinquency. However, this treatmentprocedure does not apply to companies under restructuring, composition, workout or other court proceedings subjecting them towhere there are restrictions on such auction procedures. In our experience, the filingFiling of thissuch petition with the court generally encourages the debtor to repay the overdue loan. If a debtor ultimately fails to repay and the court grants its approval for foreclosure, we will sell the collateral and recover the full principal amount and interest accrued interest up to the sales price, net of expenses incurred from the auction. Foreclosure proceedings under laws and regulations in Korea typically take from seven months to one year from initiation to collection depending on the nature of the collateral.
U.S. GAAP Financial Statement Presentation
Our U.S. GAAP financial statements include as charges-offs all unsecured consumerretail loans, including credit cards, which are overdue for more than six months. Leases are charged-offcharged off when past due for more than twelve months. For collateral dependent loans, we charge off the excess of the book value of the subject loan over the amount received or to be received from the sale of the underlying collateral when the collateral is sold as part of a foreclosure proceeding and its sale price becomes known through court publication as part of such proceeding.
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Investment Portfolio
Investment Policy
We invest in and trade Won-denominated and, to a lesser extent, foreign currency-denominated securities for our own account in order to:
| | |
| | • | maintain the stability and diversification of our assets; |
| |
| | • | maintain adequate sources ofback-up liquidity to match our funding requirements; and |
| |
| | • | supplement income from our core lending activities. |
In making securities investments, we take into account a number of factors, including macroeconomic trends, industry analysis and credit evaluation in determining whether to make investments in particular securities.
Our investments in securities are also subject to a number of regulatory guidelines, including limitations prescribed under the Financial Holding Companies Act and the Banking Act. Under these regulations, a financial holding company may not invest in securities as defined in the Securities and Exchange Act (other than those securities issued by its direct and indirect subsidiaries) in excess of the amount of its shareholders’ equity less the total amount of investment in subsidiaries, subject to certain exceptions. Generally, a financial holding company is prohibited from acquiring more than 5% of the total issued and outstanding shares of another company (other than its direct and indirect subsidiaries). Furthermore, under these regulations, Shinhan Bank must limit its investments in shares and securities with a maturity in excess of three years (other than monetary stabilization bonds issued by the Bank of Korea and national government bonds) to 60.0% of ourits total Tier I and Tier II capital. Generally, Shinhan Bank is also prohibited from acquiring more than 15.0% of the shares with voting rights issued by any other corporation (other than for the purpose of establishing or acquiring a subsidiary). Further information on the regulatory environment governing our investment activities is set out in “Supervision“— Supervision and Regulation — Principal Regulations Applicable to Banks — Restrictions on Investments in Property,” “— Principal Regulations Applicable to Banks —
90
Restrictions on Shareholdings in Other Companies,” “— Principal Regulations Applicable to Financial Holding Companies — Liquidity” and “— Principal Regulations Applicable to Financial Holding Companies — Restrictions on Shareholdings in Other Companies.”
77
Book Value and Market Value
The following table sets out the book value and market value of securities in our investment portfolio as of the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of
| | As of
| | As of
| | | As of
| | As of
| | As of
| |
| | | December 31, 2005 | | December 31, 2006 | | December 31, 2007 | | | December 31, 2007 | | December 31, 2008 | | December 31, 2009 | |
| | | Book
| | Market
| | Book
| | Market
| | Book
| | Market
| | | Book
| | Market
| | Book
| | Market
| | Book
| | Market
| |
| | | Value | | Value | | Value | | Value | | Value | | Value | | | Value | | Value | | Value | | Value | | Value | | Value | |
| | | (In billions of Won) | | | (In billions of Won) | |
| |
Available-for-sale securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Marketable equity securities | | W | 1,978 | | | W | 1,978 | | | W | 1,241 | | | W | 1,241 | | | W | 3,324 | | | W | 3,324 | | | W | 3,101 | | | W | 3,101 | | | W | 2,170 | | | W | 2,170 | | | W | 2,964 | | | W | 2,964 | |
| Debt securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Korean treasury and governmental agencies | | | 8,299 | | | | 8,299 | | | | 4,397 | | | | 4,397 | | | | 4,206 | | | | 4,206 | | | | 4,206 | | | | 4,206 | | | | 6,254 | | | | 6,254 | | | | 8,722 | | | | 8,722 | |
| Debt securities by financial institutions | | | 9,255 | | | | 9,255 | | | | 7,243 | | | | 7,243 | | | | 10,051 | | | | 10,051 | | | | 10,051 | | | | 10,051 | | | | 15,550 | | | | 15,550 | | | | 11,164 | | | | 11,164 | |
| Corporate debt securities | | | 1,952 | | | | 1,952 | | | | 1,760 | | | | 1,760 | | | | 2,145 | | | | 2,145 | | | | 2,145 | | | | 2,145 | | | | 1,918 | | | | 1,918 | | | | 2,308 | | | | 2,308 | |
| Debt securities issued by foreign government | | | 50 | | | | 50 | | | | 29 | | | | 29 | | | | 48 | | | | 48 | | | | 48 | | | | 48 | | | | 123 | | | | 123 | | | | 170 | | | | 170 | |
| Mortgage-backed and asset-backed securities | | | 946 | | | | 946 | | | | 2,269 | | | | 2,269 | | | | 3,075 | | | | 3,075 | | | | 3,075 | | | | 3,075 | | | | 3,001 | | | | 3,001 | | | | 2,284 | | | | 2,284 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total — Available-for-sale | | | 22,480 | | | | 22,480 | | | | 16,939 | | | | 16,939 | | | | 22,849 | | | | 22,849 | | | | 22,626 | | | | 22,626 | | | | 29,016 | | | | 29,016 | | | | 27,612 | | | | 27,612 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Held-to-maturity securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Debt securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Korean treasury and governmental agencies | | | 1,686 | | | | 1,706 | | | | 2,505 | | | | 2,555 | | | | 3,071 | | | | 3,036 | | | | 3,071 | | | | 3,036 | | | | 4,009 | | | | 4,126 | | | | 8,139 | | | | 8,148 | |
| Debt securities by financial institutions | | | 1,211 | | | | 1,208 | | | | 4,959 | | | | 5,018 | | | | 4,858 | | | | 4,812 | | | | 4,858 | | | | 4,812 | | | | 4,279 | | | | 4,331 | | | | 4,093 | | | | 4,117 | |
| Corporate debt securities | | | 66 | | | | 66 | | | | 64 | | | | 64 | | | | 110 | | | | 105 | | | | 110 | | | | 105 | | | | 245 | | | | 247 | | | | 363 | | | | 372 | |
| Debt securities issued by foreign government | | | — | | | | — | | | | 1 | | | | 1 | | | | 1 | | | | 1 | | | | 1 | | | | 1 | | | | 9 | | | | 9 | | | | 36 | | | | 36 | |
| Mortgage-backed and asset-backed securities | | | — | | | | — | | | | 52 | | | | 52 | | | | 184 | | | | 212 | | | | 184 | | | | 212 | | | | 154 | | | | 160 | | | | 163 | | | | 167 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total — Held-to-maturity | | | 2,963 | | | | 2,980 | | | | 7,581 | | | | 7,690 | | | | 8,224 | | | | 8,166 | | | | 8,224 | | | | 8,166 | | | | 8,696 | | | | 8,873 | | | | 12,794 | | | | 12,840 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Trading Securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Marketable equity securities | | | 465 | | | | 465 | | | | 507 | | | | 507 | | | | 655 | | | | 655 | | | | 655 | | | | 655 | | | | 705 | | | | 705 | | | | 747 | | | | 747 | |
| Debt securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Korean treasury and governmental agencies | | | 493 | | | | 493 | | | | 494 | | | | 494 | | | | 406 | | | | 406 | | | | 406 | | | | 406 | | | | 528 | | | | 528 | | | | 1,524 | | | | 1,524 | |
| Financial institutions | | | 1,145 | | | | 1,145 | | | | 1,022 | | | | 1,022 | | | | 3,033 | | | | 3,033 | | | | 3,033 | | | | 3,033 | | | | 3,279 | | | | 3,279 | | | | 2,104 | | | | 2,104 | |
| Corporations | | | 1,307 | | | | 1,307 | | | | 1,315 | | | | 1,315 | | | | 2,130 | | | | 2,130 | | | | 2,130 | | | | 2,130 | | | | 1,264 | | | | 1,264 | | | | 1,177 | | | | 1,177 | |
| Mortgage-backed and asset-backed securities | | | 140 | | | | 140 | | | | 74 | | | | 74 | | | | 1,966 | | | | 1,966 | | | | 1,966 | | | | 1,966 | | | | 889 | | | | 889 | | | | 873 | | | | 873 | |
| Other trading assets(1) | | | 23 | | | | 23 | | | | 62 | | | | 62 | | | | 30 | | | | 30 | | | | 30 | | | | 30 | | | | 59 | | | | 59 | | | | 256 | | | | 256 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total — Trading | | | 3,573 | | | | 3,573 | | | | 3,474 | | | | 3,474 | | | | 8,220 | | | | 8,220 | | | | 8,220 | | | | 8,220 | | | | 6,724 | | | | 6,724 | | | | 6,681 | | | | 6,681 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total securities | | W | 29,016 | | | W | 29,033 | | | W | 27,994 | | | W | 28,103 | | | W | 39,293 | | | W | 39,235 | | | W | 39,070 | | | W | 39,012 | | | W | 44,436 | | | W | 44,613 | | | W | 47,087 | | | W | 47,133 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Note:
| | |
| (1) | | Consists of commodity indexedcommodity-indexed deposits. |
9178
Maturity Analysis
The following table categorizes our securities by maturity and weighted average yield as of December 31, 2007.2009.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2007 | | | As of December 31, 2009 | |
| | | | | Over 1 but
| | Over 5 but
| | | | Securities Not Due
| | | | | | | Over 1 but Within
| | Over 5 but Within
| | | | | |
| | | 1 Year or Less | | Within 5 Yrs | | Within 10 Yrs | | Over 10 Yrs | | in a Single Maturity(1) | | Total | | | 1 Year or Less | | 5 Yrs | | 10 Yrs | | Over 10 Yrs | | Total | |
| | | | | Weighted
| | | | Weighted
| | | | Weighted
| | | | Weighted
| | | | Weighted
| | | | Weighted
| | | | | Weighted
| | | | Weighted
| | | | Weighted
| | | | Weighted
| | | | Weighted
| |
| | | Carrying
| | Average
| | Carrying
| | Average
| | Carrying
| | Average
| | Carrying
| | Average
| | Carrying
| | Average
| | Carrying
| | Average
| | | Carrying
| | Average
| | Carrying
| | Average
| | Carrying
| | Average
| | Carrying
| | Average
| | Carrying
| | Average
| |
| | | Amount | | Yield(2) | | Amount | | Yield(2) | | Amount | | Yield(2) | | Amount | | Yield(2) | | Amount | | Yield(2) | | Amount | | Yield(2) | | | Amount | | Yield(1) | | Amount | | Yield(1) | | Amount | | Yield(1) | | Amount | | Yield(1) | | Amount | | Yield(1) | |
| | | (In billions of Won, except percentages) | | | (In billions of Won, except percentages) | |
| |
Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Korean Treasury securities and government agencies | | W | 1,301 | | | | 4.72 | % | | W | 2,389 | | | | 5.04 | % | | W | 169 | | | | 4.64 | % | | W | 10 | | | | 5.29 | % | | W | 337 | | | | 4.85 | % | | W | 4,206 | | | | 4.92 | % | | W | 1,066 | | | | 4.62 | % | | W | 6,421 | | | | 4.73 | % | | W | 1,224 | | | | 4.45 | % | | W | 11 | | | | 5.31 | % | | W | 8,722 | | | | 4.68 | % |
| Debt securities issued by financial institutions | | | 4,209 | | | | 5.17 | | | | 5,187 | | | | 5.35 | | | | 455 | | | | 5.72 | | | | 200 | | | | 6.24 | | | | — | | | | — | | | | 10,051 | | | | 5.32 | | | | 6,549 | | | | 2.64 | | | | 3,485 | | | | 2.10 | | | | 923 | | | | 3.42 | | | | 207 | | | | 4.37 | | | | 11,164 | | | | 2.57 | |
| Corporate debt securities | | | 738 | | | | 5.00 | | | | 1,349 | | | | 5.42 | | | | 58 | | | | 4.48 | | | | — | | | | — | | | | — | | | | — | | | | 2,145 | | | | 5.25 | | | | 642 | | | | 4.77 | | | | 1,486 | | | | 3.28 | | | | 180 | | | | 4.47 | | | | — | | | | — | | | | 2,308 | | | | 3.78 | |
| Debt securities issued by foreign governments | | | 23 | | | | 5.01 | | | | 12 | | | | 5.63 | | | | 13 | | | | 5.82 | | | | — | | | | — | | | | — | | | | — | | | | 48 | | | | 5.38 | | | | 58 | | | | 0.71 | | | | 66 | | | | 4.79 | | | | 37 | | | | 4.30 | | | | 9 | | | | 4.85 | | | | 170 | | | | 3.30 | |
| Mortgage Backed Securities and Asset Backed Securities | | | 515 | | | | 4.11 | | | | 2,378 | | | | 2.53 | | | | 172 | | | | 5.12 | | | | 10 | | | | 5.73 | | | | — | | | | — | | | | 3,075 | | | | 2.95 | | | | 937 | | | | 0.28 | | | | 1,327 | | | | 0.22 | | | | 20 | | | | 3.08 | | | | — | | | | — | | | | 2,284 | | | | 0.27 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 6,786 | | | | 4.97 | % | | | 11,315 | | | | 4.71 | % | | | 867 | | | | 5.31 | % | | | 220 | | | | 6.17 | % | | | 337 | | | | 4.90 | % | | | 19,525 | | | | 4.85 | % | | | 9,252 | | | | 2.76 | % | | | 12,785 | | | | 3.38 | % | | | 2,384 | | | | 4.06 | % | | | 227 | | | | 4.44 | % | | | 24,648 | | | | 3.22 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Held-to-maturity securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Korean Treasury securities and government agencies | | | 1,125 | | | | 5.48 | % | | | 1,763 | | | | 5.35 | % | | | 99 | | | | 5.54 | % | | | 84 | | | | 5.58 | % | | | — | | | | — | % | | | 3,071 | | | | 5.41 | % | | | 694 | | | | 4.55 | % | | | 5,279 | | | | 4.90 | % | | | 1,871 | | | | 4.67 | % | | | 295 | | | | 5.56 | % | | | 8,139 | | | | 4.84 | % |
| Debt securities issued by financial institutions | | | 2,502 | | | | 4.91 | | | | 1,876 | | | | 5.58 | | | | 270 | | | | 6.58 | | | | 210 | | | | 6.23 | | | | — | | | | — | | | | 4,858 | | | | 5.32 | | | | 1,825 | | | | 3.54 | | | | 1,777 | | | | 3.72 | | | | 311 | | | | 5.11 | | | | 180 | | | | 4.47 | | | | 4,093 | | | | 3.78 | |
| Corporate debt securities | | | 8 | | | | 3.93 | | | | 102 | | | | 5.04 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 110 | | | | 4.96 | | | | 15 | | | | 4.02 | | | | 267 | | | | 3.76 | | | | 71 | | | | 4.76 | | | | 10 | | | | 5.72 | | | | 363 | | | | 4.02 | |
| Debt securities issued by foreign governments | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | 4.00 | | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | 4.00 | | | | 10 | | | | 2.18 | | | | 25 | | | | 0.50 | | | | 1 | | | | 0.03 | | | | — | | | | — | | | | 36 | | | | 0.93 | |
| Mortgage Backed Securities and Asset Backed Securities | | | 4 | | | | 5.12 | | | | 140 | | | | 4.15 | | | | 30 | | | | 5.49 | | | | 10 | | | | 5.23 | | | | — | | | | — | | | | 184 | | | | 4.45 | | | | 10 | | | | 5.59 | | | | 143 | | | | 1.21 | | | | — | | | | — | | | | 10 | | | | 5.23 | | | | 163 | | | | 1.73 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 3,639 | | | | 5.09 | % | | | 3,881 | | | | 5.41 | % | | | 400 | | | | 6.23 | % | | | 304 | | | | 6.02 | % | | | — | | | | — | % | | | 8,224 | | | | 5.33 | % | | | 2,554 | | | | 3.82 | % | | | 7,491 | | | | 4.50 | % | | | 2,254 | | | | 4.73 | % | | | 495 | | | | 5.16 | % | | | 12,794 | | | | 4.43 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Trading securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Korean Treasury securities and government agencies | | | 91 | | | | 5.67 | % | | | 170 | | | | 5.95 | % | | | 125 | | | | 3.60 | % | | | 10 | | | | 5.68 | % | | | 10 | | | | 5.54 | % | | | 406 | | | | 5.15 | % | | | 727 | | | | 3.24 | % | | | 752 | | | | 4.60 | % | | | 44 | | | | 5.18 | % | | | 1 | | | | 5.56 | % | | | 1,524 | | | | 3.97 | % |
| Debt securities issued by financial institutions | | | 1,686 | | | | 5.45 | | | | 1,347 | | | | 5.99 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3,033 | | | | 5.69 | | | | 1,481 | | | | 3.35 | | | | 624 | | | | 4.10 | | | | — | | | | — | | | | — | | | | — | | | | 2,104 | | | | 3.54 | |
| Corporate debt securities | | | 1,642 | | | | 5.53 | | | | 488 | | | | 0.45 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,130 | | | | 4.40 | | | | 1,009 | | | | 3.24 | | | | 167 | | | | 5.22 | | | | — | | | | — | | | | 1 | | | | 5.00 | | | | 1,177 | | | | 3.52 | |
| Mortgage Backed Securities and Asset Backed Securities | | | 1,947 | | | | — | | | | 19 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,966 | | | | 5.92 | | | | 825 | | | | 3.73 | | | | 48 | | | | 6.77 | | | | — | | | | — | | | | — | | | | — | | | | 873 | | | | 3.90 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 5,366 | | | | 5.65 | % | | | 2,024 | | | | 4.71 | % | | | 125 | | | | 3.60 | % | | | 10 | | | | 5.68 | % | | | 10 | | | | 5.54 | % | | | 7,535 | | | | 5.36 | % | | | 4,042 | | | | 3.38 | % | | | 1,591 | | | | 4.53 | % | | | 44 | | | | 5.18 | % | | | 2 | | | | 5.36 | % | | | 5,678 | | | | 3.71 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Debt Securities | | W | 15,791 | | | | | | | W | 17,220 | | | | | | | W | 1,392 | | | | | | | W | 534 | | | | | | | W | 347 | | | | | | | W | 35,284 | | | | | | |
| Total | | | W | 15,848 | | | | | | | W | 21,867 | | | | | | | W | 4,682 | | | | | | | W | 724 | | | | | | | W | 43,120 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Notes:Note:
| | |
| (1) | | The principal repayment schedule for such securities is based on installment due on different maturity dates. |
|
(2) | | The weighted-average yield for the portfolio represents the yield to maturity for each individual security, weighted using its amortized cost. |
9279
Concentrations of Risk
As of December 31, 2007,2009, we held the following securities of individual issuers where the aggregate book value of those securities exceeded 10.0%10% of our stockholders’ equity, atwhich was W20,233 billion as of such date.
| | | | | | | | | | | | | | | | | |
| | | As of December 31, 2007 | | | As of December 31, 2009 | |
| | | Book Value | | Market Value | | | Book Value | | Market Value | |
| | | (In billions of Won) | | | (In billions of Won) | |
| |
Name of issuer: | | | | | | | | | | | | | | | | |
| Korean Government | | W | 3,645 | | | W | 3,629 | | |
| Bank of Korea | | | 6,789 | | | | 6,784 | | |
| Ministry of Strategy and Finance | | | W | 11,633 | | | W | 11,621 | |
| The Bank of Korea | | | | 5,498 | | | | 5,511 | |
| Korea Development Bank | | | 1,737 | | | | 1,732 | | | | 2,771 | | | | 2,767 | |
| Korea Deposit Insurance Corporation | | | | 2,582 | | | | 2,592 | |
| | | | | | | | | | | |
| Total | | W | 12,171 | | | W | 12,145 | | | W | 22,484 | | | W | 22,491 | |
| | | | | | | | | | | |
Our stockholders’ equity as of December 31, 2007 was W16,910 billion.
All of the above entities (other than the Korean government) are controlled and owned by the Korean government.
Credit-Related Commitments and Guarantees
In the normal course of our operations, we make various commitments and guarantees to meet the financing and other business needs of our customers. Commitments and guarantees are usually in the form of, among others, commitments to extend credit, commercial letters of credit, standby letter of credit and performance guarantees. The contractual amount of these financial instruments represents the maximum possible loss amount if the account party draws down the commitment or we should fulfill our obligation under the guarantee and the account party fails to perform under the contract.
The following table sets forth our credit-related commitments and guarantees as of the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | | | As of December 31, | |
| | | 2005 | | 2006 | | 2007 | | | 2007 | | 2008 | | 2009 | |
| | | (In billions of Won) | | | (In billions of Won) | |
| |
| Commitments to extend credit: | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate | | W | 46,336 | | | W | 55,580 | | | W | 65,611 | | | W | 65,611 | | | W | 49,873 | | | W | 49,590 | |
| Credit cards(1) | | | 16,080 | | | | 13,938 | | | | 46,079 | | | | 46,079 | | | | 52,577 | | | | 64,904 | |
| Consumer | | | 5,863 | | | | 6,127 | | | | 6,968 | | | | 6,968 | | | | 8,350 | | | | 8,795 | |
| Commercial letters of credit(2) | | | 2,960 | | | | 2,963 | | | | 3,518 | | | | 3,518 | | | | 3,006 | | | | 3,319 | |
| Standby letters of credit, other financial and performance guarantees and liquidity facilities to SPEs | | | 4,604 | | | | 5,353 | | | | 12,573 | | |
| Standby letters of credit, other financial and performance guarantees and liquidity facilities to special purpose entities | | | | 12,573 | | | | 14,859 | | | | 13,392 | |
| | | | | | | | | | | | | | | |
| Total | | W | 75,843 | | | W | 83,961 | | | W | 134,749 | | | W | 134,749 | | | W | 128,665 | | | W | 140,000 | |
| | | | | | | | | | | | | | | |
Notes:
| | |
| (1) | | RelatesCredit card commitments relate to the unused portion of credit card limits that may be cancelled by us, after notice to the borrowercustomer, if we determine that the borrower’scustomer’s repayment ability is significantly impaired. Prior to January 2008, we were able to change credit card limits of all customers whose account is inactive for more than 12 months without their approval. However, following a change in the Korea Fair Trade Commission’s policy related to credit card limits effective January 2008, we now require the customer’s agreement before changing the credit card limits for customers whose repayment ability is not significantly impaired. |
| |
| (2) | | These are generally short-term and collateralized by the underlying shipments of goods to which they relate. |
We have credit-related commitments that are not reflected on the balance sheet, which primarily consist of commitments to extend credit and commercial letters of credit. Commitments to extend credit, including credit lines, represent unfunded portions of authorizations to extend credit in the form of loans. These commitments
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expire on fixed dates and a customer is required to comply with predetermined conditions to draw funds under the commitments.
93
Commercial letters of credit are undertakings on behalf of customers authorizing third parties to draw drafts on us up to a stipulated amount under specific terms and conditions. They are generally short-term and collateralized by the underlying shipments of goods which they relate to and therefore have less risk.
We also have guarantees that are recorded on the balance sheet at their fair value at inception which isare amortized over the life of the guarantees. Such guarantees generally include standby letters of credit, other financial and performance guarantees and liquidity facilities to SPEs.special purpose entities.
Standby letters of credit are irrevocable obligations to pay third party beneficiaries when our customers fail to repay loans or debt instruments, which are generally in foreign currencies. A substantial portion of these standby letters of credit are secured by underlying assets, including trade-related documents.
Other financial and performance guarantees are irrevocable assurance that we make payments to beneficiaries in the event that our customers fail to fulfill their obligations or to perform under certain contracts. Liquidity facilities to SPEsspecial purpose entities represent irrevocable commitments to provide contingent liquidity credit lines to SPEsspecial purpose entities established by our customers in the event that a triggering event such as shortage of cash occurs.
The commitments and guarantees do not necessarily represent our exposure since they often expire unused.
Derivatives
As discussed under “— Business Overview — Our Principal Activities — Treasury and Securities Investment” above, we engage in derivatives trading activities primarily on behalf of our customers so that they may hedge their risks and also enter intoback-to-back derivatives with other financial institutions to cover exposures arising from such transactions. In addition, we enter into derivatives transactions to hedge against risk exposures arising from our own assets and liabilities, some of which are nontrading derivatives that do not qualify for hedge accounting treatment.
The following shows, as of December 31, 2007,2009, the gross notional or contractual amounts of derivatives and foreign exchange contracts held or issued for (i) trading and (ii) nontrading that qualify for hedge accounting and (iii) nontrading that do not qualify for hedge accounting.
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | As of December 31, 2009 | |
| | | As of December 31, 2007 | | | Underlying
| | | | Estimated
| |
| | | Underlying Notional
| | Estimated
| | Estimated
| | | Notional
| | Estimated
| | Fair Value
| |
| | | Amount(1) | | Fair Value Assets | | Fair Value Liabilities | | | Amount(1) | | Fair Value Assets | | Liabilities | |
| | | (In billions of Won) | | | (In billions of Won) | |
| |
Trading: | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign exchange contracts: | | | | | | | | | | | | | | | | | | | | | | | | |
| Forward contracts | | W | 30,762 | | | W | 335 | | | W | 258 | | | W | 59,473 | | | W | 1,706 | | | W | 714 | |
| Options purchased | | | 13,307 | | | | 170 | | | | — | | | | 3,378 | | | | 316 | | | | 7 | |
| Options written | | | 15,398 | | | | — | | | | 181 | | | | 713 | | | | 4 | | | | 68 | |
| | | | | | | | | | | | | | | |
| Sub-total | | | 59,467 | | | | 505 | | | | 439 | | | | 63,564 | | | | 2,026 | | | | 789 | |
| | | | | | | | | |
| Interest rate contracts: | | | | | | | | | | | | | | | | | | | | | | | | |
| Swaps | | | 93,503 | | | | 617 | | | | 1,191 | | | | 129,613 | | | | 625 | | | | 937 | |
| Futures and forward contracts | | | | 43 | | | | — | | | | — | |
| Options purchased | | | 1,490 | | | | 30 | | | | — | | | | 5,371 | | | | 54 | | | | — | |
| Options written | | | 2,477 | | | | — | | | | 24 | | | | 5,975 | | | | — | | | | 52 | |
| | | | | | | | | | | | | | | |
| Sub-total | | | 97,470 | | | | 647 | | | | 1,215 | | | | 141,002 | | | | 679 | | | | 989 | |
| | | | | | | | | |
| Cross currency swaps | | | 52,508 | | | | 629 | | | | 540 | | | | 23,143 | | | | 1,285 | | | | 1,991 | |
| Equity contracts: | | | | | | | | | | | | | |
| Swaps | | | 1,679 | | | | 97 | | | | 97 | | |
| Option purchased | | | 708 | | | | 66 | | | | — | | |
| Option written | | | 1,472 | | | | — | | | | 55 | | |
| | | | | | | | | |
| Sub-total | | | 3,859 | | | | 163 | | | | 152 | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2007 | | | As of December 31, 2009 | |
| | | Underlying Notional
| | Estimated
| | Estimated
| | | Underlying
| | | | Estimated
| |
| | | Amount(1) | | Fair Value Assets | | Fair Value Liabilities | | | Notional
| | Estimated
| | Fair Value
| |
| | | (In billions of Won) | | | Amount(1) | | Fair Value Assets | | Liabilities | |
| | | (In billions of Won) | |
| | |
| Equity contracts: | | | | | | | | | | | | | |
| Swaps | | | | 1,737 | | | | 120 | | | | 149 | |
| Futures and forward contracts | | | | 48 | | | | — | | | | — | |
| Option purchased | | | | 2,742 | | | | 161 | | | | 5 | |
| Option written | | | | 2,632 | | | | 6 | | | | 131 | |
| | | | | | | | | |
| Sub-total | | | | 7,159 | | | | 287 | | | | 285 | |
| | | | | | | | | |
| Other derivatives: | | | | | | | | | | | | | | | | | | | | | | | | |
| Commodity swaps | | | 2,891 | | | | 8 | | | | — | | | | 23 | | | | — | | | | 1 | |
| Forward contracts | | | 906 | | | | 6 | | | | 6 | | |
| Options purchased | | | 2 | | | | 1 | | | | — | | | | 57 | | | | 2 | | | | — | |
| Options written | | | 2 | | | | — | | | | 1 | | | | 24 | | | | — | | | | 1 | |
| | | | | | | | | | | | | | | |
| Sub-total | | | 3,801 | | | | 15 | | | | 7 | | | | 104 | | | | 2 | | | | 2 | |
| | | | | | | | | |
| Credit derivatives: | | | | | | | | | | | | | | | | | | | | | | | | |
| Protection buy | | | 563 | | | | — | | | | — | | |
| Protection sell | | | 66 | | | | 3 | | | | 5 | | | | 175 | | | | 3 | | | | 23 | |
| | | | | | | | | |
| Sub-total | | | 629 | | | | 3 | | | | 5 | | |
| | | | | | | | | | | | | | | |
Total | | W | 217,734 | | | W | 1,962 | | | W | 2,358 | | | W | 235,147 | | | W | 4,282 | | | W | 4,079 | |
| | | | | | | | | | | | | | | |
Nontrading: | | | | | | | | | | | | | | | | | | | | | | | | |
| Hedge accounting: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate swaps | | | 608 | | | | — | | | | 6 | | | | 90 | | | | 2 | | | | — | |
| | | | | | | | | | | | | | | |
| Sub-total | | | 608 | | | | — | | | | 6 | | | | 90 | | | | 2 | | | | — | |
| | | | | | | | | |
| Nontrading that do not qualify for hedge accounting(2): | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate swaps | | | 12,424 | | | | 55 | | | | 506 | | | | 10,453 | | | | 219 | | | | 146 | |
| Forward contracts | | | 19 | | | | — | | | | — | | | | 24 | | | | — | | | | 5 | |
| Cross currency swaps | | | 272 | | | | 5 | | | | 1 | | | | 914 | | | | 115 | | | | 16 | |
| | | | | | | | | | | | | | | |
| Sub-total | | | | 11,391 | | | | 334 | | | | 167 | |
| | | | | | | | | |
Total | | W | 12,715 | | | W | 60 | | | W | 507 | | | W | 11,481 | | | W | 336 | | | W | 167 | |
| | | | | | | | | | | | | | | |
Notes:
| | |
| (1) | | Notional amounts in foreign currencies were converted into Won at prevailing exchange rates as of December 31, 2007.2009. |
| |
| (2) | | While we engage in derivatives trading activities to hedge the interest rate risk and foreign exchange risk exposure that arisesarise from our own assets and liabilities, as these nontrading derivative contracts do not qualify for hedge accounting under U.S. GAAP, they are accounted for as trading derivatives in the financial statements. These contracts include interest rate swaps, forward contracts and cross-currency swaps held for nontrading that do not qualify for hedge accounting treatment. |
Funding
For our banking activities, weWe obtain funding from a variety of sources, both domestic and foreign. Our principal source of funding is customer deposits obtained from our banking operations.operations, and we from time to time issue equity and debt securities, including preferred shares to fund large-scale acquisitions such as Chohung Bank and LG Card and a recent rights offering in anticipation of greater liquidity and capital requirements during the recent global financial crisis. In addition, Shinhan Bank acquiresour subsidiaries acquire funding through call money, borrowings from the Bank of Korea, other short-term borrowings and other long-term debt.
Our primary funding strategy for our banking activities has been to achieve low-cost funding by increasing the average balances of low-cost retail deposits. Customer deposits accounted for 61.6% of our total funding as of December 31, 2005, 60.7% of our total funding as of December 31, 2006 and 59.1% of our total funding as of December 31, 2007. In the past, largely due to the lack of alternative investment opportunities for individuals and households in Korea, especially in light of the low interest rate environment and volatile stock market conditions, a substantial portion of customer deposits were rolled over upon maturity and accordingly provided a stable source of funding for our banking subsidiaries. However, due to the increasing popularity of higher-yielding investment
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opportunities driven by the recent bullish stock market, an increasing portion of customer deposits maintained at banks have shifted to in the form of money market funds and other brokerage accounts maintained at securities companies in recent, which has resulted in a temporary difficulty in finding sufficient funding for Korean banks in general, including our banking subsidiaries, in January 2008. No assurance can therefore be given that our banking subsidiaries will continue to enjoy a stable funding source in the future through rollovers of customer deposits. See “Item 3 — Key Information — Risk Factors — Risks related to our banking business — Our banking subsidiaries are highly dependent on short-term funding sources that are susceptible the availability of alternative funding sources and their price volatility, which dependence may adversely affect our operations.”
As of December 31, 2005, 2006 and 2007, W5,002 billion, W5,390 billion and W5,136 billion, or 6.0%, 6.9% and 6.6%, respectively, of our total deposits in Korean Won were deposits made by litigants in connection with legal proceedings in Korean courts. Court deposits carry interest rates, which are generally lower than market rates.
In addition, we acquire funding through the issuance of bonds, primarily through Shinhan Bank. Our borrowings, consist mainly of borrowings from financial institutions, the Korean government and Korean government-affiliated funds. Call money, which is available in both Won and foreign currencies, is obtained from the domestic call loan market, a short-term loan market for loans with maturities of less than one month. Furthermore, we have also issued preferred shares, such as redeemable preferred shares and redeemable convertible preferred shares, as part of funding for major acquisitions, such as those for Chohung Bank and LG Card. See Item 10 “Additional Information — Articles of Incorporation — Description of Capital Stock — Description of Redeemable Preferred Stock” and “Additional Information — Articles of Incorporation — Description of Capital Stock — Description of Redeemable Convertible Preferred Stock.”
We also have funding requirements for our credit card activities, which represented <<10% of our overall funding requirements. We also obtain funding for our credit card activities from a variety of sources, primarily domestic. The principal sources of funding for Shinhan Card are debentures, asset-backed securitization, commercial papers, loans from the holding company and third-party borrowings, which amounted, on a managed basis under Korean GAAP, to W6,967 billion, W2,769 billion, W1,762 billion, W650 billion, W169 billion, or 56.6%, 22.5%, 14.3%, 5.3% and 1.4%, respectively, of the funding for our credit card activities, as of December 31, 2007. The high AAA credit rating of the holding company among local rating agencies benefits Shinhan Card with respect to our corporate debentures, third-party borrowingother long-term debt and commercial paper. We aimasset-backed securitizations. For further details relating to reduce the exposure to asset-backed securitization as a funding source but otherwise continue to have a balanced mix of funding sources for credit card activities.by us and our subsidiaries, see “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources.”
Deposits
Although the majority of our bank deposits are short-term, it has been our experience that the majority of our depositors generally rollhave historically rolled over their deposits at maturity, providing our banking operation with a stable source of funding.
The following table shows the average balances of our deposits and the average rates paid on our deposits for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2006 | | 2007 | | | 2007 | | 2008 | | 2009 | |
| | | Average
| | Average
| | Average
| | Average
| | Average
| | Average
| | | Average
| | Average Rate
| | Average
| | Average Rate
| | Average
| | Average Rate
| |
| | | Balance(1) | | Rate Paid | | Balance(1) | | Rate Paid | | Balance(1) | | Rate Paid | | | Balance(1) | | Paid | | Balance(1) | | Paid | | Balance(1) | | Paid | |
| | | (In billions of Won, except percentages) | | | (In billions of Won, except percentages) | |
| |
| Interest-bearing deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing demand deposits | | W | 6,594 | | | | 1.90 | % | | W | 7,964 | | | | 0.46 | % | | W | 8,455 | | | | 0.41 | % | | W | 8,455 | | | | 0.41 | % | | W | 5,786 | | | | 0.78 | % | | W | 7,399 | | | | 0.45 | % |
| Savings deposits | | | 26,100 | | | | 0.96 | | | | 27,279 | | | | 2.21 | | | | 30,583 | | | | 2.05 | | | | 30,583 | | | | 2.05 | | | | 30,877 | | | | 2.32 | | | | 36,876 | | | | 1.22 | |
| Certificates of deposit | | | 8,838 | | | | 3.82 | | | | 9,934 | | | | 4.67 | | | | 15,475 | | | | 5.22 | | | | 15,475 | | | | 5.22 | | | | 16,152 | | | | 5.94 | | | | 11,802 | | | | 5.48 | |
| Other time deposits | | | 39,031 | | | | 3.69 | | | | 39,644 | | | | 3.84 | | | | 44,397 | | | | 4.55 | | | | 44,397 | | | | 4.55 | | | | 60,437 | | | | 4.94 | | | | 77,961 | | | | 3.91 | |
| Mutual installment deposits(2) | | | 1,997 | | | | 4.16 | | | | 1,211 | | | | 3.80 | | | | 567 | | | | 3.88 | | | | 567 | | | | 3.88 | | | | 291 | | | | 3.78 | | | | 189 | | | | 3.70 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest-bearing deposits(3) | | W | 82,560 | | | | 2.71 | % | | W | 86,032 | | | | 3.08 | % | | W | 99,477 | | | | 3.53 | % | | W | 99,477 | | | | 3.53 | % | | W | 113,543 | | | | 4.15 | % | | W | 134,227 | | | | 3.12 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
96
Notes:
| | |
| (1) | | Average balances are based on daily balances for Shinhan Bank and Jeju Bank and quarterly balances for other subsidiaries. |
| |
| (2) | | MutualShinhan Bank offers mutual installment deposits which are interest-bearing deposits offered by Shinhan Bank which enablemade periodically for a contracted term. The mutual installment deposit account enables customers to become eligible for loans while they maintain an account with us. The customer’s account does not have to secure loan amounts once made but is a requirement for loan eligibility.which would be secured by the deposits already made. Prior to qualifying for a loan, a customer must make required periodic deposits to the mutual installment account for a contracted term of less than five years. A customer is not requiredobliged to fulfillmake the depositperiodic deposits for the full term priorof the contract to requestingobtain a loan from Shinhan Bank, but loan amounts and terms are not as favorable in the event of a loan request is made prior to completingcompletion of the deposit contract term. |
| |
| (3) | | Under U.S. GAAP, interest-bearing assets do not include cover bills sold or bonds sold under repurchase agreements, which are offered to our customers as deposit products. These are reflected as short-term borrowings and secured borrowings, respectively. |
For a breakdown of retail deposit products, see “— Business Overview — Our Principal Activities — Deposit-taking Activities,” except that cover bills sold are reflected on short-term borrowings and securities sold under repurchase agreements are reflected as secured borrowings.
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Certificates of Deposit and Other Time Deposits
The following table presents the balance and remaining maturities of our other time deposits, certificates of deposit and mutual installment deposits which had a fixed maturity in excess of W100 million or more as of December 31, 2007.2009.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2007 | | As of December 31, 2009 | |
| | | | | | | Mutual
| | | | | | | | Mutual
| | | |
| | | Certificates
| | Other Time
| | Installment
| | | | Certificates
| | Other Time
| | Installment
| | | |
| | | of Deposit | | Deposits | | Deposits | | Total | | of Deposit | | Deposits | | Deposits | | Total | |
| | | (In billions of Won) | | (In billions of Won) | |
| |
| Maturing within three months | | | 5,437 | | | | 12,451 | | | | 13 | | | | 17,901 | | | W | 2,734 | | | W | 15,152 | | | W | 27 | | | W | 17,913 | |
| After three but within six months | | | 2,387 | | | | 3,151 | | | | 4 | | | | 5,542 | | | | 1,584 | | | | 7,770 | | | | 6 | | | | 9,360 | |
| After six but within 12 months | | | 3,874 | | | | 14,321 | | | | 15 | | | | 18,210 | | | | 2,504 | | | | 38,937 | | | | 3 | | | | 41,444 | |
| After 12 months | | | 3,512 | | | | 1,973 | | | | 13 | | | | 5,498 | | | | 947 | | | | 4,721 | | | | 3 | | | | 5,671 | |
| | | | | | | | | | | | | | | | | | | |
| Total | | | 15,210 | | | | 31,896 | | | | 45 | | | | 47,151 | | | W | 7,769 | | | W | 66,580 | | | W | 39 | | | W | 74,388 | |
| | | | | | | | | | | | | | | | | | | |
A majority of our certificates of deposit accounts and other time deposits issued by our foreign offices is in the amount of US$100,000 or more.
Japanese Yen Deposits and Dispute with the Korean National Tax Service
We are currently in dispute with the Korean National Tax Service in respect of tax and tax withholding over certain deposit products that utilized Korean Won and Japanese Yen swaps, which we, together with other commercial banks in Korea, offered to customers. See “Item 5. Operating and Financial Review and Prospects — Overview — Certain Income Tax Expenses and Provision for Other Losses.”
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Short-term Borrowings
The following table presents information regarding our short-term borrowings (borrowings with an original maturity of one year or less) for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2006 | | 2007 | | | 2007 | | 2008 | | 2009 | |
| | | | | | | Highest
| | Weighted
| | | | | | | | Highest
| | Weighted
| | | | | | | | Highest
| | Weighted
| | | | | | | | | Highest
| | Weighted
| | | | | | | | Highest
| | Weighted
| | | | | | | | Highest
| | Weighted
| | | |
| | | | | Average
| | Balances at
| | Average
| | Year-end
| | | | Average
| | Balances at
| | Average
| | | | | | Average
| | Balances at
| | Average
| | | | | | | Average
| | Balances at
| | Average
| | | | | | Average
| | Balances at
| | Average
| | | | | | Average
| | Balances at
| | Average
| | | |
| | | Balance
| | Balance
| | Any
| | Interest
| | Interest
| | Balance
| | Balance
| | Any
| | Interest
| | Year-end
| | Balance
| | Balance
| | Any
| | Interest
| | Year-end
| | | Balance
| | Balance
| | Any Month-
| | Interest
| | Year-End
| | Balance
| | Balance
| | Any Month-
| | Interest
| | Year-End
| | Balance
| | Balance
| | Any Month-
| | Interest
| | Year-End
| |
| | | Outstanding | | Outstanding(1) | | Month-end | | Rate(2) | | Rate | | Outstanding | | Outstanding(1) | | Month-end | | Rate(2) | | Interest Rate | | Outstanding | | Outstanding(1) | | Month-end | | Rate(2) | | Interest Rate | | | Outstanding | | Outstanding(1) | | End | | Rate(2) | | Interest Rate | | Outstanding | | Outstanding(1) | | End | | Rate(2) | | Interest Rate | | Outstanding | | Outstanding(1) | | End | | Rate(2) | | Interest Rate | |
| | | (In billions of Won, except for percentages) | | | | | | | | | | | | | | | (In billions of Won, except for percentages) | | | | | | | | | | | | | |
| |
| Borrowings from BOK(3) | | W | 1,668 | | | W | 1,581 | | | W | 1,719 | | | | 1.85% | | | | 0.104.65% | | | W | 1,173 | | | W | 1,274 | | | W | 1,467 | | | | 2.21% | | | | 0.102.75% | | | W | 883 | | | W | 881 | | | W | 1,169 | | | | 2.97% | | | | 0.103.25% | | |
| Borrowings from | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Bank of Korea(3) | | | W | 883 | | | W | 881 | | | W | 1,169 | | | | 2.97 | % | | | 0.10-3.25 | % | | W | 1,259 | | | W | 964 | | | W | 1,285 | | | | 2.54 | % | | | 0.10-2.75 | % | | W | 1,434 | | | W | 1,369 | | | W | 1,490 | | | | 1.11 | % | | | 1.25-3.50 | % |
| Call money | | | 994 | | | | 2,930 | | | | 5,648 | | | | 3.24% | | | | 1.906.80% | | | | 1,686 | | | | 3,070 | | | | 4,055 | | | | 4.77% | | | | 0.355.44% | | | | 1,673 | | | | 3,173 | | | | 4,615 | | | | 5.49% | | | | 0.7510.25% | | | | 1,673 | | | | 3,173 | | | | 4,615 | | | | 5.49 | % | | | 0.75-10.25 | | | | 4,878 | | | | 2,875 | | | | 4,878 | | | | 5.41 | | | | 0.40-6.93 | | | | 2,398 | | | | 3,087 | | | | 5,943 | | | | 2.42 | | | | 1.35-10.50 | |
| Other borrowings(4) | | | 9,306 | | | | 10,464 | | | | 11,945 | | | | 2.23% | | | | 0.109.00% | | | | 8,136 | | | | 9,343 | | | | 15,992 | | | | 3.03% | | | | 0.075.86% | | | | 13,245 | | | | 12,756 | | | | 13,245 | | | | 3.93% | | | | 0.987.83% | | | | 13,245 | | | | 12,756 | | | | 13,245 | | | | 3.93 | % | | | 0.98-7.83 | % | | | 17,088 | | | | 17,874 | | | | 19,839 | | | | 4.12 | | | | 1.08-8.10 | % | | | 5,883 | | | | 12,723 | | | | 18,262 | | | | 3.85 | | | | 0.77-6.25 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | W | 11,968 | | | W | 14,975 | | | W | 19,312 | | | | 2.39% | | | | | | | W | 10,995 | | | W | 13,687 | | | W | 21,514 | | | | 3.30% | | | | | | | W | 15,801 | | | W | 16,810 | | | W | 19,029 | | | | 4.17% | | | | | | | W | 15,801 | | | W | 16,810 | | | W | 19,029 | | | | 4.17 | % | | | | | | W | 23,225 | | | W | 21,713 | | | W | 26,002 | | | | 4.22 | % | | | | | | W | 9,715 | | | W | 17,179 | | | W | 25,695 | | | | 3.38 | % | | | | |
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Notes:
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| (1) | | Average outstanding balances have beenare calculated using daily balances for our primary banking operationsShinhan Bank and Jeju Bank and quarterly balances for other subsidiaries. |
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| (2) | | Weighted-average interest rates during this year are calculated by dividing the total interest expenses by the average amount borrowed. |
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| (3) | | Borrowings from the Bank of Korea generally mature within one month for borrowings in Won and six months for borrowings onin foreign currencies. |
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| (4) | | Other short-term borrowings included borrowings from trust accounts, bills sold, borrowings in domestic and foreign currencies and short-term debentures. |
Our short-term borrowings have maturities of less than one year which are generally unsecured with the exception of borrowings from the Bank of Korea.
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Risk Management
Overview
As a financial services provider, we are exposed to various risks relating to our lending, credit card, insurance, securities investment, trading and leasing businesses, our deposit taking and borrowing activities and our operating environment. The principal risks to which we are exposed are credit risk, market risk, liquidity risk and operational risk. These risks are recognized, measured and reported in accordance with risk management guidelines established at our holding company level.level and implemented at the subsidiary level through a carefully stratifiedchecks-and-balances system.
OurWe believe that our risk management system has been instrumental to building our reputation as a well-managed and prudent financial service provider and withstanding various external shocks. In particular, during the recent global financial crisis, we believe our risk management has provided effective early warning signals which helped us to proactively reconfigure our asset portfolio and substantially reduce our exposure to troubled debtors and thereby avoid what could have been a substantially greater credit loss during such crisis.
In particular, our groupwide risk management is guided by several principles, including:the following core principles:
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| | • | identifying and managing all inherent risks; |
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| | • | standardizing risk management process and methodology; |
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| | • | ensuring supervision and control of risk management independent of business activities; |
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| | • | continuously assessing risk preference; |
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| | • | preventing risk concentration; |
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| | • | operating a precise and comprehensive risk management system including statistical models; and |
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| | • | balancing profitability and risk management through risk-adjusted profit management. |
Organization
Risk management and oversight begins with the Group Risk Management Committee of the board of directors at the holding company level. The Group Risk Management Committee establishes the overallprimary risk management guidelines and risk limits applicable to the group and each subsidiary, while delegating the day-to-day risk management and oversight functions to the Managing Director of Risk Management and the Risk Management Team. The Managing Director of Risk Management discusses the risk management policies and strategies of the Group and its subsidiaries at the Group Risk Management Council, comprised of the Managing Director of Risk Management, as its chairperson, and the executive officers of risk management from its subsidiaries. The Risk Management Team provides support to the Group Risk Management Committee, the Managing Director of Risk Management and the Group Risk Management Council, oversees the overall risk management for the Group and coordinates the risk management strategies among the Group’s subsidiaries.
In order to maintain the Group’s risk at an appropriate level,tools we have establishedadopted at a hierarchical limit system, wheregroupwide level to implement the Group Risk Management Committee establishes risk limits for the holding company and each subsidiary, and each subsidiary establishes and manages more detailed risk limits by type of risk and type of product for each department and division within the respective subsidiary. In accordance with the group risk management policies and strategies, each subsidiary’s risk management committee establishes its own risk management policies and strategies in more detail and the respective risk management department implements those policies and strategies. The risk management department, operating independently from business operations of each subsidiary, monitors, assesses, manages and controls the overall risk of its operations and reports all major risk-related issues to the Group’s Risk Management Team, which then reports to the Managing Director of Risk Management.
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The following table sets forth the levels of our risk management system.
Group Risk Management Committee
The Group Risk Management Committee consists of three outside directors of the holding company. The Group Risk Management Committee convenes at least once every quarter and may also convene on anad hocbasisforegoing principles are as needed. The Group Risk Management Committee makes decisions related to:follows:
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| | • | establishing basican embedded culture of risk management policies consistent with business strategy;— As a basic matter, we emphasize that all of our employees embrace, adhere and are guided in their daily operations by a culture of strict risk management and the core groupwide risk management principles. |
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| | • | establishingdetailed risk limits appropriatetolerance prescriptions — Risk tolerance, defined as the allowable level of risk, is prescribed for each subsidiary and for each business segment based on a groupwide analysis of possible losses. Each of our subsidiaries is required to manage its operations within the groupbounds of the specified risk tolerance and each subsidiary;not incur a concentration risk though detailed and specific risk limit control systems. |
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| | • | establishingintegrated groupwide risk monitoring system — We have adopted a groupwide comprehensive risk monitoring system that collects extensive risk-related information from both external and amending, as necessary,internal sources and assesses related risks based on such information. Our risk management regulations, which regulates risk management activities of the group as well as each subsidiary, establishes risk limitsmonitoring system emphasize early warning signals and provides risk management guidelines; andpreemptive measures. |
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| | • | development of a groupwide risk experts network — In order to enhance our overall risk management capabilities, we have a designated team of risk experts, each of whom have experience and knowledge in risk management, in charge of our groupwide risk education and build out of groupwide risk management competence. |
Organization
Our risk management system is organized along the following hierarchy: from the top and at the holding company level,, the Group Risk Management Committee, the Group Risk Management Council, the Chief Risk Officer and the Group Risk Management Team, and at the subsidiary level, the Risk Management Committees and the Risk Management Team of the relevant subsidiary. Further details follow.
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At the holding company level:
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| • | Group Risk Management Committee —The Group Risk Management Committee consists of three outside directors of our holding company. The Group Risk Management Committee convenes at least once every quarter and may also convene on anad hocbasis as needed. Specifically, the Group Risk Management Committee does the following: (i) establish the overall risk management policies consistent with management strategies, (ii) set risk limits for the entire group and each of our subsidiaries, (iii) approve appropriate investment limits or allowed loss limits, (iv) enact and amends risk management regulations, and (v) decide other risk management-related issues the board of directors or the Group Risk Management Committee seesees fit to discuss. The results of the Group Risk Management Committee meetings are reported to the board of directors of our holding company. The Group Risk Management Committee makes decisions through affirmative votes by a majority of the committee members. |
The results of Group Risk Management Committee meetings are reported to the board of directors of the holding company. The Group Risk Management Committee makes decisions through affirmative votes by a majority of the committee members.
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Group Risk Management Council
The Group Risk Management Council provides a forum for risk management executives from each subsidiary to discuss the group’s risk management guidelines and strategy in order to maintain consistency in the group risk policies and strategies. The Group Risk Management Council consists of the holding company’s Managing Director of Risk Management, as chairman, the executive officers in charge of risk management of each of our subsidiaries and the head of the Risk Management Team of the holding company. The Group Risk Management Council discusses:
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| | • | Group Risk Management Council— Comprised of the holding company’s chief risk officer, risk management team head, and risk officers of each of our subsidiaries, the Group Risk Management Council provides a forum for risk management executives from each subsidiary to discuss our groupwide risk management guidelines and strategy in order to maintain consistency in the groupwide risk policies and strategies. Specifically, the Group Risk Management Council deliberates on the following: (i) changes in risk management policies and strategies for each subsidiary; |
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| • | subsidiary, (ii) matters warranting discussion of risk management at the group level and cooperation among the subsidiaries;subsidiaries, (iii) the effect of external factors on the groupwide risk, (iv) determination of the risk appetite for our group as a whole and each of our subsidiaries, (v) risk limits of our group as a whole and each of our subsidiaries, (vi) operation of risk measuring systems for our group as a whole and each of our subsidiaries, (vii) matters requiring joint deliberation in relation to groupwide risk management and (viii) matters related to providing funds to our subsidiaries. The Group Risk Management Council has asub-council consisting of working-level risk management officers, to discuss the above-related matters in advance. |
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| | • | Group Chief Risk Officer— The Group Chief Risk Officer aids the effectGroup Risk Management Committee by implementing the risk policies and strategies as well as ensuring consistency of externalities onrisk management systems among our subsidiaries. Furthermore, the group’s risk; andGroup Chief Risk Officer evaluates the risk officers of each subsidiary in addition to monitoring the risk management practices of each subsidiary. |
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| | • | other risk management-related matters.Group Risk Management Team — This team provides support and assistance to the Group Chief Risk Officer in carrying out his responsibilities. |
At the subsidiary level:
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| • | Risk Management Committee — In order to maintain the groupwide risk at an appropriate level, we have established a hierarchical risk limit system, where the Group Risk Management Committee establishes risk limits for us and our subsidiaries, and each of our subsidiaries establishes and manages risk limits in more detail by type of risk and type of product for each department and division within such subsidiary. In accordance with the group risk management policies and strategies, the risk management committee at the subsidiary level establishes its own risk management policies and strategies in more detail and the respective risk management department implements those policies and strategies. |
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| • | Risk Management Team —The risk management team, operating independently from the business units of each of our subsidiaries, monitors, assesses, manages and controls the overall risk of its operations and reports all major risk-related issues to the Group Risk Management Team at the holding company level, which then reports to the Group Chief Risk Officer. |
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The Group Risk Management Council hasfollowing is a sub-council, consistingflowchart of working-levelour risk management officers, to discuss the above-related matters in advance. The principal function of the Risk Management Team is to oversee the risk management operationssystem at the holding company level and the subsidiary level.
Credit Risk Management
Credit risk, which is the risk of loss from default by an obligor or counter-party, is theour greatest risk we face.risk. A substantial majority of our credit risk is derived fromrelates to the operations of Shinhan Bank and Shinhan Card.
Credit Risk Management of Shinhan Bank
Shinhan Bank’s credit risk management is guided by the following principles:
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| | • | achieve profit level corresponding to the level of risks involved; |
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| | • | improve asset quality and achieve optimal industrial and rating loan portfolio;portfolios; |
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| | • | focus on the small- and medium-sized enterprises and markets; |
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| | • | avoid excessive loan concentration to a particular borrower or sector; |
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| | • | focus on the borrower’s ability to repay the debt; and |
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| | • | financiallyprovide financial support ourto advance the growth of select customers’ growth.customers. |
Major policies for Shinhan Bank’s credit risk management are determined by the Credit Policy Committee of Shinhan Bank, the executive decision-making body for management of credit risk. The Credit Policy Committee is led by the Deputy President &and head of the Risk Management Group. The Credit Policy Committee further consists of chief officers from nineeight business divisions.groups. Apart from the Credit Policy Committee, Shinhan Bank has a Credit Review Committee in place to perform credit review evaluation, thereby separating the credit policy decision-makings and loan approvals. Both committees make decisions by2/3 two-thirds or more votes of the attending members, which must constitute at least two-thirds of the committee members to satisfy the quorum.based on a two-third quorum requirement.
Shinhan Bank performscomplies with credit risk management procedures pursuant to internal guidelines and regulations and continually monitors and improves these guidelines and regulations. Its credit risk management procedures include:
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| | • | credit evaluation and approval; |
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| | • | credit review and monitoring; and |
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| | • | credit risk assessment and control. |
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Credit Evaluation and Approval
All loan applicants and guarantors are subject to credit review evaluation before approval of any loans. Credit evaluation of loan applicants are carried out on a separate levelseparately by Credit Officer and Senior Credit Officer and (senior) credit officer committees consisting of loan evaluation specialists from different subject areas. Loan evaluation is carried out by a group rather than byat an individual level through an objective and deliberatedeliberative process. Shinhan Bank uses a credit scoring system for consumerretail loans and a credit-risk rating system for commercialcorporate loans.
— ConsumerRetail loans
Loan applications for consumerretail loans are reviewed in accordance with Shinhan Bank’s credit scoring system and the objective statistics methodology regardingmodels for secured and unsecured loans maintained and operated by Shinhan Bank’s Retail Banking Division. TheShinhan Bank’s credit scoring system is an automated credit approval systems used to evaluate loan applications and determine the appropriate pricing for the loan.
Shinhan Bank’s credit scoring systemloan, and takes into account factors such as a borrower’s personal information, transaction history with Shinhan Bank and other financial institutions and other relevant credit information. The applicant is givenassigned a score, based upon which the decision is usedmade as to decide whether to approve loans as well asthe loan application and determine loan amounts.its amount. The applicant’s score also determines whether the applicant is approved for credit, conditionally approved, subject to further assessment, or denied. If the applicant becomes subject to further assessment, the appropriate discretionary body, either at the branch level or at the headquarters level, makes a reassessment which considersbased on qualitative factors as well as quantitative factors, such as credit history, occupation and past relationship with Shinhan Bank.
For mortgage loans and loans secured by real estate, Shinhan Bank evaluates the value of the real estate offered as collateral for a loan using a proprietary database, Shinhan Bank has developed, which contains information about real estate values throughout Korea. In addition, Shinhan Bank usesup-to-date information from aprovided by third party provider of information aboutparties regarding the real estate marketvalues in Korea, which givesKorea. While Shinhan Bank up-to-date market value information for Korean real estate values. Staffsuses internal staff from the processing centers to appraise the value of the real estate. In addition, for loans of W5 billion or more,estate collateral, Shinhan Bank also hires certified appraisers to review the appraisal value of real estate collateral that have an appraisal value exceeding W105 billion, as initially determined by the processing centers. Shinhan Bank reevaluates internally,also performs internal revaluations, on a summary basis, the appraisal value of collateral at least every two years. To protect against fraudulent transfers, Shinhan Bank has established an underwriting standard for adequacy of collaterals and the procedure of legal screening for whether or not there is a perfection of ownership.year.
For loans secured by securities, deposits or other assets other than real estate, Shinhan Bank evaluates the value of the securities based upon the market value of the securities. If the value of the securities declines over the life of a loan, the borrower will be requiredrequires borrowers to post additional securities as collateral. For loans secured by deposits, Shinhan Bank will grant loans in an amount up to 95% of the deposit amount if the deposit is held with Shinhan Bank or, if the deposits are held with another financial institution, up to 90% of the deposit amount. Shinhan Bank also requires borrowersobserve specified collateral ratios in respect of secured obligations to observe specified collateral ratios.obligations.
— Corporate loans
Shinhan Bank rates all of its corporate borrowers using a rating system. Shinhan Bank uses internally developed credit evaluation models to rate potential borrowers. Shinhan Bank implemented a new corporate credit risk rating system in February 2005, as part of Chohung Bank’s integration. The credit risk-ratingsystems. These systems take into accountconsider a variety of evaluation criteria in order to standardize credit decisions by focusingand focuses on the quality of borrowers rather than the volumesize of loans. The systemsrelevant criteria include both quantitative factors based onrelated to the borrower’s financial and other data, and qualitative factors based onsuch as the judgment of Shinhan Bank’s credit officers. Financial evaluation factors Shinhan Bank also considers include financial variables and ratios based on Shinhan Bank’s customer’s financial statements, such as return on assets and cash flow to total debt ratios. Non-financialratios, as well as non-financial evaluation factors includesuch as the industry in which the borrower operates, its competitive position in its industry, its operating and funding capabilities, Shinhan Bank’s belief regarding its financial prospects, the quality of its management and controlling stockholders (based in part on interviews with its officers and employees), technological capabilities and labor relations, the status of its auditors and information gathered from outside sources such as rating agencies or industrial associations.relations.
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In addition, Shinhan Bank consultsreviews reports prepared by external credit rating services, such as Korea Information Service, National Information & Credit Evaluation Inc. and Korea Management Consulting & Credit Rating Corporation. Shinhan Bank uses these serviceswhich are used to provide it with support forconfirm the accuracy of theShinhan Bank’s internal credit review it conducts.reviews.
Shinhan Bank monitors and improves the effectiveness of the credit risk-rating systems using a database that it updates continually with actual default records.
Based on the scores calculated under the credit rating system, which takes into account the evaluation criteria described above and the probability of default, Shinhan Bank assigns the borrower one of twenty22 grades (AAA(from the highest of AAA to the lowest of D). Grades AA through B are further broken down into “+,” “0” or “−.” Grades AAA through B−B- are classified as normal, grade CCC precautionary, and grades CC through D non-performing. The credit risk-rating model is further differentiated by the size of the corporate borrower and the type of credit facilities.
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— Loan approval process
Evaluations of general loansLoans are generally approved after combineda joint evaluation and approval ofby the relationship manager at the branch level. The approval limit for retails loan is made based on automated credit scoring system by Shinhan Bank. In the case of each branchlarge corporate loans, approval limits are also reviewed and approved by a Credit Officer at the committee of the applicable business unit.headquarters level. Depending on the size and the importance of the loan, the approval process passes through review ofis further reviewed by the Credit Officer Committee or the Senior Credit Officer Committee. In the case whereIf the loan is considered significant or the amount exceeds the discretion limit of the Senior Credit Officer Committee, the creditfurther evaluation is carried out at the highest decision-making credit approval body,made by the Credit Review Committee.Committee, which is Shinhan Bank’s highest decision-making body in relation to credit approval. The Credit Review Committee’s evaluation and approval of loan limits vary depending on the credit ratings of the borrowers. For example, for borrowers with B — ratings, the Credit Review Committee evaluates and approves large credits in excess of W10 billion for unsecured lending and W15 billion for secured lending, whereas for borrowers with AAA ratings, the Credit Review Committee evaluates credits exceeding W30 billion for unsecured lending and W80 billion for secured lending. Meetings to approve these large credits are held twice a week. The Credit Review Committee makes decisions by2/3 a vote of two-thirds or more votes of the attending members, which must constitute at least two-thirds of the committee members to satisfy the quorum.
The chart below summarizes the credit approval process of our banking operation. The Senior Credit Officer and the Head of Business Division doesdo not make individual decisions on loan approval, but isare part of the decision-making process at the group level.
The discretionreviewer at each level of the review process may in its discretion approve loans up to a maximum amount per loan assigned to such level. The discretionary loan approval limit for each level of the loan approval process is determined bytakes into account the total amount of loans extended to the borrower, the credit level of the applicant based on credit review, whether the loan is secured byexistence and value of collateral and the level of credit risk established by the credit rating system.
The discretionary levels are divided into five categories depending on the credit rating assigned and the existence and value of collateral. The loan amount determinesapproval limit ranges from W30 million (which is applicable to corporate loans to a borrower with a B- rating to be approved by the approval body — branch manager, branch
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manager and Credit Officer, Credit Officer Committee,head of a banking branch) to W80 billion (which is applicable to corporate loans to a borrower with a AAA rating to be approved by the Senior Credit Officer Committee orCommittee). Any loans exceeding the maximum discretionary loan amount approval limit must be approved by the Credit Review Committee.
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| | | | Approval Limit of Loan Amount |
Category
| | Approval Body | | Grade B− | | Grade AAA |
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| 1 | | | Retail Branch Manager | | | | |
| | | | Unsecured | | W100 million or less | | W2 billion or less |
| | | | Secured | | W500 million or less | | W5 billion or less |
| 2 | | | Corporate Branch Manager | | | | |
| | | | Unsecured | | W200 million or less | | W3 billion or less |
| | | | Secured | | W2 billion or less | | W6 billion or less |
| 3 | | | Branch Manager and Credit Officer | | | | |
| | | | Unsecured | | W500 million or less | | W5 billion or less |
| | | | Secured | | W3 billion or less | | W10 billion or less |
| 4 | | | Credit Officer Committee | | | | |
| | | | Unsecured | | W1 billion or less | | W10 billion or less |
| | | | Secured | | W5 billion or less | | W20 billion or less |
| 5 | | | Senior Credit Officer Committee | | | | |
| | | | Unsecured | | W10 billion or less | | W30 billion or less |
| | | | Secured | | W15 billion or less | | W80 billion or less |
| 6 | | | Credit Review Committee | | | | |
| | | | Unsecured | | More than W10 billion | | More than W30 billion |
| | | | Secured | | More than W15 billion | | More than W80 billion |
Credit Review and Monitoring
Shinhan Bank continually reviews and monitors existing credit risks primarily with respect to borrowers. In particular, Shinhan Bank’s automated early warning system conducts daily examination for borrowers using over 163 financial and non-financial factors, and the relationship manager and the credit officer must conduct periodic loan review and report to independent loan review team which analyzes in detail the results and adjusts credit rating accordingly. Based on these reviews, Shinhan Bank adjusts a borrower’s credit rating, credit limit, applied interest rates and credit policies. In addition, the group credit rating of the borrower’s group, if applicable, may be adjusted following a periodic review of the main debtor groups, mostly comprised ofchaebols, as identified by the Governor
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of the Financial Supervisory Service based on their outstanding credit exposures, of which 4243 were identified most recently inas such as of December 2007.31, 2009. Shinhan Bank also continually reviews other factors, such as industryindustry-specific conditions in which borrowers operatefor the borrower’s business and theirits domestic and overseas asset base and operations, in order to ensure that ratings are appropriate.the appropriateness of the assigned ratings. The Credit Review Department provides credit review reports, independent of underwriting, to Chief Risk Officer on a monthly basis.
The early warning system makesperforms automatic daily checkchecks for borrowers withto whom Shinhan Bank has more than W2 billion of exposure. The relationship manager and the Credit Officer in the Credit Review Department monitor those borrowers, and then the Credit Review Department further reviews the results of the monitoring. In addition, Shinhan Bank carries out a planned review of each borrower in accordance with changing credit risk factors based on changing economic environment. The results of such planned review are continually reported to the Chief Risk Officer of Shinhan Bank.
Depending on the nature of the items detected by the early warning system, a borrower may be classified as a “deteriorating credit” and undergobecome subject to evaluation for a possible downgrade in its customer rating, or may be initially classified as a “borrower showing early warning signs” or re-attainbecome reinstated to the “normal borrower” status. For borrowers classified as “showing early warning signs,” the relevant relationship manager gathers information and conducts a review of the borrower to determine whether it should be classified as a deteriorating credit or whether to impose management improvement warnings or implement joint creditors’ management. In the case where the borrower
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becomes non-performing, Shinhan Bank’s collection department directly manages such borrower’s account in order to maximize recovery rate, and conducts auctions, court proceedings, sale of assets or corporate restructuring as needed.
Credit Risk Assessment and Control
ToIn order to assess credit risk in a systematic manner, Shinhan Bank has developed and upgraded systems designed to quantify credit risksrisk based on selection and monitoring of various statistic,statistics, including delinquency rate, non-performing loan ratio, expected loan loss and weighted average risk rating.
Shinhan Bank controls loan concentration by monitoring and managing loans at two levels —levels: portfolio level and individual loan account level. In order to prevent undue concentration of loans, Shinhan Bank has established a credit limit per country, industry, affiliates, corporation and financial institution, and has encouragedencourages extension of credit to customers with good credit and reduction of credit to customers with less than good credit. In addition, Shinhan Bank utilizes the results of credit portfolio analysis in allocating asset quality based on forward looking criteria, increasing discretion and adjusting loan to value ratio.
Shinhan Bank measures credit risk using internally accumulated data. Shinhan Bank measures expected and unexpected losses with respect to total assets monthly, which Shinhan Bank refers to when setting risk limits for, and allocate capital to, its business groups. Expected loss is calculated based on the probability of default, the loss given default, the exposure at default and the past bankruptcy rate and recovery rate, and Shinhan Bank provides allowance for loan losses under Korean GAAP accordingly. Shinhan Bank selectsmakes provisioning at a level which is the higher of the two provisioning levels, as determined by the Financial Supervisory Service requirement or Shinhan Bank’s internal calculation. Unexpected loss is predicted based on value at risk or “VaR,”(“VaR”), which is used to determine compliance with the aggregate credit risk limits setlimit for the entire Shinhan Bank as well as the credit risk limit for eachthe relevant department thereof. Beginning on January 1, 2008, wewithin Shinhan Bank. We use the “Monte Carlo” simulation method to compute the VaR, compared to the “historical” simulation method used previously, as the “Monte Carlo” method provides a more systematic method for reflecting concentration risks and correlation effects.
Credit Risk Management of Shinhan Card
Major policies for Shinhan Card’s credit risk management are determined by Shinhan Card’s Risk Management Council, and Shinhan Card’s Risk Management Committee is responsible for approving them. Shinhan Card’s Risk Management Council is comprised of 13 members: the headheads of Business Planning Unit, as chairman; the head of Retail Business Unit; the head of Special Business Unit; the head of Credit Management Unit; the head of Business Support Unit, the head of Strategy Planning Division; the head of Business Management Division; the head of Retail Planning Division; the head of Customer Sales Division; the head of Consumer Lending Sales Division; the head of Account Management Division; the head of Credit Management Division; and the head of Collection Management Division.Shinhan Card’s 14 business units. Shinhan Card’s Risk Management Council convenes at least once every month and may also convene on anad hocbasis as needed. Shinhan Card’s Risk Management Committee is comprised of three Non-Standing Directors. Shinhan Card’s Risk Management Committee convenes at least once every quarter and may also convene on anad hocbasis as needed.
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The risk of loss from default by an obligor or counter-party is theShinhan Card’s greatest riskrisk. Shinhan Card faces. Shinhan Card’smanages credit risk management is guided bybased on the following principles:
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| | • | achieve profit at a level corresponding to the level of risks involved; |
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| | • | improve asset quality and achieve optimal asset portfolio;portfolios; and |
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| | • | focus on borrower’s ability to repay the debt. |
Credit Card Approval Process
Approval of credit card applications is processed usingShinhan Card uses an automated credit scoring system.system to approve credit card applications or credit card authorizations. The credit scoring system is divided into twosub-systems: the application scoring system and the behavior scoring system. The behavior scoring system is based largely on the credit history, and the application scoring system is based largely on
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personal information of the applicant. For card applicants with whom Shinhan Card has an existing relationship, the credit scoring system factors in internally gathered information such as repayment ability, total assets, the length of the existing relationship and the applicant’s contribution to profitability. The credit scoring system also automatically conducts credit checks on all credit card applicants. Shinhan Card gathers information about applicants’ transaction history with financial institutions, including banks and credit card companies, from a number of third party credit reporting agencies including, among others, National Information & Credit Evaluation Inc., other credit card companies in Korea, the Korea Federation of Banks, Korea Non-bank Financing Association, Korea Information Service and Korea Credit Bureau. These credit checks reveal a list of the delinquent customers of all the credit card issuers in Korea.
If thea credit score awarded to an applicant is above a minimum threshold, then the application is approved unless overridden bybased on other policy factorsconsiderations such as delinquencies with other credit card companies. In respect ofFor credit card applications by a long-standing customerscustomer with good credit history, Shinhan Card has discretion to waive the application of the awardedassigned credit score unless overridden by other policy factors. All of these factors also act as the basis for setting a credit limit if Shinhan Bank approves an application.considerations.
Monitoring
Shinhan Card conducts ongoing monitoring ofcontinually monitors all accountholders and accounts using thea behavior scoring system. The behavior scoring system predicts a cardholder’s future usage and payment pattern by evaluating the cardholder’s credit history, card usage and amounts, payment status and other relevant data. The behavior score is recalculated each month and is used to manage the accounts and approval of additional loans and other products to the accountholder. Thecardholder. Shinhan Card also uses the scoring system is also used by Shinhan Card to monitor its overall risk exposure and to modify its credit risk management strategy. As of December 31, 2007, Shinhan Card maintained separate behavior scoring systems of LG Card and former Shinhan Card for the purpose of monitoring existing cardholders of LG Card and former Shinhan Card, respectively, as factors taken into account when assessing the behavior scores by respective companies differed. However, Shinhan Card is currently integrating former Shinhan Card’s behavior scoring system and relevant data into that of LG Card to form a unified behavior scoring system and expects the integration process to be completed in the course of the overall IT systems integration process.
Consumer Loan Installment Purchase Loans and Leasing Application Review and On-going Credit Review
Shinhan Card’s application reviewWhen reviewing new applications and conducting an on-going credit review processes for consumerretail loans, installment purchase loans and personal leases, use many of the sameShinhan Card uses substantially similar criteria used in the credit underwriting system and credit review system for credit card customers. For consumerretail loans, installment purchase loans and personal leases provided to Shinhan Card’sexisting cardholders, Shinhan Card reviews their card usage history in addition to other factors such as their income, occupation and assets. In the case of lease finance to corporate customers, Shinhan Card has an extensive application review process that typically takes one to three days, during which Shinhan Card reviews the creditworthiness of the applicant based on an analysis of the applicant’s financial statements and cash flow and information provided by the major credit rating agencies. As a result of Shinhan Card’s focus on maintaining a high credit quality for its lease assets, Shinhan Card’s lease customers have generally been companies that are financially sound or low risk customers such as government-affiliated entities. Once a lease application has been approved and lease financing has been granted, Shinhan Card monitors and reviews the creditworthiness of such corporate customer on an on-going basis.
Fraud Loss Prevention
Shinhan Card attemptsseeks to minimize losses from the fraudulent use of credit cards it has issued.issued by it. Shinhan Card’s efforts are focusedCard focuses on preventing fraudulent uses and, investigatingfollowing the occurrence of a fraudulent uses that occuruse, makes investigations in order to make the responsible party bear the losses. Misuses of lost credit cards account for a substantial majority of Shinhan Card’s fraud losses. On a real time basis, Shinhan Card’sThrough its fraud loss prevention system, attemptsShinhan Card seeks to detect, on a real-time basis, transactions that are unusual or inconsistent with prior usage history and calls are made to the relevant cardholders to confirm their purchases. A team at Shinhan Card dedicated to investigating fraud losses also examines whether the cardholder was at fault by, for example, not reporting a lost card or failing to sign the back ofendorse the card, or whether the relevant merchant was
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negligent in checking the identity of the user. Fault may also lie with delivery companies that fail to deliver credit cards to the relevant applicant. In such instances, Shinhan Card attempts to recover fraud losses from the responsible party. To prevent misuse of a card as well as to manage credit risk, Shinhan Card’s information technology system will automatically suspend the use of a card:
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| | • | when it receives a report of a card’s fraudulent use or loss; |
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| | • | at the request of a cardholder; |
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| | • | for cash advances, immediately upon recognition by the system that the relevant cardholder became delinquent; or |
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| | • | for other types of transactions, one day to three months (depending on the customer’s credit score) after recognition by the system that the relevant cardholder became delinquent. |
Approximately a quarter of Shinhan Card’s cardholders have consented to Shinhan Card accessing their travel records to detect any misuse of credit cards while they are traveling abroad. Shinhan Card also offers cardholders additional fraud protection through a fee-based short message service. At the cardholder’s option, Shinhan Card notifies the cardholder of any credit card activity in his or her account by sending a text message to his or her mobile phone. This monitoring service allows customers to quickly and easily identify any fraudulent use of their credit cards.
Credit Risk Management of Shinhan Investment
In accordance with the guidelines of the Financial Supervisory Service, Shinhan Investment assesses its credit risks (including through VaR analyses) and allocates the maximum limit for the credit amount at risk by department. Shinhan Investment also assesses the counterparty risks in all credit-related transactions, such as loans, acquisitions financing and derivative transactions and takes corresponding risk management measures. In assessing the credit risk of a corporate counterparty, Shinhan Investment considers such counterparty’s corporate credit rating obtained from Shinhan Bank’s internal corporate rating database. Through its risk management system, Shinhan Investment also closely monitors credit risk exposures by counterparty, industry, conglomerates, credit ratings and country. Shinhan Investment conducts credit risk stress tests on a daily basis based on hypothetical extreme market scenarios and also conducts more advanced stress tests from time to time, the results of which are then reported to its management as well as Shinhan Financial Group’s credit risk officer to support groupwide credit risk management.
Market Risk Management
Market risk is the risk of loss generated by fluctuations in market prices such as interest rates, foreign exchange rates and equity prices. The principal market risks to which we are exposed are interest rate risk and, to a lesser extent, equity price risk, foreign exchange risk and commodity risk. These risks stem from our trading and nontradingnon-trading activities relating to financial instruments such as loans, deposits, securities and financial derivatives. We divide market risk into risks arising from trading activities and risks arising from nontradingnon-trading activities.
Market risk to which we are exposed arisesOur market risks arise primarily from Shinhan Bank, and the other subsidiaries do not incur significant market risk, except for Good Morningto a lesser extent, Shinhan Securities,Investment, our securities trading and brokerage subsidiary, which incurs market risk relating to its trading activities. For Shinhan Bank’s market risk management, theShinhan Bank’s Risk Management Committee establishes overall market risk management principles for both the trading and nontrading activities of Shinhan Bank. Based on these principles, theShinhan Bank’s Asset & Liability Management Committee, or the ALM Committee, of Shinhan Bank assesses and controls market risks arising from trading and nontradingnon-trading activities. The ALM Committee, which consists of 1110 executive vice presidents and the head of the Treasury Department of Shinhan Bank, is the executive decision-making body for Shinhan Bank’s risk management and asset and liability management operations. At least on a monthly basis, the ALM Committee reviews and approves reports, which include the position andvalue-at-risk, or “VaR,” VaR with respect to Shinhan Bank’s trading activities and the position, VaR, duration gap and market value analysis and net interest income simulation with respect to its nontradingnon-trading activities. Shinhan Bank measures market risk with respect to all assets and liabilities in the bank accounts and trust accounts in accordance with the regulations promulgated by the Financial Services Commission.
Good Morning Shinhan SecuritiesInvestment manages its market risk based on its overall risk limit established by its risk management committee as well as the risk limits and detailed risk management guidelines for each product and department established by its management’s committee. Good Morning Shinhan SecuritiesInvestment assesses the adequacy of these limits at least annually. In addition, Shinhan Investment assesses the market risks of its trading assets. The assessment procedure is based on the standard procedures set by the Financial Supervisory Services as well as an internally developed
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model. Shinhan Investment assesses the risk amount and VaR, and manages the risk by setting a risk limit per sector as well as a VaR limit.
Shinhan Life Insurance manages its market risk based on its overall risk limit established by its risk management committee. Shinhan Life Insurance manages market risk in regard to assets that are subject to market valuation.trading activities and foreign exchange positions.
Shinhan Card does not have any assets with significant exposure to market risks and therefore does not maintain a risk management policy with respect to market risks.
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We use Korean GAAP numbers on a nonconsolidatednon-consolidated basis for our market risk management and, unless otherwise specified, the numbers presented for quantitative market risk disclosure werehave been prepared in accordance with Korean GAAP on a nonconsolidatednon-consolidated basis.
Market Risk Exposure from Trading Activities
Shinhan Bank’s trading activities principally consist of:
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| | • | trading activities to realize short-term trading profits in debt and stock markets and foreign exchange markets based on Shinhan Bank’s short-term forecast of changes in market situation and customer demand, for its own account as well as for the account of the trust accounts of Shinhan Bank’s customers; and |
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| | • | trading activities primarily to realize profits from arbitrage transactions in derivatives such as swap, forward, futures and option transactions, and, to a lesser extent, to sell derivative products to Shinhan Bank’s customers and to cover market risk incurred from those trading activities. |
Shinhan Investment’s trading activities principally consist of trading for customers and for proprietary accounts equity and debt securities and derivatives based on stocks, stock indexes, interest rates, foreign exchange and commodity.
As a result of these trading activities, Shinhan Bank is exposed principally to interest rate risk, foreign exchange risk and equity risk, and Shinhan Investment is exposed principally to equity risk and interest rate risk.
— Interest rate risk
Shinhan Bank’s exposure to interest rate risk arises primarily from Won-denominated debt securities, directly held or indirectly held through beneficiary certificates, and, to a lesser extent, from interest rate derivatives. Shinhan Bank’s exposure to interest rate risk arising from foreign currency-denominated trading debt securities is minimal since its net position in those securities is not significant. As Shinhan Bank’s trading accounts aremarked-to-market daily, it manages the interest rate risk related to its trading accounts using VaR, a market value-based tool.
Shinhan Investment’s interest rate risk arises primarily from management of its interest rate-sensitive asset portfolio, which mainly consists of debt securities, interest rate swaps and government bond futures, and the level of such risk exposure depends largely on the variance between the interest rate movement assumptions built into the asset portfolio and the actual interest rate movements and the spread between a derivative product and its underlying assets. Shinhan Investment quantifies and manages the interest rate-related exposure by daily conducting VaR and stress tests on amarked-to-market basis.
— Foreign exchange risk
Foreign exchange risk arises because of Shinhan Bank’s assets and liabilities, including derivatives such as foreign exchange forwards and futures and currency swaps, which are denominated in currencies other than the Won. Shinhan Bank manages foreign exchange risk on an overall position basis, including its overseas branches, by covering all of its foreign exchange spot and forward positions in both trading and nontradingnon-trading accounts.
Shinhan Bank’s net foreign currency open position, which is the difference between its foreign currency assets and liabilities as offset against forward foreign exchange positions, is Shinhan Bank’s foreign exchange risk. The ALM Committee oversees Shinhan Bank’s foreign exchange exposure for both trading and nontradingnon-trading activities by establishing limits for the net foreign currency open position, loss limits and VaR limits. The management of
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Shinhan Bank’s foreign exchange position is centralized at the FX & Derivatives Department. Dealers in the FX & Derivatives Department manage Shinhan Bank’s overall position within the set limits through spot trading, forward contracts, currency options, futures and swaps and foreign exchange swaps. Shinhan Bank sets forth thea limit for net open positionpositions by currency and the limits for currencies other than the U.S. dollars and Japanese yen are restrictiveset in a conservative manner in order to minimize other foreign exchange trading.
The net open foreign currency positions held by theour other subsidiaries are not significant.insignificant. In the case of Shinhan Capital which incurs a considerable amount of foreign exchange exposure from its leasing business, it maintains its net exposure below US$1 million by hedging its foreign exchange positions using forwards and currency swaps.
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The following table shows Shinhan Bank’s net foreign currency open positions as of December 31, 2005, 20062007, 2008 and 2007 and Chohung Bank’s net foreign currency open positions as of December 31, 2005. Shinhan Bank’s information as of December 31, 2006 and 2007 is presented on a combined basis to reflect the merger of the two banks in April 2006.2009. Positive amounts represent long exposures and negative amounts represent short exposures.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | | | As of December 31, | |
Currency | | 2005 | | 2006 | | 2007 | | | 2007 | | 2008 | | 2009 | |
| | | (In millions of US$) | | | (In millions of US$) | |
| |
| Shinhan Bank: | | | | | | | | | | | | | |
| U.S. dollars | | US$ | (2.4 | ) | | US$ | 301.1 | | | US$ | 20.4 | | | US$ | 20.4 | | | US$ | (41.6 | ) | | US$ | (41.6 | ) |
| Japanese yen | | | (18.4 | ) | | | (27.2 | ) | | | (21.0 | ) | | | (21.0 | ) | | | (43.7 | ) | | | 23.3 | |
| Euro | | | (0.1 | ) | | | 25.5 | | | | 18.9 | | | | 18.9 | | | | (10.8 | ) | | | (2.7 | ) |
| Others | | | 1.3 | | | | 70.3 | | | | 66.1 | | | | 66.1 | | | | 59.3 | | | | 34.0 | |
| | | | | | | | | | | | | | | |
| Total | | | (19.6 | ) | | | 369.7 | | | | 84.4 | | | US$ | 84.4 | | | US$ | (36.8 | ) | | US$ | 13.1 | |
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| Chohung Bank: | | | | | | | | | | | | | |
| U.S. dollars | | US$ | 18.0 | | | | N/A | | | | N/A | | |
| Japanese yen | | | (6.1 | ) | | | N/A | | | | N/A | | |
| Euro | | | (5.0 | ) | | | N/A | | | | N/A | | |
| Others | | | 9.8 | | | | N/A | | | | N/A | | |
| | | | | | | | | |
| Total | | US$ | 16.7 | | | | N/A | | | | N/A | | |
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— Equity risk
Equity risk for Shinhan Bank’s trading activities results from the trading of equity portfolioportfolios of Korean companies and Korea Stock Price Index futures and options. The trading equity portfolio consists of stocks listed on the StockKRX KOSPI Market or the KRX KOSDAQ Market of the Korea Exchange and nearest-month or second nearest-month futures contracts under strict limits on diversification as well as limits on positions. This has been an areaShinhan Bank maintains strict scrutiny of particular focus due tothese activities in light of the level of volatility in the Korean stock market. In addition, Shinhan Bank pays close attention to the loss limits. Although Shinhan Bank holds a substantially smaller amount of equity securities than debt securities in its trading accounts, the VaR of trading account equity risk is generally higher than that of trading account interest rate risk due to high volatility in the value of equity securities. As of December 31, 2005, 20062007, 2008 and 2007,2009, Shinhan Bank held W59.833.6 billion, W92.013.4 billion and W31.780.6 billion, respectively, of equity securities in its trading accounts (including the trust accounts).
Equity risk for Shinhan Investment’s trading activities also results from the trading of equity portfolio of Korean companies and Korea Stock Price Index futures and options. As of December 2007, 2008 and 2009, the total amount of equity securities at risk held by Shinhan Investment was W48.6 billion, W5.7 billion and W29.9 billion, respectively.
Equity positions held by our other subsidiaries are insignificant.
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Management of Market Risk from Trading Activities
The following tables present an overview of market risk, measured by VaR, from trading activities of Shinhan Bank and Good Morning Shinhan Securities,Investment, respectively, for the year ended and as of December 31, 2007.2009. For market risk management purposes, Shinhan Bank includes its trading portfolio in bank accounts and assets in trust accounts for which it guarantees principal or fixed return in accordance with the Financial Services Commission regulations.
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| | | Trading Portfolio VaR for the Year 2007 | | | | | | | | | | | | | | | | | |
| | | | | | | | | As of
| | | Trading Portfolio VaR for the Year 2009 | |
| | | | | | | | | December 31,
| | | | | | | | | As of
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| | | Average | | Minimum | | Maximum | | 2007 | | | Average | | Minimum | | Maximum | | December 31, 2009 | |
| | | (In billions of Won) | | | (In billions of Won) | |
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Shinhan Bank:(1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate | | W | 22.9 | | | W | 17.5 | | | W | 37.5 | | | W | 31.5 | | | W | 49.6 | | | W | 5.7 | | | W | 108.9 | | | W | 88.3 | |
| Foreign exchange(2) | | | 2.9 | | | | 0.3 | | | | 7.7 | | | | 4.1 | | | | 30.2 | | | | 2.5 | | | | 89.0 | | | | 5.5 | |
| Equities | | | 10.8 | | | | 6.5 | | | | 22.3 | | | | 10.4 | | | | 12.0 | | | | 5.3 | | | | 49.2 | | | | 5.3 | |
| | | | | | | | | | | | | | | | | | |
| Option volatility(3) | | | 1.3 | | | | 0.3 | | | | 3.9 | | | | 2.5 | | | | 2.4 | | | | 0.8 | | | | 4.2 | | | | 1.6 | |
| Less: portfolio diversification(4) | | | (12.4 | ) | | | (5.4 | ) | | | (32.2 | ) | | | (13.6 | ) | | | (35.7 | ) | | | 13.8 | | | | (134.5 | ) | | | (12.6 | ) |
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| Total VaR(5) | | W | 25.5 | | | W | 19.2 | | | W | 39.2 | | | W | 34.9 | | | W | 58.4 | | | W | 28.0 | | | W | 116.7 | | | W | 88.2 | |
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Good Morning Shinhan Securities(6): | | | | | | | | | | | | | | | | | |
Shinhan Investment:(1)(6) | | | | | | | | | | | | | | | | | |
| Interest rate | | W | 1.0 | | | W | 0.3 | | | W | 3.5 | | | W | 2.8 | | | W | 16.83 | | | W | 4.70 | | | W | 47.55 | | | W | 7.11 | |
| Equities | | | 2.0 | | | | 0.7 | | | | 4.3 | | | | 1.8 | | | | 4.45 | | | | 0.60 | | | | 18.47 | | | | 2.41 | |
| Option volatility(3) | | | | 0.99 | | | | (1.44 | ) | | | 2.78 | | | | 1.34 | |
| Less: portfolio diversification(4) | | | 0.6 | | | | — | | | | 2.8 | | | | 1.7 | | | | (5.94 | ) | | | 1.43 | | | | (27.36 | ) | | | (4.67 | ) |
| | | | | | | | | | | | | | | | | | | |
| Total VaR | | W | 2.4 | | | W | 1.0 | | | W | 5.0 | | | W | 2.9 | | | W | 16.33 | | | W | 5.29 | | | W | 41.45 | | | W | 6.19 | |
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Notes:
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| (1) | | Shinhan Bank and Shinhan Investment’sTen-dayten-day VaR results withis based on a 99% confidence level. |
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| (2) | | Includes both trading and nontradingnon-trading accounts as Shinhan Bank manages foreign exchange risk on a total position basis. |
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| (3) | | Volatility implied from the option price using the Black-Scholes or a similar model. |
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| (4) | | Calculation of portfolio diversification effects may occur on different days for different risk components. The Total VaRs are less than the simple sum of the risk component VaRs due to offsets resulting from portfolio diversification. |
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| (5) | | Includes trading portfolio in Shinhan Bank’s bank accounts and assets in trust accounts for which it guarantees principal or fixed return. |
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| (6) | | The average change in market value of Good Morningthe portfolio of Shinhan Securities’ trading portfolioInvestment was W0.41.1 billion per day.day in 2009. |
Shinhan Bank generally manages its market risk from trading activities at the entire portfolio level. To controlof its market risk for trading portfolio, Shinhan Bankportfolios on an aggregated basis, uses position limits, VaR limits, and stop loss limits. In addition, it establishes appropriate limits for investment securities. Shinhan Bank prepared itsmaintains risk control and management guidelines for derivative trading based on the regulations and guidelines promulgated by the Financial Services Commission.
Shinhan BankCommission, and measures market risk from trading activities to monitor and control the risk of its operating divisions and teams that perform trading activities.
Value-at-risk analysis. We useShinhan Bank usesten-day andone-day VaRs to measure Shinhan Bank’sits market risk. Shinhan Bank calculates VaRs on a daily basis based on data for the previous 12 months for the holding periods of ten days. Aten-day VaR is a statistically estimated maximum amount of loss that can occur for ten days under normal market conditions. We use a 99%99.9% confidence level to measure the VaRs, which means the actual amount of loss may exceed the VaR, on average, once out of 100 business days.One-day VaR is used as VaR limit for each trading desk.
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We useShinhan Investment usesone-day VaRs to measure its market risk of Good Morningrisk. Shinhan Securities. Good Morning Shinhan SecuritiesInvestment calculates VaRs on a daily basis based on data for the previous 12 months for the holding periods of one day. We use a 99% confidence
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level to measure the VaRs for Good Morning Shinhan Securities. Good MorningInvestment Shinhan SecuritiesInvestment is currently using a variance-covariance methodology called “delta-normal“delta-gamma method” for its overall VaR calculation and uses historical simulation and “Monte Carlo” simulation for stress test and calculation of VaRs for individual risks of options.
Variance-covariance method assumes a normal distribution of risks which may underestimate market risk when the distribution of market risk is not normal. This method also does not provide accurate analysis for risks of non-linear products such as options.
Value-at-risk is a commonly used market risk management technique. However, VaR models have the following shortcomings:
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| | • | By its nature as a statistical approach, VaR estimates possible losses over a certain period at a particular confidence level using past market movement data. Past market movement, however, is not necessarily a goodreliable indicator of future events, particularly potential future events that are extreme in nature. |
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| | • | This modelVaR may underestimate the probability of extreme market movements. |
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| | • | The time periods used for the model,Shinhan Bank’s VaR models assume that a holding period of generally one orto ten days are assumedis sufficient prior to be a sufficientliquidating the underlying positions, but the length of the holding period before liquidating the relevant underlying positions. If these holding periods are not sufficient,so assumed may actually be insufficient or too long, the VaR results may understate the potential loss. |
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| • | The use of a 99% confidence level, does not take account of, nor makes any statement about, any losses that might occur beyond this confidence level.excessive. |
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| | • | VaR does not capture all complex effects of various risk factors on the value of positions and portfolios and could underestimate potential losses. |
Currently, Shinhan Bank and Good Morning Shinhan SecuritiesInvestment conduct back-testing of VaR results against actual outcomes on a daily basis.
Shinhan Bank operates an integrated market risk management system which manages Shinhan Bank’s Won-denominated and foreign-denominated accounts. This system uses historical simulation to measure both linear risks arising from such products as equity and debt securities and nonlinear risks arising from other products including options. We believe that this system enables Shinhan Bank to generate elaborate and consistent VaR numbers and perform sensitivity analysis and back testing to check the validity of the models on a daily basis.
Stress test. In addition to VaR, Shinhan Bank performs stress test to measure market risk. As VaR assumes normal market situations, Shinhan Bank assesses its market risk exposure to unlikely abnormal market fluctuations through stress test. Stress test is an important way of supplement VaR since VaR does not cover potential loss if the market moves in a manner which is outside Shinhan Bank’s normal expectations. Stress test projects the anticipated change in value of holding positions under certain scenarios assuming that no action is taken during a stress event to change the risk profile of a portfolio.
Shinhan Bank uses relatively simple but fundamental seven scenarios for stress test taking into account four market risk components such as foreign exchange rates, stock prices and Won-denominated and foreign currency-denominated interest rates. For the worst case scenario, we assumed instantaneous and simultaneous movements in the four market risk components — depreciation of Won by 20%, decrease in Korea Exchange Composite Index by 30%, and increases in Won-denominated and USU.S. dollar-denominated interest rates by 200 basis point and 200 basis point, respectively. In the case of this worst-case scenario, the changeschange in market value of Shinhan Bank’s trading portfolio was a decline of W144.750.9 billion as of December 31, 2007.2009. Shinhan Bank performs stress test at least monthly and reports the results to the ALM Committee and the Risk Management Committee.
Good Morning Shinhan SecuritiesInvestment uses five scenarios for stress testtests, taking into account two market risk components: stock prices (both in terms of stock market indices and ß-based individual stock prices) and interest rates for Won-denominated interest rates.loans. As of December 31, 2007,2009, for the worst case scenario, which was in the case of instantaneous and simultaneous drops in Korea Stock Price Index 200 by 10% and
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a 1% point increase in the three-year government bond yield, the changeschange in market value of Good Morning Shinhan Securities’Investment’s trading portfolio was W19.419.3 billion for one day.
Shinhan Life Insurance uses actual events fromconducts a stress test semi-annually based on a “bad” scenario and a “worst-case” scenario, and the past for stress testing. One example of an actual-event evaluation relates to the evaluation of events over the course of one day following the stock market crash on April 17, 2000 following the news announcementresults of the accounts of SK Networks,stress test include expected losses and which resulted in a dropimpacts on capital adequacy. Shinhan Life Insurance takes preemptive measures on the basis of the KOSPI index by 12.5% on the same date and was accompanied by a 50 basis-point increase in the three-year Government bond yield and a 5.9% depreciation of the Won against the U.S. dollar. Other examples include the evaluation of events over the course of 10 days following the sudden depreciation of the Won in December 1997 and the collapse of the Daewoo Group in July 1999, each of which was accompanied by a more than 10% drop of the KOSPI index, a more than 100 basis-point decrease in the Government bond yield and a more than 10% depreciation of the Won against the U.S. dollar.results from its stress tests.
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Shinhan Bank sets limits on stress testing for its overall operations. Although Shinhan Life Insurance does not set any limits on stress testing, it monitors the impact of market turmoil or any abnormality. Good Morning Shinhan SecuritiesInvestment sets limits on stress testing for its overall operations as well as at its department level. In the case of Shinhan Bank, Good Morning Shinhan SecuritiesInvestment and Shinhan Life Insurance, if the impact is large, their respective chief risk officer may request a portfolio restructuring or other proper action.
Hedging and Derivative Market Risk
The principal objective of our groupwide hedging strategy is to manage its market risk within established limits. We use derivative instruments to hedge itsour market risk as well as to make profits by trading derivative products within pre-approved risk limits. Our derivative trading includes interest rate and cross-currency swaps, foreign currency forwards and futures, stock index and interest rate futures, and stock index and currency options.
While we use derivatives for hedging purposes, derivative transactions themselves incurby nature involve market risk assince we take trading positions and trades them for the purpose of making profits. These activities consist primarily of the following:
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| | • | arbitrage transactions to make profits from short-term discrepancies between the spot and derivative markets or within the derivative markets; |
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| | • | sales of tailor-made derivative products that meet various needs of our corporate customers, principally of Shinhan Bank and Good Morning Shinhan Securities,Investment, and related transactions to reduce its exposure resulting from those sales (in the case of Good Morning Shinhan Securities,Investment, these activities commenced from February 2003 when it acquired the relevant license); |
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| | • | taking positions in limited cases when we expect short-swing profits based on its market forecasts; and |
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| | • | trading to hedge our interest rate and foreign currency risk exposure as described above. |
In relation to our adoption ofASC 820-10 (formerly SFAS No. 157,“Fair Value Measurements”), we have implemented internal processes which include a number of key controls designed to ensure that fair value is measured appropriately, particularly where a fair value model is internally developed and used to price a significant product.
Shinhan Bank assesses the adequacy of the fair market value of a new product derived from its internal model prior to the launch of such product. The assessment process involves the following:
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| • | computation of an internal dealing system market value (based on assessment by the quantitative analysis team of the adequacy of the formula and the model used to compute the market value as derived from the dealing system); |
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| • | computation of the market value as obtained from an outside credit evaluation company; and |
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| • | following comparison of the market value derived from an internal dealing system to that obtained from outside credit evaluation companies, determination as to whether to use the internally developed market value based on inter-departmental agreement. |
The dealing system market value, which is used officially by Shinhan Bank after undergoing the assessment process above, does not undergo a sampling process that confirms the value based on review of individual transactions, but is subject to an additional assessment procedure of comparing such value against the profits derived from the dealing systems based on the deal portfolio sensitivity.
Shinhan Investment follows an internal policy as set by its Fair Value Evaluation Committee for computing and assessing the adequacy of fair value of all of itsover-the-counter derivative products. Shinhan Investment computes the fair value based on an internal model and internal risk management systems and assesses the adequacy of the fair value through cross-departmental checks as well as comparison against fair values obtained from outside credit evaluation companies.
See “Item 5.A. Operating Results — Critical Accounting Policies” and Notes 28 and 29 of the notes to our consolidated financial statements.
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Market risk from derivatives is not significant since derivative trading activities of Shinhan Bank and Good Morning Shinhan SecuritiesInvestment are primarily driven by arbitrage and customer deals with very limited open trading positions. Market risk from derivatives is also not significant for Shinhan Life Insurance as its derivative trading activities are limited to those within pre-approved risk limits and are subject to heavy regulations imposed on the insurance industry. Market risk from derivatives is not significant for our other subsidiaries since the amount of such positions by our other subsidiaries is insignificant.
Market Risk Management for NontradingNon-trading Activities
Interest Rate Risk
Principal market risk from nontradingnon-trading activities of Shinhan Bank is interest rate risk. Interest rate risk is the risk of loss resulting from interest rate fluctuations that adversely affect the financial condition and results of operations of Shinhan Bank. Shinhan Bank’s interest rate risk arises primarily due to differences between the timing of rate changes for interest-earning assets and interest-bearing liabilities.
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Interest rate risk affects Shinhan Bank’s earnings and the economic value of Shinhan Bank’s net assets:
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| | • | Earnings: interest rate fluctuations have an effect on Shinhan Bank’s net interest income by affecting its interest-sensitive operating income and expenses. |
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| | • | Economic value of net assets: interest rate fluctuations influence Shinhan Bank’s net worth by affecting the present value of cash flows from the assets, liabilities and other transactions of Shinhan Bank. |
Accordingly, Shinhan Bank measures and manages interest rate risk for nontradingnon-trading activities by taking into account effects of interest rate changes on both its income and net asset value. Shinhan Bank measures and manages interest rate risk on a daily/monthly basis with respect to all interest-earning assets and interest-bearing liabilities in Shinhan Bank’s bank accounts (including derivatives denominated in Won which are interest rate swaps for the purpose of hedging) and in the trust accounts, except that it measures VaRs on a monthly basis. Most of Shinhan Bank’s interest-earning assets and interest-bearing liabilities are denominated in Won.
Interest Rate Risk Management
The principal objectives of Shinhan Bank’s interest rate risk management are to generate stable net interest income and to protect Shinhan Bank’s net asset value against interest rate fluctuations. To this end, the ALM Committee sets out Shinhan Bank’s interest rate risk limits at least annually and the Risk Management Department monitors Shinhan Bank’s compliance with these limits and reports the monitoring results to the ALM Committee on a monthly basis. Shinhan Bank uses interest rate swaps to control its interest rate exposure limits.
On a daily/monthly basis, Shinhan Bank uses various analytical methodologies to measure and manage its interest rate risk for nontrading activities, including the following:
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| | • | Interest Rate Gap Analysis: Interest rate gap analysis measures the difference in the amounts of interest-earning assets and interest-bearing liabilities at each maturity and re-pricing date for a specific time frame. |
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| | • | Duration Gap Analysis: Duration gap analysis measures durations of Shinhan Bank’s interest-earning assets and interest-bearing liabilities, which are weighted average maturities of these assets and liabilities calculated based on discounted cash flows from these assets and liabilities using yield curves. |
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| | • | Market Value Analysis: Market value analysis measures changes in the market value of Shinhan Bank’s interest-earning assets and interest-bearing liabilities based on the assumption of parallel shifts in interest rates. |
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| | • | Net Interest Income Simulation Analysis: Net interest income simulation analysis uses deterministic analysis methodology to measure changes in Shinhan Bank’s annual net interest income (interest income less interest expenses) under the current maturity structure, using different scenarios for interest rates (assuming parallel shifts) and funding requirements. |
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Interest Rate Gap Analysis
Interest rate gap analysis measures the difference in the amounts of interest-earning assets and interest-bearing liabilities at each maturity and re-pricing date by preparing interest rate gap tables in which Shinhan Bank’s interest-earning assets and interest-bearing liabilities are allocated to the applicable time bucketscategories based on the expected cash flows and re-pricing dates. On a daily basis, Shinhan Bank performs interest rate gap analysis for Won and foreign currency denominated assets and liabilities in its bank and trust accounts. Shinhan Bank’s gap analysis includes Won-denominated derivatives (which are interest rate swaps for the purpose of hedging) and foreign currency-denominated derivatives (which are currency swaps for the purpose of hedging) whose management is centralized at the FX & Derivatives Department. Through the interest rate gap analysis that measures interest rate sensitivity gaps, cumulative gaps and gap ratios, Shinhan Bank assesses its exposure to future interest risk fluctuations.
For interest rate gap analysis, we assumeShinhan Bank assumes and useuses the following maturities for different assets and liabilities:
| | |
| | • | With respect to the maturities and re-pricing dates of Shinhan Bank’s assets, we assumeShinhan Bank assumes that the maturity of Shinhan Bank’s prime rate-linked loans is the same as that of its fixed-rate loans. We also assume that the |
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| | |
| | debt securities in Shinhan Bank’s trading accounts have maturities of three months. Shinhan Bank excludes equity securities from interest-earning assets. |
| | |
| | • | With respect to the maturities and re-pricing of Shinhan Bank’s liabilities, we assumeShinhan Bank assumes that money market deposit accounts and “non-core” demand deposits under the Financial Services Commission guidelines have a maturity of one month or less for Won-denominated accounts and three months or less.less for foreign currency-denominated accounts. With respect to “core” demand deposits under the Financial Services Commission guidelines, we assumeShinhan Bank assumes that they have maturities of eight different intervals ranging from one month to five years. |
The following tables show Shinhan Bank’s interest rate gaps as of December 31, 20072009 for (1) Won-denominated nontradingnon-trading bank accounts, including derivatives for the purpose of hedging and (2) foreign currency-denominated nontradingnon-trading bank accounts, including derivatives for the purpose of hedging.
Won-denominated nontradingnon-trading bank accounts(1)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2009 |
| | | As of December 31, 2007 | | 0-3
| | 3-6
| | 6-12
| | 1-2
| | 2-3
| | Over 3
| | |
| | | 0-3 Months | | 3-6 Months | | 6-12 Months | | 1-2 Years | | 2-3 Years | | Over 3 Years | | Total | | Months | | Months | | Months | | Years | | Years | | Years | | Total |
| | | (In billions of Won, except percentages) | | (In billions of Won, except percentages) |
| |
Interest-earning assets | | W | 68,642 | | | W | 38,205 | | | W | 14,275 | | | W | 10,526 | | | W | 5,917 | | | W | 10,303 | | | W | 147,868 | | | W | 108,386 | | | W | 19,570 | | | W | 10,588 | | | W | 8,251 | | | W | 6,242 | | | W | 14,024 | | | W | 167,061 | |
| Fixed rates | | | 17,263 | | | | 9,256 | | | | 11,072 | | | | 9,194 | | | | 4,449 | | | | 4,679 | | | | 55,913 | | | | 24,952 | | | | 7,656 | | | | 8,684 | | | | 6,329 | | | | 4,743 | | | | 10,772 | | | | 63,136 | |
| Floating rates | | | 50,869 | | | | 27,229 | | | | 1,578 | | | | 461 | | | | 1,008 | | | | 769 | | | | 81,914 | | | | 82,713 | | | | 11,435 | | | | 1,254 | | | | 370 | | | | 511 | | | | 178 | | | | 96,460 | |
| Interest rate swaps | | | 510 | | | | 1,720 | | | | 1,625 | | | | 870 | | | | 460 | | | | 4,855 | | | | 10,040 | | | | 720 | | | | 480 | | | | 650 | | | | 1,552 | | | | 988 | | | | 3,075 | | | | 7,465 | |
Interest-bearing liabilities | | W | 69,637 | | | W | 17,281 | | | W | 24,097 | | | W | 12,074 | | | W | 7,837 | | | W | 12,318 | | | W | 143,244 | | | W | 85,790 | | | W | 17,602 | | | W | 30,625 | | | W | 11,630 | | | W | 5,344 | | | W | 14,026 | | | W | 165,017 | |
| Fixed liabilities | | | 34,507 | | | | 15,099 | | | | 22,600 | | | | 11,785 | | | | 7,634 | | | | 12,103 | | | | 103,728 | | | | 36,331 | | | | 14,348 | | | | 29,377 | | | | 11,534 | | | | 5,313 | | | | 13,768 | | | | 110,671 | |
| Floating liabilities | | | 25,237 | | | | 2,182 | | | | 1,497 | | | | 289 | | | | 203 | | | | 215 | | | | 29,623 | | | | 41,994 | | | | 3,254 | | | | 1,248 | | | | 96 | | | | 31 | | | | 258 | | | | 46,881 | |
| Interest rate swaps | | | 9,890 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 9,890 | | | | 7,465 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 7,465 | |
| Sensitivity gap | | | (993 | ) | | | 20,925 | | | | (9,822 | ) | | | (1,549 | ) | | | (1,920 | ) | | | (2,015 | ) | | | 4,626 | | | | 22,595 | | | | 1,969 | | | | (20,037 | ) | | | (3,380 | ) | | | 898 | | | | (2 | ) | | | 2,044 | |
| Cumulative gap | | | (993 | ) | | | 19,932 | | | | 10,110 | | | | 8,591 | | | | 6,642 | | | | 4,627 | | | | | | | 22,595 | | | | 24,564 | | | | 4,527 | | | | 1,147 | | | | 2,045 | | | | 2,044 | | | | 2,044 | |
| % of total assets | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | 13.53 | % | | | 14.70 | % | | | 2.71 | % | | | 0.69 | % | | | 1.22 | % | | | 1.22 | % | | | 1.22 | % |
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Foreign currency-denominated nontradingnon-trading bank accounts(1)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2009 | |
| | | As of December 31, 2007 | | 0-3
| | 3-6
| | 6-12
| | 1-3
| | Over 3
| | | |
| | | 0-3 Months | | 3-6 Months | | 6-12 Months | | 1-3 Years | | Over 3 Years | | Total | | Months | | Months | | Months | | Years | | Years | | Total | |
| | | (In millions of US$, except percentages) | | (In millions of US$, except percentages) | |
| |
| Interest-earning assets | | $ | 13,598 | | | $ | 2,710 | | | $ | 1,240 | | | $ | 1,142 | | | $ | 2,335 | | | $ | 21,025 | | | $ | 11,628 | | | $ | 2,876 | | | $ | 1,512 | | | $ | 1,608 | | | $ | 1,675 | | | $ | 19,298 | |
| Interest-bearing Liabilities | | | 13,675 | | | | 3,693 | | | | 1,273 | | | | 1,132 | | | | 2,821 | | | | 22,594 | | | | 9,735 | | | | 3,031 | | | | 2,472 | | | | 3,189 | | | | 2,085 | | | | 20,514 | |
| Sensitivity gap | | | (77 | ) | | | (983 | ) | | | (34 | ) | | | 10 | | | | (486 | ) | | | (1,570 | ) | | | 1,893 | | | | (156 | ) | | | (960 | ) | | | (1,581 | ) | | | (410 | ) | | | (1,215 | ) |
| Cumulative gap | | | (77 | ) | | | (1,060 | ) | | | (1,094 | ) | | | (1,084 | ) | | | (1,570 | ) | | | | | | 1,893 | | | | 1,737 | | | | 776 | | | | (805 | ) | | | (1,215 | ) | | | (1,215 | ) |
| % of total assets | | | (0.4 | )% | | | (5.0 | )% | | | (5.2 | )% | | | (5.2 | )% | | | (7.5 | )% | | | | | | 9.81 | % | | | 9.00 | % | | | 4.02 | % | | | (4.17 | )% | | | (6.30 | )% | | | (6.30 | )% |
Note:
| | |
| (1) | | Includes merchant banking accounts |
Duration Gap and Market Value Analysis
Shinhan Bank performs a duration gap analysis to measure effects of interest rate risk on the market value of its assets and liabilities. Shinhan Bank measures, on a daily basis and for each operating department, account, product and currency, durations of interest-earning assets and interest-bearing liabilities. Shinhan Bank also measures, on a daily basis, changes in the market value of Shinhan Bank’s interest-earning assets and interest-bearing liabilities.
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The following tables show duration gaps and market values of Shinhan Bank’s Won-denominated interest-earning assets and interest-bearing liabilities in its not-trading accounts as of December 31, 20072009 and changes in these market values when interest rate increases by one percentage point.
Duration as of December 31, 20072009 (for nontradingnon-trading Won-denominated bank accounts)accounts(1))
| | | | | |
| | | Duration as of
| |
| | | December 31, 2007(1)
| |
| | 2009(1) | |
| | | (In months) | |
| |
| Interest-earning assets | | | 8.49.22 | |
| Interest-bearing liabilities | | | 9.99.01 | |
| Gap | | | (1.50.41 | ) |
Market Value as of December 31, 20072009 (for nontradingnon-trading Won-denominated bank accounts)accounts(1))
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Market Value as of December 31, 2007(1) | | Market Value as of December 31, 2009(1) | |
| | | Actual | | 1% Point Increase | | Changes | | Actual | | 1% Point Increase | | Changes | |
| | | (In billions of Won) | | (In billions of Won) | |
| |
| Interest-earning assets | | W | 150,058 | | | W | 149,075 | | | W | (983 | ) | | W | 170,081 | | | W | 168,893 | | | W | (1,188 | ) |
| Interest-bearing liabilities | | | 143,674 | | | | 142,589 | | | | (1,085 | ) | | | 166,467 | | | | 165,313 | | | | (1,154 | ) |
| Gap | | | 6,384 | | | | 6,486 | | | | 101 | | | | 3,614 | | | | 3,580 | | | | (34 | ) |
Note:
| | |
| (1) | | Includes Merchant Bankingmerchant banking accounts and derivatives for the purpose of hedging. |
Net Interest Income Simulation
Shinhan Bank performs net interest income simulation to measure the effects of the change in interest rate on its results of operations. Such simulation measures the estimated changes in Shinhan Bank’s annual net interest income (interest income less interest expenses) under the current maturity structure, using different scenarios for interest rates and funding requirements.rates. For such simulation, Shinhan Bank applies three scenarios of parallel shifts in interest rate: (1) no change, (2) a 1% point increase in interest rates and (3) a 1% point decrease in interest rates. For funding requirement changes, Shinhan Bank uses two scenarios: (1) no change in funding requirement and (2) a 10% increase in funding requirement.
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The following tables illustrate by way of an example the simulated changes in Shinhan Bank’s annual net interest income for 20082009 with respect to Won-denominated interest-earning assets and interest-bearing liabilities, using Shinhan Bank’s net interest income simulation model, when it assumes (a) the maturity structure and funding requirement of Shinhan Bank as of December 31, 20072009 and (b) the same interest rates as of December 31, 20072009 and a 1% point increase or decrease in the interest rates.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Simulated Net Interest Income for 2009
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (For Non-Trading Won-Denominated Bank Accounts)(1) |
| | | Simulated Net Interest Income for 2008
| | | | Change in Net
| | Change in Net
|
| | | (For Nontrading Won-denominated Bank Accounts)(1) | | Assumed Interest Rates | | Interest Income | | Interest Income |
| | | | | Change in Net
| | Change in Net
| | | | | | | | | | %
| | | | %
|
| | | | | | | | | Interest Income | | Interest Income | | | | | | | | Amount
| | Change
| | Amount
| | Change
|
| | | Assumed Interest Rates | | Amount
| | % Change
| | Amount
| | % Change
| | | | 1%
| | 1%
| | (1%
| | (1%
| | (1%
| | (1%
|
| | | | | 1% Point
| | 1% Point
| | (1% Point
| | (1% Point
| | (1% Point
| | (1% Point
| | No
| | Point
| | Point
| | Point
| | Point
| | Point
| | Point
|
| | | No Change | | Increase | | Decrease | | Increase) | | Increase) | | Decrease) | | Decrease) | | Change | | Increase | | Decrease | | Increase) | | Increase) | | Decrease) | | Decrease) |
| | | (In billions of Won, except percentages) | | (In billions of Won, except percentages) |
| |
| Simulated interest income | | W | 9,640 | | | W | 10,588 | | | W | 8,692 | | | W | 948 | | | | 9.8 | % | | W | (948 | ) | | | (9.8 | )% | | W | 9,463 | | | W | 10,556 | | | W | 8,370 | | | W | 1,093 | | | | 11.55 | % | | W | (1,093 | ) | | | (11.55 | )% |
| Simulated interest expense | | | 6,066 | | | | 6,660 | | | | 5,469 | | | | 594 | | | | 9.8 | | | | (597 | ) | | | (9.8 | ) | | | 5,507 | | | | 6,318 | | | | 4,696 | | | | 811 | | | | 14.73 | % | | | (811 | ) | | | (14.73 | )% |
| Net interest income | | | 3,574 | | | | 3,928 | | | | 3,223 | | | | 354 | | | | 9.8 | | | | (351 | ) | | | (9.8 | ) | | | 3,956 | | | | 4,237 | | | | 3,675 | | | | 281 | | | | 7.11 | % | | | (281 | ) | | | (7.11 | )% |
Note:
| | |
| (1) | | Includes merchant banking accounts.Excludes Merchant Banking account and derivatives for the purpose of hedging. |
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Shinhan Bank’s Won-denominated interest earning assets and interest-bearing liabilities in nontradingnon-trading accounts have a maturity structure that benefits from an increase in interest rates, because the re-pricing periods of the interest-earning assets in Shinhan Bank’s nontradingnon-trading accounts aretend to be shorter than those of the interest-bearing liabilities in these accounts. This is primarily due to a continuous decrease in interest rate in the recent years in Korea, which resulted in a significant increase in floating rate loans, resulting in the maturities or re-pricing periods of Shinhan Bank’s loans shorter. As a result, Shinhan Bank’s net interest income increasestends to increase when the market interest rates rise.
Interest Rate VaRs for NontradingNon-trading Assets and Liabilities
Shinhan Bank measures VaRs for interest rate risk from nontradingnon-trading activities on a monthly basis. The following table shows, as of and for the year ended December 31, 2007,2009, the VaRs of interest rate mismatch risk for other assets and liabilities, which arises from mismatches in the re-pricing dates of Shinhan Bank’s nontradingnon-trading interest-earning assets and interest-bearing liabilities includingavailable-for-sale investment securities. Under the Financial Services Commission regulations, Shinhan Bank includes in calculation of these VaRs interest-earning assets and interest-bearing liabilities in its bank accounts and its merchant banking accounts.
| | | | | | | | | | | | | | | | | |
| | | VaR for the Year 2007(1) |
| | | Average | | Minimum | | Maximum | | As of December 31 |
| | | (In billions of Won) |
| |
| Interest rate mismatch — nontrading assets and liabilities | | W | 374 | | | W | 219 | | | W | 536 | | | W | 462 | |
| | | | | | | | | | | | | | | | | |
| | | VaR for the Year 2009(1) |
| | | Average | | Minimum | | Maximum | | As of December 31 |
| | | (In billions of Won) |
| |
| Interest rate mismatch — nontrading assets and liabilities | | W | 279 | | | W | 238 | | | W | 311 | | | W | 279 | |
Note:
| | |
| (1) | | One-year VaR results with a 99% confidence level. |
Equity Risk
Substantially all of ourShinhan Bank’s equity risk results from its equity portfolio of stocks of Korean companies. As of December 31, 2007, we2009, Shinhan bank held an aggregate amount of W10.390 billion of equity sharesinterest in unlisted foreign companies.companies (including W0 billion invested in unlisted private equity funds).
The equity securities in Won held in Shinhan Bank’s investment portfolio consist of stocks listed on the StockKRX KOSPI Market or the KRX KOSDAQ Market of the Korea Exchange and certain non-listed stocks. Shinhan Bank measures VaRs for all of these equity securities but does not manage most of the related risk using VaR limits, as
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most of these securities are held for reasons other than normal investment purposes. As of December 31, 2007,2009, Shinhan Bank held equity securities in an aggregate amount of W4,8254,342.5 billion in its nontradingnon-trading accounts, including other equity securities in the amount of W1,8633,163.5 billion that it held, among other reasons, for management control purposes orand as a result ofdebt-to-equity conversion as a part of reorganization proceedings of the companies to which it had extended loans.
As of December 31, 2007,2009, Shinhan Bank held Won-denominated convertible and exchangeable bonds in the amount of W02 billion and foreign currency convertible andcurrency-denominated exchangeable bonds in the amount of W0 billion in its nontradingnon-trading accounts. Shinhan Bank does not measure equity risk with respect to convertible and exchangeable bonds and the interest rate risk of these bonds are measured together with the other debt securities. As such, Shinhan Bank measures interest rate risk VaRs but not equity risk VaRs for these equity-linked securities.
The following table shows the VaRs of Shinhan Bank’s equity risk from nontrading activitiesfor listed equity for the year and as of December 31, 2007.2009.
| | | | | | | | | | | | | | | | | |
| | | VaR for the Year 2007(1) |
| | | Average | | Minimum | | Maximum | | As of December 31 |
| | | (In billions of Won) |
| |
| Listed equities | | W | 417 | | | W | 197 | | | W | 584 | | | W | 554 | |
| | | | | | | | | | | | | | | | | |
| | | VaR for the Year 2009(1) | |
| | | | | | | | | | | | As of
| |
| | | Average | | | Minimum | | | Maximum | | | December 31 | |
| | | (In billions of Won) | |
| |
| Listed equities | | W | 9.4 | | | W | 3.8 | | | W | 26.4 | | | W | 3.8 | |
Note:
| | |
| (1) | | Ten-day VaR results with a 99%99.9% confidence level. |
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Liquidity Risk Management
Liquidity risk is the risk of insolvency, default or loss due to disparity between inflow and outflow of funds, including having to obtain funds at a high price or to dispose of securities at an unfavorable price due to lack of available funds or losing attractive investment opportunities.
Shinhan Bank applies the following basic principles for liquidity risk management:
| | |
| | • | maintain an appropriate level of liquidity risk through liquidity risk management based on liquidity gap ordebt-to-equity ratio at each maturity date; |
| |
| | • | assess and monitor net cash flows by currency and by maturity and continuously evaluate available sources of funds and possibility of disposal of any liquid assets; |
| |
| | • | diversify sources and uses of funds by product and by maturity to prevent excessive concentration in certain periods or products; and |
| |
| | • | prepare contingency plans to cope with liquidity crisis. |
Each subsidiary manages liquidity risk in accordance with the risk limits and guidelines established internally as well as those directed by the relevant regulatory authorities. Pursuant to principal regulations applicable to financial holding companies and banks as promulgated by the Financial Services Commission, we, at the holding company, are required to keep specific Won and foreign currency liquidity ratios. These ratios require us to keep the ratio of liquid assets to liquid liabilities above certain minimum levels.
Shinhan Bank manages its liquidity risk within the limits set on Won and foreign currency accounts in accordance with the regulations of the Financial Services Commission. The Financial Services Commission requires Korean banks to maintain a Won liquidity ratio of at least 100.0% and a foreign currency liquidity ratio of at least 85%. The Financial Services Commission defines the foreign currency liquidity ratio as foreign currency-denominated liquid assets (including marketable securities) due within three months divided by foreign currency-denominated liabilities due within three months. As for the Won liquidity ratio, prior to October 2008 the Financial Services Commission defined it as Won-denominated liquid assets (including marketable securities) due within three months divided by Won-denominated liabilities due within three months, but since October 2008 defines it as Won-denominated liquid assets (including marketable securities) due within one month divided by Won-denominated liabilities due within one month.
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TheShinhan Bank’s Treasury Department is in charge of liquidity risk management with respect to Shinhan Bank’s Won and foreign currency funds. The Treasury Department submits Shinhan Bank’s monthly funding and asset management plans to theShinhan Bank’s ALM Committee for its approval, based on the analysis of various factors, including macroeconomic indices, interest rate and foreign exchange movements and maturity structures of Shinhan Bank’s assets and liabilities. TheShinhan Bank’s Risk Management Department measures Shinhan Bank’s liquidity ratio and liquidity gap ratio on a daily basis and reports whether they are in compliance with the limits to theShinhan Bank’s ALM Committee on a monthly basis.
The following tables show Shinhan Bank’s liquidity status and limits for WonWon-denominated and foreign currencycurrency-denominated accounts (including derivatives)derivatives and merchant banking accounts) as of December 31, 20072009 in accordance with the regulations of the Financial Services Commission.
Shinhan Bank’s Won-denominated accounts (including derivatives and merchant banking accounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2007 |
Won-denominated
| | | | | | | | | | | | Substandard
| | |
Accounts | | 0-3 Months | | 3-6 Months | | 6-12 Months | | 1-3 Years | | Over 3 Years | | or Below | | Total |
| | | (In billions of Won except percentage) |
| |
| Assets: | | W | 65,844 | | | W | 23,892 | | | W | 40,584 | | | W | 28,096 | | | W | 39,785 | | | W | 1,031 | | | W | 199,232 | |
| Liabilities: | | | 62,440 | | | | 19,472 | | | | 35,298 | | | | 25,425 | | | | 41,619 | | | | — | | | | 184,254 | |
| For three months or less: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liquidity gap | | | 3,404 | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liquidity ratio | | | 105.5 | % | | | | | | | | | | | | | | | | | | | | | | | | |
| Limit(1) | | | 105 | % | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2009 | |
| | | | | | | | | | | | | | | | | | | | | Sub-
| | | | |
| | | 0-1
| | | 1-3
| | | 3-6
| | | 6-12
| | | 1-3
| | | Over
| | | Standard
| | | | |
| Won-Denominated Accounts | | Months | | | Months | | | Months | | | Month | | | Years | | | 3 Years | | | or Below | | | Total | |
| | | (In billions of Won, except percentages) | |
| |
| Assets: | | W | 59,891 | | | W | 26,741 | | | W | 26,503 | | | W | 39,473 | | | W | 25,666 | | | W | 43,957 | | | W | 1,320 | | | W | 223,552 | |
| Liabilities: | | | 46,440 | | | | 21,397 | | | | 16,365 | | | | 53,842 | | | | 16,606 | | | | 50,779 | | | | | | | | 205,403 | |
| For one month or less: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liquidity gap | | | 13,451 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liquidity ratio(1) | | | 128.96 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Limit | | | 100.00 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Foreign currencies denominatedShinhan Bank’s foreign currencies-denominated accounts (including derivatives and merchant
banking accounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2009 | |
| | | As of December 31, 2007 | | | | | | | | | | | | | | Sub-
| | | |
Foreign Currencies
| | 7 Days or
| | 7 Days-
| | | | | | 6-12
| | Over 1
| | Substandard
| | | | 7 Days or
| | 7 Days-
| | | | 3-6
| | 6-12
| | Over
| | Standard
| | | |
Denominated Accounts: | | Less | | 1 Months | | 3 Months | | 3-6 Months | | Months | | Year | | or Below | | Total | | Less | | 1 Months | | 3 Months | | Months | | Months | | 1 Year | | or Below | | Total | |
| | | (In millions of US$ except percentage) | | (In millions of US$, except percentages) | |
| |
| Assets: | | $ | 8,650 | | | $ | 9,565 | | | $ | 13,348 | | | $ | 9,460 | | | $ | 9,915 | | | $ | 14,794 | | | $ | 39 | | | $ | 65,771 | | | $ | 9,791 | | | $ | 9,289 | | | $ | 13,826 | | | $ | 6,148 | | | $ | 6,059 | | | $ | 9,990 | | | $ | 152 | | | $ | 55,256 | |
| Liabilities | | | 6,489 | | | | 10,090 | | | | 13,096 | | | | 9,334 | | | | 10,575 | | | | 15,918 | | | | — | | | | 65,502 | | | | 7,789 | | | | 8,807 | | | | 12,516 | | | | 6,691 | | | | 6,159 | | | | 14,391 | | | | | | | | 56,354 | |
| For three months or less: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Assets | | | | | | | | | 31,564 | | | | | | | | | | | | | | | | | | | | | | | | | | | 32,907 | | | | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | 29,675 | | | | | | | | | | | | | | | | | | | | | | | | | | | 29,113 | | | | | | | | | | | | | | | | | | | | | |
| Liquidity ratio | | | | | | | | | 106.4 | % | | | | | | | | | | | | | | | | | | | | | | | | | | 113.03 | % | | | | | | | | | | | | | | | | | | | | |
| Limit(1) | | | | | | | | | 85 | % | | | | | | | | | | | | | | | | |
| Limit | | | | | | | | | | | | 85.00 | % | | | | | | | | | | | | | | | | | | | | |
Note:
| | |
| (1) | | The limit underIn October 31, 2008, the Banking Law and the regulations promulgated by the Financial Services Commission is 100%. Shinhan Bank maintains the 105% limit on a voluntary basis.criterion for Won-denominated liquidity ratio was changed from three months of residual maturity to one month of residual maturity. |
Shinhan Bank maintains diverse sources of liquidity to facilitate flexibility in meeting its funding requirements. Shinhan Bank funds its operations principally by accepting deposits from retail and corporate depositors, accessing the call loan market (a short-term market for loans with maturities of less than one month), issuing debentures and borrowing from the Bank of Korea. Shinhan Bank uses the funds primarily to extend loans or purchase securities. Generally, deposits are of shorter average maturity than loans or investments.
Shinhan Card manages its liquidity risk according to the following principles: (i) it must be able to provide a sufficient volume of necessary funding in a timely manner at a reasonable cost, (ii) it must establish an overall liquidity risk management strategy, including in respect of liquidity management targets, policy and internal control
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systems, and (iii) it must manage its liquidity risk in conjunction with other risks based on a comprehensive understanding of the interaction among the various risks. In managing its liquidity risks, Shinhan Card focuses on a prompt response system based on periodic monitoring of the relevant early signals, stress testing and contingency plan formulations. Shinhan Card identifies its funding needs on a daily, monthly, quarterly and annual basis based on the maturity schedule of its liabilities as well as short-term liquidity needs, based upon which it formulates its funding plans using diverse sources such as corporate debentures, commercial papers, asset-backed securitizations and credit line facilities. Shinhan Card also has in place master asset-backed securitization arrangements through which it can securitize assets with minimum delay, and when entering into asset-backed securitizations, it provides sufficient credit enhancements to avoid triggering early amortization events. In addition, Shinhan Card formulates long-term funding plans with a time horizon of three years, enters into derivative arrangements to hedge interest rate- and foreign currency-related risks and conducts pre-transaction risk analyses before entering into any new type of derivative arrangements.
Furthermore, Shinhan Card also manages its liquidity risk within the limits set on Won accounts in accordance with the regulations of the Financial Services Commission. The Financial Services Commission requires Korean credit card companies to maintain a Won liquidity ratio of at least 100.0%,
The following tables show Shinhan Card’s liquidity status and limits for Won-denominated accounts as of December 31, 2009 in accordance with the regulations of the Financial Services Commission.
Shinhan Card’s Won-denominated accounts
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 7 Days or
| | | 1 Months or
| | | 3 Months or
| | | 6 Months or
| | | 1 Year or
| | | Over
| | | | |
| Won-Denominated Accounts | | Less | | | Less | | | Less | | | Less | | | Less | | | 1 Year | | | Total | |
| | | (In billions of Won) | |
| |
| Assets | | | 1,647.24 | | | | 7,294.93 | | | | 10,780.70 | | | | 12,247.84 | | | | 14,416.72 | | | | 3,558.80 | | | | 17,975.52 | |
| Liabilities | | | 447.95 | | | | 1,983.77 | | | | 2,684.70 | | | | 3,443.44 | | | | 4,857.58 | | | | 6,302.77 | | | | 11,160.36 | |
| Liquidity ratio | | | | | | | | | | | 401.56 | % | | | | | | | | | | | | | | | | |
Shinhan Investment manages its liquidity risk for its Won-denominated accounts by setting a limit of W100 billion on each of itsseven-day and one-month liquidity gap, a limit of 110% on its three-months liquidity ratio and a limit of W10 billion on its liquidity VaR. As for its foreign currency-denominated accounts, Shinhan Investment manages the liquidity risk on a quarterly basis in compliance with the guidelines of the Financial Supervisory Service, which requires the one-week and one-month maturity mismatch ratios to be 0% and -10% or less, respectively, and the three months liquidity ratio to be 80% or higher.
Our subsidiaries other than Shinhan Banksubsidiaries fund their operations primarily through call money, bank loans, commercial paper, corporate debentures and asset-backed securities. Our holding company acts as a funding vehicle for long-term financing of our subsidiaries whose credit ratings are lower than the holding company, including Shinhan Card and Shinhan Capital, to lower the overall funding costs within regulatory limitations. Under the Monopoly Regulation and Fair Trade Act of Korea, however, a financial holding company is prohibited from borrowing funds in excess of 200% of its total stockholders’ equity. In addition, pursuant to our liquidity risk management policies designed to ensure compliance with required capital adequacy and liquidity ratios, we have set limits to the amount of liquidity support by our holding company to our subsidiaries to 70% of our total stockholders’ equity and the amount of liquidity support to a single subsidiary to 35% of our total stockholders’ equity.
In addition to liquidity risk management under the normal market situations, we have contingentcontingency plans to effectively cope with possible liquidity crisis. Liquidity crisis arises when we would not be able to effectively manage the situations with our normal liquidity management measures due to, among other reasons, inability to access our normal sources of funds or epidemic withdrawals of deposits as a result of various external or internal factors, including a collapse in the financial markets or abrupt deterioration of our credit. We have contingency plans corresponding to different stages of liquidity crisis, “cautionary stage,” “near-crisis stage” and “crisis stage,” based on the following liquidity indices:
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| | • | indices that reflect the market movements such as interest rates and stock prices; |
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| | • | indices that reflect financial market psychology such as the size of money market funds; and |
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| | • | indices that reflect our internal financial condition. |
Operational Risk Management
Operational risk is difficult to quantify and subject to different definitions. The Basel Committee defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people and systems or from other external events. Similarly, we define operational risk as the risks related to our overall management other than credit risk, market risk, interest rate risk and liquidity risk. These include risks arising from system failure, human error or non-adherence to policy and procedures, from fraud or inadequate internal controls and procedures, from
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environmental changes, resulting in financial and non-financial loss, including reputational loss. We monitor and assess operational risks related to our business operations, including administrative risk, information technology risk, managerial risk, legal risk and reputation risk, with a view to minimizing such losses.
The Group Internal Audit Activity,Department at our holding company, reporting directly to our Audit Committee, is directly responsible for overseeing our operational risk management with a focus on legal, regulatory, operational and reputational risks. Our holding company’s Audit Committee oversees and monitors our operational compliance with legal and regulatory requirements. At the holding company level, we define each subsidiary’s operational process and establish an internal review system applicable to each subsidiary. Each subsidiary’s operational risk is internally monitored and managed at the subsidiary level and the Group Internal Audit Activity continuously monitors the integrity of our subsidiaries’ operational risk management system. Our holding company’s Board of Directors and the Group Risk Management Committee and our Audit Committee establish our basic policies for operational risk management at the group level.
To monitor and manage operational risks, Shinhan Bank maintains, a system of comprehensive policies and has in place a control framework designed to provide a stable and well-managed operational environment throughout the organization. Currently, the primary responsibility for ensuring compliance with our banking operational risk procedures remains with each of the business units and operational teams. In addition, the Audit Department, the Risk Management Department and the Compliance Department of Shinhan Bank also play important roles in reviewing and maintaining the integrity of Shinhan Bank’s internal control environment.
The operational risk management system of Shinhan Bank is managed by the operational risk team under the Risk Management Department. The current system principally consists of risk control self-assessment, risk quantification using key risk indicators, loss data collection, scenario management and operational risk capital measurement. Shinhan Bank operates several educational and awareness programs with a view to familiarizing all of its employees to this new system. In addition, Shinhan Bank has a designated operational risk manager at each of its departments and branch offices, serving the role of a coordinator between the operational risk team at the headquarters and the employees in the field and seeking to provide centralized feedback to further improve the operational risk management system.
As of May 15, 2008,December 31, 2009, Shinhan Bank has conducted seven risk control self-assessments on its departments as well as domestic and overseas branch offices, from which it collects systematized data on all of its branch offices, and uses the findings from such self-assessments to improve the procedures and processes for the relevant departments or branch offices. In addition, Shinhan Bank has accumulated risk-related data since 2003, improved the procedures for monitoring operational losses and is developing risk simulation models. In addition, Shinhan Bank selects and monitors, at the department level, approximately 200188 key risk indicators.
Shinhan Investment, through its operational risk management system, conducts self-assessments of risks, collects loss data and manages key risk indicators. The operational risk management system is supervised by its audit department, compliance department and operational risk management department, as well as a risk management officer in each of Shinhan Investment’ departments.
The audit committee of Shinhan Bank, which consists of three board members, including two outside directors, is an independent inspection authority that supervises Shinhan Bank’s internal controls and compliance with established ethical and legal principles. The audit committee performs internal audits of, among other matters, Shinhan Bank’s overall management and accounting, and supervises theits Audit Department of Shinhan Bank that assists theShinhan
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Bank’s audit committee. TheShinhan Bank’s audit committee also reviews and evaluates Shinhan Bank’s accounting policies and their changes, financial and accounting matters and fairness of financial reporting.
TheShinhan Bank’s Audit Committee and the Audit Department supervise and perform the following audits:
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| | • | general audits, including full-scale audits performed annually for the overall operations, sectional audits of selected operations performed when necessary, and periodic and irregular spot audits; |
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| | • | special audits, performed when the Audit Committee or standing auditor deems it necessary or pursuant to requests by the chief executive officer or supervisory authorities such as the Financial Supervisory Service; |
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| | • | day-to-day audits, performed by the standing auditor for material transactions or operations that are subject to approval by the heads of Shinhan Bank’s operational departments or senior executives; |
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| | • | real-time monitoring audits, performed by the computerized audit system to identify any irregular transactions and take any necessary actions; and |
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| | • | self-audits as a self-check by each operational department to ensure its compliance with our business regulations and policies, which include daily audits, monthly audits and special audits. |
In addition to these audits and compliance activities, theShinhan Bank’s Audit Department designates operational risk management examiners to monitor the appropriateness of operational risk management frameworks and the functions and activities of the board of directors, relevant departments and business units, and conducts periodic checks on the operational risk and reports such findings. TheShinhan Bank’s Audit Department also reviews in advance proposed banking products or other business or service plans with a view to minimizing operational risk.
As for Shinhan Investment, its audit department conducts an annual inspection as to whether the internal policy and procedures of Shinhan Investment relating to its overall operation risk management are being effectively complied. The inspection has a particular focus on the appropriateness of the scope of operational risks and the collection, maintenance and processing of relevant operating data.
General audits, special audits,day-to-day audits and real-time monitoring audits are performed by our examiners, and self-audits are performed by the self-auditors of the relevant operational departments.
In addition to internal audits and inspections, the Financial Supervisory Service conducts general annual audits of operations at Shinhan Financial Groupour and also performs general annual audits of our subsidiaries’ operations. The Financial Supervisory Service also performs special audits as the need arises on particular aspects of our and our subsidiaries’ operations such as risk management, credit monitoring and liquidity. In the ordinary course of these audits, the Financial Supervisory Service routinely issue warning notices where it determines that a regulated financial institution or such institution’s employees have failed to comply with the applicable laws or rules, regulations and guidelines of the Financial Supervisory Service. We and our subsidiaries have in the past received, and expect in the future to receive, such notices and we have taken and will continue to take appropriate actions in response to such notices. For example, in January 2009, we reported to the Financial Supervisory Service that an employee at a regional branch of Shinhan Bank had embezzled approximately W22.0 billion of Shinhan Bank’s funds. We already recovered W2.7 billion of the embezzled fund and expect to additionally recover approximately W3.0 billion. With regard to this incident, the Financial Supervisory Service has issued a “cautionary warning” to Shinhan Bank’s Chief Executive Officer and has imposed punitive measures against the officers and employees who were involved with the incident.
We consider legal risk as a part of operational risk. The uncertainty of the enforceability of obligations of our customers and counterparties, including foreclosure on collateral, creates legal risk. Changes in laws and regulations could also adversely affect us. Legal risk is higher in new areas of business where the law is often untested in the courts although legal risk can also increase in our traditional business to the extent that the legal and regulatory landscape in Korea is changing and many new laws and regulations governing the banking industry remain untested. We seek to minimize legal risk by using stringent legal documentation, employing procedures designed to ensure that transactions are properly authorized and consulting legal advisers. The Compliance Department operates Shinhan Bank’s compliance inspection system. This system is designed to ensure that all of Shinhan Bank’s employees comply with the law. The compliance inspection system’s main function is to monitor the degree of improvement in compliance with the law, maintain internal controls (including ensuring that each
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department has established proper internal policies and that it complies with those policies) and educate employees about observance of the law. The Compliance Department also supervises the management, execution and performance of the self-audits. Shinhan Investment also maintains a legal department and a compliance department to manage legal risks and compliance risks, respectively. The functions of these are department are similar to those of their counterparts at Shinhan Bank.
Upgrades and Integration of Risk Management
OnIn December 28, 2007, Shinhan Bank obtained approval from the Financial Supervisory Service to use an internal market risk evaluation model, and onin April 28, 2008, Shinhan Bank became the first commercial bank in Korea to obtain approval from the Financial Supervisory Service to use the foundation internal rating-based(“F-IRB”) method with respect to the Basel II credit risks related to loan portfolios of large companies, smallsmall- and mediummedium-sized enterprises and retail outlets.
In December 2008, Shinhan Bank applied for approval from the Financial Supervisory Service to use the advanced measurement approach (“AMA”) with respect to operational risks and is currently undergoing the review process. The approval to use the internal market risk evaluation model enables Shinhan Bank to gain a pricing advantage compared to other banks, as suchthis model makes it easier for Shinhan Bank to manage its capital and meet the BIS equity ratio through a differentiated risk assessment based on the borrower’s credit rating.
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Since 2003, in anticipation ofIn compliance with the Basel II requirements, Shinhan Bank has taken measures to improve its risk management system, including the design and operation of its credit evaluation model, quantitative modeling of risk factors and testing the adequacy of such factors, and management and monitoring of credit risks, to a level consistent with international practice. Consistent with this approach, since 2005, Shinhan Bank has been reflectingreflects the cost of credit based on expected loss in the computation of its pre-tax profits and also adopted the Risk Adjusted Return on Capital (“RAROC”) system to evaluate risk adjustments, and in 2008, Shinhan Bank expects to give further weight to the use of the RAROC evaluation system in determining the lending rates and the risk-adjusted profitability of such loans.adjustments.
Shinhan Bank aims to apply the Basel II standards and principles more systematically in its systems governing the lending process, price determination, portfolio and risk management, allocation of capital, performance evaluations and incentive determinations. In particular, Shinhan Bank aims to further develop portfolio management techniques to optimize the investment of its own capital in light of the differentiated determination of regulatory capital based on the level of risk under Basel II.
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SUPERVISION AND REGULATIONSupervision and Regulation
Principal Regulations Applicable To Financial Holding Companies
General
The Korean financial holding companies and their subsidiaries are regulated by the Financial Holding Companies Act (last amended on MayJuly 31, 20052009, Law No. 7529)9788). In addition, Korean financial holding companies and their subsidiaries are subject to the regulations and supervision of the Financial Services Commission and the Financial Supervisory Service.
The Financial Services Commission, established on April 1, 1998 and renamed as such as of February 29, 2008 from the Financial Supervisory Commission, exerts direct control over financial holding companies pursuantPursuant to the Financial Holding Companies Act, including approval for the establishmentFinancial Services Commission regulates various activities of financial holding companies, issuingcompanies. For instance, it approves the application for setting up a new financial holding company and promulgates regulations on the capital adequacy of financial holding companies and their subsidiaries and draftingother regulations relating to the supervision of financial holding companies.
The Financial Supervisory Service was established on January 2, 1999, as a unified body of the former Banking Supervisory Authority (the successor to the Office of Bank Supervision, the Securities Supervisory Board, the Insurance Supervisory Board and the Credit Management Fund). The Financial Supervisory Service is subject to the instructions and directives of the Financial Services Commission and carries out supervision and examination of financial holding companies and their subsidiaries. In particular, the Financial Supervisory Service sets forth liquidity and capital adequacy requirements regardingfor financial holding companies’ liquiditycompanies and for capital adequacy and establishes reporting requirements withinpursuant to the authority delegated to the Financial Supervisory Service under the Financial Services Commission regulations, pursuant to which financial holding companies are required to submit quarterly reports on business performance, financial status and other matters prescribed in the Presidential Decree of the Financial Holding Companies Act.
Under the Financial Holding Companies Act, the establishment of a financial holding company must be approved by the Financial Services Commission. A financial holding company is required to be mainly engaged in controlling its subsidiaries by holding the shares or equities of the subsidiaries in the amount of not less than 50% of
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aggregate amount of such financial holding company’s assets based on the latest balance sheet. A financial holding company is prohibited from engaging in any profit-making businesses other than controlling the management of its subsidiaries and certain ancillary businesses as prescribed in the Presidential Decree of the Financial Holding Companies Act which include the following businesses:
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| | • | financially supporting its subsidiaries and the subsidiaries of its subsidiaries (the “direct and indirect subsidiaries”); |
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| | • | raising capital necessary for the investment in subsidiaries or providing financial support to its direct and indirect subsidiaries; |
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| | • | supporting the business of its direct and indirect subsidiaries for the joint development and marketing of new product and the joint utilization of facilities or IT systems; and |
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| | • | pursuing any other businessesactivities exempted from authorization, permission or approval under the applicable laws and regulations. |
The Financial Holding Companies Act requires every financial holding company (other than any financial holding company that is controlled by any other financial holding company) or its subsidiaries to obtain the prior approval from the Financial Services Commission before acquiring control of another company or to file with the Financial Services Commission a report within thirty (30) days after acquiring such control. Permission to liquidate or to merge with any other company must be obtained in advance from the Financial Services Commission. A financial holding company must report to the Financial Services Commission regarding certain events including:
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| | • | when there is a change of its officers; |
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| | • | when there is a change of its largest shareholder; |
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| | • | when there is a change of majorprincipal shareholders of a bank holding company; |
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| | • | when the shareholding of the controlling shareholder (which means, the largest shareholder or a principal shareholder as prescribed under the Financial Holding Companies Act)Act or a person who is in a special relationship with such controllinglargest or principal shareholder (as defined under the Presidential Decree of the Financial Holding Companies Act) changes by 1% or more of the total issued and outstanding voting shares of the financial holding company; |
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| • | when there is a change of its name; |
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| | • | when there is a cause for dissolution; and |
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| | • | when it or its subsidiary ceases to control any of its respective direct and indirect subsidiaries by disposing of the shares of such direct and indirect subsidiaries. |
Capital Adequacy
The Financial Holding Companies Act does not provide for a minimum paid-in capital of financial holding companies. All financial holding companies, however, are required to maintain a specified level of solvency. In addition, in its allocation of the net profit earned in a fiscal term, a financial holding company is required to set aside in its legal reserve an amount equal to at least 10% of the net income after tax each time it pays dividends on its net profits earned until its legal reserve reaches at least the aggregate amount of its paid-in capital.
Until December 31, 2006, all financial holding companies were required to meet the minimum Requisite Capital Ratio of 100%, as regulated by the Financial Services Commission.
“Requisite Capital Ratio” means the ratio of (1) “Net Total Equity Capital,” as defined below, to (2) “Requisite Capital,” as defined below.
1. “Net Total Equity Capital” means:
(a) the sum of:
(i) in the case of a financial institution subsidiary (except for a financial holding company’s indirect subsidiary which is consolidated into a direct subsidiary of a financial holding company), that is subject to minimum capital requirements under the Financial Services Commission regulations, the actual equity capital maintained by such financial institution (e.g., in the case of commercial banks and merchant banks, total Tier I and Tier II capital actually maintained by a bank or a merchant bank); and
(ii) in the case of a financial holding company or a financial institution subsidiary (except for a financial holding company’s indirect subsidiary which is consolidated into a direct subsidiary of a financial holding company), that is not subject to minimum capital requirements under the Financial Services Commission regulations, the total stockholders’ equity as recorded on its balance sheet less (x) intangible assets and (y) deferred tax assets, if any.
(b) less the sum of:
(i) the book value of investments between a financial holding company and its direct and indirect subsidiaries, if any; and
(ii) the book value of investments among direct and indirect subsidiaries, if any.
2. “Requisite Capital” means the sum of:
(a) in the case of a financial institution subsidiary (except for a financial holding company’s indirect subsidiary which is consolidated into a direct subsidiary of a financial holding company), that is subject to minimum capital requirements under the Financial Services Commission regulations, the minimum equity capital amount necessary to meet such requirements (e.g., in the case of commercial banks and merchant banks, the amount of Total Tier I and Tier II capital necessary to meet the 8% minimum capital adequacy ratio requirement);
(b) in the case of a financial institution subsidiary (except for a financial holding company’s indirect subsidiary which is consolidated into a direct subsidiary of a financial holding company), that is not subject to
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minimum capital requirements under the Financial Services Commission regulations, 8% of its total assets on its balance sheet (including off-balance sheet assets, if any); and
(c) in the case of a financial holding company, 8% of its total assets on its balance sheet (including off-balance sheet assets, if any, but excluding the book value of investments in and financial supports to its direct and indirect subsidiaries, if any).
From January 1, 2007, a bank holding company, which is a financial holding company controlling banks or other financial institutions conducting banking business as prescribed in the Financial Holding Company Act (hereinafter, the “bank holding company”) is required to maintain a minimum consolidated equity capital ratio of 8.0%. “Consolidated equity capital ratio” is defined as the ratio of equity capital as a percentage of risk-weighted assets on a consolidated basis, determined in accordance with the Financial Services Commission requirements that have been formulated based on the Bank of International Settlements standards. “Equity capital,” as applicable to bank holding companies, is defined as the sum of Tier I capital, Tier II capital, and Tier III Capitalcapital less any deductible items, each as defined under the Regulation on the Supervision of Financial Holding Companies. “Risk-weighted assets” is defined as the sum of credit risk-weighted assets and market risk-weighted assets.
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Liquidity
All financial holding companies are required to match the maturities of their assets to those of liabilities in accordance with the Financial Holding Companies Act in order to ensure liquidity. Financial holding companies are required to submit quarterly reports regarding their liquidity to the Financial Supervisory Service and must:
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| | • | maintain a Won liquidity ratio (defined as Won assets due within three months, including marketable securities, divided by Won liabilities due within three months) of not less than 100%; |
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| | • | maintain a foreign currency liquidity ratio (defined as foreign currency liquid assets due within three months divided by foreign currency liabilities due within three months) of not less than 80% except for financial holding companies with a foreign currency liability to total assets ratio of less than 1%; |
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| | • | maintain a ratio of foreign currency liquid assets due within seven days less foreign currency liabilities due within seven days divided by total foreign currency assets of not less than 0%, except for financial holding companies with a foreign currency liability to total assets ratio of less than 1%; and |
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| | • | maintain a ratio of foreign currency liquid assets due within a month less foreign currency liabilities due within a month divided by total foreign currency assets of not less than negative 10% except for financial holding companies with a foreign currency liability to total assets ratio of less than 1%. |
A financial holding company may not invest in securities as defined in the Securities and Exchange Act (other than those securities issued by its direct and indirect subsidiaries) in excess of the amount of its shareholders’ equity less the total amount of investment in subsidiaries, subject to certain exceptions such as capital reductions, a change in securities’ price, a merger of a financial holding company or an acquisition of all of the business by a financial holding company, a foreclosure of collateral or strict foreclosure of securities. A financial holding company whose investment exceeds the amount of its shareholders’ equity less the total amount of investment in subsidiaries as a result of these exceptions are required to take actions to comply with the foregoing limit within one year from the date it exceeded such limit.
Financial Exposure to Any Single Customer and Major Shareholders
Subject to certain exceptions, the total sum of credit (as defined in the Financial Holding Companies Act, the Banking Act the Merchant Banking Act and the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act, respectively) of a financial holding company and its direct and indirect subsidiaries which are banks, merchant banks or securities companies (“Financial Holding Company Total Credit”) extended to a single group of companies that belong to the same conglomerate as defined in the Monopoly Regulations and Fair Trade Act will not be permitted to exceed 25% of the Net Total Equity Capital.
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“Net Total Equity Capital”for the purpose of the calculation of financial exposure to any single customer and Major Shareholder (as defined below) is defined under the Presidential Decree of the Financial Holding Companies Act as
(a) the sum of:
(i) in case of a financial holding company, the net asset which is total assets less total liabilities on balance sheet as of the end of the most recent quarter;
(ii) in case of a bank, the capital amount as defined in Article 2(1), item 5which is the sum of Tier I and Tier II capital amounts determined according to the Banking Act;standards set by the BIS;
(iii) in case of a merchant bank, the capital amount as defined in Article 2, item 3which is the sum of Tier I and Tier II capital amounts determined according to the Merchant Banking Act;standards set by the BIS, subject to further adjustments determined by the Financial Services Commission; and
(iv) in case of a securitiesfinancial investment company with a dealing or brokerage license, the total asset amount less the total liability amount in the balance sheet as of the end of the most recent fiscal year and adjusted as determined by the Financial Services Commission, such as the amount of increase or decrease in paid-in capital after the end of the most recent fiscal year;
(b) less the sum of:
(i) the amount of shares of direct and indirect subsidiaries held by the financial holding company;
(ii) the amount of shares which are cross-held by each direct and indirect subsidiary that is a bank, a merchant bank or securities company;a financial investment company with a dealing or brokerage license; and
(iii) the amount of shares of a financial holding company held by such direct and indirect subsidiaries which are banks, merchant banks or securities companies.financial investment companies with a dealing or brokerage license.
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The Financial Holding Company Total Credit to a single individual or legal entity will not be permitted to exceed 20% of the Net Total Equity Capital. In addition, the Financial Holding Company Total Credit to a shareholder holding (together with the persons who have special relationship with such shareholder (as defined under the Presidential Decree of the Financial Holding Companies Act)) in aggregate more than 10% of the total issued and outstanding shares of the financial holding company will not be permitted to exceed the smaller of (x) 25% of the Net Total Equity Capital and (y) the amount of the equity capital of the financial holding company multiplied by the shareholding ratio of such shareholder (together with the persons who have special relationship with such shareholder).
Furthermore, the total sum of credits (as defined under the Financial Holding Companies Act, the Banking Act the Merchant Bank Act and the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act, respectively) of a financialbank holding company controlling banks and its direct and indirect subsidiaries that are banks, merchant banks or securities companies as applicable (“Bank Holding Company Total Credit”) extended to a “Major Shareholder” (together with the persons who have special relationship with such Major Shareholder) (as defined below) will not be permitted to exceed the smaller of (x) 25% of the Net Total Equity Capital and (y) the amount of the equity capital of the financial holding company multiplied by the shareholding ratio of such Major Shareholder, except in certain cases.
“Major Shareholder”is defined under the Financial Holding Companies Act as follows:
(a) a shareholder holding (together with persons who have a special relationship with such shareholder as defined in the Presidential Decree of the Financial Holding Companies Act) in excess of 10% (or in the case of a financial holding company controlling regional banks only, 15%) in the aggregate of the financial holding company’s total issued and outstanding voting shares; or
(b) a shareholder holding (together with persons who have a special relationship with such shareholder as defined in the Presidential Decree of the Financial Holding Companies Act) more than 4% in the aggregate of the total issued and outstanding voting shares of the financial holding company controlling national banks (other than a financial holding company controlling regional banks only), excluding shares related to the shareholding restrictions on non-financial business group companies as described below, where such shareholder is the largest shareholder or has actual control over the major business affairs of the financial holding
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company through, for example, appointment and dismissal of the officers pursuant to the Presidential Decree of the Financial Holding Companies Act.
In addition, the total sum of the Bank Holding Company Total Credit extended to all of a financialbank holding company’s Major Shareholder must not exceed 25% of the Net Total Equity Capital. Furthermore, the financialbank holding company and its direct and indirect subsidiaries that intend to extend the Bank Holding Company Total Credit to the financialbank holding company’s Major Shareholder not less than the lesser of (i) the amount equivalent to 0.1% of the Net Total Equity Capital or (ii) W5 billion, with respect to a single transaction, must obtain prior unanimous board resolutions and then, immediately after the completion of the transaction, must file a report with the Financial Services Commission and publicly disclose the filing of such report (e.g., via the Internet)(for example, through a website).
Restrictions on Transactions Among Direct and Indirect Subsidiaries and Financial Holding Company
Generally, a direct or indirect subsidiary of a financial holding company may not extend credit to the financial holding company which directly or indirectly controls such subsidiary. In addition, a direct andor indirect subsidiary of a financial holding company may not extend credit to any other single direct or indirect subsidiary of the financial holding company in excess of 10% of its shareholders’stockholders’ equity and to any other direct and indirect subsidiaries of the financial holding company in excess of 20% of its shareholders’stockholders’ equity in the aggregate. The direct or indirect subsidiaries of a financial holding company must obtain an appropriate level of collateral for the credits extended to the other direct and indirect subsidiaries unless otherwise approved by the Financial Services Commission. The appropriate level of collateral for each type of such collateral is as follows:
(i) For deposits and installment savings, obligations of the Korean government or The Bank of Korea, obligations guaranteed by the Korean government or The Bank of Korea, obligations secured by securities issued or guaranteed by the Korean government or The Bank of Korea: 100% of the amount of the credit extended;
(ii) (a) For obligations of local governments under the Local Autonomy Act, local public enterprises under the Local Public Enterprises Act, and investment institutions and other quasi-investment institutions under the Basic Act on the Management of Government-Invested Institution (hereinafter, the “public institutions and others”); (b) obligations guaranteed by the public institutions and others, and (c) obligations secured by the securities issued or guaranteed by public institutions and others: 110% of the amount of the credit extended; and
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(iii) For any property other than those set forth in the above (i) and (ii): 130% of the amount of the credit extended.
Subject to certain exceptions, a direct or indirect subsidiary of a financial holding company is prohibited from owning the shares of any other direct or indirect subsidiaries (other than those directly controlled by the direct and indirect subsidiaries in question) in common control by the financial holding company. In April 2005, the Ministry of Strategy and Finance announced that it will allowHowever, a direct or indirect subsidiary of a financial holding company tomay invest as a limited partner in a private equity fund that is a direct or indirect subsidiary of the same financial holding company, and the Presidential Decree of the Financial Holding Companies Act was amended in May 2005 accordingly. Before the amendment, under the Financial Holding Companies Act, a direct or indirect subsidiary of a financial holding company was prohibited from acquiring the shares of another subsidiary of the same financial holding company. A direct or indirect subsidiary of a financial holding company is also generally prohibited from owning the shares of the financial holding company controlling the direct or indirect subsidiary in question. The transfer of certain assets subject to or below the precautionary criteria between the financial holding company and its direct or indirect subsidiary or between the direct and indirect subsidiaries of a financial holding company is prohibited except for (i) the transfer to an asset-backed securitization company, (an SPV),typically a special purpose entity, or the entrustment with a trust company, under the Asset-Backed Securitization Act, (ii) the transfer to a mortgage-backed securitization company under the Mortgage-Backed Securitization Company Act, ii)(iii) the transfer or in-kind contribution to a corporate restructuring vehicle under the Corporate Restructuring Investment Company Act or (iv) the acquisition by a corporate restructuring company under the Industrial Development Act.
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Disclosure of Management Performance
For the purpose of protecting the depositors and investors in the subsidiaries of the financial holding companies, the Financial Services Commission requires financial holding companies to disclose certain material matters including (i) financial condition and profit and loss of the financial holding company and its direct and indirect subsidiaries, (ii) how capital was raised by the financial holding company and its direct and indirect subsidiaries and how such capital was used, (iii) any sanctions levied on the financial holding company and its direct and indirect subsidiaries under the Financial Holding Companies Act or any corrective measures or sanctions under the Law on Improvement of Structure of Financial Industry or (iv) occurrence of any non-performing assets or financial incident which may have a material adverse effect.
Restrictions on Shareholdings in Other Companies
Subject to certain exceptions, a bank holding company may not own more than 5% of the total issued and outstanding shares of another company (other than its direct and indirect subsidiaries). If the financial holding company owns shares of another company (other than its direct and indirect subsidiaries) which is not a finance-related company, the financial holding company is required to exercise its voting rights in the same manner and same proportion as the other shareholders of the company exercise their voting rights in favor of or against any resolutions under consideration at the shareholders’ meeting of the company.
Generally, a financial holding company is not allowed to own its subsidiary’s outstanding shares in excess of its net assets (total assetsminus total liabilities), except, among other reasons, (i) where the financial holding company invests in its subsidiary up to 130% of its net assets (total assetsminustotal liabilities) for the purpose of the improvement of the financial condition of a subsidiary which is classified as an unsound financial institution under the Law on the Improvement of Structure of Financial Industry or as an unsound or potentially unsound financial institution under the Depositor Protection Act, (ii) where the financial holding company invests in an indirect subsidiary or a company controlled by the indirect subsidiaries up to 130% of its net assets (total assetsminustotal liabilities) in order to make the company as a subsidiary of the financial holding company, (iii) where the financial holding company has already been holding the outstanding shares of its subsidiary not more than 130% of its net assets (total assetsminus total liabilities) at the time when it becomes a financial holding company, (iv) where in order to make its subsidiary as a 100% owned subsidiary or a special purpose vehicle under the Asset Backed Securitization Act as its subsidiary, the financial holding company invests in such company up to 130% of its net assets, (v) where as the amount of investments in the subsidiaries increases, the financial holding company’s net assets increase so that the ratio of the total amount of investments in subsidiaries divided by the financial holding company’s net assets do not increase, or (vi) where the total investment amount in its subsidiaries exceeds its net assets due to (a) a reduction of the financial holding company’s net assets, (b) a spin-off, merger or transfer of its whole business of a financial holding company, (c) a spin-off, merger or transfer of their whole business of its direct or indirect subsidiaries, or (d) a foreclosure of collateral or strict foreclosure (including, for example, receiving shares in a subsidiary in lieu of its original claim). The financial holding company, however, must dispose of the ownership of excess shares within two years in case of (i) through (v) and within six months in case of (vi), unless such time period is otherwise extended by the Financial Services Commission.
Restrictions on Shareholdings by Direct and Indirect Subsidiaries
Generally, a direct subsidiary of a financial holding company is prohibited from controlling any other company;providedthat a direct subsidiary of a financial holding company may control (as an indirect subsidiary of the financial holding company): (i) subsidiaries in foreign jurisdiction which are engaged in a financial business, (ii) certain financial institutions which are engaged in the business that the direct subsidiary may conduct without any licenses or permits, (iii) certain financial institutions whose business is related to the business of the direct subsidiary as prescribed under the Presidential Decree of the Financial Holding Companies Act (e.g., the companies which a bank subsidiary may control are limited to credit information companies, credit card companies, trust business companies, securities investment management companies, investment advisory companies, futures business companies, and asset management companies), (iv) certain financial institutions whose business is related to financial business as prescribed by the regulations of the Ministry of Strategy and Finance, and (v) certain companies which are not financial institutions but whose business is related to the financial business of the financial
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holding company as prescribed by the Presidential Decree of the Financial Holding Companies Act (e.g. finance-related research company, finance-related ITinformation technology company, etc.) and (vi) private equity funds established in accordance with the Indirect Investment Asset Management Business Act.. Acquisition by the direct subsidiaries of such indirect subsidiaries requires a prior permission from the Financial Services Commission or a report to be submitted to the Financial Services Commission, depending on the types of the indirect subsidiaries and the amount of total assets of the indirect subsidiaries.
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TheAn indirect subsidiary of a financial holding company is prohibited from controlling any other company, provided, however, that in the case where a company held control over another company at the time such company initially became an indirect subsidiary of a financial holding company, such indirect subsidiary shall be required to dispose of its interest in such other company within two (2) years after becoming an indirect subsidiary of a financial holding company.
In April 2005, the Ministry of Strategy and Finance announced that it will allow aA subsidiary of a financial holding company tomay invest in a special purpose company as its largest shareholder for purposes of making investments under the Act on Private Investment in Social Infrastructure without being deemed as controlling such special purpose company. Accordingly, the Presidential Decree of the Financial Holding Companies Act was amended in May 2005 and such special purpose company is not considered as a subsidiary of the financial holding company under the Financial Holding Companies Act.
In addition, a private equity fund established in accordance with the IndirectFinancial Investment Asset Management BusinessServices and Capital Markets Act is not considered to be a subsidiary of a financial holding company even if the financial holding company is the largest investor in the private equity fund unless the financial holding company is the asset management company for the private equity fund.
Restrictions on Transactions between a Financial Holding Company and its Major Shareholder
A financialbank holding company which controls banks and its direct and indirect subsidiaries isare prohibited from acquiring (including acquisition by a trust account of its subsidiary bank) shares issued by such financialbank holding company’s Major Shareholder in excess of 1% of the Net Total Equity Capital as used in the calculation of financial exposure to Major Shareholder.Capital. In addition, the financial holding company and its direct and indirect subsidiaries which intend to acquire shares issued by such Major Shareholder not less than the lesser of (i) the amount equivalent to 0.1% of the Equity Capital or (ii) W5 billion, with respect to a single transaction, must obtain prior unanimous board resolutions and then, immediately after the acquisition, must file a report with the Financial Services Commission and publicly disclose the filing of such report (e.g., via the Internet)(for example, through a website).
RestrictionRestrictions on Financial Holding Company Ownership
Under the Financial Holding Companies Act, subject to certain exceptions, a financial institution may not control any financial holding company. In August 2007, the Financial Holding Companies Act was amended to permit foreign financial institutions to establish financial holding companies in Korea. Pursuant to the Presidential Decree of the Financial Holding Companies Act, which was also amended in November 2007 to reflect the change in the statute, a foreign financial institution can control a financial holding company if, subject to satisfying certain other conditions, it, together with its specially-related persons, holds 100% of the total shares in the financial holding company.
In addition, any single shareholder and persons who stand in a special relations with such shareholder (as defined under the Presidential Decree to the Financial Holding Companies Act) may acquire beneficial ownership of up to 10% of the total issued and outstanding shares with voting rights of a financial holding company controlling national banks and(or 15% ofin the total issued and outstanding shares with voting rightscase of a financial holding company controlling regional banks only.only). The Government and the Korea Deposit Insurance Corporation are not subject to such a ceiling.
However, “non-financial business group companies” (as defined below) may not acquire beneficial ownership of shares of a financialbank holding company which controls national banks in excess of 4%9% of such financial holding company’s outstanding voting shares, provided that such non-financial business group companies may acquire beneficial ownership of up to 10% of such financial holding company’s outstanding voting shares with the approval of the Financial Services Commission under the condition that such non-financial business group companies will not exercise voting rights in respect of such shares in excess of the 4%9% limit. In addition, any person (whether a Korean national or a foreigner), with the exception of non-financial business group companies described above, may also acquire in excess of 10% of total voting shares issued and outstanding of a financial holding company which controls national bank, provided that an approval from the Financial Services Commission is obtained in instances where the total holding exceeds 10% (or 15% in the case of a financial holding company controlling
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regional banks only), 25% or 33% of the total voting shares issued and outstanding of such financialbank holding company which controls national banks.company. Also, in the event a person (whether a Korean national or a foreigner, but excluding persons prescribed under the Presidential Decree to the Financial Holding Companies Act) (i) acquires in excess of 4% of the total voting shares issued and outstanding of any financial holding company (other than a financial holding company controlling regional banks only), (ii) becomes the largest
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shareholder of such financial holding company in which such person acquired in excess of 4% of the total voting shares issued and outstanding, or (iii) has its shareholding in such financial holding company, in which it had acquired in excess of 4% of the total voting shares issued and outstanding shares, changed by not less than 1% of the total voting share issued and outstanding of such financial holding company, a report as prescribed by the Presidential Decree to the Financial Holding Companies Act shall be filed with the Financial Services Commission.
“Non-financial business group companies”are defined under the Financial Holding Companies Act as the companies, which include:
(i) any same shareholder group with aggregate net assets of all non-financial business companies belonging to such group of not less than 25% of the aggregate net assets of all members of such group;
(ii) any same shareholder group with aggregate assets of all non-financial business companies belonging to such group of not less than W2 trillion; or
(iii) any mutual fund in which a same shareholder group identified in (1) or (2) above holds more than 4%9% of the total shares issued and outstanding of such mutual fund.
Financial Investment Services and Capital MarketMarkets Act
General
On July 3, 2007, the National Assembly of Korea passed the Financial Investment Services and Capital MarketMarkets Act, (the “FCA”), a new law consolidating six laws regulating capital markets. The FCA will becomeFinancial Investment Services and Capital Markets Act became effective fromas of February 4, 2009. Prior to the effective date, certain procedural matters will be initiated from July 2008, as discussed further below. In addition, specific details regarding the implementation of the FCA will be set forth in the related presidential decree and regulations to be prepared by the Ministry of Finance and Economy, which are scheduled to be finalized prior to July 2008. The following is a summary of the major changes introduced under the FCA.
Consolidation of Capital Markets-Related Laws
Currently,Prior to the effective date of the Financial Investment Services and Capital Markets Act, separate laws regulate(for example, the Securities and Exchange Act, the Futures Business Act, and the Indirect Investment Asset Management Business Act) regulated various types of financial institutions depending on the type of the financial institution (for example, securities companies, futures companies, trust business companies, and asset management companies) and subjectsubjected financial institutions to different licensing and ongoing regulatory requirements (for example, under the Securities and Exchange Act, the Futures Business Act and the Indirect Investment Asset Management Business Act).requirements. By applying onea uniform set of rules to the same financial business having the same economic function, the FCAFinancial Investment Services and Capital Markets Act attempts to improve and address issues caused by the currentprevious regulatory system under which the same economic functionfunctions relating to capital markets-related business arewere governed by multiple regulations. To this end, the FCAFinancial Investment Services and Capital Markets Act categorizes capital markets-related business into six different functions, as follows:
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| | • | dealing (trading and underwriting of “financial investment products” (as defined below)); |
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| | • | brokerage (brokerage of financial investment products); |
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| | • | collective investment (establishment of collective investment schemes and the management thereof); |
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| | • | investment advice; |
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| | • | discretionary investment management; and |
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| | • | trusts (together with the five business set forth above, the “Financial Investment Businesses”). |
Accordingly, all current financial business relating to financial investment products will beare reclassified as one or more of the Financial Investment Businesses described above, and financial institutions will beare subject to the regulations applicable to their relevant Financial Investment Businesses, irrespective of the type of the financial
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institution it is. For example, under the FCA,Financial Investment Services and Capital Markets Act, derivative businesses conducted by securities companies and future companies will be subject to the same regulations under the FCA,Financial Investment Services and Capital Markets Act, at least in principle.
The banking business and insurance business are not subject to the FCAFinancial Investment Services and Capital Markets Act and will continue to be regulated under separate laws.laws; provided, however, that they may become
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subject to the Financial Investment Services and Capital Markets Act if their activities involve any financial investment businesses requiring a license based on the Financial Investment Services and Capital Markets Act.
Comprehensive Definition of Financial Investment Products
In an effort to encompass the various types of securities and derivative products available in the capital markets, the FCAFinancial Investment Services and Capital Markets Act sets forth a comprehensive term “financial investment products,” defined to mean all financial products with a risk of loss in the invested amount (on contract(in contrast to “deposits,” which are not financial investment products for which the invested amount is protected or preserved). Financial investment products are classified into two major categories: (i) “securities” (relating to financial investment products where the risk of loss is limited to the invested amount) and (ii) “derivatives” (relating to financial investment products where the risk of loss may exceed the invested amount). As a result of the general and open-ended manner in which financial investment products are defined, any future financial product could potentially fall under the definition of financial investment products, which would enable Financial Investment Companies (as defined below) to handle a broader range of financial products. Under the FCA,Financial Investment Services and Capital Markets Act, securities companies, asset management companies, futurefutures companies and other entities engaging in any Financial Investment Business are classified as “Financial Investment Companies.”
New License System and the Conversion of Existing Licenses
Financial Investment Companies will be able to choose what Financial Investment Business to engage in (through the “check the box” method set forth in the relevant license application), by specifying the desired (i) Financial Investment Business, (ii) financial investment product and (iii) target customers to which financial investment products may be sold or dealt to (i.e., general investors or professional investors). Licenses will be issued under the specific businesssub-categories described in the foregoing sentence.above. For example, it would be possible for a Financial Investment Company to obtain a license to engage in the Financial Investment Business of (i) dealing (ii) over the counter derivatives products (iii) only with sophisticatedprofessional investors.
Financial institution currently engaging in business activities constituting a Financial Investment Business will have to take certain steps, such as renewal of their license or registration, in order to continue engaging in July 2008, subject to extension as further described in the FCA. Financial institutions that are not licensed Financial Investment Companies will not be permitted to engage in any Financial Investment Business, subject to the following exceptions: (i) banks and insurance companies will be permitted to engage in certain categories of Financial Investment Business; and (ii) other financial institutions that engaged in any Financial Investment Business prior to the effective date of the FCA (whether in the form of a concurrent business or an incidental business) will be permitted to continue such Financial Investment Business for a period not exceeding six months commencing on the effective date of the FCA.
Expanded Business Scope of Financial Investment Companies
Under the currentprevious regulatory regime in Korea, it iswas difficult for a financial institution to explore a new line of business or expand upon its existing line of business. For example, a financial institution licensed as a securities company generally maycould not engage in the asset management business. In contrast, under the FCA,Financial Investment Services and Capital Markets Act, pursuant to the integration of its current business involving financial investment products into a single Financial Investment Business, a licensed Financial Investment Company will beis permitted to engage in all types of Financial Investment Businesses, subject to satisfyingcompliance with the relevant regulations, for example, maintaining an adequate “Chinese Wall,” to the extent required. As to incidental businesses (i.e., a financial related business which is not a Financial Investment Business), the FCAFinancial Investment Services and Capital Markets Act generally allows a Financial Investment Company to freely engage in such incidental businesses by shifting away from the current positive-listprevious system of permitting only the listed activities towards a more comprehensive system. In addition, a Financial Investment Company will beis permitted (i) to outsource marketing activities by contracting with “introducing brokers” that are individuals but not employees of the Financial Investment Company. It is expected that Financial Investment Companies will be permitted (i)Company, (ii) to engage in foreign exchange business related to their Financial
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Investment Business and (ii)(iii) to participate in the settlement network, pursuant to an agreement among the settlement network participants.
Improvement in Investor ProtectingProtection Mechanism
While the FCA widensFinancial Investment Services and Capital Markets Act broadens the scope of financial businesses in which financial institutions are permitted to engage, a more rigorous investor-protection mechanism will beis imposed upon Financial Investment Companies dealing in financial investment products. The FCA distinguishesFinancial Investment Services and Capital Markets Act makes a distinction between general investors formand sophisticated investors and provides new or enhanced protections to general investors. For instance, the FCAFinancial Investment Services and Capital Markets Act expressly provides for strict know-your-customer rules for general investors and imposes an obligation thaton Financial Investment Companies that they should market financial investment products suitable to each general investor using written explanatory materials.considering his or her personal attributes, including investment objective, net worth, and investment
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experience. Under the FCA,Financial Investment Services and Capital Markets Act, a Financial Investment Company can be held liable if a general investor proves (i) damagedamages or losses relating to such general investor’s investment in financial investment products solicited by such Financial Investment Company and (ii) the absence of the requisite written explanatory materialsexplanation, false explanation, or omission of material fact (without having to prove fault or causation). In case there are any conflicts of interest between the Financial Investment Companies and investors, the FCAFinancial Investment Services and Capital Markets Act expressly requires (i) disclosure of any conflict of interest to investors and (ii) mitigation of conflicts of interest to a comfortable level or abstention from the relevant transaction.
Other Regulatory Changes Related to Securities and Investments
The FCA aimsFinancial Investment Services and Capital Markets Act brought changes to change various rules in securities regulations including those relating to public disclosure, insider trading and proxy contests, which are currentlyhad previously been governed by the Securities and Exchange Act. For example, the 5% and 10% reporting obligations under the Securities and Exchange Act willhave become more stringent under the FCA.Financial Investment Services and Capital Markets Act. For example,instance, the numbernumbers of events requiring an investor to update its 5% report will behave increased under the FCA. Currently,Financial Investment Services and Capital Markets Act. Previously, only a change in the shareholding of 1% or more or in the purpose of shareholding (such as an intention to influence management) cancould trigger the obligation to update the 5% report. The government is expected to issueGovernment has issued detailed regulations stipulating additional events requiring updates to 5% reports. The Financial Services Commission will be also grantedreports, such as the authority to order suspension or prohibitionchange in the type of trades.holding and change in any major aspect of the relevant contract. As for the 10% report filing obligation, the initial filing is expected to be required to be made within five business days of the date of the event triggering the 10% reporting obligation, compared to 10 calendar days under the currentprevious law. The due date for reporting a subsequent change after the initial 10% report filing is also expected to behas been reduced from the 10th day of the first month immediately following the month in which such change took place to five business days of the date of such change. Under the currentprevious law, there arehad been a limitation on the type of investment vehicles that cancould be used in a collective investment scheme (namely, to trusts and corporations), the type of funds that cancould be used for investment,collective investments, and the types of assets and investment securities a fund cancould invest in. However, the FCA willFinancial Investment Services and Capital Markets Act significantly liberalizeliberalizes these restrictions, permitting all legal entities, including limited liability companies or partnerships, to be used for the purpose of collective investments, allowing the formation of fund complexes and permitting investment funds to invest in a wide variety of different assets and investment instruments.
Principal Regulations Applicable to Banks
General
The banking system in Korea is governed by the Banking Act of 1950, as amended (the “Banking Act”) and the Bank of Korea Act of 1950, as amended (the “Bank of Korea Act”). In addition, Korean banks are subject to the regulations and supervision of the Bank of Korea, the Bank of Korea’s Monetary Policy Committee, the Financial Services Commission and its executive body, the Financial Supervisory Service.
The Bank of Korea, established in June 1950 under the Bank of Korea Act, performs the customary functions of a central bank. It seeks to contribute to the sound development of the national economy by price stabilization through establishing and implementing efficient monetary and credit policies. The Bank of Korea acts under instructions of the Monetary Policy Committee, the supreme policy-making body of the Bank of Korea.
Under the Bank of Korea Act, the Monetary Policy Committee’s primary responsibilities are to formulate monetary and credit policies and to determine the operations, management and administration of the Bank of Korea. The Financial Services Commission, established on April 1, 1998, exerts direct control overregulates commercial banks
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pursuant to the Banking Act, including establishing guidelines on capital adequacy of commercial banks, and preparespromulgates regulations relating to supervision of banks. Furthermore, pursuant to the Amendment to the Government Organization Act and the Banking Act on May 24, 1999, the Financial Services Commission, instead of the Ministry of Strategy and Finance, now regulates market entry into the banking business.
The Financial Supervisory Service is subject to the instructions and directives of the Financial Services Commission and carries out supervision and examination of commercial banks. In particular, the Financial Supervisory Service sets requirements both for the prudent control of liquidity and for capital adequacy and
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establishes reporting requirements withinpursuant to the authority delegated to it under the Financial Services Commission regulations, pursuant to which banks are required to submit annual reports on financial performance and shareholdings, regular reports on management strategy and non-performing loans, including write-offs, and management of problem companies and plans for the settlement of bad loans.
Under the Banking Act, permissionapproval to commence a commercial banking business or a long-term financing business must be obtained from the Financial Services Commission. Commercial banking business is defined as the lending of funds acquired predominantly from the acceptance of deposits for a period not exceeding one year or, subject to the limitation established by the Financial Services Commission, for a period between one year and three years. Long-term financing business is defined as the lending, for periods in excess of one year, of funds acquired predominantly from paid-in capital, reserves or other retained earnings, the acceptance of deposits with maturities of at least one year, or the issuance of bonds or other securities. A bank wishing to enter any business other than commercial banking and long-term financing businesses, such as the trust business, must obtain permissionapproval from the Financial Services Commission. PermissionApproval to merge with any other banking institution, to liquidate, to close a banking business or to transfer all or a part of a business must also be obtained from the Financial Services Commission.
If the Korean government deems a bank’s financial condition to be unsound or if a bank fails to meet the applicable capital adequacy ratio set forth under Korean law, the government may order:
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| | • | capital increases or reductions; |
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| | • | stock cancellations or consolidations; |
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| | • | transfers of a part or all of business; |
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| | • | sale of assets; |
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| | • | closures of branch offices; |
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| | • | mergers or becoming a subsidiary under the Financial Holding Companies Act of a financial holding company; |
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| | • | acquisition of a bank by a third party; |
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| | • | suspensions of a part or all of business operation; or |
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| | • | assignments of contractual rights and obligations relating to financial transactions. |
Capital Adequacy
The Banking Act requires nationwide banks to maintain a minimum paid-in capital of W100 billion and regional banks to maintain a minimum paid-in capital of W25 billion.
In addition to minimum capital requirements, all banks including foreign bank branches in Korea are required to maintain a prescribed solvency position. Until March 31, 1999, a bank’s outstanding liabilities arising from guarantees and other contingent liabilities (except those specifically excluded under the Banking Act) were not permittedA bank must also set aside as its legal reserve an amount equal to exceed 20 times its equity capital amount. However, beginning on April 1, 1999, such limitation on guarantees and contingent liabilities was eliminated and, for regulatory purposes, guarantees provided by banks are counted as an extension of credit and will be regulated accordingly. Also, in its allocation of the net profit earned in a fiscal term, a bank is required to credit at least 10% of such profit to a legal reserveits net profits after tax each time it pays dividends on net profits earned until such time when the reserve equals the amount of its total paid-in capital.
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Under the Banking Act, the capital of a bank is divided into two categories pursuant to Bank for International Settlements (“BIS”) standards, which were originally envisaged by the Basel Committee.categories: Tier I and Tier II capital. Tier I capital (core capital) consists of stockholders’ equity, capital surplus, retained earnings and equity representing new types of equity securities deemed to be functionally equivalent to capital which are designated by the Financial Services Commission and undistributed stock dividends.Commission. Tier II capital (supplementary capital) consists of revaluation reserves, gain on valuation of investment in securities, allowance for bad debts set aside for loans classified as “normal’’“normal” or “precautionary’’,“precautionary,” perpetual subordinated debt, cumulative preferred shares, redeemable preferred shares (with a right to redeem after the fifth anniversary of the date of issuance) and certain other subordinated debt.
All banks must meet standards regarding minimum ratios of Tier I and Tier II capital (less any capital deductions) to risk-weighted assets, determined in accordance with the Financial Services Commission requirements that have been formulated based on BISthe Bank for International Settlement (“BIS”) Standards. These
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standards were adopted by the Monetary Board and the Office of Bank Supervision (the predecessor of the Financial Supervisory Service) and became effective in 1993.1996. Under these regulations, all domestic banks and foreign bank branches were required to satisfy at least 8% as ofmeet the end of 1995, and thereafter, in accordance with the standards regarding minimum ratiosratio of Tier I and Tier II capital (less any capital deductions) to risk-weighted assets.assets of 8%.
The Financial Services Commission amended the Regulation on the Supervision of the Banking Business in November 2002 to includeintroduce a more conservative risk-weighting system on certain newly extended mortgage and home equity loans. Asloans, requiring Korean banks to apply the risk-weighted ratio of 50%, 60%, or 70% in respect of home mortgage loans depending on the borrowers’ debt ratios and whether the home mortgage loans are overdue. On June 28, 2007, the Financial Services Commission further amended the Detailed Regulations on the Supervision of the Banking Business, and, as a result, for mortgage and home equity loans extended after November 13, 2002, Korean banks are required to calculate a risk-weight of 60% on certain mortgage and home equity loans if either ofhave been applying the following two conditions are satisfied, and a risk-weight ratios in respect of 70% if both of the following two conditions are satisfied: (1) if thetheir home mortgage and home equity loans are overdue for at least 30 consecutive days as of the date of calculating the bank’s BIS capital adequacy ratio, or the total number of overdue days for the past one yearstarting from the date of calculating the bank’s BIS capital adequacy ratio is at least 30 days; and (2) the borrower’s debt ratio (i.e., total borrowed amount, including the borrowed amount provided by other financial institutions, of the borrower against the borrower’s annual income) exceeds 250%. For all other home mortgages, a 50% risk-weight is applicable.1st January, 2008:
The BIS adopted changes to its(1) for those banks adopting a standardized approach for calculating credit risk capital adequacy standards to take into account marketrequirements, the risk-weight ratio of 35%; and
(2) for those banks adopting an internal ratings-based approach for calculating credit risk from equity securities, foreign exchange and derivative instruments held by banks. These changes have become applicable to most Korean banks commencing in 2002. Before 2002, all assets received risk weighting accordingcapital requirements, a risk-weight ratio calculated with reference to the risk weights applicable toprobability of default, loss given default and exposure at default, each as defined in the typeDetailed Regulations on the Supervision of assets. For example, assets relating to government received a risk weight of 0%, assets relating to securities companies and banks received a 20% risk weight and assets relating to other companies received a risk weight of 100%. Starting from 2002, risk weights for assets that are subject to market risks, such as publicly-traded securities, foreign exchange and interest rate, are calculated in accordance with a formula based on market risk.the Banking Business.
In Korea, Basel II, the new convention entered into by the Basel committee in June 2004 for the purpose of improving risk management and increasing capital adequacy of banks, was implemented in January 2008. Pursuant to Basel II, operational risk, such as inadequate procedure, loss risk by employees, internal system, occurrence of unexpected event, as well as credit risk and market risk, should beis taken into account in calculating the risk-weighted assets. However, asassets, in addition to maintaining the current capital adequacy ratio of 8% for banks would be maintained, it would become more onerous for banks to satisfy the minimum capital requirements.banks. Under Basel II, the capital requirements for credit risk can be calculated by the internal rating based (IRB) approach or the standardized approach. Out of eighteen 18 domestic banks in Korea, two banks have obtained regulatory approval for the use of the IRB approach whereas the other 16 banks are using the standardized approach, although some of them are currently in the process of obtaining regulatory approval for the use of IRB in 2009.
Under the standardized approach, a home mortgage loansloan fully secured by thea residential property, that arewhich is or will be occupied by thea borrower, areis risk-weighted at 35%.
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Under the Regulation on the Supervision of the Banking Business, banks generally must maintain allowances for credit losses in respect of their outstanding loans and other credits (including confirmed guarantees and acceptances and trust account loans) in an aggregate amount covering not less than:
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| | • | 0.85% of normal credits (or 0.9% in the case of normal credits comprising loans to certain industries including construction, retail and wholesale sales, accommodations, restaurant, real estate and lease, and 1.0% in the case of normal credits comprising loans to individuals and households and 1.5% in the case of normal credits comprising outstanding credit card receivables and card loans); |
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| | • | 7% of precautionary credits (or 10% in the case of precautionary credits comprising loans to individuals and households, and 15% in the case of precautionary credits comprising outstanding credit card receivables and card loans); |
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| | • | 20% of substandard credits; |
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| | • | 50% of doubtful credits (or 55% in the case of doubtful credits comprising loans to individuals and households, and 60% in the case of doubtful credits comprising outstanding credit card receivables and card loans); and |
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| | • | 100% of estimated loss credits. |
Furthermore, under an amendment in 2006 to the Regulation on the Supervision of the Banking Business, banks must maintain allowances for credit losses in respect of their confirmed guarantees (including confirmed acceptances) and outstanding non-used credit lines as of the settlement date in an aggregate amount calculated at the same rates applicable to normal, precautionary, substandard and doubtful credits comprising their outstanding loans and other credits as set forth above.
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Liquidity
All banks are required to match the maturities of their assets and liabilities in accordance with the Banking Act in order to ensure adequate liquidity. Banks may not invest in excess of an amount exceeding 60% of their Tier I and Tier II capital (less any capital deductions) in stocks and other securities with a period remaining to maturity of over three years. However, this restriction does not apply to government bonds or to Monetary Stabilization Bonds issued by the Bank of Korea.
In 1999, the Financial Services Commission adopted a new requirement to ascertain a bank’s liquidity. Starting from January 1, 1999, theThe Financial Services Commission requires each Korean bank to maintain a Won liquidity ratio (defined as Won assets due within three months,one month, including marketable securities, divided by Won liabilities due within three months)one month) of not less than 100% and to make monthly reports to the Financial Supervisory Service. The Financial Services Commission also requires each Korean bank to (1) maintain a foreign-currency liquidity ratio due within three months (defined as foreign-currency liquid assets due within three months divided by foreign-currency liabilities due within three months) of not less than 85%, (2) maintain a ratio of foreign-currency liquid assets due within seven days (defined as foreign-currency liquid assets due within seven days less foreign-currency liabilities due within seven days, divided by total foreign-currency assets) of not less than 0%3% and (3) maintain a ratio of foreign-currency liquid assets due within a month (defined as foreign-currency liquid assets due within a month less foreign currency liabilities due within a month, divided by total foreign-currency assets) of not less than negative 10%. The Financial Services Commission also requires each Korean bank to submit monthly reports with respect to maintenance ofits compliance with these ratios.
The Monetary Policy Committee is authorized to fix and alter minimum reserve requirements that banks must maintain against their deposit liabilities. The current minimum reserve ratio is 7.0% of average balances for Won currencyWon-denominated demand deposits outstanding, 0.0% of average balances for Won currencyWon-denominated employee asset establishment savings deposits, employee long-term savings deposits, employee house purchase savings deposits, long-term house purchase savings deposits, household long-term savings deposits and employee preferential savings deposits outstanding and 2.0% of average balances for Won currencyWon-denominated time and savings deposits, mutual installments, housing installments and certificates of deposit outstanding. For foreign currency deposit liabilities, a 2.0% minimum reserve ratio is applied to savings deposits outstanding and a 7.0% minimum reserve ratio is applied to
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demand deposits, while a 1.0% minimum reserve ratio is applied for offshore accounts, immigrant accounts and resident accounts opened by foreign exchange banks.
Financial Exposure to Any Single Customer and Major Shareholders
Under the Banking Act, the sum of material credit exposures by a bank, that is,namely, the total sum of its credits to single individuals, legal entities or business groups that exceed 10% of the sum of Tier I and Tier II capital (less any capital deductions), must not exceed five times the sum of Tier I and Tier II capital (less any capital deductions), subject to certain exceptions. Beginning on January 1, 2000, subjectSubject to certain exceptions, no bank is permitted to extend credit (including loans, guarantees, purchases of securities (only in the nature of a credit) and such other transactions which directly or indirectly create credit risk) in excess of 20% of the sum of Tier I and Tier II capital (less any capital deductions) to a single individual or a legal entity, and no bank may grant credit in excess of 25% of the sum of Tier I and Tier II capital (less any capital deductions) to a single group of companies that belong to the same conglomerate as defined in the Monopoly Regulations and Fair Trade Act.
Pursuant to an amendment toUnder the Banking Act, which became effective on July 28, 2002, thecertain restrictions onapply to extending credits to a major shareholder have been amended.shareholder. The definition of a “major shareholder” is as follows:
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| | • | a shareholder holding (together with persons who have a special relationship with such shareholder as defined in the Presidential Decree of the Banking Act) in excess of 10% (or in the case of regional banks, 15%) in the aggregate of the bank’s total issued and outstanding voting shares; or |
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| | • | a shareholder holding (together with persons who have a special relationship with such shareholder as defined in the Presidential Decree of the Banking Act) more than 4% in the aggregate of the bank’s (excluding regional banks) total issued and outstanding voting shares of a bank (other than a regional bank), where such shareholder is the largest shareholder or is able to actually control the major business affairs of the bank, for example, through appointment and dismissal of the chief executive officer or of the majority of the executives. |
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According to such amendment, banks are prohibited from extending credits in the amount greater than the lesser of (1) 25% of the sum of such bank’s Tier I and Tier II capital (less any capital deductions) orand (2) the relevant major shareholder’s shareholding ratio multiplied by the sum of the bank’s Tier I and Tier II capital (less any capital deductions) to a major shareholder (together with persons who have special relationship with such major shareholder as defined in the Presidential Decree of the Banking Act). Also, no bank is allowed to grant credit to its major shareholders in the aggregate in excess of 25% of its Tier I and Tier II capital (less any capital deductions).
Recently, there has been a rapid increase in the use of credit support agreements between banks and special purpose companies that have been established for asset-backed securitization. When managing the credit risk of banks, among the methods for providing credit support by banks, a loan agreement, a purchase agreement for asset-backed commercial papers, purchase of subordinate beneficiary certificates, and assumption of liability by providing warranty against default under asset-backed securitization are examples of creating financial exposure to banks.
Interest Rates
Korean banks remain dependent on the acceptance of deposits as their primary source of funds. Currently, there are no legal controls on interest rates on bank loans in Korea except for the cap of 49% on the default interest rate under the Act on Lending Business. Historically, interest rates on deposits and lending rates were regulated by the Monetary Board of the Bank of Korea. Under the government’s Financial Reform Plan issued in May 1993, controls on deposit interest rates in Korea have been gradually reduced. In February 2004, the Korean government removed restrictions on all interest rates, except for the prohibition on interest payments on current account deposits. Deregulation of interest rates on deposits has increased competition for deposits based on interest rates offered and therefore may increase our banking operation’s interest expense.
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Lending to Small- and Medium-Sized Enterprises
In order to obtain funding from the Bank of Korea at concessionary rates for their small- and medium-sized enterprise loans, banks are required to extend to small- and medium-sized enterprises a certain minimum percentage of any monthly increase in their Won currencyWon-denominated lending. Currently, this minimum percentage is 45% in the case of national banks and 60% in the case of regional banks. If a bank does not comply with the foregoing, all or a portion of the Bank of Korea funds provided to such bank in support of loans to small-and medium-sized enterprises may have to be prepaid to the Bank of Korea or the credit limit from the Bank of Korea for such bank may be decreased.
Disclosure of Management Performance
For the purpose of enforcing mandatory disclosure of management performance so that the general public, especially depositors and stockholders, will be in a better position to monitor banks, the Financial Services Commission requires commercial banks to disclose certain matters as follows:
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| | • | loans bearing no profit made to a single business group in an amount exceeding 10% of the sum of the bank’s Tier I and Tier II capital (less any capital deductions) as of the end of the previous month (where the loan exposure to such borrower is calculated as the sum of substandard credits, doubtful credits and estimated loss credits) except where the loan exposure to a single business group is not more than W4 billion; |
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| | • | occurrence of any financial event involving embezzlement, malfeasance or misappropriation of funds the amount of which exceeds 1% of the sum of the bank’s Tier I and Tier II capital (less any capital deductions), unless the bank has lost or expects to lose not more than W1 billion as a result thereof, or the Governor of the Financial Supervisory Service has made a public announcement regarding such an occurrence; |
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| | • | any loss due to court judgments or similar decisions in civil proceedings in an amount exceeding 1% of the sum of the bank’s Tier I and Tier II capital (less any capital deductions) as of the end of the previous month except where the loss is not more than W1 billion; |
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| | • | any event which can cause a material change in the financial status, such as resolutions for a capital increase or reduction, issuance of convertible bonds, bonds with warrants, exchangeable bonds, or depositary receipts or cancellation of shares with profit; |
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| | • | any event which can cause a material change in a bank’s management, such as knowledge of a proposal or confirmation of a litigation that can have a material effect on the management of the bank such as litigation regarding the effectiveness of securities issuance or amendments of rights thereunder, appointment or dismissal of an officer, or a change in bank’s largest shareholder, major shareholder, affiliate company, or a resolution for change of business objective; |
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| | • | any event which can cause a material change in the bank’s property, such as a natural disaster which causes damages in an amount exceeding 5% (or 2.5% in the case of a “Large Listed Company,” which refers to a company that has total assets as of the end of the most recent fiscal year of W2 trillion or more) or more of its total assets as of the end of the most recent fiscal year; |
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| | • | any event which can cause a material change in the bank’s investment, such as investment in other companies in an amount exceeding 5% (or 2.5% in the case of a Large Listed Company) or more of the bank’s Tier I and Tier II capital; |
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| | • | any event which can cause a material change in the bank’s profit or loss, such as special profit or special loss of 10% (or 5% in the case of a Large Listed Company) or more of the bank’s Tier I and Tier II capital;loss; and |
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| | • | any other events which can have material effects on the bank’s operation, including, among others, payment of cash dividend, acquisition or disposal of treasury shares, or distribution of stock option. |
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Restrictions on Lending
According to the Banking Act, commercial banks are prohibited from making any of the following categories of loans:
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| | • | loans made for the purpose of speculation in commodities or securities; |
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| | • | loans made directly or indirectly on the pledge of a bank’s own shares, or on the pledge of shares in excess of 20% of the issued and outstanding shares of any other corporation (subject to certain exceptions with respect to financing for infrastructure projects); |
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| | • | loans made directly or indirectly to enable a natural or a legal person to buy the bank’s own shares; |
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| | • | loans made directly or indirectly to finance political campaigns and other related activities; and |
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| | • | loans made to any of the bank’s officers or employees other than de minimis loans of up to (1) W20 million in the case of a general loan, (2) W50 million in the case of a general loan plus a housing loan, or (3) W60 million in the aggregate for general loans, housing loans and loans to pay damages arising from wrongful acts of employees in financial transactions. |
Restrictions on Investments in Property
A bank may possess real estate property only to the extent necessary for the conduct ofconducting its business; provided that the aggregate value of such real estate property must not exceed 60% of the sum of its Tier I and Tier II capital (less any capital deductions). Any property acquired by a bank (1) through the exercise of its rights as a secured party or (2) the acquisition of which is prohibited by the Banking Act must be disposed of within one year, subject to certain exceptions.
Restrictions on Shareholdings in Other Companies
Under the Banking Act, a bank may not own more than 15% of shares outstanding with voting rights of another company, except where, among other reasons:
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| | • | the company issuing such shares is engaged in a business that falls under the category of financial businesses set forth by the Financial Services Commission (including private equity funds); or |
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| | • | the acquisition of shares by the bank is necessary for corporate restructuring of such company and is approved by the Financial Services Commission. |
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In the above cases, a bank must satisfy either of the following requirements:
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| | • | the total investment in companies in which the bank owns more than 15% of the outstanding shares with voting rights does not exceed 15% of the sum of Tier I and Tier II capital (less any capital deductions); or |
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| | • | the acquisition satisfies the requirements determined by the Financial Services Commission. |
According to an amendment to theThe Banking Act which became effective on July 28, 2002,provides that a bank using its bank accounts and its trust accounts is not permitted to acquire the shares issued by the Major Shareholder of such bank in excess of an amount equal to 1% of the sum of Tier I and Tier II capital (less any capital deductions).
Restrictions on Bank Ownership
Under an amendment to the Banking Act, which became effective on July 28, 2002, subject to certain exceptions, a single shareholder and persons who stand in a special relationship with such shareholder (as described in the Presidential Decree to the Banking Act) may acquire beneficial ownership of up to 10% of a national bank’s total issued and outstanding shares with voting rights and up to 15% of a regional bank’s total issued and outstanding shares with voting rights. The government, the Korea Deposit Insurance Corporation and financial holding companies qualifying under the Financial Holding Companies Act are not subject to such ceilings. However, non-financial business group companies (i.e.— i.e., (1) any same shareholder group with an aggregate net assets of all non-financial companies belonging to such group of not less than 25% of the aggregate net assets of all
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corporations that are members of such group,group; (2) any group with aggregate assets of all non-financial companies belonging to such group of not less than W2 trillion ortrillion; (3) any mutual fund in which a same shareholder group, as described in items (1) and (2) above, owns more than 4%9% of the total shares issued and outstanding)outstanding; (4) a private equity fund (under the Financial Investment Services and Capital Markets Act) where (i) the general partner of such private equity fund, (ii) the limited partner whose equity holding ratio in such private equity fund is 18% or more, or (iii) the limited partners, being member companies of a single group of companies that belong to the same conglomerate as defined in the Monopoly Regulations and Fair Trade Act, whose aggregate equity holding ratio in such private equity fund is 36% or more falls under either of item (1) to (3) above; or (5) a special purpose company of a private equity fund where a private equity fund, as described in item (4) above, owns 9% or more of the special purpose company’s issued and outstanding shares or has actual control over the major business affairs of the special purpose company through, for example, appointment and dismissal of the officers — may not acquire beneficial ownership of shares of a national bank in excess of 4% of such bank’s outstanding voting shares, provided that such non-financial business group companies may acquire beneficial ownership of:
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| | • | up to 10% of a national bank’s outstanding voting shares with the approval of the Financial Services Commission under the condition that such non-financial group companies will not exercise voting rights in respect of such shares in excess of the 4% limit; and |
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| | • | in the event that a foreigner, as defined in the Foreign Investment Promotion Act, owns in excess of 4% of a national bank’s outstanding voting shares, up to 10% of such bank’s outstanding voting shares without the approval of the Financial Services Commission, and in excess of 10%, 25% or 33% of such bank’s outstanding voting shares, with the approval of the Financial Services Commission, up to the number of shares owned by such foreigner. |
In addition, any person (whether a Korean national or a foreigner), with the exception of non-financial business group companies described above, may also acquire in excess of 10% of a national bank’s total voting shares issued and outstanding, provided that an approval from the Financial Services Commission is obtained in instances where the total holding exceeds 10% (or 15% in the case of regional banks), 25% or 33% of the bank’s total voting shares issued and outstanding.
Deposit Insurance System
The Depositor Protection Act provides, through a deposit insurance system, insurance for certain deposits of banks in Korea. Under the Depositor Protection Act, all banks governed by the Banking Act, including Shinhan Bank Chohung Bank and Jeju Bank, are required to pay to the Korea Deposit Insurance Corporation an insurance premium on a quarterly basis at such rate as determined by the Presidential Decree to the Depositor Protection Act, which shall
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not exceed 0.5% of the bank’s insurable deposits in any given year. The current insurance premium is 0.025%0.02% of insurable deposits for each quarter. If the Korea Deposit Insurance Corporation pays the insured amount, it will acquire the claims of the depositors within the payment amount. Under current rules, the Korea Deposit Insurance Corporation insures only up to a total of W50 million per an individual for deposits and interest in a single financial institution, regardless of when the deposits were made and the size of the deposits. However, the maximum limit of W50 million is not applicable to interest-free settlement accounts (for example, a checking account), for any insurable event occurring during the period from January 1, 2001 to December 31, 2003.
Restrictions on Foreign Exchange Position
Under the Korean Foreign Exchange Transaction Regulations, a bank’s net overpurchasedover purchased and oversold positions are each limited to 50% of the stockholders’ equity as of the end of the prior month.
Trust Business
A bank that intends to enter into the trust business must obtain the approval of the Financial Services Commission. Trust activities of banks are governed by the Trust ActFinancial Investment Services and Trust BusinessCapital Markets Act. Banks engaged in the banking business and trust business are subject to certain legal and accounting procedures requirements, including the following:
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| | • | under the Banking Act, assets accepted in trust by a bank in Korea must be segregated from its other assets in the accounts of such bank; accordingly, banks engaged in the banking and trust businesses must maintain two separate accounts, the “banking accounts” and the “trust accounts,” and two separate sets of records which provide details of their banking and trust businesses, respectively; and |
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| | • | assets comprising the trust accounts are not available to depositors or other general creditors of such bank in the event the trustee is liquidated or is wound up. |
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With respect to each unspecified money trust account for which a bank guarantees the principal amount and a minimum yield thereon, the bank must make a special reserve of 25% or more of fees and commissions from such trust account until the total reserve for such trust account equals 5% of the trust amount in such trust account. However, effective January 1, 1999, Korean banks have been prohibited from offering new guaranteed fixed rate trust account products whose principal and interest are guaranteed by the bank.
In addition, a trustee bank must deposit with a court an amount equal to 0.02% of its paid-in capital each year until the aggregate amount of such court deposits reaches 2.5% or more of its paid-in capital. In the event that a trustee bank breaches its duty of care as a trustee and causes loss to its customers, the court deposits will be available as a source of compensation for such loss.
On January 17, 2005, in accordance with the amendment to the Trust Business Act, a comprehensive trust system was introduced to allow banks engaged in trust businesses to accept in trust two or more properties such as money, securities, or real estate with one trust deed. In addition, intellectual property rights can also be held as trust asset.
The Indirect Investment Asset Management Business Act, which appliesapplied to unspecified money trust account products under the Trust Business Act, securities investment trusts under the Securities Investment Trust Business Act, securities investment companies under the Securities Investment Company Act and variable insurance products under the Insurance Business Act, took effect on January 5, 2004. In accordance with the Indirect Investment Asset Management Business Act, we ceased offering unspecified money trust account products from our banking subsidiariesShinhan Bank and instead began to offer products developed by our investment trust management business that fulfills the requirements as an asset management company.
Since February 4, 2009, a trust business conducted by a bank has been governed by the Financial Investment Services and Capital Markets Act which replaced and superseded the Trust Business Act and the Indirect Investment Asset Management Business Act. In the event that a bank qualifies and operates as an asset management company, a trustee, a custodian or a general office administrator under the IndirectFinancial Investment Asset Management BusinessServices and Capital Markets Act, it is required to establish relevant operation and management systems to prevent potential conflicts of interest among the banking business, the asset management business, the trustee or custodian business and general office administration. These measures include:
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| | • | prohibitions against officers, directors and employees of one particular business operation from serving as an officer, director and employee in another business operation, except where an officer or a director (1) serving in two or more business operations with no significant conflict of interest in accordance with the Presidential Decree on the IndirectFinancial Investment Asset Management BusinessServices and Capital Markets Act or (2) serving in a trustee |
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| | business or a custodian business and simultaneously serving in a general office administrator business in accordance with the IndirectFinancial Investment Asset Management BusinessServices and Capital Markets Act; |
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| | • | prohibitions against the joint use or sharing of computer equipment or office equipment; and |
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| | • | prohibitions against the sharing of information by and among officers, directors and employees engaged in the different business operations. |
In addition, a bank is also required to establish an Indirect Investment Asset Management Committee consisting of three directors, two of whom must be outside directors of such bank.
A bank which qualifies and operates as an asset management company may engage in the sale of beneficiary certificates of investment trusts which are managed by such bank. However, such bank is prohibited from engaging in the following activities:
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| | • | acting as trustee of an investment trust managed by such bank; |
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| | • | purchasing with such bank’s own funds beneficiary certificates of an investment trust managed by such bank; |
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| | • | using in its sales activities information relating to the trust property of an investment trust managed by such bank; |
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| | • | selling through a financial institution established under the Banking Act beneficiary certificates of an investment trust managed by such bank; |
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| | • | establishing a short-term financial indirect investment vehicle; and |
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| | • | establishing a mutual fund. |
Laws and Regulations Governing Other Business Activities
To enter the foreign exchange business, a bank must register with the Minister of the Ministry of Strategy and Finance. The foreign exchange business is governed by the Foreign Exchange Transaction Law. To enter the securities business, a bank must obtain the permissionapproval of the Financial Services Commission. The securities business is governed by regulations under the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act. Pursuant to the above-mentioned laws, banks are permitted to engage in the foreign exchange business and the underwriting business for government and other public bonds.
Principal Regulations Applicable to Credit Card Companies
General
Any person, including a bank, wishing to engage in the credit card business must obtain a license from the Financial Services Commission. In addition, in order to enter the credit card business, a bank must obtain a license from the Financial Services Commission (hereinafter, a bank which obtains such license is defined as “licensed bank engaged in the credit card business”). The credit card business is regulated and governed by the Specialized Credit Financial Business Act. Under the Specialized Credit Financial Business Act and regulations thereunder, a company in the same conglomerate group (as defined in the Monopoly Regulation and Fair Trade Act) may engage in the credit card business even though another company in the same conglomerate group is already engaged in such business, which was previously not permitted.
The Specialized Credit Financial Business Act establishes guidelines on capital adequacy and provides for other regulations relating to the supervision of credit card companies. The Specialized Credit Financial Business Act delegates regulatory authority over credit card companies to the Financial Services Commission and its executive body, the Financial Supervisory Service.
A licensed bank engaging in the credit card business is regulated by the Financial Services Commission and the Financial Supervisory Service.
The Financial Services Commission exerts direct control overregulates credit card companies and licensed banks engaged in the credit card business by establishing guidelines or regulations on management of such companies. Moreover if the Financial Services Commission deems the financial condition of a credit card company or a licensed bank engaged
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in the credit card business to be unsound or such companies fail to satisfy the guidelines or regulations, the Financial Services Commission may take certain measures to improve the financial condition of such companies.
Restrictions on Scope of Business
Under the Specialized Credit Financial Business Act, a credit card company may conduct only the following types of business: (i) credit card business as licensed or other specialized credit finance businesses as registered pursuant to the Specialized Credit Financial Business Act; (ii) the businesses ancillary to the credit card business, (i.e.,(for example, providing cash advance loans to existing credit card members, issuing and settling of debit cards and issuing, selling and settling of pre-paid cards); (iii) provision of unsecured or secured loans; (iv) provision of discount on notes; (v) purchase, management and collection of account receivables originated by companies in the course of providing goods and services; (vi) provision of payment guarantee; (vii) asset management business under the Asset Backed Securitization Act; (viii) credit investigation; and (ix) other incidental businesses related to the foregoing. As a result of the amendment to the Specialized Credit Financial Business Act on January 27, 2005, a credit card company’s scope of business presently includes “businesses that utilize existing manpower, assets or facilities in a credit card company, as designated by the Financial Services Commission.” Under the current regulation established by the Financial Services Commission, a credit card company may engage in various types of business including, but not limited to,e-commerce, operation of insurance agency, delegation of card issuance and, supply of payment settlement system.system, loan brokerage and brokerage of collective investment securities.
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Pursuant to the Presidential Decree of the Specialized Credit Financial Business Act, as of the end of each quarter, a credit card company’s average balance of claim amounts during such quarter from engaging in the businesses set forth above in (iii) and (iv), excluding claim amounts arising from the provision of loans to companies, extension of new loans in connection with rescheduling of outstanding loans, the provision of mortgage loans and the provision of cash advances or any other loans to credit card members, may not exceed the average balance of claim amounts during such quarter from engaging in the businesses set forth above in (i), excluding a credit card business, and (v); provided, however, that with respect to any excess amount existing as of April 21, 2004, credit card companies have until December 31, 2008 to eliminate such excess amount.
Capital Adequacy
The Specialized Credit Financial Business Act provides for a minimum paid-in capital amount of: (i) W20 billion in the case of a specialized credit financial business company which wishes to engage in no more than two kinds of core businesses (i.e. credit card, installment finance, leasing and new technology business) and (ii) W40 billion in the case of an specialized credit financial business company, which wishes to engage in three or more kinds of core businesses.
Under the Specialized Credit Financial Business Act and regulations thereof, a credit card company must maintain a “capital adequacy ratio,” defined as the ratio of adjusted equity capital to adjusted total asset, of 8% or more and a “delinquent claim ratio,” defined as the ratio of delinquent claims to total claims as set forth under the regulations relating to the Specialized Credit Financial Business Act, of less than 10%.
Under the Specialized Credit Financial Business Act and regulations thereof, the minimum ratio of allowances for losses on loans, leased assets (except assets subject to an operating lease) and suspense receivables as of the date of accounting settlement (including semiannual preliminary accounts settlement) would be 0.5% of normal assets, 1% of precautionary assets and 20% of substandard assets, 75% of doubtful assets and 100% of estimated loss assets, and the minimum ratio of allowances for losses on credit card receivables and cash advances would be 1.5% of normal assets, 15% of precautionary assets, 20% of substandard assets, 60% of doubtful assets and 100% of estimated loss assets. In addition, a credit card company has to reserve a certain amount calculated according to relevant regulations as loss allowances for unused credit limits.
Liquidity
Under the Specialized Credit Financial Business Act and regulations thereof,thereunder, a credit card company must maintain a Won liquidity ratio (Won-denominated current assets/Won-denominated current liabilities) of 100% or more. In addition, once a credit card company is registered as a foreign exchange business institution with the
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Minister of the Ministry of Strategy and Finance, such credit card company is required to (1) maintain a foreign-currency liquidity ratio within three months (defined as foreign-currency liquid assets due within three months divided by foreign-currency liabilities due within three months) of not less than 80%, (2) maintain a ratio of foreign-currency liquid assets due within seven days (defined as foreign-currency liquid assets due within seven days less foreign-currency liabilities due within seven days, divided by total foreign-currency assets) of not less than 0% and (3) maintain a ratio of foreign-currency liquid assets due within a month (defined as foreign-currency liquid assets due within a month less foreign-currency liabilities due within a month, divided by total foreign-currency assets) of not less than negative 10%. The Financial Services Commission requires a credit card company to submit quarterly reports with respect to the maintenance of these ratios.
Restrictions on Funding
Under the Specialized Credit Financial Business Act, a credit card company may raise funds using only the following methods: (i) borrowing from financial institutions, (ii) issuing corporate debentures or notes, (iii) selling securities held by the credit card company, (iv) transferring claims held by the credit card company, (v) transferring claims held by the credit card company in connection with its businesses, or (vi) issuing securities backed by the claims held by the credit card company relating to its businesses.
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Further, theFurthermore, a credit card company may borrow funds from offshore or issue foreign currency denominated securities once it is registered as a foreign exchange business institution with the Minister of the Ministry of Strategy and Finance.
With respect to the issuance of debentures and notes, thea credit card company may issue debentures up to an amount equal to ten times the company’s total equity capital. In addition, a credit card company may issue, on a temporary basis, debentures exceeding the maximum limit for the purpose of redeeming the outstanding debentures, but must repay such outstanding debentures within one month after the date of issuance of new debentures.
Restrictions on Loans to Affiliate Companies
Under the Specialized Credit Financial Business Act and regulations thereof, a credit card company may not provide loans exceeding 100% of its equity capital, in the aggregate, to its specially related persons (as defined under the relevant laws) including, but not limited to, its affiliates.
Restrictions on Assistance to Other Companies
Under the Specialized Credit Financial Business Act, a credit card company shallmay not engage in any of the following acts in conjunction with other financial institutions or companies; (i) holding voting shares under cross shareholding or providing credit for the purpose of avoiding the restrictions on loans to affiliate companies; (ii) acquiring shares under cross shareholding for the purpose of avoiding the limitation on purchase of its treasury shares under the Korean Commercial Code or the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act; or (iii) other acts which are likely to have a material adverse effect on the interests of transaction parties as stipulated by the Presidential Decree to the Specialized Credit Financial Business Act, which are not yet provided.
A credit card company shallalso may not extend credit for enabling another person to purchase the shares of such credit card company or to arrange financing for the purpose of avoiding the restrictions on loans to affiliate companies.
Restrictions on Investment in Real Estate
Under the Specialized Credit Financial Business Act and the regulations thereof, a credit card company is allowed tomay possess real estate only to the extent that such business conduct is designated by such laws and regulations, with certain exceptions such as for the purposes of factoring or leasing or as a result of enforcing its security rights, provided that the Financial Services Commission may limit the maximum amount a credit card company may invest in real estate investments for business purposes up to a percentage equal to or in excess of 100% of its equity capital.
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Restrictions on Shareholding in Other Companies
Under the Specialized Credit Financial Business Act and the LawAct on the Structural Improvement of Structure ofthe Financial Industry, a credit card company and its affiliate financial institutions (together a “group”) are required to obtain prior approval of the Financial Services Commission if such credit card company, together with its affiliate financial institutions, (i) owns 20% or more of outstanding voting shares of a target company or (ii) owns 5% or more of outstanding voting shares of a target company, and shall be deemed to have control of the target company, including being the largest shareholder of such target company or otherwise.
The indirect subsidiary of the financial holding company is prohibited from controlling any other company.
Disclosure and Reports
Pursuant to the Specialized Credit Financial Business Act and the regulations thereof, the ordinary disclosure requirement for a credit card company is to disclose any material matters relating to management performance, profitprofits and loss,losses, corporate governance, manpowercompetence of the employees or risk management within three months from the end of each fiscal year and within two months from the end of the first half of the fiscal year. Also,In addition, a credit card company is required to disclose on an on-going basis certain matters such as the occurrence of non-performing loans, a financial accidentincident or the occurrence of losses exceeding certain amounts. Prior to December 29, 2005, a credit card company or a licensed bank engaging in the credit card business was required to submit its business reports and reports on
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actual results of management to the Financial Services Commission within one month from the end of each quarter. However, after the amendment to the regulations issued by the Financial Services Commission on December 29, 2005, a credit card company or a licensed bank engaging in the credit card business must submit such report as required by the Governor of Financial Supervisory Service, with certain important matters being reported as frequently as each month. In addition, all companies engaged in the specialized credit financial business under the Specialized Credit Financial Business Act, including, without limitation, credit card companies, must file a report withto the Financial Supervisory Service regarding the result of settlement of accounts within one month after the end of its fiscal year. Also, these companies are required to conduct a provisional settlement of accounts for each quarter and file a report withto the Financial Supervisory Service within one month after the end of such quarter.
Risk of Loss due to Lost, Stolen, Forged or Altered Credit Cards
Under the Specialized Credit Financial Business Act, upon notice from the holder of a credit card or a debit card of its loss or theft, thea credit card company or a licensed bank engagingengaged in the credit card business, as the case may be, is liable for any loss arising from the unauthorized use of credit cards or debit cards thereafter as well as any loss from unauthorized transactions made within 60 days prior to such notice. However, a credit card company or a licensed bank engaged in the credit card business, as the case may be, may transfer to the cardholder all or part of the risks of loss associated with unauthorized transactions made within 60 days prior to such notice, in accordance with the standard terms and conditions agreed between the credit card company or athe licensed bank engaged in the credit card business, as the case may be, and the cardholder, provided that the loss or theft must be due to the cardholder’s willful misconduct or negligence. Disclosure of a cardholder’s password under duress or threat to the cardholder’s orhis/her family’s life or health will not be deemed as the cardholder’s willful misconduct or negligence.
Moreover, a credit card company or a licensed bank engagingengaged in the credit card business, as the case may be, is also responsible for any losses resulting from the use of forged or altered credit cards, debit cards and pre-paid cards. However, a credit card company or a licensed bank engagingengaged in the credit card business, as the case may be, may transfer all or part of this risk of loss to holders of credit cards in the event of willful misconduct or gross negligence by holders of such cards if the terms and conditions of the written agreement entered between the credit card company or a licensed bank engagingengaged in the credit card business, as the case may be, and holders of such cards specifically provide for such transfer. For these purposes, disclosure of a customer’s password that is made intentionally or through gross negligence, or the transfer of or giving as collateral of the credit card or debit card, is considered willful misconduct or gross negligence.
In addition, the Specialized Credit Financial Business Act prohibits a credit card company from transferring to merchants the risk of loss arising from lost, stolen, forged or altered credit cards, debit cards or pre-paid cards;
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provided, however, that a credit card company may enter into an agreement with a merchant under which the merchant agrees to be responsible for such loss if caused by the merchant’s gross negligence or willful misconduct.
Each credit card company or a licensed bank engaged in the credit card business must institute appropriate measures such as establishing reserves, purchasing insurance or joining a cooperative association in order to fulfill its obligations whenrelated to the risk of loss arisesarising from unauthorized use due to lost, stolen, forged or altered credit cards, debit cards or pre-paid cards.
Pursuant to the Specialized Credit Financial Business Act, the Financial Services Commission may either impose thea limit or take other necessary measures against thea credit card company or a licensed bank engaged in the credit card business including, without limitation, with respect to the following:
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| | • | set maximum limits for cash advances on credit cards; |
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| | • | use restrictions on debit cards with respect to per day or per transaction usage; or |
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| | • | aggregate issuance limits and maximum limits on the amount per card on pre-paid cards. |
Lending Ratio in Ancillary Business
Pursuant to the Presidential Decree to the Specialized Credit Financial Business Act, as amended in December 2003, a credit card company or a licensed bank engagingengaged in the credit card business, as the case may be, must
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maintain an aggregate quarterly average outstanding lending balance to credit card holders (including cash advances and credit card loans, but excluding restructured loans and revolving cash advances) no greater than its aggregate quarterly average outstanding credit card balance arising from the purchase of goods and services (excluding receivables arising from the purchase of goods and services by specially-related persons using “exclusive use card for business purposes” (aspurposes,” as defined in the Tax Incentives Limitation Act)) plus its aggregate quarterly amount of payments made by members using their debit cards; provided that, with respect to any excess amount existing as of December 31, 2003, the credit card companies have a grace period until December 31, 2007 to eliminate such excess amount.
Issuance of New Cards and Solicitation of New Card Holders
The Presidential Decree to the Specialized Credit Financial Business Act establishes the conditions under which a credit card company or a licensed bank engagingengaged in the credit card business may issue new cards and solicit new members. Specifically, new credit cards may be issued only to the following persons: (i) persons who are at the age of 18 years or more at the time of applying for issuance of a credit card; (ii) persons whose capability to pay bills as they come due, as determined according to standards established by the credit card company or a licensed bank engaging in the credit card business, is verified; (iii) in the case of minors, persons who submit a guardian’s consent along with documents evidencing income, such as an employment certificate or a tax certificate; and (iv) personpersons whose identity hashave been verified.
In addition, a credit card company or a licensed bank engagingengaged in the credit card business, as the case may be, may not engage in the following methods of soliciting credit card members: (i) providing economic benefits or conditioning such benefits in excess of 10% of the annual credit card fee (in the case of no-annual fee credit cards, the average annual fees will be W10,000) in connection with issuance of credit cards; (ii) street solicitation of card members on roadsstreets and private roads as prescribed under the Road Act and Private Road Act, public place and along corridors used by the general public; (iii) solicitation through visits, except those visits made upon prior consent and visits to a business area; (iv) solicitation through pyramid sales methods; and (v) solicitation through the Internet, as further discussed below.
Amendments to the law in 2005 resulted in the application of more stringent standards in the issuance of credit cards and solicitation of credit card applicants, such as requiringIn addition, a credit card company or a licensed bank engaged in the credit card business is required to check whether the credit card applicant has any delinquent debt owingowed to any other credit card company or other financial institutions which the applicant is unable to repay, and also requiring,require, in principle, with respect to solicitations made through the Internet, the certified electronic signature of the applicant. Moreover, persons who intend to engage in solicitation of credit card applicants must register with the Financial Services Commission, unless the solicitation is made by officers or employees of a credit card company or a company in business alliance with such credit card company.
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Compliance Rules on Collection of Receivable Claims
Pursuant to the Specialized Credit Financial Business Act and its regulations, a credit card company or a licensed bank engagingengaged in the credit card business are prohibited from collecting its claims by way of:
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| | • | exerting violence or threat of violence; |
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| | • | informing a Related Party (a guarantor of the debtor, blood relative or fiancée of the debtor, a person living in the same household as the debtor or a person working in the same workplace as the debtor) of the debtor’s liability without just cause; |
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| | • | providing false information relating to the debtor’s obligation to the debtor orhis/ his or her Related Party; |
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| | • | threatening to sue or suing the debtor for fraud despite lack of affirmative evidence to establish that the debtor has submitted forged or false documentation with respect tohis/her capacity to make payment; |
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| | • | visiting or telephoning the debtor during late hours between 9:00 p.m. —and 8:00 a.m.; and |
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| | • | utilizing other uncustomary methods to collect the receivables thereby invading the privacy or the peacefulness in the workplace of the debtor orhis/ his or her Related Party. |
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Principal Regulations Applicable to SecuritiesFinancial Investment Companies
General
The securities business is regulated and governed by the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act. SecuritiesFinancial investment companies are under the regulation and supervision of the Financial Services Commission, the Financial Supervisory Service and the Securities and Futures Commission.
Under the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act, permission to commence a financial investment company may engage in dealing, brokerage, business, a trading businesscollective investment, investment advice, discretionary investment management or an underwriting business must betrust businesses if it has obtained relevant licenses from the Financial Services Commission.
A securitiesfinancial investment company may also engage in certain businesses ancillary to the primary business without obtaining any separate license andor certain other additional businesses by obtaining separate licenses fromsubmitting a report to the Financial Services Commission. PermissionCommission at least seven days prior to the commencement of the business without obtaining any separate license. Approval to merge with any other entity or to transfer all or substantially all of a business must also be obtained from the Financial Services Commission.
Under the Act on the Structural Improvement of the Financial Industry, if the Korean government deems a securitiesfinancial investment company’s financial condition to be unsound or if a securitiesfinancial investment company fails to meet the applicable Net Operating Equity Ratio (as defined below), the government may order any of the following:
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| • | sanctions to a securities company or its officers or employees; |
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| • | capital increase or reduction; |
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| • | a stock cancellation or consolidation; |
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| • | a transfer of business or assets; |
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| • | closing of branch offices; |
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| • | acquisition of such company by a third party; |
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| • | a merger with any other entity; |
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| • | becoming a subsidiary (under the Financial Holding Companies Act) of a financial holding company; |
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| • | prohibition on acquiring risky assets or taking deposits at an excessively high interest rate; |
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| • | certain sanctions, including among others, sanctions against a financial investment company or its officers or employees, capital increase or reduction and a suspension or assignment of a part or all of business operation; |
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| • | an assignment of contractual rights and obligations relating to financial transactions; |
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| • | suspension of officer’s performance and appointment of a receiver; or |
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| • | any other measures as necessary to protect financial soundness. |
Scope of Business
The 2005 amendment to the Securities and Exchange Act and the Presidential Decree and regulations thereunder resulted in enlarging the scope of business of securities companies by allowing them to engage in the following businesses:operation.
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| • | brokerage, trading, or underwriting business of equity of undisclosed association (as defined under the Korean Commercial Code) or limited partnership and certain derivative securities linked with prices, interest rates, indices and indicators relating to securities (under the Securities and Exchange Act and the Presidential Decree), foreign securities of similar character, currencies, commodities (under the Futures and Exchange Act), or linked with credit risks; |
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| • | trust business under the Trust Business Act or over-the-counter derivative trading linked to credit risks, price of securities, interest rate or indices based on the foregoing, or currency rate, price of goods or indices based on the foregoing, if the company obtains necessary license from the Financial Services Commission. A securities company intending to engage in the business of over-the-counter derivative trading will be subject to the limit of 30% of its equity capital as the total amount of risks from over-the-counter derivative trading, and further subject to the limit of 5% of equity capital for the amount of risks from a credit-linked derivative |
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| | transaction with a person or a company (including specially-related person of such person or company), with the 300% of minimum equity capital regulation rate and with the W100 billion of minimum equity capital requirement (provided that the W100 billion requirement will be applicable only until March 28, 2007) in order to conduct over-the-counter derivative trading Pursuant to the amendment of the Trust Business Act effective as of July 29, 2005, a securities company is exempted from regulations under the Trust Business Act regarding the use of the word ’trust’ in the corporate name, the qualifications of officers, restrictions on the management of the trustee’s own fund, and internal control standards; and |
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| • | ancillary businesses such as (1) real estate brokerage or consulting business on real estates owned by clients who are being provided with services relating to brokerage on mergers and acquisitions or business management and financing consulting, (2) selling books, reports or electronic documents containing securities-related information and (3) arranging loans to customers of securities companies based on business alliances established with such securities companies. |
Regulations on Financial Soundness — Capital Adequacy
The SecuritiesFinancial Investment Services and ExchangeCapital Markets Act sets forth various types of brokerageand/or dealing business licenses based on (i) the scope of products and services that may be provided by each type of the Presidential Decree thereunder provide forbrokerageand/or dealing licensee and (ii) the type of customers to which such products and services may be provided. For example, a financial investment company engaged in the brokerage, dealing and underwriting businesses with retail investors as well as professional investors in connection with all types of securities is required to have a minimum paid-in capital of W5053 billion in the case oforder to obtain a securities company engaged in thelicense for such brokerage, tradingdealing and underwriting businesses.
The financial soundness of a securitiesfinancial investment company is to be assessed, underpursuant to the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act and the regulations of the Financial Services Commission, in accordance with the net operating equity ratioNet Operating Equity Ratio of the company, which is to be calculated as follows and to be expressed as a percentage.
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Net operating equity ratioOperating Equity Ratio = Net operating equity/Operating Equity/Total riskRisk × 100
The terms “Net Operating Equity” and “Total Risk” for the purpose of the above-stated formula are defined and elaborated in the regulations of the Financial Services Commission. Generally, the net operating equityNet Operating Equity and the Total risk isRisk are to be calculated according to the following formula:
Net operating equityOperating Equity = Net assets (total assets −— total liabilities) −— the total of items that may be deducted + the total of items that may be added
Total riskRisk = market risk + counterparty risk + basicmanagement risk + credit concentration risk − risk offsetting factor
The regulations of the Financial Services Commission requires, among other things, securitiesfinancial investment companies to maintain the net operating equity ratio at a level equal to or higher than 100% (and 150%, in case of securities companies engaging in the foreign exchange business), at the end of the each quarter of the fiscal year.
In addition, all Korean companies, including securitiesfinancial investment companies, are required to set aside, as a legal reserve, 10% of the cash portion of the annual dividend or interim dividend in each fiscal year until the reserve reaches 50% of itsthe stated capital.
Under the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act and regulations thereunder, the minimum ratio of allowances for losses on loans and suspense receivables specified under such regulations is 0.5% of normal assets, 2% of precautionary assets, 20% of substandard assets, 75% of doubtful assets and 100% of estimated loss assets.
The regulations of the Financial Services Commission as amended in 2004 imposed stricter standards on the capital adequacy ratio by allowing “term subordinated debt” with a maturity of five years or more, to be recognized as an additional item to be added to the net operating equity and by also allowing only up to an amount equal to 50% of the net assets as an item to be added. By comparison, the amendment of the regulations of the Financial Services Commission on June 29, 2005, in certain cases, allows treating a subordinated debt with a maturity of two years or more as an item to be added to the net operating equity under the Act on the Structural Improvement of the Financial Industry.
Other Provisions on Financial Soundness
The SecuritiesFinancial Investment Services and ExchangeCapital Markets Act, the Presidential Decree of the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act and the regulations of the Financial Services Commission also include certain provisions which are designed to regulate
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certain types of activities relating to the management of the assets of a securities company, withsubject to certain exceptions. Such provisions include:
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| | • | restrictions on the holdings by a securities company of securities issued by another company which is the largest shareholder or the major shareholder (each as defined under the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act) of such securities company; and |
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| | • | restrictions on providing money or credit to the largest shareholder (including specially-related persons of such shareholder), major shareholders, officers and specially-related persons of the securities company; and |
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| • | special provisions concerning the payment guarantee by a securities company. For instance, a securities company is not allowed to provide payment guarantees for third parties other than its overseas subsidiaries. |
A securities company may invest in shares, bonds (whether listed or unlisted) and stock price index futures and options or other derivative transactions. However, a securities company may not enter into cross-border financial futures, swaps, options or other derivative transactions without obtaining prior approval from the Bank of Korea, except in the case when such securities company, which has been registered as a foreign exchange business institution with the Minister of the Ministry of Strategy and Finance, is confirmed by the Financial Services Commission to satisfy certain conditions set forth in the Foreign Exchange Transaction Regulations and the counterparty (other than an individual) is an institutional investor, a company listed on the Stock Market Division or the KOSDAQ Market Division of the Korea Exchange or not a resident of Korea. Furthermore, a securities company that is registered as a foreign exchange business institution and licensed to engage in over-the-counter derivative transactions may enter into Won currency derivative transactions (except for credit-linked derivative transactions) without obtaining prior approval from the Bank of Korea. As a result of the 2005 amendment to the Securities and Exchange Act and the Presidential Decree and regulations thereunder, a securities company licensed to engage in over-the-counter derivative trading may enter into credit-linked derivative transactions. However, a securities company must obtain prior approval from the Bank of Korea when entering into a cross-border credit-linked derivative transaction even if the securities company is registered as a foreign exchange business institution.
The Securities and Exchange Act was amended in June 2005 and took effect on January 30, 2006 to prevent capital of the industrial business from dominating the financial markets. For this purpose, certain regulations were adopted to require a prior approval of the Financial Services Commission to be a controlling shareholder. “Controlling shareholder” means the largest shareholder, its specially-related persons (only those holding 1% of outstanding voting shares), or major shareholders except for the government and the Deposit Insurance Corporation. Shares acquired without this approval can be ordered by the Financial Services Commission to be disposed within six months.
Business Conduct Rules
In 2001, the Financial Services Commission adopted the “business conduct rules” applicable to securities companies. The business conduct rules impose greater responsibilities on securities companies, strictly banning unfair practices such as front running or scalping and ensuring suitability of investment solicitation by securities companies.
Disclosure and Reports
Pursuant to the Securities and Exchange Act, a securities company has a continuing obligation to disclose certain material matters including (i) financial condition and profit and loss of the securities company, (ii) any sanctions levied on the securities company under the Securities and Exchange Act or any corrective measures or sanctions under the Law on Improvement of Structure of Financial Industry or (iii) occurrence of any matters which may have a material adverse effect on the operation or management of the securities company.
A securities company is also required to submit reports on actual results of operation to the Financial Services Commission within 45 days from the end of each quarter. In addition, a securities company is required to submit financial documents, including financial statements and audit reports to the Financial Services Commission, within three months from the end of the fiscal year.
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A securities company engaging in over-the-counter derivative trading is required to submit a detailed report of such trading during each month on every 10th day of the following month.
Customer Protection
Under Korean law, the relationship between a customer and a securities company in connection with a securities sell or buy order is deemed to be consignment and the securities acquired by a consignment agent (i.e., the securities company) through such sell or buy order are regarded as belonging to the customer in so far as the customer and the consignment agent’s creditors are concerned. Therefore, in the event of a bankruptcy or reorganization procedure involving a securities company, the customer of the securities company is entitled to the proceeds of the securities sold by the securities company.
As the cash deposited with a securities company is regarded as belonging to the securities company, which is liable to return the same at the request of its customer, the customer cannot take back deposited cash from the securities company if a bankruptcy or reorganization procedure is instituted against the securities company and, therefore, can suffer from loss or damage as a result. However, the Depositor Protection Act provides that Korea Deposit Insurance Corporation will, upon the request of the investors, pay each investors up to W50 million per financial institution in case of the securities company’s bankruptcy, liquidation, cancellation of securities business license or other insolvency events. Securities companies are required to pay the premiums related to this insurance. Pursuant to the Securities and Exchange Act, securities companies are required to deposit the cash received from its customers with the Korea Securities Finance Corporation, a special entity established pursuant to the Securities and Exchange Act. Set-off or attachment of cash deposits by securities companies with the Korea Securities Finance Corporation is prohibited. In addition, in the event of bankruptcy or dissolution of the securities company, the cash so deposited shall be withdrawn and paid to the customer prior to payment to other creditors of the securities company.
Principal Regulations Applicable to Insurance Companies
General
Insurance companies are regulated and governed by the Insurance Business Act, as amended (the “Insurance Business Act”). In addition, Korean insurance companies in Korea are under the regulation and supervision of the Financial Services Commission and its governing entity, the Financial Supervisory Service.
Under the Insurance Business Act, permissionapproval to commence an insurance business must be obtained from the Financial Services Commission based on the type of insurance businesses, which are classified as life insurance business, non-life insurance business and third party insurance business. Life insurance business means an insurance business which deals with life insurance policies or pension insurance policies (including retirement insurance policies). Non-life insurance business means an insurance business which deals with fire insurance policies, marine insurance policies, car insurance policies, guaranty insurance policies, reinsurance policies, liability insurance policies or other insurance policies prescribed under the Presidential Decree of the Insurance Business Act. Third party insurance business means an insurance business which deals with injury insurance policies, sicknesshealth insurance policies or nursing care insurance policies. According toUnder the Insurance Business Act, insurance companies are not allowed to engage in both a life insurance business and a non-life insurance business, withsubject to certain exceptions.
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If the Korean government deems an insurance company’s financial condition to be unsound or if an insurance company fails to properly manage the business as set forth under relevant Korean law, the government may order:order certain sanctions including, among others, sanctions against an insurance company or its officers or employees, capital increase or reduction and a suspension or assignment of a part or all of business operation.
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| • | sanctions to an insurance company or its officers or employees; |
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| • | capital increase or reduction; |
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| • | a stock cancellation or consolidation; |
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| • | a transfer of business or assets; |
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| • | closing of branch offices; |
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| • | acquisition of such company by a third party; |
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| • | a merger with any other entity; |
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| • | becoming a subsidiary (under the Financial Holding Companies Act) of a financial holding company; |
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| • | prohibition on acquiring risky assets or taking deposits at excessively high interest rate; |
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| • | a suspension or assignment of a part or all of business operation; |
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| • | an assignment of contractual rights and obligations relating to financial transactions; |
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| • | suspension of officer’s performance and appointment of a receiver; or |
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| • | any other measures as necessary to protect financial soundness. |
Capital Adequacy
The Insurance Business Act provides forrequires a minimum paid-in capital of W30 billion for an insurance company,company; provided, that, the insurance company which intends to engage in only certain types of insurance policies may have a lower paid-in capital pursuant to the Presidential Decree of the Insurance Business Act.
In addition to the minimum capital requirement, an insurance company is required to maintain a Solvency Margin Ratio of 100% or more. “Solvency Margin Ratio” is the ratio of the Solvency Margin to the Standard Amount of the Solvency Margin. Solvency Margin is the aggregate amount of paid-in capital, reserve for dividends to policyholders, allowance for bad debt and subordinated debt amount and others similar thereto as set out in the regulation of the Financial Services Commission, lessnon-amortized acquisition costs, goodwill and others similar thereto as appearing in the regulation of the Financial Services Commission. The Standard Amount of Solvency marginMargin for life insurance companies is defined under the regulation of the Financial Services Commission and is calculated as follows:
1. (Net(net premium type policy reserve −—Non-amortizednon-amortized acquisition cost) × (Corresponding(corresponding ratio of risk factor for policy reserve) (4%); and
2. (Net(risk insurance benefits) × (Corresponding(corresponding ratio of insurance risk factor).
The Financial Services Commission amended the Regulation on Supervision of Insurance Business on March 23, 2009 to introduce the “risk based capital” regime. Under the risk based capital regime, the Standard Amount of Solvency Margin for life insurance companies is calculated as follows:
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| * | | Insurance Risk, Interest Risk, Credit Risk, Market Risk and Operation Risk are defined under the Regulation on Supervision of Insurance Business. |
Under the applicable provisions of the Regulation on Supervision of Insurance Business, as amended on March 23, 2009, an insurance company can opt to comply with the solvency margin requirements under the previous regulation for another two years following April 1, 2009. The stated intention of the regulators is that the change in the solvency margin regime to the risk based capital regime should not have any adverse effect on the insurance companies. Accordingly, until March 31, 2011, an insurance company may choose between solvency margin ratio calculated under the previous regulation and the risk based capital regime (whichever is more favorable to the insurance company). Since April 1, 2011, however, all insurance companies will be required to comply with the risk based capital regime.
Under the Insurance Business Act, the Presidential Decree and other regulations thereunder, for each accounting period, insurance companies are required to appropriate policy reserve that is earmarked for future payments of insurance money, refund and dividends to policyholders (hereinafter collectively referred to as “Insurance Money”) for each insurance contract. However, if an insurance company has reinsured a portion of its insurance contracts with a creditworthy reinsurance company in order to lower its overall risk, in principle, the insurance company is not required to appropriate policy reserve for the reinsured contracts but insteadcontracts. Instead, the reinsurance company is required to appropriate such policy reserve for the reinsured contracts. However, from April 1, 2008, if an insurance company transfers more than 50% of its risk to a reinsurance company, the amount of risk transferred in excess of 50% will be disallowed for purposes of calculating the solvency margin ratio. In particular, if the ratio of the risks transferred to the reinsurance company to the total risks insured by an insurance company exceeds 50%, such insurance company will be required to have net assets in relation to such risks transferred in excess of the 50% threshold for purposes of the solvency margin requirement. Further, insurance companies are required to submit written calculation methods for insurance premiums and policy reserves by insurance types when applying for the
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insurance business license. If an insurance company develops a new insurance product or amends the policy reserve calculation method, it is required to report such matters to the Financial Services CommissionSupervisory Service and obtain approval thereof.
The policy reserve amount consists of the following; (i) premium reserves and prepaid insurance premiums which are calculated under the methods determined by the written calculation methods for insurance premiums and policy reserves by insurance types or by lapses of insurance period, with regard to the contracts for which the causes for payment of the Insurance Money have yet to occur as of the end of each accounting period, (ii) amounts for which a lawsuit is pending on the Insurance Money or amounts for which a payment has been fixed with regard to the contracts for which the causes for payment of Insurance Money have occurred as of the end of each accounting period, and amounts which have not been paid yet due to an unsettled amount for paying the Insurance Money, even
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if the causes for payment of the Insurance Money have already occurred; and (iii) amounts reserved by an insurance company for allocation to policyholders.
Pursuant to the regulations established by the Financial Services Commission, insurance companies are required to maintain allowances for outstanding loans, accounts receivables and other credits (including accrued income, payment on account, and bills receivables or dishonored) in an aggregate amount covering not less than 0.5% of normal credits (excluding confirmed guarantees and acceptances), 2% of precautionary credits, 20% of substandard credits, 50% of doubtful credits and 100% of estimated loss credits, provided that the minimum ratio of allowances for certain type of outstanding loans by insurance companies to individuals and households (including, consumerretail loans, housing loans, and other forms of consumerretail loans extended to individuals not registered for business), is increased to 0.75% of normal credits and 5% of precautionary credits.
LiquidityVariable Insurance and Bancassurance Agents
According to the Insurance Business Act and regulations thereunder, if an insurance company is registered as a foreign exchange business institution with the Ministry of Strategy and Finance, such insurance company is required to (1) maintain a ratio of foreign-currency liquid assets due within three months (defined as foreign-currency liquid assets due within three months divided by foreign-currency liabilities due within three months) of not less than 80%, (2) maintain a ratio of foreign-currency liquid assets due within seven days (defined as foreign-currency liquid assets due within seven days less foreign-currency liabilities due within seven days, divided by total foreign-currency assets) of not less than 0% and (3) maintain a ratio of foreign-currency liquid assets due within a month (defined as foreign-currency liquid assets due within a month less foreign-currency liabilities due within a month, divided by total foreign-currency assets) of not less than negative 10%, if the ratio of foreign-currency liabilities to the Total Assets (defined as the assets on the balance sheet lessnon-amortized acquisition costs, goodwill and assets in special accounts) is 1% or more.
Variable Insurance
Prior to the enactment of the Indirect Investment Asset Management Business Act on January 4, 2004, insurance companies were engaged in the variable insurance business by establishing special accounts pursuant to the Insurance Business Act. Although the assets held in each special account was separated from other assets held in other special account and other assets of the company and was required to have separate accounting, prior to the enactment of the Indirect Investment Asset Management Business Act, it was difficult to protect against the bankruptcy risk of an insurance company.
After the enactment of the Indirect Investment Asset Management Business Act, variable insurance is regulated pursuant to the Insurance Business Act and the IndirectFinancial Investment Asset Management BusinessServices and Capital Markets Act. After the enactment of the Indirect Investment Asset Management Business Act, inIn order for an insurance company to sell variable insurance to a policyholder and operate such variable insurance, the insurance company must obtain an approval as an asset management companya license with respect to collective investment business from the Financial Services Commission and register as a selling company with the Financial Services Commission. In this case, according to the IndirectFinancial Investment Asset Management BusinessServices and Capital Markets Act, an insurance company will be regulated as an investment trust and assets acquired in connection with variable insurance must be held by a trust company that is registered with the Financial Services Commission pursuant to the IndirectFinancial Investment Asset Management BusinessServices and Capital Markets Act. However, for those special accounts that were established prior to the enactment of the Indirect Investment Asset Management Business Act, the Insurance Business Act will apply, provided however, upon six months after its enactment, further enrollment into such special accounts is prohibited, with certain exceptions.
According to the IndirectFinancial Investment Asset Management BusinessServices and Capital Markets Act, insurance companies may operate variable insurance through (i) mandating all of the management and the management instruction business to another asset management company, (ii) operating by way of discretionary investment all of the assets constituting the investment advisory assets out of the investment trust assets, or (iii) operating all of the investment trust assets into other indirectcollective investment securities, thereby allowing all of the particular variable insurance assets to be outsourced. According to the Indirect Investment Asset Management Business Act and the Presidential Decree thereunder, indirect investment vehicles in principle may purchase only up to 20% of the indirect investment securities issued
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by another single indirect investment vehicle,provided that if such securities have been issued by “listed index-linked indirect investment vehicles” (as defined under the Indirect Investment Asset Management Business Act), the indirect investment vehicles may purchase up to 30% of such securities.
Insurance companies may not transfer assets held in a special account into a general account or a different special account, provided that, for efficient operation of a special account, insurance companies may transfer the initial investment funds held in a general account into a special account. The assets which may be transferred from a general account to a special account must be the lower of 1% of the total asset value in the account or W10 billion. If the value of the assets held in a special account is more than 200% of the initial investment fund at the end of any quarter, the initial investment fund must be transferred back to the general account within three months from the end of such quarter, the value of the assets to be transferred is estimated by the value of the assets in the special account at the time of such transfer.
Solicitation of Insurance Policy & Bancassurance Agents
Under the Insurance Business Act, the following persons are permitted to solicit subscription of insurance: (i) financial planners registered with the Financial Supervisory Service, (ii) insurance agents registered with the Financial Supervisory Service, (iii) insurance brokers registered with the Financial Supervisory Service, (iv) officers and employees of insurance companies and (v) officers and employees of the insurance agents and brokers described above who are notified to solicit insurance subscription pursuant to the Insurance Business Act. In order for these persons to solicit subscription of insurance contracts that are required to be managed under a special account (including, without limitation, variable insurance contracts), they must pass the examination or complete additional training sessions administered or offered by the Financial Services Commission.
The amendment to the Insurance Business Act which became effective on August 30, 2003 permits banks, securities companies, credit card companies and other financial institutions to register as insurance agents or insurance brokers and engage in the insurance business (the “Bancassurance Agents”). Under the Insurance Business Act as amended, and the related regulations, the range of insurance products to be sold by the Bancassurance Agents expanded in four stages: the first stage at the time of the amendments, the second stage in April 2005, the third stage in October 2006, and the fourth stage in April 2008 when all types of life and non-life insurance products were to be sold by the Bancassurance Agents. The original expansion plan contemplated that protection type insurance products, such as whole life insurance, critical illness insurance and automobile insurance, would be included in the fourth stage of expansion. However, pursuant to the amendment to the Presidential Decree of the Insurance Business Act in March 2008 following a decision by the Finance and Economy Committee of the National Assembly in February 2008, the protection type insurance products were excluded from the fourth stage of expansion and therefore are not allowed to be sold through Bancassurance Agents.
No Bancassurance Agents with the total assets in excess of W2 trillion as of the end of the most recent operating year is permitted to solicit subscription for insurance products of any single life insurance company or non-life insurance company in excess of 25% of the total amount of the subscriptions for all life insurance products or all non-life insurance products, as the case may be, solicited by such Bancassurance Agents during any operating year. In addition, the aggregate amount of subscriptions solicited by any Bancassurance Agents for insurance products of any life insurance company or non-life insurance company and those of any other companies that have special relationships with such insurance company as prescribed under the Enforcement Decree of the Insurance Business Act is not allowed to exceed 33% of the total amount of the subscriptions for all life insurance products or all non-life insurance products, as the case may be, solicited by such Bancassurance Agents during any operating year. The Bancassurance Agents is only allowed to solicit subscription for insurance products at its office with no more than two persons per office who are officers or employees registered with the Financial Supervisory Service through face-to-face meetings with potential policyholders at designated places or is allowed to solicit subscription from the general public by introducing its products on its websites. The Bancassurance Agents is not allowed to cause officers or employees of insurance companies, financial planners, or insurance brokers or agents dispatched to such Bancassurance Agents to solicit subscription for insurance products, nor is it allowed to exert undue influence on the operation of insurance companies.
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Financial Exposure to Any Single Borrower and Major Shareholders
Under the Insurance Business Act, an insurance company is not allowed to extend credit or any equivalent thereof to a single individual or legal entity, similarly situated borrowers (as defined below), its subsidiary or major shareholder, in each case in excess of the following amount:
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| • | with respect to the sum of credit to a single individual or legal entity, 3% of its Total Assets (as defined above); |
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| • | with respect to the total amount of investment in the debentures or shares issued by a single legal entity, 7% of its Total Assets; |
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| • | with respect to the sum of (i) credit to a single individual or legal entity and any other persons who share the credit risk of such individual or legal entity (the “similarly situated borrowers”) and (ii) the amount of investment in the debentures or shares issued by such similarly situated borrowers, 12% of its Total Assets; |
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| • | with respect to the sum of the large credit which is credit to a single individual or legal entity, similarly situated borrowers or major shareholders that exceeds 1% of its Total Assets, 20% of its Total Assets; |
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| • | with respect to the sum of credit to a single subsidiary, 10% of the Equity Capital (defined as the sum of paid-in capital, capital surplus, earned surplus and others equivalent thereto (excluding any recapitalization) that are obtained by subtracting the aggregate amount of items such as goodwill and others equivalent thereto prescribed by the Presidential Decree from the aggregate amount of the items prescribed by the Presidential Decree) of such insurance company; |
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| • | with respect to the sum of credit to major shareholders or subsidiaries designated by the Presidential Decree, the lesser of (i) 40% of its Equity Capital and (ii) 2% of its Total Assets; and |
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| • | with respect to the total amount of investment in the debentures or shares issued by major shareholders or subsidiaries designated by the Presidential Decree, the lesser of (i) 60% of its Equity Capital and (ii) 3% of its Total Assets. |
According to the Insurance Business Act and the Presidential Decree thereunder, an insurance company which intends to extend credit to its major shareholder in an amount equal to or in excess of the lesser of 0.1% of its Equity Capital and W1 billion or to buy debentures or shares issued by such person for the purchase price equal to or in excess of such amount must obtain the unanimous approval of its board of directors. Furthermore, an insurance company is not allowed to, directly or indirectly, extend any credit for the purpose of assisting any major shareholder in equity investment in other companies, or transfer of any asset to the major shareholder without consideration, or sell or exchange any assets or extend any credit to the major shareholder on terms that are materially adverse to such company.
Restrictions on Investment of Assets
According to the Insurance Business Act, insurance companies are prohibited from making any of the following investment of assets:
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| | • | subject to certain exceptions, owning precious metals, antiques, and paintings and writings; |
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| | • | owning any real estate (excluding any real estate owned as a result of enforcing their own security interest) other than real estate for the conduct ofconducting its business as designated by the Presidential Decree. In any case, the total amount of real estate owned by an insurance company must not exceed 15% of its Total Assets; |
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| | • | loans made for the purpose of speculation in commodities or securities; |
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| | • | loans made directly or indirectly to enable a natural or legal person to buy their own shares; |
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| | • | loans made directly or indirectly to finance political campaigns and other similar activities; and |
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| | • | loans made to any of the insurance company’s officers or employees other than loans based on insurance policy or de minimis loans of up to (1) W20 million in the case of a general loan, (2) W50 million in the case |
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| | of a general loan plus a housing loan, or (3) W60 million in the aggregate for general loans, housing loans and loans to pay damages arising from wrongful acts of employees in financial transactions. |
In addition, insurance companies are not allowed to exceed the following limits in making the following investments:
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| | • | with respect to holding unlisted stock, 10% of its Total Assets; |
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| | • | with respect to holding foreign currency under the Foreign Exchange Transaction Act or owning offshore real estate, 30% of its Total Assets; and |
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| | • | with respect to the sum of margins for a futures exchange designated by the Presidential Decree or a foreign futures exchange, 3% of its Total Assets. |
Life insurance companies are required to extend loans of not less thanlend 35% or greater of the annual increase in thetheir corporate loans (with the exclusion of those to the banks and securities companies) to the smallsmall- and medium-sizedmedium -sized enterprises.
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| ITEM 4.C. | Organizational Structure |
As of the date hereof, we have 12 direct and 18 indirect subsidiaries (not including any special purpose entities). The following diagram provides an overview of our organizational structure, including our significant subsidiaries and our ownership of such subsidiaries as of the date of this annual report:
Restrictions on Shareholdings in Other Companies
UnderAll of our subsidiaries are incorporated in Korea, except for the Insurance Business Act, an insurance company may not own more than 15% of the issued and outstanding voting shares of another company, except when the insurance company obtains approval of the Financial Supervisory Service with respect to having subsidiaries that are engaged in any of the following business:following:
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| | • | the finance-related business of the financial institutions as designated under the Act on Structural Improvement of Financial Industry; |
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| • | The credit information business designated by the Use and Protection of Credit Information Act (excluding the credit evaluation business designated thereunder)Shinhan Asia Limited (incorporated in Hong Kong); |
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| | • | The businessShinhan Bank America (incorporated in the United States); |
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| • | Shinhan Bank Canada (incorporated in Canada); |
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| • | Shinhan Bank (China) Limited (incorporated in the People’s Republic of administering insurance contracts includingChina); |
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| • | Shinhan Bank Europe GmbH (incorporated in Germany); |
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| • | Shinhan Bank Kazakhstan Limited (incorporated in Kazakhstan); |
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| • | Shinhan Bank Japan (incorporated in Japan); |
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| • | Shinhan Khmer Bank Limited (incorporated in Cambodia); |
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| • | Shinhan Vina Bank (incorporated in Vietnam); |
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| • | Shinhan Vietnam Bank (incorporated in Vietnam); |
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| • | Shinhan Investment Corp., Europe Ltd. (incorporated in the maintenance, rescission, amendment and reinstatement andUnited Kingdom); |
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| • | Shinhan Investment Corp., USA Inc. (incorporated in the like;United States); and |
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| | • | Other businesses that do not undermine the soundness of the insurance business as prescribed under the Presidential Decree of the Insurance Business Act.Shinhan Investment Corp., Asia Ltd. (incorporated in Hong Kong). |
Disclosure of Management Performance
Pursuant to the Insurance Business Act and regulations thereunder, an insurance company is required to make a periodic disclosure of any material matters relating to management performance, profit and loss, corporate governance, workforce, risk management or others within three months following the end of each fiscal year and within two months following the end of the first half of the fiscal year.
Furthermore, an insurance company must disclose, on an ongoing basis, the public and the Financial Supervisory Service of the occurrence of any events designated by the regulations of the Financial Services Commission and the guidelines of the Korea Life Insurance Association or the Korea Non-Life Insurance Association that may have a material adverse effect on the management of such insurance company immediately after such occurrence.
Deposit Insurance System
The Depositor Protection Act provides for, through a deposit insurance system, insurance for certain premiums and other amounts payable to policyholders by insurance companies (other than those relating to variable insurance contracts). Under the Depositor Protection Act, all insurance companies subject to the Insurance Business Act, including Shinhan Life Insurance, are required to pay to the Korea Deposit Insurance Corporation an insurance premium for such insurance on an annual basis at such rate as determined by the Presidential Decree of the Depositor Protection Act, which shall not exceed 0.5% of the amount designated by the Presidential Decrees of the Depositor Protection Act, taking into account the policy reserves of insurance companies in any given year (the “Premium Amount”). The current insurance premium payable by Shinhan Life Insurance is 0.3% of the Premium
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Amount for each year. If the Korea Deposit Insurance Corporation pays the insured amount to any policyholders, it will acquire the claims of the policyholders in an amount not to exceed the amount of such payment. Under the current rules, the Korea Deposit Insurance Corporation insures only up to a total of W50 million for premiums, surrender value to a policyholder or any other amount payable to such policyholder by the insurance company, regardless of when the premiums were paid and the size of the amount payable to such policyholder.
PROPERTIES
Our registered office and corporate headquarters are located at 120, 2-Ga, Taepyung-Ro, Jung-Gu, Seoul100-102, Korea. InformationThe following table provides information regarding certain of our properties in Korea is presented in the following table.Korea.
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Type of Facility | | Location | | Building | | (If Different) | | Location | | Building | | (If Different) | |
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| Registered office and corporate headquarters | | 120, 2-Ga, Taepyung-Ro, Jung-Gu, Seoul 100-102, Korea | | 59,519 | | 5,418 | | | 120, 2-Ga, Taepyung-Ro, Jung-Gu, Seoul 100-102, Korea | | | 59,519 | | | | 5,418 | |
| Good Morning Shinhan Securities | | 23-2, Yoido-Dong, Youngdungpo-Gu, Seoul, Korea 150-312 | | 70,170 | | 4,765 | | |
| Shinhan Investment Corp. | | | 23-2, Youido-Dong, Youngdungpo-Gu, Seoul, Korea 150-312 | | | 70,170 | | | | 4,765 | |
| Shinhan Centennial Building | | 117, Samgak-Dong, Jung-Gu, Seoul, Korea | | 19,697 | | 1,389 | | | 117, Samgak-Dong, Jung-Gu, Seoul, Korea | | | 19,697 | | | | 1,389 | |
| Shinhan Bank Gwanggyo Branch | | 14, 1-Ga, Namdaemun-Ro, Jung-Gu, Seoul, Korea | | 16,727 | | 6,783 | | | 14, 1-Ga, Namdaemun-Ro, Jung-Gu, Seoul, Korea | | | 16,727 | | | | 6,783 | |
| Shinhan Myongdong Branch | | 53-1, 1-Ga, Myong-Dong, Jung-Gu, Seoul, Korea | | 8,936 | | 1,014 | | | 53-1, 1-Ga, Myong-Dong, Jung-Gu, Seoul, Korea | | | 8,936 | | | | 1,014 | |
| Shinhan Youngdungpo Branch | | 57, 4-Ga, Youngdungpo-Dong, Youngdungpo-Gu, Seoul, Korea | | 6,171 | | 1,983 | | | 57, 4-Ga, Youngdungpo-Dong, Youngdungpo-Gu, Seoul, Korea | | | 6,171 | | | | 1,983 | |
| Shinhan Back Office Support Center | | 781, Janghang-Dong, Ilsan-Gu, Goyang-Si, Kyunggi Province, Korea | | 24,496 | | 5,856 | | | 781, Janghang-Dong, Ilsan-Gu, Goyang-Si, Kyunggi Province, Korea | | | 24,496 | | | | 5,856 | |
| Storage(1) | | 731, Yoksam-Dong, Kangnam-Gu, Seoul, Korea | | 23,374 | | 7,964 | | |
| Storage(2) | | 1704-Ga, Yongam-Dong, Sangdang-Gu, Cheongju-Si, Chungcheongbuk-Do, Korea | | 5,756 | | 6,398 | | |
| Shinhan Bank Back Office and Call Center | | | 731, Yoksam-Dong, Kangnam-Gu, Seoul, Korea | | | 23,374 | | | | 7,964 | |
| Shinhan Bank Back Office and Storage Center | | | 1704-Ga, Yongam-Dong, Sangdang-Gu, Cheongju-Si, Chungcheongbuk-Do, Korea | | | 5,756 | | | | 6,398 | |
| Shinhan Card Yoksam-Dong Building | | 790-5, Yoksam-Dong, Kangnam-Gu, Seoul, Korea | | 7,348 | | 1,185 | | | 790-5, Yoksam-Dong, Kangnam-Gu, Seoul, Korea | | | 7,348 | | | | 1,185 | |
| Shinhan Card Dangsan-Dong Building | | 9-13, 5-Ga, Dangsan-Dong, Youngdungpo-Gu, Seoul, Korea | | 2,383 | | 2,645 | | |
Notes:
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(1) | | Formerly used as an information technology center. |
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(2) | | Formerly used as an information technologyback-up center. |
Our subsidiaries own or lease various land and buildings for their branches and sales offices.
As of December 31, 2007,2009, Shinhan Bank had a countrywide network of 1,035925 branches. Approximately 24.3%27.1% of these facilities waswere housed in buildings owned by us, while the remaining branches are leased properties. As of December 31, 2007,2009, Jeju Bank had 3840 branches of which we own 18 of the buildings in which the facilities are located, representing 47.4%45.0% of its total branches. Lease terms are generally from two to three years, and seldom exceed five years.
As of December 31, 2007,2009, Shinhan Card had 9269 branches, all but onethree of which are leased. Lease terms are generally from two to three years, and seldom exceed five years. We also lease Shinhan Card’s headquarters for a term of three years. Shinhan Bank houses its central mainframe computer system at its information technology centers in Ilsan, one of the suburban districts outside of Seoul. As of December 31, 2007, Good Morning2009, Shinhan SecuritiesInvestment had 8489 branches of which we own 1510 of the buildings in which the facilities are located, representing 17.8%11.2% of its total branches. Lease terms are generally from two to three years, and seldom exceed five years. As of December 31, 2007,2009, Shinhan Life had 141160 branches all of which we leased for a term of generally one to two years.
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The net book value of all the properties owned by us at December 31, 20072009 was W1,7401,883 billion. We do not own any material properties outside of Korea.
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| ITEM 4A. | UNRESOLVED STAFF COMMENTS |
We do not have any unresolved comments from the staff of the U.S. Securities and Exchange Commission regarding our periodic reports under the Securities Exchange Act of 1934, as amended.
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| ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and notes thereto included in this document.annual report. The following discussion is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP.
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| ITEM 5.A. | Operating Results |
Overview
TrendsWe are one of the leading financial institutions in Korea in terms of total assets, revenues, profitability and capital adequacy, among others. Incorporated on September 1, 2001, we are the Korean Economyfirst privately-held financial holding company to be established in Korea. Since inception, we have developed and introduced a wide range of financial products and services in Korea and aimed to deliver comprehensive financial solutions to clients through a convenient one-portal network. According to reports by the Financial Supervisory Service, we are one of the three largest financial services providers in Korea as measured by total assets as of December 31, 2009 and operate the third largest banking business (as measured by total assets as of December 31, 2009) and the largest credit card business (as measured by the total credit purchase volume as of December 31, 2009) in Korea.
FinancialMost of our assets are located in, and we generate most of our income from, Korea. Accordingly, our business and profitability are largely dependent on the general economic and social conditions in Korea, materially affect ourincluding interest rates, inflation, exports, personal expenditures and consumption, unemployment, demand for business products and operations. In 2007, Korean economy continued to grow steadily amid relatively stable inflation, strong exportsservices, debt service burden of households and low interest rates. Beginning inbusinesses, the second halfgeneral availability of 2007, there have been some signscredit, the asset value of concern. These signs included the increases in call rates by the Bank of Korea in Julyreal estate and August of 2007, the rapid rise in the price of oilsecurities and other raw materials, and the volatility infactors affecting the financial markets globally, which were engendered, in part, by reduced liquidity, greater volatility, wideningwell-being of credit spreadsour corporate and a lack of price transparency in the credit and other financial markets stemming from thesub-prime mortgage crisis in the United States.
In the household sector, the growth of household debt slowed in 2007, but the ability to finance debt is facing strains due to the increase in interest rates. In the corporate sector, while profitability and financing capabilities have generally improved for the large corporations, the prospects are less certain for small- to medium-sized enterprises.
In 2007, in light of the slowdown in the real estate market, particularly in the residential sector, due to the government’s policy to hold down real estate prices through tax and regulatory constraints, there was intense competition among banks to extend loans to small- to medium-sized enterprises. In addition, in the first quarter of 2008, corporate lending also grew in the large corporate sector due to the heightened mergers and acquisitions activities and related financing needs. There is no assurance that these trends will not lead to an increase in delinquency ratios previously experienced by the banks in recent years.
In the credit card industry, the overall credit card receivables continued to increase in 2007, while their delinquency ratio continued to decrease.
In large part due to the bullishness in the stock market in recent years, customers in Korea are increasingly showing preference for investment rather than savings, and hence for financial products that emphasize higher risk and return rather than stable income. While this trend has created opportunities for banks to generate greater fee-based income, it has also magnified the difficulty of securing a stable source of funding as an increasing number of banking customers move away from the traditional depositary products to more market-based investment fund products.
Financial institutions in Korea, particularly securities and asset management companies and to a lesser extent commercial banks, are likely to face intensified competition when the Financial Investment Services and Capital Market Act take effect in February 2009, as the principal aim of this new law is to deregulate the securities and asset management industries by establishing financial investment companies that can effectively act as investment banks and engage in a broader spectrum of financial services, including taking deposits.
retail customers. The Korean economy is closely tied to,integrated with, and is significantly affected by, developments in the global economy.economy and financial markets. In addition to the subprime mortgage-driven liquidity crisis in global financial markets discussed above,recent years, the global economy hasand financial markets experienced hardship, which also had a number ofsignificant adverse developments, including hikesimpact on the Korean economy and in oil, foodturn on our business and other commodity prices, wars in the Middle Eastprofitability. See “Item 3.D.Risk Factors — Risks Relating to our Banking Business — Difficult conditions and elsewhere, natural disasters including earthquakes, a potential breakout of epidemics, among others.
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In light of the developmentsturbulence in the Korean and global economy described above,and financial markets may adversely affect our business, asset quality, capital adequacy and earnings”.
The recent financial crisis and economic downturn in Korea and globally presented a number of difficulties and challenges for financial institutions in Korea, including us, particularly in the form of deterioration in asset quality as an increasing number of corporate borrowers faced a liquidity crisis and were forced to undergo restructuring, sometimes at the behest of the Government which was concerned with containing the risk of systemic collapse by undertaking a preemptive and aggressive “fast track” restructuring program in collaboration with major creditor financial institutions with respect to troubled companies in industries that were particularly hard hit by the economic crisis, such as real estate development, construction, shipbuilding and shipping. The crisis also led to an increased need among Korean financial institutions for additional capital amid growing concerns about liquidity and capital adequacy of financial institutions, as well as politicalan increase in funding costs.
Following the onset of the crisis, we experienced a significant deterioration in the quality of our assets, particularly with respect to corporate loans made to small- and other factorsmedium-sized enterprises, which represents our traditional core customers. For example, Shinhan Bank’s delinquency ratio under Korean GAAP for corporate loans increased from 0.78% as December 31, 2007 to 1.06% as of December 31, 2008. In response to the crisis, we took active steps to tighten risk management in substantially all areas of our operations, including concerted efforts to improve the quality of our assets through prudent charge-offs and provisioning. For example, in 2008 and 2009, Shinhan Bank made substantial charge-offs of corporate loans (which amounted to W252 billion in 2008 and W659 billion in 2009 compared to W109 billion in 2007) and set aside provisioning for corporate loans (which amounted to W1,164 billion in 2008 and W973 billion in 2009 compared to W196 billion in 2007). In addition, in an attempt to further strengthen our capital base following the onset of the global financial crisis, we made a rights offering in March in the amount of W1,310 billion. As a result of our such asefforts, and also driven in part by the tensions with North Korea and government regulation, the economic outlook forrecovery of the Korean economy beginning in the second half of 2009, the quality of our assets and our capital adequacy have returned largely to, or exceeded, pre-crisis levels by the end of 2009, as evidenced by a decrease in Shinhan Bank’s delinquency ratio under Korean GAAP for corporate loans to 0.77% as of December 31, 2009, and our BIS ratio of 12.60% as of December 31, 2009 compared to 9.85% and 10.19% as of December 31, 2007 and 2008, respectively.
Compared to their impact on the corporate sector, the recent financial crisis and economic downturn had a less severe impact on our retail businesses, particularly in our retail banking and credit card businesses. This was largely because our retail loans are mostly home mortgage loans collateralized by residential properties and individuals and households traditionally are less prone to default on home mortgage loans. As a result, Shinhan Bank’s delinquency
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ratio under Korean GAAP for retail loans decreased modestly from 0.39% as December 31, 2007 to 0.35% as of December 31, 2008 and further slightly decreased to 0.34% as of December 31, 2009. As for our credit card business, partly as a result of active tightening of its risk management policy and a more disciplined credit approval policy, Shinhan Card’s delinquency ratio under Korean GAAP actually showed a decrease from 3.4% as of December 31, 2007 to 3.1% as of December 31, 2008 and 2.7% as of December 31, 2009.
We derive most of our income from interest earned on our corporate and retail loans, net of funding costs (which primarily consist of interest payable on customer deposits). Net interest income is largely a function of the average volume of loans and the net interest spread thereon. During the recent crisis, the average volume of loans and deposits increased. The average volume of loans increased largely as we continued to make secured housing loans while reducing exposure to unsecured lending, and corporate customers relied on bank loans as their sources of funding due to difficulties in finding alternative sources of funding in capital markets due to the credit crisis and the volatility in financial services sectormarkets. However, due to the active involvement by the Government to maintain low interest rates in order to add liquidity to the general economy, net interest spreads tightened from 2007 to 2008 and from 2008 to 2009. From 2007 to 2008, the volume effect outweighed the rate effect, and Shinhan Bank’s net interest income increased from W3,742 billion in 2007 to W4,344 billion in 2008. From 2008 to 2009, the rate effect outweighed the volume effect, and Shinhan Bank’s net interest income decreased from W4,344 billion in 2008 is uncertain.to W3,701 billion in 2009. Net interest income after provision for loan losses, which Shinhan Bank significantly increased in 2008 and 2009 due to its enhanced risk management policies, including prudent additional provisioning, amounted to W3,283 billion, W3,415 billion and W2,494 billion in 2007, 2008 and 2009, respectively.
Basel Capital AccordAs for Shinhan Card, its net interest income is largely dependent on the transaction volume and less sensitive to interest rate movements than our banking business, since merchant fees (representing a fixed percentage of a credit card purchase amount) provide a stable source of income and our credit card business relies on more diversified sources of funding such as commercial paper, corporate debentures (which have maturities longer than most bank deposit products) and asset-backed securitizations. The credit card transaction volume is largely dependent on overall trends of the general economy, such as general consumer spending patterns. As a result, net interest income from Shinhan Card increased from W1,120 billion in 2007 to W1,250 billion in 2008 and decreased to W1,068 billion in 2009, in reflection of the relatively low impact of the recent global financial crisis on the retail sector.
In Korea, Basel II,Currently, there are increasing signs of recovery from the new convention entered intorecent global financial crisis. However, uncertainties remain. On the one hand, governments worldwide are consideringand/or implementing exit strategies by discontinuing or reducing fiscal stimulus designed to ensure sufficient liquidity in their respective economies and raising base interest rates amid inflationary concerns. A rise in interest rates generally results in an improvement of Shinhan Bank’s net interest margin. See “— Interest Rates” below. However, a general increase in market interest rates, especially if inappropriately timed, not properly coordinated with other macroeconomic policy, or at excessive levels, may unduly dampen economic recovery and trigger another credit crisis, which would adversely affect the Basel committeeliquidity and financial condition of our corporate and retail borrowers, which in June 2004turn may lead to deterioration in our credit exposure. On the regulatory front, the global financial crisis may have a legacy effect in the form of heightened regulatory scrutiny over key aspects of the financial sector and a call for more stringent capital adequacy requirements. Furthermore, within the Korean banking industry, potential consolidation following the intended privatization of government-invested banks may inject further uncertainty to the competitive environment among the major commercial banks. As for the purposecredit card industry, as part of improving risk managementan effort to streamline the fee structure related to cash advances and increasing capital adequacy of banks was implemented in January 2008. Pursuant to Basel II, operational risk, such as inadequate procedure, loss risk by employees, internal system, occurrence of unexpected event, as well as credit risk and market risk, should be taken into account in calculatingcurb excessive fees charged thereon, the risk-weighted assets.
Shinhan Bank has voluntarily chosen to establish and follow an internal ratings-based approach, which is more risk-sensitive in assessing its credit risk capital requirements. On April 28, 2008, the Financial Supervisory Service approved Shinhan Bank’s foundation internal ratings-based approach for credit risk. Accordingly, starting June 30, 2008, Shinhan BankGovernment plans to implement a regulation effective April 2010, which will have the foundation internal rating-based method with respecteffect of lowering the fee rate we apply to the Basel II credit risks related to loan portfolios of large companies, small and medium enterprises and retail outlets. While wecash advances by our cardholder customers.
We believe that the implementation of Shinhan Bank’s foundation ratings-based approachfollowing factors will increase its capital adequacy ratio and lead to a decrease in its credit risk-related capital requirements in 2008 as compared to those under its previous approach under the initial Basel Capital Accord of 1988, there can be no assurance that such approach under Basel II will not require an increase in Shinhan Bank’s credit risk capital requirements in the future, which may require Shinhan Bank to either improve its asset quality or raise additional capital.also have material impacts on our principal business activities:
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| • | Banking. In recent years, commercial banks in Korea, including Shinhan Bank, have significantly expanded lending in the areas of home and mortgage loans to individuals and loans to small- to medium-enterprises. The global economic and financial crisis significantly increased the credit risk of such loans, which represents Shinhan Bank’s core lending activities, as well as the market risks of its new |
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| | product offerings such as structured derivative products. The recent global crisis also increased the funding costs of foreign-denominated as well as Won-denominated borrowings, and has significantly affected liquidity in general, notwithstanding the active liquidity support provided by the Bank of Korea. Shinhan Bank’s deposit products increased in volume in the second half of 2008 due to the downturn in the Korean stock market, but the reduction in market interest rates may negatively impact the continuing popularity of our deposit products compared to other higher-yielding investment alternatives. We expect that the results of operation for our banking business will, at least in the short term, depend primarily on the strength of risk management, improvement of funding and the net interest margin and cost reduction, rather than a pricing competition among the commercial banks as was the case in the recent past, given the anticipated increases in capital and liquidity requirements by the Government in light of the recent global financial crisis. |
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| • | Credit cards. In large part due to growing signs of recovery from the recent global financial crisis, Shinhan Card experienced an improvement in asset quality and lower funding costs starting in the second half of 2009. However, the credit card industry in Korea is showing signs of maturation while competition remains intense and may further intensify following the introduction and greater acceptance of mobile phone payments in substitution of credit card payments. |
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| • | Securities brokerage. The securities brokerage industry in Korea has faced intensified competition due to the lowered barriers of entry among different securities and investment businesses as the result of the Financial Investment Services and Capital Markets Act enacted in February 2009. If the Korean stock market were to suffer another prolonged decline as a result of another global economic and financial crisis, we expect that the results of operation of our securities brokerage business will be negatively impacted. |
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| • | Life insurance. While the life insurance industry in Korea has grown substantially in recent years due to the popularity of variable insurance products whose payout is tied to the performance of the stock market, we believe that a downturn in the stock market as well as a reduction in disposable income as a result of another onset of economic difficulties in Korea may lead to increased non-payment or delayed payments of insurance premiums or termination of existing insurance contracts. Further, if the low-interest environment continues, it may create difficulties for insurance companies, including our insurance subsidiaries, in finding alternative investment sources to operate the funds received in the form of insurance premiums. |
Interest Rates
OverInterest rate movements, in terms of magnitude and timing as well as the past ten years, wedivergence of such movements with respect to Shinhan Bank’s assets and liabilities, have operated in environments characterized by higha significant impact on its net interest margins and its profitability, particularly with respect to its financial products that are sensitive to such movements. For example, if the interest rates periodsapplicable to our loans (which are recorded as our assets) decrease or increase at a slower pace or by a thinner margin compared to the interest rates applicable to its deposits (which are recorded as our liabilities), our net interest margin will shrink and its profitability will be negatively affected. In addition, the relative size and composition of significant interest-rateour variable rate loans and deposits (as compared to our fixed rate loan and deposits) may also impact our net interest margin. Furthermore, the difference in the average term of our loans compared to our deposits may also impact our net interest margin. For example, since our deposits tend to have a longer term, on average, than that of our loans, our deposits are on average less sensitive to movements in the base interest rates on which our deposits and loans tend to be pegged, and therefore, an increase in the base interest rates tend to increase our net interest margin while a decrease in the base interest rates tend to have the opposite effect. While we continually manage our assets and liabilities to minimize our exposure to the interest rate volatilities, such efforts by us may not mitigate the impact of interest rate volatility and low interest rates. in a timely or effective manner.
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The following table shows certain benchmark Won-denominated borrowing interest rates as of the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Certificate
| | | | | | Certificate
|
| | | Corporate
| | Treasury
| | of Deposit
| | Corporate
| | Treasury
| | of Deposit
|
| | | Bond Rates(1) | | Bond Rates(2) | | Rates(3) | | Bond Rates(1) | | Bond Rates(2) | | Rates(3) |
| |
| December 31, 2003 | | | 5.58 | | | | 4.82 | | | | 4.36 | | |
| June 30, 2004 | | | 4.84 | | | | 4.24 | | | | 3.93 | | |
| December 31, 2004 | | | 3.72 | | | | 3.28 | | | | 3.43 | | |
| June 30, 2005 | | | 4.41 | | | | 4.02 | | | | 3.54 | | | | 4.41 | | | | 4.02 | | | | 3.54 | |
| December 31, 2005 | | | 5.52 | | | | 5.08 | | | | 4.09 | | | | 5.52 | | | | 5.08 | | | | 4.09 | |
| June 30, 2006 | | | 5.20 | | | | 4.92 | | | | 4.59 | | | | 5.20 | | | | 4.92 | | | | 4.59 | |
| December 31, 2006 | | | 5.29 | | | | 4.92 | | | | 4.86 | | | | 5.29 | | | | 4.92 | | | | 4.86 | |
| June 30, 2007 | | | 5.66 | | | | 5.26 | | | | 5.00 | | | | 5.66 | | | | 5.26 | | | | 5.00 | |
| December 31, 2007 | | | 6.77 | | | | 5.74 | | | | 5.82 | | | | 6.77 | | | | 5.74 | | | | 5.82 | |
| March 31, 2008 | | | 6.01 | | | | 5.10 | | | | 5.38 | | |
| June 30, 2008 | | | | 6.88 | | | | 5.90 | | | | 5.37 | |
| December 31, 2008 | | | | 7.72 | | | | 3.41 | | | | 3.93 | |
| June 30, 2009 | | | | 5.39 | | | | 4.16 | | | | 2.41 | |
| December 31, 2009 | | | | 5.53 | | | | 4.41 | | | | 2.86 | |
Source:Korea Securities Dealers Association
Notes:Notes:
| | |
| (1) | | Measured by the yield on three-year AA- rated corporate bonds. |
| |
| (2) | | Measured by the yield on three-year treasury bonds. |
| |
| (3) | | Measured by the yield on certificates of deposit (with maturity of 91 days). |
Interest rate movements on the asset and liability side have often been divergent, both in terms of the size of the movement as well as the timing thereof, and the movements together with this divergence have had a significant impact on our margins, particularly with respect to financial products that are sensitive to such fluctuations. We continually manage our respective balance sheet to minimize volatility exposure, but the impact has been, and may
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continue to be, significant in analyzingperiod-to-period margin comparisons and the trends that they may indicate for our business.
Financial Impact of Acquisitions
Acquisition of LG Card
On March 23,19, 2007, we acquired the controlling interest in LG Card and LG Card became our subsidiary following a public tender offer, held from February 28, 2007 to March 19, 2007, as a result of which we acquired 98,517,316 shares, or 78.6%78.58%, of the common stock of LG Card at the price of W67,770 per share, or an aggregate priceresulting in a total equity ownership of W6,676 billion, in addition to 8,960,005107,477,321 shares, or 7.15%85.73%, of the common stock of LG Card based on the 7.15% interest in LG Card previously held by Shinhan Bank prior to the public tender offer, for a total of 107,477,321 shares, or 85.7%, of the common stock of LG Card immediately after the public tender offer.Bank. Through a secondfollow-on public tender offer held fromin June 14, 2007 toand July 3, 2007, we acquired an additional 9,624,218 shares, (including 8,960,005 shares purchased from Shinhan), or 7.68%, of the common stock of LG Card at the price of W46,392 per share or an aggregate price of W446 billion. On September 21,from Shinhan Bank and others through a second tender offer on July 3, 2007 we acquiredand the remaining 17,227,869 shares, or 13.74%, of the common stock of LG Card on September 21, 2007 through a stock swapshare exchange, at thean exchange ratio of 0.84932 common share of Shinhan Financial Group per common share of LG Card.
On March 23, 2007, we acquired 98,517,316 shares or 78.58% of LG Card’s issued and outstanding common stock through a tender offerCard, which amounted to the public for approximately W6,684 billion, following which we owned 85.73% of LG Card’s outstanding common shares, when counted together with the 7.15% equity interest in LG Card previously held by us.
We applied the equity method of accounting for our previous ownership interest of 7.15% in LG Card in conformity with APB Opinion No. 18,The Equity Method of Accounting for Investments in Common Stock. Accordingly, our investment, results of operations, and retained earnings were retrospectively adjusted as follows (in billions of Korean Won, except share data):
| | | | | | | | | | | | | |
| | | 2006 | |
| | | | | | Equity Method of
| | | | |
| | | As Previously
| | | Accounting
| | | | |
| | | Reported | | | Adjustments | | | As Adjusted | |
| |
Available-for-sale securities | | W | 17,458 | | | W | (519 | ) | | W | 16,939 | |
| Other assets | | | 6,843 | | | | 275 | | | | 7,118 | |
| | | | | | | | | | | | | |
| Assets adjusted | | W | 24,301 | | | W | (244 | ) | | W | 24,057 | |
| | | | | | | | | | | | | |
| Accrued expenses and other liabilities | | W | 9,311 | | | W | (67 | ) | | W | 9,244 | |
| Retained earnings | | | 5,146 | | | | 59 | | | | 5,205 | |
| Accumulated other comprehensive income, net of taxes | | | 377 | | | | (236 | ) | | | 141 | |
| | | | | | | | | | | | | |
| Liabilities and stockholders’ equity adjusted | | W | 14,834 | | | W | (244 | ) | | W | 14,590 | |
| | | | | | | | | | | | | |
| Gain on other investment | | W | 207 | | | W | 117 | | | W | 324 | |
| Income tax expense | | | 617 | | | | 32 | | | | 649 | |
| Net income | | | 1,470 | | | | 85 | | | | 1,555 | |
| Basic net income per share | | | 3,951 | | | | 229 | | | | 4,180 | |
| Diluted net income per share | | | 3,951 | | | | 229 | | | | 4,180 | |
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| | | | | | | | | | | | | |
| | | 2005 |
| | | | | Equity Method of
| | |
| | | As Previously
| | Accounting
| | |
| | | Reported | | Adjustments | | As Adjusted |
| |
| Gain on other investment | | W | 284 | | | W | 248 | | | W | 532 | |
| Non-interest expense (Other) | | | 331 | | | | (15 | ) | | | 316 | |
| Income tax expense | | | 942 | | | | 72 | | | | 1,014 | |
| Net income | | | 1,739 | | | | 191 | | | | 1,930 | |
| Basic net income per share | | | 5,190 | | | | 573 | | | | 5,763 | |
| Diluted net income per share | | | 4,882 | | | | 537 | | | | 5,419 | |
On May 28, 2007, we decided to acquire LG Card’s remaining issued and outstanding common stock, through a tender offer and share exchange, at the board of directors’ meeting.
On July 6, 2007, we acquired 664,213 shares or 0.53% of LG Card’s issued and outstanding common stock through a tender offer to the public for approximately W31 billion.
On September 21, 2007, we completed the acquisition of the remaining LG Card shares by issuing 14,631,973 the Group common shares (approximately W815 billion based on the exchange terms) in exchange for those LG Card shares.
terms. On October 1, 2007, we effected a business transfer was held in which LG Card acquired and assumed all assets, liabilities and contracts of former Shinhan Card, and LG Card changed its name to “Shinhan Card.” Also, the former Shinhan Card changed its name to “SHC Management Co., Ltd.”, and on October 1, 2009, commenced its liquidation proceedings.
On May 28, 2007, we decided to acquire LG Card’s remaining issued and outstanding common stock, through a tender offer and share exchange, at the board of directors’ meeting.
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The aforementioned acquisitions of the remaining 92.85% equity interest in LG Card were accounted for under the purchase method of accounting in accordance with SFAS 141. The purchase price was allocated to the assets acquired and the liabilities assumed based on their estimated fair value at the respective acquisition datesvalues as summarized below.
| | | | | |
| | | 2007 | |
| | | (In billions of Korean Won) | |
| |
| Cash and cash equivalents | | W | 316315 | |
| Deposits | | | 256 | |
| Call loans | | | 512 | |
| Trading assets | | | 2 | |
| Securities | | | 44 | |
| Loans, net of allowance for loan losses | | | 9,902 | |
| Premises and equipment, net | | | 129 | |
| Other assets | | | 718719 | |
| | | | | |
| Total assets | | W | 11,879 | |
| | | | | |
| Borrowings and debentures | | W | 6,970 | |
| Other liabilities | | | 1,381 | |
| | | | | |
| Total liabilities | | W | 8,351 | |
| | | | | |
| Fair value of net assets of LG Card | | W | 3,528 | |
| | | | | |
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The allocation of the purchase consideration is as follows:
| | | | | |
| | | 2007 | |
| | | (In billions of Korean Won) | |
| |
| Cash paid | | W | 6,707 | |
| Stock exchanged | | | 815 | |
| Direct acquisition costs | | | 8 | |
| | | | | |
| Total purchase price | | W | 7,530 | |
| | | | | |
| Allocation of purchase price: | | | | |
| Fair value of net assets of LG Card (excluding effect of CCI and deferred taxes) | | W | 3,831 | |
Credit card relationship intangible asset(1) asset(1) | | | 1,064 | |
| Deferred tax | | | (303 | ) |
| Goodwill | | | 2,938 | |
| | | | | |
| Total purchase price | | W | 7,530 | |
| | | | | |
Note:
| | |
| (1) | | Credit card relationship intangible reflects the estimated fair value of the credit card relationships acquired from LG Card from which we expect to derive future benefits over the estimated life of such relationships. The customer relationship intangible is amortized over its estimated useful life on asum-of-the years’-digits basis. The estimated weighted average life of the customer relationship intangible is approximately 6six years. The fair value of this asset was based principally upon the estimates of (i) the profitability of the acquired accounts and (ii) the projected run-off of the acquired accounts. |
See “Item 4. Information on the Company — Acquisition of LG Card.”
Certain Income Tax Expenses and Provision for Other Losses
Beginning in 2002, commercial banks in Korea, including Shinhan Bank and Chohung Bank, offered to their customers deposit products that utilize Korean Won and Japanese Yen swaps to maximize the return for such customers. According to the terms of these deposit products, deposits made by customers in Korean Won are converted into Japanese Yen and repaid in Japanese Yen at maturity. The repayment amount is then converted back into Korean Won. While these deposit products typically carry a low interest rate, ranging from 0.05% to 0.3% per annum, the actual return to the customers was higher as a result of foreign exchange gains. These deposit products are attractive to customers, in particular high net worth customers, since the gains from foreign exchange were deemed not to be interest subject to income tax. However, in 2005, the Korean National Tax Service announced that foreign currency deposits disguised as derivative products would be subject to tax and tax withholding and issued a recommendation that the banks should refile its tax returns to include the unwithheld amounts. Eight of the commercial banks in Korea, who are subject to this adverse tax treatment, have announced their intention to challenge the foregoing decision by the Korean National Tax Service while complying with the Tax Service’s information requests. Following the announcement, Shinhan Bank ceased to offer these deposit products.
The commercial banks had marketed these deposit products to their customers on the basis that such deposit products were exempt from income tax or tax withholding. We believe that few, if any, of these customers have reported the gains from such deposit products as interest income subject to taxation in their tax returns. According to the Korean National Tax Service, these deposit customers are also responsible for including the income received from these deposits in their final individual tax returns relating to comprehensive financial taxable income. However, depending on the amount of income received from these products, the individual customers may be subject to (i) a higher tax rate on all of his or her taxable income, (ii) a fine for failing to properly report the interest income in an amount equal to 20% of the unreported amount, and (iii) a fine for failing to pay tax on such interest income in an amount equal to interest applied at a rate of 10.95% per annum to such unpaid tax amount. No
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assurance can be given that aggrieved customers will not bring claims against these commercial banks, including Shinhan Bank, if their tax liabilities are increased as a result of the foregoing events.
In November 2006, following a tax audit of us, the Korean National Tax Service imposed additional taxes in the amount of W13 billion with respect to our tax liabilities and additional taxes in the amount of W21 billion with respect to our customers’ tax liabilities, in each case, in respect of the deposits utilizing the Korean Won and Japanese Yen swaps as described above. We are currently appealing such imposition by the Korean National Tax Service although we have already made the imposed payments in order to avoid any further interest and penalty on unpaid taxes. For the purpose of fostering customer goodwill, we have determined, on a voluntary basis, to indemnify our customers for their increased tax liability to the extent resulting from their investment in these deposit products, including any additional tax liability that our customers may have against the Korean National Tax Service for gifts tax from the benefit of this indemnity. In 2006, based on the assumption that we may be subject to maximum additional tax-related liability, including the liability from the indemnity to our customers, we recorded a total charge to our income of W52 billion in the year ended December 31, 2006, consisting of additional tax expenses of W13 billion and provision for other losses of W39 billion. In addition, we also recorded W11 billion as deferred tax assets on our balance sheet as of December 31, 2006. In 2007, out of W39 billion recorded as provision for other losses as of December 31, 2006, W21 billion was reduced due to the advance payment of our customers’ tax liability and W15 billion was reversed on the assumption that we will not be subject to any additional tax liability with respect to the Japanese Yen swaps discussed above, other than W3 billion of provision for other losses in inheritance taxes related to our payment in 2007 for our customers’ tax on behalf of our customers. Mainly as a result of the foregoing, we had W3 billion of provision for other losses and W0.9 billion of related deferred tax assets as of December 31, 2007.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with U.S. GAAP, including prevailing practices within the financial services industry. The preparation of consolidated financial statements requires management to make judgments, involving significant estimates and assumptions, in the application of certain
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accounting policies about the effects of matters that are inherently uncertain. These estimates and assumptions, which may materially affect the reported amounts of certain assets, liabilities, revenues and expenses, are based on information available to us as of the date of the financial statements, and changes in this information over time could materially impact amounts reported in the financial statements as a result of the use of different estimates and assumptions. Certain accounting policies, by their nature, have a greater reliance on the use of estimates and assumptions, and could produce results materially different from those originally reported.
Based on the sensitivity of financial statement amounts to the methods, estimates and assumptions underlying reported amounts, we have identified the following significant accounting policies that involve critical accounting estimates. These policies require subjective or complex judgments, and as such could be subject to revision as new information becomes available. Our significant accounting policies are described in more detail in Note 1 in the notes to our consolidated financial statements included in this annual report.
Allowance for Credit Losses
The allowance for credit losses includes allowance for loan losses and allowance for off-balance sheet credit instruments. The allowance for loan losses is reported as a reduction of loans and the allowance for off-balance sheet credit instruments is reported in other liabilities. The allowance for credit losses represents the amount available for estimated probable credit losses existing in our lending portfolio. The methodology used to provide the appropriate level of reserve is inherently subjective and involves many complex estimates and assumptions. We perform periodic systematic reviews of our credit portfolios to identify inherent losses and assess the overall probability of collection. Each loan portfolio is evaluated based on its respective characteristics.
We evaluate large impaired corporate loans individually as part of our normal corporate review practice due to the unique characteristics of such borrowers. As described in more detail in the footnotes to our consolidated financial statements, we consider a loan to be impaired when, after consideration of risk characteristics and current
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information and events, we believe it is probable that we will be unable to collect all amounts owed under the contractual terms of the agreement, including principal and interest, according to the contractual terms of the loan.
We generally consider the following corporate loans to be impaired:
| | |
| | • | loans classified as “substandard” or below according to the asset classification guidelines of the Financial Services Commission; |
| |
| | • | loans that are more than 90 days past due; and |
| |
| | • | loans which are “troubled debt restructuring” as defined under U.S. GAAP. |
Once we have identified a loan as impaired, we value that loan either based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Each of these variables involves judgment and the use of estimates. For instance, discounted cash flows are based on estimates of the amount and timing of expected future cash flows. Forecasts of expected future cash flows are based on various data including restructuring plans, due diligence reports, as well as industry forecasts among other quantitative tools. The fair value of collateral is determined by using third party valuation reports. Additional consideration is given to recent auction results and court valuations. If the resulting value is less than the carrying amount of the loan, we establish a specific allowance for the difference.
We generally evaluate consumerretail loans and certain smaller balance corporate loans, including leases, mortgage and home equity loans, and credit card balances, as individual pools for credit loss allowance purposes due to their homogeneous nature based on historical loss experience. Such allowances have been established using several modeling tools, including a risk rating migration model, when considering consumerretail loans and corporate loans, and a delinquency roll-rate model when considering credit cards.
The allowance for off-balance sheet credit instruments represents the amounts available for estimated probable credit loss existing in our unfunded credit facilities such as commitments to extend credit, guarantees, acceptances, standby and commercial letters of credit and other financial instruments. As stated above, we perform
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periodic systematic reviews of our credit portfolio including off-balance sheet credit instruments to identify inherent losses and assess the overall probability of collection.
When we evaluate large impaired corporate loans individually for specific allowance, the related guarantees and acceptances made to the same borrowers are also evaluated for inherent loss. We generally evaluate the remaining guarantees and acceptances, which are generally smaller balances, on a pool basis. Allowance for the remaining guarantees and acceptances is generally established using estimated payout ratios and loss severity which are based on historical loss experience and various factors such as macroeconomic factors.
The determination of the allowance for credit losses requires a great deal of judgment and the use of estimates as discussed above. As such, we have also considered changes in underwriting, credit monitoring, the Korean and global economic environment, industry concentrations, and delinquencies among other factors when concluding on the level of the allowance for credit losses.
Fair Value of Financial InstrumentsMeasurements
Our securities and trading assets and liabilities includeWe invest in debt and marketable equity securities, equity securities that do not have readily determinable fair values and derivatives. Financial instruments are measured at fair value based on various inputs that are observable or unobservable, depending on the type of securities, utilizing assumptions of the marketplace and our management is required to make estimate and judgment in valuing them.
We adoptedASC 820-10 (formerly SFAS No. 157,“Fair Value Measurements”) effective January 1, 2008.ASC 820-10 defines fair value, expands disclosure requirements around fair value and specifies a three-level fair value hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. We determine the fair value of the financial instruments that are recognized or disclosed at fair value in the financial statements, whether on a recurring or non-recurring basis, in accordance withASC 820-10. We adopted certain provisions ofASC 820-10 related to nonfinancial assets and nonfinancial liabilities that are not measured at fair value on a recurring basis since January 1, 2009.
ASC820-10 requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is an, exit price, defined as a price received in exchange of financial instrumentsassets disposed or paid in transferring liabilities between market participants, at the measurement date. As such, the Group’s own assumptions reflect those market participants used in pricing the asset or liability at the measurement date. The following is the current amount that would be exchanged between willing parties, other thandescription of fair value hierarchy based on pricing inputs.
Level 1 — Quoted prices for identical instruments in a forced sale or liquidation. The fair values of our securities and tradingactive markets. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are estimatedtraded in an active exchange market, as well as certain securities that are highly liquid and are actively traded inover-the-counter markets.
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value measurements. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques based on quoted market pricessignificant unobservable inputs, as well as management judgments or internally developed pricing models.estimates that are significant to valuation.
Fair value is best determined based on quoted market prices, if available.available, and are classified as Level 1. If quoted market prices are not available, fair value is estimated using the present value of expected future cash flows calculated by usingbased upon internally developed models that primarily use, as inputs, market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, comparable with the credit rating and maturity of the security. An alternative to estimate fair value is to use internally developed pricing models based on external market variables including interest rate yield curves, option volatilities, andequity or debt prices, foreign exchange rates. The estimation of fair value involves the assessment of various
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financial variables, prices of comparable financial instruments,rates and credit ratings of counterparties, liquidity of the financial instruments and transaction costs.curves as well as other relevant factors. Our management applies judgments in assessing the variables used in the fair valuation process and also if certain external market variables are less readily available.available and such significant assumptions or judgments employed in fair valuation could render subject securities to Level 3. Changes in model assumptions, market conditions and unexpected circumstances can affect the fair values of the securities and trading assets and liabilities.
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Debt securities and equity securities with readily determinable fair values classified asavailable-for-sale are carried at fair value with corresponding changes recognized in other comprehensive income within stockholders’ equity, net of taxes. Debt securities classified asheld-to-maturity securities are recorded at amortized cost. Equity securities that do not have readily determinable fair values are carried at cost. Declinescost except in valuesthe cases specific industry accounting practice is applied, e.g., Shinhan PEF 1st and 2nd, the Group’s wholly owned subsidiaries, are subject to accounting for investment companies and accordingly underlying assets are fair valued. Additionally, certain alternative investments classified as other investments under other assets which meet both of the criteria underavailable-for-saleASC 820-10-15-4 securities,held-to-maturity debt securitiesare measured at fair value determined by net asset value per share and the resulting valuation gain or loss is recognized through profit or loss. Whether the equity securities that do not have readily determinable fair values or not, when it is determined that are deemed to beother-than-temporaryother-than-temporary-impairment are reflectedhas occurred, the entire difference between market value and cost is recognized in earnings as realized losses. Weloss. For debt securities, if an investor has the intent to sell the securities, or if it is more likely than not that it will be required to sell the securities before recovery of amortized cost basis,other-than-temporary-impairment must be recognized by the entire difference between market value and cost. However, when an investor does not have the intent to sell, or if it is more likely than not that it will not be required to sell the debt securities, only the credit related loss is recognized in current-period earnings, while non-credit related loss is recognized in other comprehensive income (“OCI”). In determining the credit loss amount, we measure the difference between the amortized cost basis and the net present value of the security, where we use our best estimate of the present value of cash flows expected to be collected from the debt security. The net present value is calculated by discounting the expected cash flows at the effective interest rate implicit in the security at the date of acquisition. Additionally, we perform regular assessment of various quantitative and qualitative factors to determine whether impairment isother-than-temporary. Such factors include the duration and extent of the decline in the fair values of securities, the current operating and future expected performance, market values of comparable companies, and changes in industry and market prospects. These factors can be adversely affected by changing economic conditions that are global or regional in nature or are issuer or industry specific. For certain securities without readily determinable fair values, or with sales restrictions exceeding one year, we may periodically utilize external valuations performed by qualified independent valuation consulting firms.
Trading assets and liabilities are carried at fair value with the corresponding changes recognized in earnings. The majority of our trading assets and liabilities that are actively traded are valued based on quoted market prices except for derivatives. Since few derivatives are actively traded, the majority of our derivatives are valued using internally developed models based on external market variables that can be independently validated by third party sources. However, certain derivatives are valued based on external market variables that are less readily available and are subject to managementmanagement’s judgment. Also, in connection withASC 820-10 adoption, we made some amendments to the valuation techniques used in measuring the fair value of derivatives and other positions. These amendments change the way that the probability of default of a counterparty is factored into the valuation of derivative positions and include the impact of our own credit risk on derivatives and other liabilities measured at fair value. We make adjustments to reflect such changes in credit risk of the counterparties and our own based on market-based measures of credit risk to the extent available, such as CDS spread, and also take into account collateral factors designed to reduce our credit exposure. For certain derivatives not valued by our internally developed models, we periodically utilize external valuations performed by qualified independent valuation consulting firms.
In August 2003, we issued redeemable preferred sharesFor collateral dependent loans, impairment is measured based on the fair value of the collateral underlying the subject loan. When the carrying amount of the subject loan is higher than the fair value of the collateral, the carrying amount is written down to the fair value of the collateral and redeemable convertible preferred sharesthe fair value disclosure requirements ofASC 820-10 apply to the subject loan. The fair value of the collateral is determined as the present value of the estimated realizable value of the collateral at the expected time of the sale of such collateral. Once the valuation report of the court-appointed appraiser becomes publicly available as part of a foreclosure proceeding, we use the consideration paid toappraisal value for the Korea Deposit Insurance Corporationcollateral indicated in such report as the estimated realizable value of the collateral. However, until such publication, we use the valuation amount for the collateral as determined by outside independent appraisers at the time that the subject loan was initially approved, with adjustments made for the change in value from the effect of time passage and current market circumstances that may impact the value of the collateral.
Since there is no secondary market where collateral dependent loans are actively traded, they are measured for impairment based on the fair value of the underlying collateral. While outside appraisers (whether court-appointed
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or in connection with our acquisition of Chohung Bank. In January 2007, we issued additional redeemable preferred shares and redeemable convertible preferred shares to 12 government entities and financial institutions in Korea to raise funds for the acquisition of LG Card. Our redeemable preferred shares and redeemable convertible preferred shares are recorded at their fair value asinitial approval of the issuance. Changessubject loan) consider observable inputs such as the sale prices of assets similar to such collateral, additional adjustments based on unobservable inputs are warranted in the expected future cash dividend payments, repayment provisions or model assumptions and variables used can affectvaluation of collateral subject to a court-supervised foreclosure proceeding since the fair values of the preferred stock. See Note 21auction from such proceeding tends to result in a sale price less than that obtainable from a sale transaction conducted in the notesordinary course of business. This use of unobservable inputs makes it necessary to our consolidated financial statements included in this annual report for additional information related to our redeemable preferred shares.classify collateral dependent loans as Level 3.
Goodwill and Other Intangible Assets
Effective January 1, 2002, we adopted Statement of Financial Accounting Standards, or “SFAS,”ASC 350 (formerly SFAS No. 142,“Goodwill and Other Intangible AssetsAssets”), (“SFAS No. 142”) as required by the accounting principles generally accepted in the United States.
SFAS No. 142ASC 350 classified intangible assets into three categories: (1) intangible assets with definite lives subject to amortization; (2) intangible assets with indefinite lives not subject to amortization; and (3) goodwill. For intangible assets with definite lives, tests for impairment must be performed if conditions exist that indicate the carrying amount may not be recoverable. For intangible assets with indefinite lives and goodwill, tests for impairment must be performed at least annually.
We recognized a significant amount of goodwill in connection with our acquisition of LG Card in 2007. In addition, we acquired the credit card relationship intangible asset, in connection with the acquisition of LG Card. For discussions on the nature and accounting for goodwill and intangible assets see Notes 1, 3 and 10 in “Item 18.“Index to Financial Statements — Notes to the consolidated financial statements of Shinhan Financial Group.”
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Our core deposit, credit card relationship, andbrokerage customer relationship, deposit held at Korean Securities Finance Corporation, value of business acquisition, or VOBA, intangibles determined to have definitefinite lives are amortized over their useful lives. If conditions exist that indicate the carrying amount may not be recoverable, we review these intangible assets with definite lives for impairment to ensure they are appropriately valued. Such conditions may include adverse changes in business or political climate, actions by regulators and customer account run-off rates.
We do not amortize goodwill or indefinite-lived intangibles consisting of court deposits and borrowings from Korea Securities Finance Corporation. Instead, we perform tests for impairment of goodwill annually or more frequently if events or circumstances indicate it might be impaired. Such tests include comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value is less than the carrying value, a second test is required to measure the amount of goodwill impairment. The second step of the goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying value of that goodwill. If the carrying value of reporting unit goodwill exceeds the implied fair value of that goodwill, we recognize an impairment loss in an amount equal to that excess. TestTests for indefinite-lived intangible assets, including borrowings from Korea Securities Finance Corporation and court deposits at Shinhan Bank, isare also carried out on an annual basis on anasset-by-asset basis, or more frequently if events or circumstances indicate they might be impaired. Impairment assessments are performed using a variety of valuation methodologies, including discounted cash flow estimates. Management estimates the future cash flows expected to be derived from the use and, if applicable, the terminal value of the assets. The key variables that management must estimate include, among other factors, market trading volume, market share, fee income, growth rate and profitability margin. Although the assumptions used are consistent with our internal planning, significant management judgment is involved in estimating these variables, which include inherent uncertainties. A discount rate is applied to the cash flow estimates considering our cost of capital rate and specific country and industry risk factors. The cash flows of Shinhan Bank’s reporting units were discounted using discount rates ranging from 12.64%12.53% to 13.00%13.18% during 2007.
The sharp decline in the Korean financial industry during the second half of 2002 prompted a re-assessment of all key assumptions underlying our goodwill valuation judgments. As result of our review, we determined that goodwill impairment charges of W115 billion and W22 billion were required on the goodwill recorded in the brokerage and capital market units of Good Morning Shinhan Securities. The decline of the brokerage industry during 2006 required us to further assess key assumptions underlying our goodwill valuation judgment. As result of our review, we determined that goodwill impairment charges of W129 billion were required on the goodwill recorded in the brokerage market unit of Good Morning Shinhan Securities during 2006. The amount of these charges were equal to the difference between the carrying amount of goodwill and its implied fair value, which is based on the fair value of the net assets in respect of reporting units.2009.
The assumptions and conditions for goodwill and intangible assets reflect management’s best assumptions and estimates. However, these items involve inherent uncertainties, as described above, that may or may not be controllable by management. Economic and political conditions, such as movements in interest rates, delinquencies in Korea and tension with North Korea, represent uncertainties that are not controllable by management. As a result, if other assumptions and conditions had been used in the current period, the carrying amount of goodwill and other intangible assets could have been materially different. Furthermore, if management uses different assumptions, including the discount rates used to determine the implied fair value of reporting units, or if different conditions occur in future periods, future operating results could be materially impacted.
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See notesNotes 3 and 10 in the notes to our consolidated financial statements included in this annual report for additional information related to goodwill and intangible assets.
Consolidation
Under the provisions of Financial Accounting Standards Board (“FASB”)ASC810-10,Consolidation(formerly FASB Interpretation No. 46 and 46R,46(R),Consolidation of Variable Interest Entities(“FIN 46 and FIN 46R”revised December 2003) (FIN 46(R)), a variable interest entity (“VIE”) is consolidated by the company holding the variable interest that will absorb a majority of the VIE’s expected losses, or receive a majority of the expected residual returns, or both. All other entities are evaluated for consolidation under Statementother subtopics ofASC 810-10 (formerly Accounting Research Bulletin (ARB) No. 51,Consolidated Financial Accounting Standards, orStatements, and SFAS No. 94,“Consolidation of All Majority-owned Subsidiaries”Majority-Owned Subsidiaries (“SFAS 94”). The company that consolidates a VIE is referred to as the primary
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beneficiary. A variety of complex estimation processes involving both qualitative and quantitative factors are used to determine whether an entity is a variable interest entity, to analyze and calculate expected losses and expected residual returns, which involves estimating the future cash flows of the VIE and analyzing the variability in those cash flows, and allocating the losses and returns among the parties holding variable interests. Also, there is a significant amount of judgment required in interpreting the provisions of FIN 46 and FIN 46RASC 810-10 and applying them to specific transactions.
In our case, FIN 46 and FIN 46RASC 810-10 apply to certain asset securitization transactions involving our corporate loans, credit card receivables, mortgage and student loans, financing activities conducted for corporate clients, including conduits that we administerand/or provide liquidity facilities, as well as for our own funding needs, and investing activities conducted for our own account, such as beneficial certificates in investment trusts and for our customers, such as guaranteed trusts.
See note 35Note 36 of the notes to our consolidated financial statements included in this annual report for additional information related to VIEs.
In connection with certain asset securitization transactions, we do not sell assets to an entity referred to as a qualifying special-purpose entity (QSPE) as defined pursuant to the FASB Statement No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement 125.ASC 810-10.
Contingent Liabilities
We are subject to contingent liabilities, including judicial, tax, regulatory and arbitration proceedings, commitments provided to our customers and other claims arising from the conduct of our business activities. We establish allowances against these contingencies in our financial statements based on our assessment of the probability of occurrence and our estimate of the obligation. We involve internal and external advisors, such as attorneys, consultants and other professionals, in assessing probability and in estimating any amounts involved. Throughout the life of a contingency, we or our advisors may learn of additional information that can affect our assessments about probability or about the estimates of amounts involved. Changes in these assessments can lead to changes in allowances recorded on our financial statements. In addition, the actual costs of resolving these claims may be substantially higher or lower than the amounts provided in our financial statements for those claims. See note 30Note 31 of the notes to our consolidated financial statements included in this annual report for additional information related to commitments and contingencies.
Future Policy Benefits
Our liability for future policy benefits is primarily comprised of the present value of estimated future payments to or on behalf of policyholders, where the timing and amount of payment depends on policyholder mortality or morbidity, less the present value of future net premiums. Major assumptions used for future policy benefits are mortality and interest rate and such assumptions could be affected from the change in circumstances and market situations. If changes are significant, we may be required to provide for expected future losses on a product by establishing premium deficiency reserves. Premium deficiency reserves, if required, are determined based on assumptions at the time the premium deficiency reserve is established and do not include a provision for the risk of adverse deviation. Also included in our liability for future policy benefits is a liability for unpaid claims and claim adjustment expenses.
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Deferred Policy Acquisition Costs (DAC)
Deferred policy acquisition costs, which are included in other assets, represent the costs of acquiring new business, principally commissions, certain underwriting and agency expenses, and the cost of issuing policies. Deferred policy acquisition costs are reviewed to determine if they are recoverable from future income, including investment income, and, if not recoverable, are charged to expense. All other acquisition expenses are charged to operations as incurred.
Valuation Allowance for Deferred Income Tax Assets
We recognize deferred tax assets and liabilities for the future tax consequences attributes to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, net operating loss carryforwards and tax credits. A valuation allowance is maintained for deferred tax assets that we estimate are more likely than not to be unrealizable based on available evidence at the time the estimate is made. Determining the valuation allowance requires significant management judgments and assumptions. In determining the valuation allowance, we use historical and forecasted future operating results, based upon approved business plans, including a review of the eligible carryforward periods, tax planning opportunities and other relevant considerations.
We believe that the accounting estimate related to the valuation allowance is a critical accounting estimate because the underlying assumptions can change from period to period. For example, tax law changes or variance in future projected operating performance could result in a change in the valuation allowance. If we were not able to realize all or part of our net deferred tax assets in the future, an adjustment to our deferred tax assets valuation allowance would be charged to income tax expense in the period such determination was made.
In 2007,2009, we decided that it is more likely than not that we will not be able to utilize in the future certain net deferred tax assets of net operating loss carryforwards of Shinhan Financial Group. Thus we recorded valuation allowance of W65.8104.9 billion on such deferred tax assets.
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See noteNote 24 of the notes to our consolidated financial statements included in this annual report for additional information related to deferred tax assets and valuation allowance.
Average Balance Sheet and Volume and Rate Analysis
Average Balance Sheet and Related Interest
The following table shows our average balances and interest rates, as well as the net interest spread, net interest margin and asset liability ratio, for the years ended December 31, 2005, 2006in 2007, 2008 and 2007.2009.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2005 | | | 2006 | | | 2007 | |
| | | | | | Interest
| | | | | | | | | Interest
| | | | | | | | | Interest
| | | | |
| | | Average
| | | Income/
| | | Yield /
| | | Average
| | | Income/
| | | Yield /
| | | Average
| | | Income/
| | | Yield /
| |
| | | Balance(1) | | | Expense | | | Rate | | | Balance(1) | | | Expense | | | Rate | | | Balance(1) | | | Expense | | | Rate | |
| | | (In billions of Won, except percentages) | |
| |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing deposits | | W | 1,778 | | | W | 64 | | | | 3.60 | % | | W | 2,607 | | | W | 93 | | | | 3.57 | % | | W | 3,412 | | | W | 150 | | | | 4.40 | % |
| Call loans and securities purchased under resale agreements | | | 2,499 | | | | 85 | | | | 3.40 | | | | 1,674 | | | | 73 | | | | 4.36 | | | | 2,506 | | | | 111 | | | | 4.43 | |
| Trading assets | | | 3,394 | | | | 111 | | | | 3.27 | | | | 4,152 | | | | 147 | | | | 3.54 | | | | 7,432 | | | | 300 | | | | 4.04 | |
| Securities(2) | | | 19,348 | | | | 932 | | | | 4.82 | | | | 26,526 | | | | 1,199 | | | | 4.52 | | | | 28,388 | | | | 1,403 | | | | 4.94 | |
| Loans(3): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | | | 36,079 | | | | 2,075 | | | | 5.75 | | | | 36,663 | | | | 2,349 | | | | 6.41 | | | | 47,492 | | | | 3,071 | | | | 6.47 | |
| Other commercial | | | 20,072 | | | | 1,145 | | | | 5.70 | | | | 21,054 | | | | 1,433 | | | | 6.81 | | | | 27,436 | | | | 1,909 | | | | 6.96 | |
| Lease financing | | | 749 | | | | 47 | | | | 6.28 | | | | 656 | | | | 37 | | | | 5.64 | | | | 1,201 | | | | 69 | | | | 5.66 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total corporate | | | 56,900 | | | | 3,267 | | | | 5.74 | | | | 58,373 | | | | 3,819 | | | | 6.54 | | | | 76,129 | | | | 5,049 | | | | 6.63 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage and home equity | | | 24,630 | | | | 1,290 | | | | 5.24 | | | | 27,212 | | | | 1,665 | | | | 6.12 | | | | 30,605 | | | | 1,938 | | | | 6.33 | |
| Credit cards | | | 4,574 | | | | 589 | | | | 12.88 | | | | 4,877 | | | | 508 | | | | 10.42 | | | | 12,555 | | | | 1,517 | | | | 12.08 | |
| Other consumer | | | 15,552 | | | | 1,150 | | | | 7.39 | | | | 19,357 | | | | 1,389 | | | | 7.18 | | | | 22,625 | | | | 1,681 | | | | 7.43 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total consumer | | | 44,756 | | | | 3,029 | | | | 6.77 | | | | 51,446 | | | | 3,562 | | | | 6.92 | | | | 65,785 | | | | 5,136 | | | | 7.81 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total loans | | | 101,656 | | | | 6,296 | | | | 6.19 | | | | 109,819 | | | | 7,381 | | | | 6.72 | | | | 141,914 | | | | 10,185 | | | | 7.18 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other interest-earning assets | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest-earning assets | | W | 128,675 | | | W | 7,488 | | | | 5.82 | % | | W | 144,778 | | | W | 8,893 | | | | 6.14 | % | | W | 183,652 | | | W | 12,149 | | | | 6.62 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | | 3,855 | | | | — | | | | | | | | 3,910 | | | | — | | | | | | | | 4,585 | | | | — | | | | | |
| Other assets | | | 16,669 | | | | — | | | | | | | | 18,209 | | | | — | | | | | | | | 24,716 | | | | — | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | W | 149,199 | | | W | 7,488 | | | | | | | W | 166,897 | | | W | 8,893 | | | | | | | W | 212,953 | | | W | 12,149 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing demand deposits | | W | 6,594 | | | W | 125 | | | | 1.90 | % | | W | 7,964 | | | W | 37 | | | | 0.46 | % | | W | 8,455 | | | W | 35 | | | | 0.41 | % |
| Savings deposits | | | 26,100 | | | | 250 | | | | 0.96 | | | | 27,279 | | | | 577 | | | | 2.12 | | | | 30,583 | | | | 626 | | | | 2.05 | |
| Certificates of deposit | | | 8,838 | | | | 338 | | | | 3.82 | | | | 9,934 | | | | 464 | | | | 4.67 | | | | 15,475 | | | | 808 | | | | 5.22 | |
| Other time deposits | | | 39,031 | | | | 1,439 | | | | 3.69 | | | | 39,644 | | | | 1,524 | | | | 3.84 | | | | 44,397 | | | | 2,021 | | | | 4.55 | |
| Mutual installment deposits | | | 1,997 | | | | 83 | | | | 4.16 | | | | 1,211 | | | | 46 | | | | 3.80 | | | | 567 | | | | 22 | | | | 3.88 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest-bearing deposits | | | 82,560 | | | | 2,235 | | | | 2.71 | | | | 86,032 | | | | 2,648 | | | | 3.08 | | | | 99,477 | | | | 3,512 | | | | 3.53 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Short-term borrowings | | | 14,975 | | | | 357 | | | | 2.38 | | | | 13,688 | | | | 536 | | | | 3.92 | | | | 16,810 | | | | 701 | | | | 4.17 | |
| Secured borrowings | | | 6,584 | | | | 240 | | | | 3.65 | | | | 8,132 | | | | 334 | | | | 4.11 | | | | 10,635 | | | | 510 | | | | 4.80 | |
| Long-term debt | | | 22,209 | | | | 1,182 | | | | 5.32 | | | | 28,839 | | | | 1,394 | | | | 4.83 | | | | 42,316 | | | | 2,256 | | | | 5.33 | |
| Other interest-bearing liabilities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest bearing liabilities | | W | 126,328 | | | W | 4,014 | | | | 3.18 | % | | W | 136,691 | | | W | 4,912 | | | | 3.59 | % | | W | 169,238 | | | W | 6,979 | | | | 4.12 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2007 | | | 2008 | | | 2009 | |
| | | | | | Interest
| | | | | | | | | Interest
| | | | | | | | | Interest
| | | | |
| | | Average
| | | Income/
| | | Yield/
| | | Average
| | | Income/
| | | Yield/
| | | Average
| | | Income/
| | | Yield/
| |
| | | Balance(1) | | | Expense | | | Rate | | | Balance(1) | | | Expense | | | Rate | | | Balance(1) | | | Expense | | | Rate | |
| | | (In billions of Won, except percentages) | |
| |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing deposits | | W | 3,412 | | | W | 150 | | | | 4.40 | % | | W | 5,458 | | | W | 282 | | | | 5.17 | % | | W | 7,114 | | | W | 191 | | | | 2.68 | % |
| Call loans and securities purchased under resale agreements | | | 2,506 | | | | 111 | | | | 4.43 | | | | 2,862 | | | | 99 | | | | 3.46 | | | | 5,600 | | | | 102 | | | | 1.82 | |
| Trading assets | | | 7,432 | | | | 300 | | | | 4.04 | | | | 8,726 | | | | 469 | | | | 5.37 | | | | 8,035 | | | | 227 | | | | 2.83 | |
| Securities(2) | | | 28,388 | | | | 1,403 | | | | 4.94 | | | | 32,837 | | | | 1,775 | | | | 5.41 | | | | 38,433 | | | | 1,852 | | | | 4.82 | |
| Loans(3): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | | | 47,492 | | | | 3,071 | | | | 6.47 | | | | 56,002 | | | | 3,778 | | | | 6.75 | | | | 54,838 | | | | 3,186 | | | | 5.81 | |
| Other commercial | | | 27,436 | | | | 1,909 | | | | 6.96 | | | | 29,929 | | | | 2,236 | | | | 7.47 | | | | 35,171 | | | | 1,923 | | | | 5.47 | |
| Lease financing | | | 1,201 | | | | 69 | | | | 5.66 | | | | 1,487 | | | | 94 | | | | 6.32 | | | | 1,592 | | | | 100 | | | | 6.28 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total corporate | | | 76,129 | | | | 5,049 | | | | 6.63 | | | | 87,418 | | | | 6,108 | | | | 6.99 | | | | 91,601 | | | | 5,209 | | | | 5.69 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
165146
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2005 | | 2006 | | 2007 | | | 2007 | | 2008 | | 2009 | |
| | | | | Interest
| | | | | | Interest
| | | | | | Interest
| | | | | | | Interest
| | | | | | Interest
| | | | | | Interest
| | | |
| | | Average
| | Income/
| | Yield /
| | Average
| | Income/
| | Yield /
| | Average
| | Income/
| | Yield /
| | | Average
| | Income/
| | Yield/
| | Average
| | Income/
| | Yield/
| | Average
| | Income/
| | Yield/
| |
| | | Balance(1) | | Expense | | Rate | | Balance(1) | | Expense | | Rate | | Balance(1) | | Expense | | Rate | | | Balance(1) | | Expense | | Rate | | Balance(1) | | Expense | | Rate | | Balance(1) | | Expense | | Rate | |
| | | (In billions of Won, except percentages) | | | (In billions of Won, except percentages) | |
| |
| Mortgage and home equity | | | | 30,605 | | | | 1,938 | | | | 6.33 | | | | 33,579 | | | | 2,314 | | | | 6.89 | | | | 37,991 | | | | 1,775 | | | | 4.67 | |
| Credit cards | | | | 12,555 | | | | 1,517 | | | | 12.08 | | | | 14,458 | | | | 1,765 | | | | 12.21 | | | | 13,585 | | | | 1,568 | | | | 11.54 | |
| Other consumer | | | | 22,625 | | | | 1,681 | | | | 7.43 | | | | 25,803 | | | | 1,922 | | | | 7.45 | | | | 23,869 | | | | 1,673 | | | | 7.01 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total consumer | | | | 65,785 | | | | 5,136 | | | | 7.81 | | | | 73,840 | | | | 6,001 | | | | 8.13 | | | | 75,445 | | | | 5,016 | | | | 6.65 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total loans | | | | 141,914 | | | | 10,185 | | | | 7.18 | | | | 161,258 | | | | 12,109 | | | | 7.51 | | | | 167,046 | | | | 10,225 | | | | 6.12 | |
| | | | | | | | | | | | | | | | | | | | | |
| Other interest-earning assets | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
Total interest-earning assets(4) | | | W | 183,652 | | | W | 12,149 | | | | 6.62 | % | | W | 211,141 | | | W | 14,734 | | | | 6.98 | % | | W | 226,228 | | | W | 12,597 | | | | 5.57 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Non-interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | | | 4,585 | | | | — | | | | | | | | 4,546 | | | | — | | | | | | | | 5,132 | | | | — | | | | — | |
| Other assets | | | | 24,716 | | | | — | | | | | | | | 32,514 | | | | — | | | | | | | | 35,381 | | | | — | | | | — | |
| | | | | | | | | | | | | | | |
Total assets | | | W | 212,953 | | | W | 12,149 | | | | | | | W | 248,201 | | | W | 14,734 | | | | | | | W | 266,741 | | | W | 12,597 | | | | | |
| | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing demand deposits | | | W | 8,455 | | | W | 35 | | | | 0.41 | % | | W | 5,786 | | | W | 45 | | | | 0.78 | % | | W | 7,399 | | | W | 33 | | | | 0.45 | % |
| Savings deposits | | | | 30,583 | | | | 626 | | | | 2.05 | | | | 30,877 | | | | 716 | | | | 2.32 | | | | 36,876 | | | | 449 | | | | 1.22 | |
| Certificates of deposit | | | | 15,475 | | | | 808 | | | | 5.22 | | | | 16,152 | | | | 959 | | | | 5.94 | | | | 11,802 | | | | 647 | | | | 5.48 | |
| Other time deposits | | | | 44,397 | | | | 2,020 | | | | 4.55 | | | | 60,437 | | | | 2,983 | | | | 4.94 | | | | 77,961 | | | | 3,052 | | | | 3.91 | |
| Mutual installment deposits | | | | 567 | | | | 22 | | | | 3.88 | | | | 291 | | | | 11 | | | | 3.78 | | | | 189 | | | | 7 | | | | 3.70 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total interest-bearing deposits | | | | 99,477 | | | | 3,511 | | | | 3.53 | | | | 113,543 | | | | 4,714 | | | | 4.15 | | | | 134,227 | | | | 4,188 | | | | 3.12 | |
| | | | | | | | | | | | | | | | | | | | | |
| Short-term borrowings (including call money) | | | | 16,810 | | | | 702 | | | | 4.18 | | | | 21,713 | | | | 916 | | | | 4.22 | | | | 17,180 | | | | 580 | | | | 3.38 | |
| Secured borrowings | | | | 10,635 | | | | 510 | | | | 4.80 | | | | 9,473 | | | | 563 | | | | 5.94 | | | | 7,995 | | | | 331 | | | | 4.14 | |
| Long-term debt | | | | 42,316 | | | | 2,256 | | | | 5.33 | | | | 49,876 | | | | 2,762 | | | | 5.54 | | | | 46,847 | | | | 2,277 | | | | 4.86 | |
| Other interest-bearing liabilities | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
Total interest bearing liabilities | | | W | 169,238 | | | W | 6,979 | | | | 4.12 | % | | W | 194,605 | | | W | 8,955 | | | | 4.60 | % | | W | 206,249 | | | W | 7,376 | | | | 3.58 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Non-interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-interest-bearing deposits | | | 2,393 | | | | — | | | | | | | | 2,166 | | | | — | | | | | | | | 2,736 | | | | — | | | | | | | | 2,736 | | | | — | | | | | | | | 2,615 | | | | — | | | | | | | | 2,439 | | | | — | | | | | |
| Trading liabilities | | | 1,177 | | | | — | | | | | | | | 1,635 | | | | — | | | | | | | | 1,671 | | | | — | | | | | | | | 1,671 | | | | — | | | | | | | | 6,710 | | | | — | | | | | | | | 8,543 | | | | — | | | | | |
| Acceptance outstanding | | | 1,944 | | | | — | | | | | | | | 1,189 | | | | — | | | | | | | | 339 | | | | — | | | | | | |
| Bank acceptance outstanding | | | | 339 | | | | — | | | | | | | | 401 | | | | — | | | | | | | | 2,418 | | | | — | | | | | |
| Accrued expenses and other liabilities | | | 10,985 | | | | — | | | | | | | | 16,038 | | | | — | | | | | | | | 18,939 | | | | — | | | | | | | | 18,939 | | | | — | | | | | | | | 22,847 | | | | — | | | | | | | | 25,019 | | | | — | | | | | |
| Minority interest | | | 73 | | | | — | | | | | | | | 121 | | | | — | | | | | | | | 188 | | | | — | | | | | | |
| Redeemable convertible preferred stock | | | 585 | | | | — | | | | | | | | 195 | | | | — | | | | | | | | — | | | | — | | | | | | |
| Stockholders’ equity | | | 5,714 | | | | — | | | | | | | | 8,862 | | | | — | | | | | | | | 19,842 | | | | — | | | | | | |
| Total Group stockholders’ equity | | | | 19,842 | | | | — | | | | | | | | 20,761 | | | | — | | | | | | | | 21,751 | | | | — | | | | | |
| Noncontrolling interest | | | | 188 | | | | | | | | | | | | 262 | | | | — | | | | | | | | 322 | | | | — | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities and stockholders’ equity | | W | 149,199 | | | W | 4,014 | | | | | | | W | 166,897 | | | W | 4,912 | | | | | | | W | 212,953 | | | W | 6,979 | | | | | | |
Total liabilities and equity | | | W | 212,953 | | | W | 6,979 | | | | | | | W | 248,201 | | | W | 8,955 | | | | | | | W | 266,741 | | | W | 7,376 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest spread(4) | | | | | | | | | | | 2.64 | % | | | | | | | | | | | 2.55 | % | | | | | | | | | | | 2.49 | | | | | | | | | | | | 2.49 | % | | | | | | | | | | | 2.38 | % | | | | | | | | | | | 1.99 | % |
| Net interest margin(5) | | | | | | | | | | | 2.70 | % | | | | | | | | | | | 2.75 | % | | | | | | | | | | | 2.82 | | | | | | | | | | | | 2.82 | % | | | | | | | | | | | 2.74 | % | | | | | | | | | | | 2.31 | % |
| Average asset liability ratio(6) | | | | | | | | | | | 101.86 | % | | | | | | | | | | | 105.92 | % | | | | | | | | | | | 108.52 | | | | | | | | | | | | 108.52 | % | | | | | | | | | | | 108.50 | % | | | | | | | | | | | 109.69 | % |
Notes:
| | |
| (1) | | Average balances are based on (a) daily balances for Shinhan Bank and Jeju Bank and (b) quarterly balances for other subsidiaries. |
147
| | |
| (2) | | TheRepresents the average balance and yield on securities are based on amortized cost. The yield on theavailable-for-sale portfolio is based on average historical cost balances, therefore, the yield information does not give effect to changes in fair value that are reflected as a component of stockholders’ equity. |
| |
| (3) | | Non-accruing loans are included in the respective average loan balances. Income on such non-accruing loans is no longer recognized from the date the loan is placed on nonaccrual status. We reclassify loans as accruing when interest (including default interest) and principal payments are current. |
| |
| (4) | | TheRepresents the difference between the average rate of interest earned on interest-earning assets and the average rate of interest paid on interest-bearing liabilities. |
| |
| (5) | | TheRepresents the ratio of net interest income to average interest-earning assets. |
| |
| (6) | | TheRepresents the ratio of average interest-earning assets to average interest-bearing liabilities. |
148
Analysis of Changes in Net Interest Income — Volume and Rate Analysis
The following tables provide an analysis of changes in interest income, interest expense and net interest income between changes in volume and changes in rates for (i) 20062008 compared to 20052007 and (ii) 20072009 compared to 2006.2008. Volume and rate variances have been calculated on the movement in average balances and the change in the interest rates on average interest-earning assets and average interest-bearing liabilities in proportion to absolute volume and rate change. The variance caused by the change in both volume and rate has been allocated in proportion to the absolute volume and rate change.
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | From 2007 to 2008
| |
| | | From 2005 to 2006
| | | Interest Increase (Decrease)
| |
| | | Interest Increase (Decrease) Due to Change in | | | Due to Change in | |
| | | Volume | | Rate | | Change | | | Volume | | Rate | | Change | |
| | | (In billions of Won) | | | (In billions of Won) | |
| |
Increase (decrease) in interest income | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing deposits | | W | 30 | | | W | (1 | ) | | W | 29 | | | W | 102 | | | W | 30 | | | W | 132 | |
| Call loans and securities purchased under resale agreements | | | (32 | ) | | | 20 | | | | (12 | ) | | | 14 | | | | (26 | ) | | | (12 | ) |
| Trading assets | | | 26 | | | | 10 | | | | 36 | | | | 58 | | | | 111 | | | | 169 | |
| Securities | | | 327 | | | | (60 | ) | | | 267 | | | | 233 | | | | 139 | | | | 372 | |
| Loans: | | | | | | | | | | | | | |
| Commercial and industrial | | | | 569 | | | | 138 | | | | 707 | |
| Other commercial | | | | 181 | | | | 146 | | | | 327 | |
| Lease financing | | | | 17 | | | | 8 | | | | 25 | |
| | | | | | | | | |
| Total corporate | | | | 767 | | | | 292 | | | | 1,059 | |
| | | | | | | | | |
| Mortgage and home equity | | | | 197 | | | | 179 | | | | 376 | |
| Credit cards | | | | 232 | | | | 16 | | | | 248 | |
| Other consumer | | | | 237 | | | | 4 | | | | 241 | |
| | | | | | | | | |
| Total consumer | | | | 666 | | | | 199 | | | | 865 | |
| | | | | | | | | |
| Total loans | | | | 1,433 | | | | 491 | | | | 1,924 | |
| | | | | | | | | |
| Other interest-earning assets | | | | — | | | | — | | | | — | |
| | | | | | | | | |
| Total interest income | | | | 1,840 | | | | 745 | | | | 2,585 | |
| | | | | | | | | |
Increase (decrease) in interest expense | | | | | | | | | | | | | |
| Interest bearing deposits: | | | | | | | | | | | | | |
| Demand deposits | | | | (14 | ) | | | 24 | | | | 10 | |
| Savings deposits | | | | 6 | | | | 84 | | | | 90 | |
| Certificates of deposit | | | | 37 | | | | 114 | | | | 151 | |
| Other time deposits | | | | 780 | | | | 183 | | | | 963 | |
| Mutual installment deposits | | | | (10 | ) | | | (1 | ) | | | (11 | ) |
| | | | | | | | | |
| Total interest-bearing deposits | | | | 799 | | | | 404 | | | | 1,203 | |
| | | | | | | | | |
| Short-term borrowings | | | | 207 | | | | 7 | | | | 214 | |
| Secured borrowings | | | | (60 | ) | | | 113 | | | | 53 | |
| Long-term debt | | | | 416 | | | | 90 | | | | 506 | |
| Other interest-bearing liabilities | | | | — | | | | — | | | | — | |
| | | | | | | | | |
| Total interest expense | | | | 1,362 | | | | 614 | | | | 1,976 | |
| | | | | | | | | |
Net increase (decrease) in net interest income | | | W | 478 | | | W | 131 | | | W | 609 | |
| | | | | | | | | |
166
149
| | | | | | | | | | | | | |
| | | From 2005 to 2006
| |
| | | Interest Increase (Decrease) Due to Change in | |
| | | Volume | | | Rate | | | Change | |
| | | (In billions of Won) | |
| |
| Loans: | | | | | | | | | | | | |
| Commercial and industrial | | | 34 | | | | 240 | | | | 274 | |
| Other commercial | | | 58 | | | | 230 | | | | 288 | |
| Lease financing | | | (6 | ) | | | (4 | ) | | | (10 | ) |
| | | | | | | | | | | | | |
| Total corporate | | | 86 | | | | 466 | | | | 552 | |
| | | | | | | | | | | | | |
| Mortgage and home equity | | | 144 | | | | 231 | | | | 375 | |
| Credit cards | | | 37 | | | | (118 | ) | | | (81 | ) |
| Other consumer | | | 274 | | | | (35 | ) | | | 239 | |
| | | | | | | | | | | | | |
| Total consumer | | | 455 | | | | 78 | | | | 533 | |
| | | | | | | | | | | | | |
| Total loans | | | 541 | | | | 544 | | | | 1,085 | |
| | | | | | | | | | | | | |
| Other interest-earning assets | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Total interest income | | | 892 | | | | 513 | | | | 1,405 | |
| | | | | | | | | | | | | |
Increase (decrease) in interest expense | | | | | | | | | | | | |
| Interest bearing deposits: | | | | | | | | | | | | |
| Demand deposits | | | 22 | | | | (110 | ) | | | (88 | ) |
| Savings deposits | | | 12 | | | | 315 | | | | 327 | |
| Certificates of deposit | | | 45 | | | | 81 | | | | 126 | |
| Other time deposits | | | 23 | | | | 62 | | | | 85 | |
| Mutual installment deposits | | | (30 | ) | | | (7 | ) | | | (37 | ) |
| | | | | | | | | | | | | |
| Total interest-bearing deposits | | | 72 | | | | 341 | | | | 413 | |
| | | | | | | | | | | | | |
| Short-term borrowings | | | (33 | ) | | | 212 | | | | 179 | |
| Secured borrowings | | | 61 | | | | 33 | | | | 94 | |
| Long-term debt | | | 328 | | | | (116 | ) | | | 212 | |
| Other interest-bearing liabilities | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Total interest expense | | | 428 | | | | 470 | | | | 898 | |
| | | | | | | | | | | | | |
Net increase in net interest income | | | 464 | | | | 43 | | | | 507 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | From 2006 to 2007
| |
| | | Interest Increase (Decrease) Due to Change in | |
| | | Volume | | | Rate | | | Change | |
| | | (In billions of Won) | |
| |
Increase in interest income | | | | | | | | | | | | |
| Interest-bearing deposits | | W | 33 | | | W | 24 | | | W | 57 | |
| Call loans and securities purchased under resale agreements | | | 37 | | | | 1 | | | | 38 | |
| Trading assets | | | 130 | | | | 23 | | | | 153 | |
| Securities | | | 88 | | | | 116 | | | | 204 | |
167
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | From 2006 to 2007
| | | From 2008 to 2009
| |
| | | Interest Increase (Decrease) Due to Change in | | | Interest Increase (Decrease)
| |
| | | Volume | | Rate | | Change | | | Due to Change in | |
| | | (In billions of Won) | | | Volume | | Rate | | Change | |
| | | (In billions of Won) | |
| | |
Increase (decrease) in interest income | | | | | | | | | | | | | |
| Interest-bearing deposits | | | W | 70 | | | W | (161 | ) | | W | (91 | ) |
| Call loans and securities purchased under resale agreements | | | | 65 | | | | (62 | ) | | | 3 | |
| Trading assets | | | | (35 | ) | | | (207 | ) | | | (242 | ) |
| Securities | | | | 282 | | | | (205 | ) | | | 77 | |
| Loans: | | | — | | | | — | | | | — | | | | | | | | | | | | | |
| Commercial and industrial | | | 700 | | | | 22 | | | | 722 | | | | (77 | ) | | | (515 | ) | | | (592 | ) |
| Other commercial | | | 443 | | | | 33 | | | | 476 | | | | 350 | | | | (663 | ) | | | (313 | ) |
| Lease financing | | | 31 | | | | — | | | | 31 | | | | 7 | | | | (1 | ) | | | 6 | |
| | | | | | | | | | | | | | | |
| Total corporate | | | 1,174 | | | | 55 | | | | 1,229 | | | | 280 | | | | (1,179 | ) | | | (899 | ) |
| | | | | | | | | | | | | | | |
| Mortgage and home equity | | | 213 | | | | 60 | | | | 273 | | | | 276 | | | | (815 | ) | | | (539 | ) |
| Credit cards | | | 916 | | | | 93 | | | | 1,009 | | | | (104 | ) | | | (93 | ) | | | (197 | ) |
| Other consumer | | | 241 | | | | 51 | | | | 292 | | | | (139 | ) | | | (110 | ) | | | (249 | ) |
| | | | | | | | | | | | | | | |
| Total consumer | | | 1,370 | | | | 204 | | | | 1,574 | | | | 33 | | | | (1,018 | ) | | | (985 | ) |
| | | | | | | | | | | | | | | |
| Total loans | | | 2,544 | | | | 259 | | | | 2,803 | | | | 313 | | | | (2,197 | ) | | | (1,884 | ) |
| | | | | | | | | | | | | | | |
| Other interest-earning assets | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | |
| Total interest income | | | 2,832 | | | | 423 | | | | 3,255 | | | | 695 | | | | (2,832 | ) | | | (2,137 | ) |
| | | | | | | | | | | | | | | |
Increase (decrease) in interest expense | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest bearing deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
| Demand deposits | | | 2 | | | | (4 | ) | | | (2 | ) | | | 10 | | | | (22 | ) | | | (12 | ) |
| Savings deposits | | | 68 | | | | (19 | ) | | | 49 | | | | 120 | | | | (387 | ) | | | (267 | ) |
| Certificates of deposit | | | 284 | | | | 60 | | | | 344 | | | | (243 | ) | | | (69 | ) | | | (312 | ) |
| Other time deposits | | | 196 | | | | 301 | | | | 497 | | | | 761 | | | | (692 | ) | | | 69 | |
| Mutual installment deposits | | | (25 | ) | | | 1 | | | | (24 | ) | | | (4 | ) | | | — | | | | (4 | ) |
| | | | | | | | | | | | | | | |
| Total interest-bearing deposits | | | 525 | | | | 339 | | | | 864 | | | | 644 | | | | (1,170 | ) | | | (526 | ) |
| | | | | | | | | | | | | | | |
| Short-term borrowings | | | 128 | | | | 37 | | | | 165 | | | | (172 | ) | | | (164 | ) | | | (336 | ) |
| Secured borrowings | | | 114 | | | | 62 | | | | 176 | | | | (79 | ) | | | (153 | ) | | | (232 | ) |
| Long-term debt | | | 706 | | | | 156 | | | | 862 | | | | (161 | ) | | | (324 | ) | | | (485 | ) |
| Other interest-bearing liabilities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | |
| Total interest expense | | | 1,473 | | | | 594 | | | | 2,067 | | | | 232 | | | | (1,811 | ) | | | (1,579 | ) |
| | | | | | | | | | | | | | | |
Net increase (decrease) in net interest income | | | 1,359 | | | | (171 | ) | | | 1,188 | | | W | 463 | | | W | (1,021 | ) | | W | (558 | ) |
| | | | | | | | | | | | | | | |
168150
Operating Results of Operation
20072009 Compared to 20062008
Net Interest Income
The following table shows, for the periods indicated, the principal components of our net interest income.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2006 | | 2007 | | % Change | | | 2008 | | 2009 | | % Change | |
| | | (In billions of Won, except percentages) | | | (In billions of Won, except percentages) | |
| |
| Interest and dividend income: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest and fees on loans | | W | 7,381 | | | W | 10,185 | | | | 38.0 | % | | W | 12,109 | | | W | 10,225 | | | | (15.6 | )% |
| Interest and dividends on securities | | | 1,199 | | | | 1,403 | | | | 17.0 | | | | 1,775 | | | | 1,852 | | | | 4.3 | |
| Trading assets | | | 147 | | | | 300 | | | | N/M | | | | 469 | | | | 227 | | | | (51.6 | ) |
| Other interest income | | | 166 | | | | 261 | | | | 57.2 | | | | 381 | | | | 293 | | | | (23.1 | ) |
| | | | | | | | | | | | | | | |
| Total interest and dividend income | | W | 8,893 | | | W | 12,149 | | | | 36.6 | | | W | 14,734 | | | W | 12,597 | | | | (14.5 | )% |
| | | | | | | | | | | | | | | |
| Interest expense: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest on deposits | | W | 2,648 | | | W | 3,511 | | | | 32.6 | % | | W | 4,714 | | | W | 4,188 | | | | (11.2 | )% |
| Interest on short-term borrowings | | | 524 | | | | 660 | | | | 26.0 | | | | 866 | | | | 555 | | | | (35.9 | ) |
| Interest on secured borrowings | | | 334 | | | | 510 | | | | 52.7 | | | | 563 | | | | 331 | | | | (41.2 | ) |
| Interest on long-term debt | | | 1,394 | | | | 2,256 | | | | 61.8 | | | | 2,762 | | | | 2,277 | | | | (17.6 | ) |
| Other interest expense | | | 12 | | | | 42 | | | | N/M | | | | 50 | | | | 25 | | | | (50.0 | ) |
| | | | | | | | | | | | | | | |
| Total interest expense | | | 4,912 | | | | 6,979 | | | | 42.1 | | | | 8,955 | | | | 7,376 | | | | (17.6 | ) |
| | | | | | | | | | | | | | | |
| Net interest income | | W | 3,981 | | | W | 5,170 | | | | 29.9 | % | | W | 5,779 | | | W | 5,221 | | | | (9.7 | )% |
| | | | | | | | | | | | | | | |
| Net interest margin(1) | | | 2.75 | % | | | 2.82 | % | | | | | | | 2.74 | % | | | 2.31 | % | | | | |
N/M = Notnot meaningful
Note:
| | |
| (1) | | TheRepresents the ratio of net interest income to average interest-earning assets. See “— Average Balance Sheet and Volume and Rate Analysis — Average Balance Sheet and Related Interest.” |
Interest and dividend income. The 36.6% increase14.5% decrease in interest and dividend income is due primarily to a 38.0% increase15.6% decrease in interest and fees on loans and, to a lesser extent, a 17.0% increase in interest and dividends on securities.
loans. The 38.0% increasedecrease in interest and fees on loans was due primarily to a decrease in the following;average lending rate, which was partially offset by an increase in the volume of loans made. The average lending rate decreased from 7.51% in 2008 to 6.12% in 2009, as a result of a decrease in the average lending rate for corporate loans from 6.99% in 2008 to 5.69% in 2009 and a decrease in the average lending rate for retail loans from 8.13% in 2008 to 6.65% in 2009. The decrease in lending rates for both corporate and retail loans was principally due to the lowering of the base rate set by the Bank of Korea in an effort by the Government to increase the supply of liquidity in the Korean financial markets in light of the recent global credit crisis, which remained low throughout the rest of 2008 and 2009. In the meanwhile, the average balance of our loans increased by 3.6% from W161,258 billion in 2008 to W167,046 billion in 2009. The average balance of our corporate loans increased by 4.8% from W87,418 billion in 2008 to W91,601 billion in 2009, primarily due to an increase in other commercial loans, which was largely due to the significant purchase of commercial papers in the second half of 2008 in response to lowered market interest rates as part of our asset management strategy, most of which commercial papers we largely continue to hold throughout 2009. The average balance of our consumer loans increased by 2.2% from W73,840 billion in 2008 to W75,445 billion in 2009, primarily due to an increase in mortgage and home equity lending, which more than offset a decrease in unsecured lending, resulting mainly from our enhanced risk management policy to reduce such loans to improve asset quality.
151
More specifically, the decrease in interest and dividend income was due to the following:
| | |
| | • | a significant increase16.4% decrease in interest and fees on credit cardconsumer loans from W5086,001 billion in 20062008 to W1,5175,016 billion in 2007,2009 and a 14.7% decrease in interest and fees on corporate loans from W6,108 billion in 2008 to W5,209 billion in 2009, which was largely due primarily to the acquisition of credit carda decrease in lending rates charged for variable rate retail and corporate loans as parta result of the LG Card acquisition;decrease in the base rate, which more than offset an increase in the average balances of retail and corporate loans; |
| |
| | • | a 30.7% increase15.7% decrease in interest and fees on commercial and industrial loans from W2,3493,778 billion in 20062008 to W3,0713,186 billion in 2007,2009, which was primarily due primarily to a 29.5% increasedecrease in the average balance of commercial and industrial loans from W36,66356,002 billion in 20062008 to W47,49254,838 billion in 2007, and an increase2009, which resulted largely from increased repayment of existing loans by six basis pointslarge corporate borrowers in light of the greater liquidity in the average yield on such loans from 6.41% in 2006 to 6.47% in 2007;domestic credit market; |
| |
| | • | a 33.2% increase14.0% decrease in interest and fees on other commercial loans from W1,4332,236 billion in 20062008 to W1,9091,923 billion in 2007,2009, which was primarily due primarily to a 30.3%general decrease in market interest rates, the effect of which was partially offset by an increase in the average balanceamount of other commercial loans from W21,054 billion in 2006 to W27,436 billion in 2007 and an increasediscounted notes held by 15 basis points in the average yield on such loans from 6.81% in 2006 to 6.96% in 2007; andus as part of our asset management strategy; |
| |
| | • | a 16.4% increase23.3% decrease in interest and fees on mortgage and home equity loans from W1,6652,314 billion in 20062008 to W1,9381,775 billion in 2007,2009, which was primarily due primarily to a 12.5%decrease from 6.89% to 4.67% in the average lending rate on mortgage and home equity loans, which more than offset the steady increase in the average balance of the mortgage and |
169
| | |
| | home equity loans from W27,21233,579 billion in 20062008 to W30,60537,991 billion in 20072009 due to the improved housing market in the second half of 2009; and 21 basis points |
|
| • | a 13.0% decrease in interest and fees on other consumer loans from W1,922 billion in 2008 to W1,673 billion in 2009, which was primarily due to a decrease in the average yield on suchbalance of other consumer loans from 6.12%W25,803 billion in 20062008 to 6.33%W23,869 billion in 2007.2009, resulting largely from a decrease in unsecured lending in line with our enhanced risk management policy in light of the recent global financial crisis. |
The increase in the average volume of commercial and industrial loans as well as other commercial loans was primarily as a result of increased lending to small- and medium-sized enterprises due to increased market efforts targeted at such customers. The increase in the average volume of mortgage and home equity loans was primarily as a result of continued demand for such loans in 2007 and the carryover of such loans from prior periods. The growth in demand for such loans continued to build up in 2007 compared to 2006, during which the average balance of such loans increased by 10.5% compared to 12.5% in 2007.
Overall, the average volume of our loans increased by 29.2% from W109,819 billion in 2006 to W141,914 billion in 2007.
The increase in the average yields for commercial and industrial loans, other commercial loans, and mortgage and home equity loans was primarily due to the general rise in market interest rates in Korea from 2006 to 2007.
The 17.0%4.3% increase in interest and dividends on securities from W1,775 billion in 2008 to W1,852 billion in 2009 was due primarily to a 7.0%17.0% increase in the average balance of securities from W26,52632,837 billion in 20062008 to W28,38838,433 billion in 2007 and an increase of 422009, which was more than offset by a decrease by 59 basis points in the average yield on securities from 4.5%5.41% in 20062008 to 4.9%4.82% in 2007.2009. The average balance of securities increased as a result of an increase in the appraisal value of our securities. The decrease in the average yield of securities was largely due to the general decrease in market interest rates in Korea in 2009.
Interest Expense.expense. Interest expense increaseddecreased by 42.1%17.6% from W4,9128,955 billion in 20062008 to W6,9797,376 billion in 2007,2009, due primarily to a 32.6% increase11.2% decrease in interest expense on interest-bearing deposits from W2,6484,714 billion in 20062008 to W3,5124,188 billion in 20072009 and a 61.84%24.8% decrease in interest expense on borrowings from W4,241 billion in 2008 to W3,188 billion in 2009.
The decrease in interest expense on interest-bearing deposits was due to a decrease in the average interest rate payable by us on interest-bearing deposits by 103 basis points from 4.15% in 2008 to 3.12% in 2009, which more than offset a 18.2% increase in the average balance of interest-bearing deposits (particularly time and savings deposits) from W113,543 billion in 2008 to W134,227 billion in 2009. The decrease in the average interest rate payable on interest-bearing deposits resulted mainly from the overall decrease in market interests as governments worldwide, including Korean government, actively lowered base rates in order to increase the supply of liquidity in response to the global credit crisis. As a result, the average interest rates payable on demand deposits, savings deposits, certificates of deposits and other time deposits decreased from 0.78%, 2.32%, 5.94% and 4.94%, respectively, in 2008 to 0.45%,1.22%, 5.48% and 3.91%, respectively, in 2009. The increase in the average balance of interest-bearing deposits was primarily due to a 25.8% increase in the average balance of time and savings deposits from W91,314 billion in 2008 to W114,837 billion in 2009, which mainly resulted from the increasing preference among consumers for depositary products which are relatively safer and more stable compared to alternative investment products with higher risk-return profiles, such as stocks, in light of the volatile equity markets following the recent global financial crisis, as well as a change in our groupwide funding strategy in the aftermath of such crisis to rely more on quality long-term deposits rather borrowings or corporate debentures as the
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primary source of our funding. The average balance of demand deposits increased by 27.9% from W5,786 billion in 2008 to W7,399 billion in 2009 for similar reasons. However, the average balance of certificates of deposit decreased by 26.9% from W16,152 billion in 2008 to W11,802 billion in 2009 largely due to our active policy of increasing other time deposits instead of certificates of deposit in order to secure a more stable source of funding.
The decrease in interest expense on borrowings was due to a 36.7% decrease in the average balance of short-term borrowings from W916 billion in 2008 to W580 billion in 2009, a 41.2% decrease on secured borrowings from W563 billion in 2008 to W331 billion in 2009, a 17.6% decrease on long-term debt from W1,3942,762 billion in 20062008 to W2,2562,277 billion in 2007.
The increase in interest expense on deposits in 2007 was primarily the result of2009, and a 15.6% increasedecrease in the average volume of interest-bearing deposits from W86,032 billion in 2006 to W99,477 billion in 2007short term, secured and an increaselong term borrowing rates by 45 basis points in the cost of interest-bearing deposits from 3.08% in 2006 to 3.53% in 2007.
The principal reason for the increase in interest rates payable on our interest-bearing deposits was the increase in high interest rate deposit products, especially time deposits. The average interest rate paid on our certificates of deposit, which accounted for 15.6% of our average interest-bearing deposits in 2007, increased by 5584 basis points from 4.67%4.22% in 20062008 to 5.22%3.38% in 2007. The average interest rate paid on our time deposits other than certificate of deposit, which generally have maturities of more than one year (at the time of the execution of the contract) and accounted for 44.6% of our average interest-bearing deposits in 2007, increased2009, by 71180 basis points from 3.84%5.94% in 20062008 to 4.55%4.14% in 2007. The average interest rate paid on our savings deposits , which accounted for 30.7% of our average interest-bearing deposits in 2007, decreased2009 and by 768 basis points from 2.12%5.54% in 20062008 to 2.05%4.86% in 2007.
The increase in the average volume of interest-bearing deposits was due primarily to a 12.1% increase in average volume of savings deposits from W27,279 billion in 2006 to W30,583 billion in 2007, a 55.8% increase in average volume of our certificate of deposits from W9,934 billion in 2006 to W15,475 billion in 2007 and a 12.0% increase in average volume of time deposits other than certificate of deposits from W39,644 billion in 2006 to W44,397 billion in 2007, which was partially offset by a 53.2% decrease in the average volume of mutual installment deposits from W1,211 billion in 2006 to W567 billion in 2007.
The 61.8% increase in interest expense on long-term debt was primarily due to a 46.7% increase in the average volume of long-term debt from W28,839 billion in 2006 to W42,316 billion in 2007, which2009, respectively, mainly resulted from:
| | |
| • | the increased issuance of foreign long-term debt by Shinhan Bank to take advantage of lower funding costs in the low exchange rate environment in 2007; |
|
| • | the increased issuance of financial debentures by Shinhan bank to secure long-term funding for operations in light of the increased outflow of customer funds to other higher-yielding accounts, such as cash management accounts (CMA) offered by securities companies; |
|
| • | the increased issuance of corporate debentures by our holding company to fund the operations of its non-banking subsidiaries and secure funding for the LG Card acquisition; and |
|
| • | an increase by 50 basis points in the average interest rates paid on our long-term debt from 4.83% in 2006 to 5.33% in 2007, primarily as a result of the general increase in the average market interest in 2007. |
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The 52.7% increase in interest on secured borrowings was due primarily to a 30.8% increase in the average volume of secured borrowings from W8,132 billion in 2006 to W10,635 billion in 2007 as a result of consolidationour enhanced risk management policies to increase the proportion of LG Card’s results of operation for the period from March 1, 2007 through December 31, 2007 and an increase by 69 basis pointsmore risk-averse interest-bearing deposits compared to borrowings in our liabilities portfolio following the average interest rates paid on secured borrowings from 4.11% in 2006 to 4.80% in 2007.global credit crisis.
Net interest margin. Net interest margin represents the ratio of net interest income to the average interest earningvolume of interest-earning assets. Our overall net interest margin increaseddecreased by 43 basis points from 2.75%2.74% in 20062008 to 2.82%2.31% in 2007,2009, primarily due to the acquisition of credit card receivables upon the acquisition of LG Card, which typically carry higher net interest margins than bank loans. The increase in our overall net interest margin was also due to a 29.87% increasedecrease by 39 basis points in net interest incomespread from W3,981 billion2.38% in 20062008 to W5,170 billion1.99% in 2007 and a 26.85%2009, which more than offset the 7.1% increase in the average volume of our interest earninginterest-earning assets from W144,778211,141 billion in 20062008 to W183,652226,228 billion in 2007.2009. Net interest spread, which represents the difference between the average rate of interest earned on interest-earning assets and the average rate of interest paid on interest-bearing liabilities, decreased primarily due to the relatively longer time lag for interest-bearing liabilities compared to interest-earning assets in reflecting the reduction in base interest rates set by the Bank of Korea. For example, the interest rates for time and savings deposits, which comprise the substantial majority of our interest-bearing deposits, are typically reset on an annual basis, and corporate debentures issued by us typically carry a fixed rate for a term of one year or more, while the interest rates for variable-rate corporate and retail loans, which represented most of our interest-earning assets, are typically reset on a quarterly basis.
Provision for loan losses
For a discussion of our loan loss provisioning policy, see “Item 4. Information on the Company4.B. Business Overview — Description of Assets and Liabilities — Loan PortfolioLoans — Provisioning Policy.”
Our provision for loan losses significantly decreasedincreased by 32.8% from W1,319 billion in 2008 to W401,751 billion in 20072009, primarily due to prudent charge-off of low-quality assets as part of our enhanced risk management policy to improve the overall quality of assets held by us in the aftermath of the recent global financial crisis. Loan loss allowance against our loans increased by 13.7% from W2523,201 billion in 2006, primarily reflecting the improvement in the overall asset quality of our loan resulting from the relatively paucity of problem loans in the credit card sector and the large corporate sector compared to prior years and the implementation of stricter loan review process. For similar reasons, our ratio of non-performing loans over total loans decreased to 0.87% as of December 31, 2007 from 1.02%2008 to W3,638 billion as of December 31, 2006.
The total2009, primarily as a result of an increase in our consumer loan balance increased by W29,372 billion from December 31, 2006 to December 31, 2007. Credit cardassets and a deterioration in asset quality of corporate loans, which are considered to have a higher credit risk than other types of loans, accounted for W10,757 billion, or 36.62% of such increase, due toparticularly in the acquisition of LG Card in March 2007. Accordingly, our nonaccrual loans, including the past due loans within the repayment grace period, increased to W3,057 billion, or 2.01% of our total loans, as of December 31, 2007, from W2,099 billion, or 1.71% of our total loans, as of December 31, 2006.shipping, shipbuilding and real estate development sectors.
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The following table sets forth for the periods indicated the components of provision for loan and other credit losses by product type.
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | As of December 31, | |
| | | As of December 31, | | | 2008 | | 2009 | | % Change | |
| | | 2006 | | 2007 | | % Change | | | (In billions of Won, except
| |
| | | (In billions of Won, except percentages) | | | percentages) | |
| |
| Total (reversal of) provision for loan losses (A): | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate | | W | 194 | | | W | 182 | | | | (6.2 | )% | | W | 1,288 | | | W | 1,477 | | | | 14.7 | % |
| Mortgages and home equity | | | (18 | ) | | | (4 | ) | | | 77.8 | | | | 8 | | | | 1 | | | | (87.5 | ) |
| Other consumer | | | 44 | | | | 14 | | | | (68.2 | ) | | | (3 | ) | | | 189 | | | | N/M | |
| Credit cards | | | 32 | | | | (152 | ) | | | N/M | | | | 26 | | | | 84 | | | | N/M | |
| | | | | | | | | | | | | | | |
| | | | 252 | | | | 40 | | | | (84.1 | )% | | | 1,319 | | | | 1,751 | | | | 32.8 | % |
| | | | | | | | | | | | | | | |
| Total (reversal of) provision for off-balance sheet credit instruments (B): | | | | | | | | | | | | | | | | | | | | | | | | |
| Guarantees and acceptances | | W | (15 | ) | | W | (12 | ) | | | (20.0 | )% | | W | 170 | | | W | 93 | | | | (45.3 | )% |
| Unused portions of credit line | | | (11 | ) | | | 52 | | | | N/M | | | | (52 | ) | | | 357 | | | | N/M | |
| | | | | | | | | | | | | | | |
| | | | (26 | ) | | | 40 | | | | N/M | | | | 118 | | | | 450 | | | | N/M | |
| | | | | | | | | | | | | | | |
| Total (reversal of) provision for credit losses (A+B) | | W | 226 | | | W | 80 | | | | (64.6 | )% | |
| Total provision for credit losses (A+B) | | | W | 1,437 | | | W | 2,201 | | | | 53.2 | % |
| | | | | | | | | | | | | | | |
N/M = not meaningful
Provision for loan losses for corporate loans decreasedincreased by 6.2%14.7% from W1941,288 billion in 20062008 to W1821,477 billion in 2007,2009, primarily due to prudent charge-off of low-quality corporate loan assets as part of our enhanced risk management policy to improve the overall quality of assets held by us in the aftermath of the recent global financial crisis. Loan loss allowance against our corporate loans increased by 21.8% from W2,449 billion as of December 31, 2008 to W2,982 billion as of December 31, 2009, primarily as a result of a decreasedeterioration in impaired loans and improvements in the asset quality of our corporate
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loan portfolio. On the other hand, our loan loss allowance against corporate loans, increasedparticularly in the shipping, shipbuilding and real estate development sectors. Specifically, in December 2008, the Government announced a program to promote a “fast-track” restructuring of such borrowers by 10.79% fromtheir Korean creditor financial institutions, under the supervision of major commercial banks. In accordance with such program, 29 construction companies and eight shipbuilding companies became subject to workout in February and March 2009, following review by their creditor financial institutions (including Shinhan Bank) and the Korean government. Currently, ten construction companies and two shipbuilding companies remain under our supervision in connection with such program. Our total exposure to such companies amounted to W1,269503 billion as of December 31, 20062009, we have established an allowance for the loans and off-balance sheet credit instruments for such companies amounting to W1,406119 billion and W18 billion, respectively, as of December 31, 2007, due primarily2009. In addition, we continued to the increasebe involved in fast-track restructuring of other companies, particularly, small- to medium-sized enterprises in the volumeshipping, shipbuilding and real estate development sectors. Net charge-offs of our corporate loans which more than offset the effect of improved asset quality.
Reversal of provision for loan losses against mortgage and home equity loans decreasedincreased significantly from W18249 billion in 20062008 to W4944 billion in 2007 due2009, primarily toas a result of prudent charge-off undertaken by us in 2009 in the continued improvement in asset quality and recoveriesaftermath of charged-off loan. Ourthe recent global financial crisis. The non-performing loan loss allowance against mortgage and home equityratio of our corporate loans remained stable at W4 billionincreased from 1.15% as of December 31, 2006 and 2007, while our mortgage and home equity loans increased by 4.6% from W30,097 billion2008 to 1.28% as of December 31, 2006 to W31,495 billion2009, primarily as a result of December 31, 2007 reflectingdeterioration in asset quality of corporate loans, particularly in the continued demand for such loansshipping, shipbuilding and the carryover of such loans from prior periods. The ratio of non-performing loans to total loans within this portfolio declined from 0.23% in 2006 to 0.14% in 2007.real estate development sectors.
Provision for loan losses for mortgage and home equity loans and other consumer loans decreased by 68.2%significantly increased from W445 billion in 20062008 to W14190 billion in 2007,2009, primarily reflecting the improvementas a result of prudent charge-off undertaken by us in 2009 in the asset qualityaftermath of the recent global financial crisis. We recorded reversal of net charge-off of our mortgage and home equity loans and other consumer loans which more than offsetin the amount of W5 billion in 2008 compared to net charge-off of W166 billion in 2009. Total allowance for losses for our mortgage and home equity loans and other consumer loans increased by 15.3% from W157 billion in 2008 to W181 billion in 2009 primarily as a result of an increase in the total volume of our other consumer loans. Net charge-offs within the other consumer loan portfolio remained relatively stable from W53 billion in 2006 to W52 billion in 2007. Other consumer loans have increased by 24.5% from W20,458 billion as of December 31, 2006 to W25,475 billion as of December 31, 2007. However, the allowance for loan losses has decreased by 14.3% from W175 billion as of December 31, 2006 to W150 billion as of December 31, 2007, primarily reflecting the improvement in the asset quality of our other consumer loans which more than offset an increase in the total volume of our other consumer loans. The ratio of non-performing loans to total loans within this portfolio decreased from 0.58% as of December 31, 2006 to 0.33% as of December 31, 2007.retail lending.
We recorded reversal of provision for loan losses against credit cardscard loans of W15284 billion in 20072009 compared to provision for loan losses of W3226 billion in 2006, primarily due to the improvement in the asset quality of credit card receivables acquired as part of acquisition of LG Card. We recorded reversal of net charge-offs within the credit card portfolio of W33 billion in 2007 compared to W141 billion in 2006. Our credit card balances increased significantly from W3,924 billion as of December 31, 2006 to W14,681 billion as of December 31, 2007,2008, primarily as a result of the acquisition increased charge-off. The non-performing loan ratio
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of LG Cardour credit card loans decreased from 1.17% in March 2007. Our allowance2008 to 1.13% in 2009, and total allowances for losses against credit cards increased significantlycard loans decreased by 20.2% from W127595 billion as of December 31, 2006in 2008 to W539 billion as of December 31, 2007,475 billions in 2009, in each case, primarily due to the acquisitiondecrease of LG Cardnon-delinquent loans and general improvement in March 2007. The ratioasset quality of non-performingour loans to total loans within ouras a result of increased charge-offs.
Provision for off-balance sheet credit card portfolioinstruments significantly increased from 1.07% as of December 31, 2006W118 billion in 2008 to 1.12% as of December 31, 2007,W450 billion in 2009, primarily as a result of the acquisition of LG Card, whose asset quality was comparatively poorer than of former Shinhan Card.
Totala change in accounting policy related to such provision, increased credit card usage for cash advances and prudent provisioning for off-balance sheet credit instruments increased from 2006 to 2007, primarily due to an increase in the unused portionrespect of credit lines,card usage in anticipation of lower interest rates applicable to cash advances, which was primarily due to an increasebecame effective in commitments to extend credit in the form of corporate loans and credit cards as a result of the acquisition of LG Card.April 2010.
NoninterestNon-interest Income
The following table sets forth for the periods indicated the components of our noninterest income.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | | | As of December 31, | |
| | | 2006 | | 2007 | | % Change | | | 2008 | | 2009 | | % Change | |
| | | (In billions of Won, except percentages) | | | (In billions of Won, except percentages) | |
| |
Non interest income | | | | | | | | | | | | | |
| Commissions and fees from non-trust management: | | | | | | | | | | | | | | | | | | | | | | | | |
| Brokerage fees and commissions(1) | | W | 479 | | | W | 858 | | | | 79.1 | % | | W | 626 | | | W | 569 | | | | (9.1 | )% |
| Other fees and commissions(2) | | | 1,032 | | | | 1,754 | | | | 70.0 | | | | 1,969 | | | | 2,132 | | | | 8.3 | |
| Net trust management fees(3) | | | 106 | | | | 73 | | | | (31.1 | ) | | | 69 | | | | 69 | | | | — | |
| Net trading profits | | | 141 | | | | (210 | ) | | | N/M | | | | 584 | | | | (517 | ) | | | N/M | |
| Net gains (losses) on securities | | | 31 | | | | 169 | | | | N/M | | | | (135 | ) | | | 308 | | | | N/M | |
| Gain on other investment | | | 324 | | | | 181 | | | | (44.1 | ) | | | 317 | | | | 268 | | | | (15.5 | ) |
| Net gain on foreign exchange | | | 229 | | | | 146 | | | | (36.2 | ) | |
| Net gain (loss) on foreign exchange | | | | (566 | ) | | | 956 | | | | N/M | |
| Insurance income | | | 1,109 | | | | 1,119 | | | | 0.9 | | | | 1,329 | | | | 1,229 | | | | (7.5 | ) |
| Other | | | 336 | | | | 648 | | | | 92.9 | | | | 379 | | | | 671 | | | | 77.0 | |
| | | | | | | | | | | | | | | |
| Total noninterest income | | W | 3,787 | | | W | 4,738 | | | | 25.1 | % | | W | 4,572 | | | W | 5,685 | | | | 24.3 | % |
| | | | | | | | | | | | | | | |
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N/M = not meaningful
Notes:
| | |
| (1) | | Consists of commissions, fees and markup on securities brokerage activities. |
| |
| (2) | | Includes commissions received on remittance, commissions received on imports and export letters of credit and commissions received from foreign exchange transactions. |
| |
| (3) | | Consists principally of fees from management of trust accounts in our banking operations. |
The 25.1%24.3% increase in noninterestnon-interest income was mainly attributable to the 70.0% increase in other fees and commissions and the 79.1% increase in brokerage fees and commissions. The increase in other fees and commissions was principally the result of an increase in fees from the sales of beneficiary certificates, including investment fund products,largely due to the increasing popularity of such fund products among consumers seeking products that provide higher yields than bank deposits. The increase in brokerage fees and commissions was duenet gain on foreign exchange translation related to the increased investment in stocks and other securities by our customers dueappreciation of the Won compared to the general upturnU.S. dollar, net gain from increased volume of foreign exchange transactions and net gain on securities which resulted from the sale ofavailable-for-sale securities which appreciated in value. Such gains more than offset the Korean stock market.loss from net trading profits related to foreign currency derivative transactions resulting from decreased transaction and translation gains.
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NoninterestNon-interest Expenses
The following table shows, for the periods indicated, the components of our noninterest expense.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2006 | | 2007 | | % Change | | | 2008 | | 2009 | | % Change | |
| | | (In billions of Won, except percentages) | | | (In billions of Won, except percentages) | |
| |
| Employee compensation and other benefits | | W | 1,789 | | | W | 2,056 | | | | 14.9 | % | | W | 1,817 | | | W | 2,000 | | | | 10.1 | % |
| Depreciation and amortization | | | 471 | | | | 812 | | | | 72.4 | | | | 871 | | | | 714 | | | | (18.0 | ) |
| General and administrative expenses | | | 666 | | | | 878 | | | | 31.8 | | | | 882 | | | | 868 | | | | (1.6 | ) |
| Credit card fees | | | 205 | | | | 665 | | | | N/M | | | | 700 | | | | 742 | | | | 6.0 | |
| Provision (reversal) for other losses | | | (16 | ) | | | 72 | | | | N/M | | | | (18 | ) | | | 166 | | | | N/M | |
| Insurance fees on deposits | | | 128 | | | | 131 | | | | 2.3 | | | | 133 | | | | 162 | | | | 21.8 | |
| Other fees and commission expenses | | | 358 | | | | 446 | | | | 24.6 | | | | 422 | | | | 454 | | | | 7.6 | |
| Taxes (except income taxes) | | | 96 | | | | 128 | | | | 33.3 | | | | 179 | | | | 143 | | | | (20.1 | ) |
| Insurance operating expense | | | 1,147 | | | | 1,351 | | | | 17.8 | | | | 1,038 | | | | 1,456 | | | | 40.3 | |
| Other | | | 482 | | | | 301 | | | | (37.6 | ) | | | 703 | | | | 432 | | | | (38.5 | ) |
| | | | | | | | | | | | | | | |
| Total noninterest expenses | | W | 5,326 | | | W | 6,840 | | | | 28.4 | % | | W | 6,727 | | | W | 7,137 | | | | 6.1 | % |
| | | | | | | | | | | | | | | |
N/M = Notnot meaningful
The 28.4%6.1% increase in noninterest expensesnon-interest expense was mainly attributableprincipally due to the significantan increase in credit card fees, the 72.4% increase in depreciation and amortization, the 14.9% in employee compensation and other benefits and the 31.8%an in general administrative expenses. All of these increases wereinsurance operating expense, which more than offset a decrease in other expense related to the increasesdepreciation and amortization of intangible assets, depreciated on an accelerated basis. Employee compensation and other benefits increased by 10.1%, mainly due to increased severance payments related to voluntary retirements, offsetting aggressive cost-cutting campaigns for wage and fringe benefits. Insurance operating expense increased mainly due to an increase in corresponding items followinginsurance payouts as well as increased policy reserve to renew the acquisition of LG Card in March 2007.current policies.
Income Tax Expense
Income tax expense increaseddecreased by 62.9%39.0% from W656695 billion in 20062008 to W1,058424 billion in 2007 to2009 as a result of the increasea decrease in our taxable income due toas well as a decline in the acquisition of LG Card in March 2007. The statutory tax rate wasfrom 27.5% in 2006 and 2007.2008 to 24.2% in 2009. Our effective rate of income tax increaseddecreased to 34.3%27.1% in 20072009 from 29.2%31.8% in 2006, due to the provision of valuation allowance for deferred tax assets change related to the Japanese Yen swap.2008.
Net Income Before Extraordinary ItemItems
As a result of the foregoing, our net income before extraordinary items increaseddecreased by 23.2%23.4% from W1,5661,481 billion in 20062008 to W1,9301,134 billion in 2007.2009.
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20062008 Compared to 20052007
Net Interest Income
The following table shows, for the periods indicated, the principal components of our net interest income.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2005 | | 2006 | | % Change | | | 2007 | | 2008 | | % Change | |
| | | (In billions of Won, except percentages) | | | (In billions of Won, except percentages) | |
| |
| Interest and dividend income: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest and fees on loans | | W | 6,296 | | | W | 7,381 | | | | 17.2 | % | | W | 10,185 | | | W | 12,109 | | | | 18.9 | % |
| Interest and dividends on securities | | | 932 | | | | 1,199 | | | | 28.6 | | | | 1,403 | | | | 1,775 | | | | 26.5 | |
| Trading assets | | | 111 | | | | 147 | | | | 32.4 | | | | 300 | | | | 469 | | | | 56.3 | |
| Other interest income | | | 149 | | | | 166 | | | | 11.4 | | | | 261 | | | | 381 | | | | 46.0 | |
| | | | | | | | | | | | | |
| Total interest and dividend income | | W | 7,488 | | | W | 8,893 | | | | 18.8 | | | W | 12,149 | | | W | 14,734 | | | | 21.3 | % |
| | | | | | | | | | | | | |
| Interest expense: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest on deposits | | W | 2,234 | | | W | 2,648 | | | | 18.5 | % | | W | 3,511 | | | W | 4,714 | | | | 34.3 | % |
| Interest on short-term borrowings | | | 340 | | | | 524 | | | | 54.1 | | | | 660 | | | | 866 | | | | 31.2 | |
| Interest on secured borrowings | | | 240 | | | | 334 | | | | 39.2 | | | | 510 | | | | 563 | | | | 10.4 | |
| Interest on long-term debt | | | 1,182 | | | | 1,394 | | | | 17.9 | | | | 2,256 | | | | 2,762 | | | | 22.4 | |
| Other interest expense | | | 18 | | | | 12 | | | | (33.3 | ) | | | 42 | | | | 50 | | | | 19.0 | |
| | | | | | | | | | | | | |
| Total interest expense | | | 4,014 | | | | 4,912 | | | | 22.4 | | | | 6,979 | | | | 8,955 | | | | 28.3 | |
| | | | | | | | | | | | | |
| Net interest income | | W | 3,474 | | | W | 3,981 | | | | 14.6 | % | | W | 5,170 | | | W | 5,779 | | | | 11.8 | % |
| | | | | | | | | | | | | |
| Net interest margin(1) | | | 2.70 | % | | | 2.75 | % | | | | | | | 2.82 | % | | | 2.74 | % | | | | |
N/M = not meaningful
Note:
| | |
| (1) | | TheRepresents the ratio of net interest income to average interest-earning assets. See “— Average Balance Sheet and Volume and Rate Analysis — Average Balance Sheet and Related Interest.” |
Interest and dividend income. The 18.8%21.3% increase in interest and dividend income iswas due primarily to a 17.2%18.9% increase in interest and fees on loans and a 28.6% increase in interest and dividends on securities.
The average balance of our interest earning assets increased 12.7% from W128,733 billion in 2005 to W145,037 billion in 2006, principally as a result of an increase in the average balances of investment securities and loans.
The 28.6% increase in interest and dividends on securities was due primarily to a 38.4% increase in the average balance of securities from W19,348 billion in 2005 to W26,785 billion in 2006, which was partially offset by a decline by 34 basis points in the average yield on securities from 4.82% in 2005 to 4.48% in 2006.
The 17.2%18.9% increase in interest and fees on loans was due primarily to the following;
| | |
| | • | a 29.1%23.0% increase in interest and fees on commercial and industrial loans from W3,071 billion in 2007 to W3,778 billion in 2008, which was due primarily to a 17.9% increase in the average balance of commercial and industrial loans from W47,492 billion in 2007 to W56,002 billion in 2008, and to a lesser extent, an increase by 28 basis points in the average yield on such loans from 6.47% in 2007 to 6.75% in 2008; |
|
| • | a 17.1% increase in interest and fees on other commercial loans from W1,909 billion in 2007 to W2,236 billion in 2008, which was due primarily to a 9.1% increase in the average balance of other commercial loans from W27,436 billion in 2007 to W29,929 billion in 2008 and an increase by 51 basis points in the average yield on such loans from 6.96% in 2007 to 7.47% in 2008; |
|
| • | a 19.4% increase in interest and fees on mortgage and home equity loans from W1,2901,938 billion in 20052007 to W1,6652,314 billion in 2006,2008, which was due primarily to a 10.5%9.7% increase in the average balance of mortgage and home equity loans from W24,63030,605 billion in 20052007 to W27,21233,579 billion in 20062008 and an increase of 88by 56 basis points in the average yield on such loans from 5.24%6.33% in 20052007 to 6.12%6.89% in 2006; |
|
| • | a 25.2% increase in interest and fees on other commercial loans from W1,145 billion in 2005 to W1,433 billion in 2006, which was due primarily to a 4.6% increase in average balance of other commercial loans from W20,130 billion in 2005 to W21,054 billion in 2006 and an increase by 112 basis points in the average yield on such loans from 5.69% in 2005 to 6.81% in 2006;2008; and |
| |
| | • | a 13.2%14.3% increase in interest and fees on commercial and industrialother retail loans from W2,0751,681 billion in 20052007 to W2,3491,922 billion in 2006,2008, which was due primarily to an increase by 66 basis points in the average yield on |
174
| | |
| | such loans from 5.75% in 2005 to 6.41% in 2006 and a 1.6% increase in the average balance of such loans from W36,079 billion in 2005 to W36,663 billion in 2006. |
Our loans in 2006 recorded a 8.0% increase in average volume from W101,714 in 2005 to W109,819 in 2006, due primarily to an increase in the average balance of consumer loans as follows:
| | |
| • | a 10.5% increase in the average balance of mortgage and home equity loans from W24,630 billion in 2005 to W27,212 billion in 2006; and |
|
| • | a 24.5%14.0% increase in the average balance of other consumerretail loans from W15,55222,625 billion in 20052007 to W19,35725,803 billion in 2006.2008. |
157
Our credit cards recorded a 6.6%The increase in the average volume of commercial and industrial loans was primarily due to the continued increase in lending to small- and medium-sized enterprises in the first half of 2008 and increased lending to large corporations compared to small- to medium-sized enterprises in the second half of 2008, which resulted from our efforts to improve the asset quality of our corporate loans in light of the downturn in the Korean economy in the second half of 2008. The increase in the average volume of mortgage and home equity loans was primarily due to the steady increase in such lending in the first half of 2008. The increase in the average volume of other retail loans was primarily due to increased lending to professionals and other high income-earning individuals as part of a targeted marketing campaign in 2008.
Overall, the average volume of our loans increased by 13.6% from W4,574141,914 billion in 20052007 to W4,877161,258 billion in 2008.
The increases in the yields of commercial and industrial loans, other commercial loans and mortgage and home equity loans were largely due to the general increase in market interest rates in Korea in the second half of 2008 as a result of the global liquidity crisis.
The 26.5% increase in interest and dividends on securities was due primarily to a 15.7% increase in the average balance of securities from W28,388 billion in 2007 to W32,837 billion in 2008 and an increase by 47 basis points in one-time credit card purchases, which was partially offset by a decrease in cash advances and card loans. Thethe average yield on credit cards decreased by 246 basis pointssecurities from 12.88%4.94% in 20052007 to 10.42%5.41% in 2006.2008. The average balance of securities increased as a result of an increased purchase of securities in proportion to the increase in total assets. The increase in the average yield of securities was largely due to the general increase in market interest rates in Korea in the second half of 2008.
Interest Expense.expense. Interest expense increased by 22.4%28.3% from W4,0146,979 billion in 20052007 to W4,9128,955 billion in 2006,2008, due primarily to a 18.5%34.3% increase in interest on deposits from W2,2343,511 billion in 20052007 to W2,6484,714 billion in 2008 and a 17.9%22.4% increase in interest on long-term debt from W1,1822,256 billion in 20052007 to W1,3942,762 billion in 2006, and a 39.2% increase in interest on secured borrowings from W240 billion in 2005 to W334 billion in 2006.2008.
The 18.5% increase in interest expense on deposits in 20062008 was primarily the result of an increase by 46 basis points in the cost of interest-bearing deposits from 2.71% in 2005 to 3.08% in 2006 and a 4.2%14.1% increase in the average volume of interest-bearing deposits from W82,56099,477 billion in 20052007 to W86,032113,543 billion in 2006.2008 and an increase by 62 basis points in the cost of interest-bearing deposits from 3.53% in 2007 to 4.15% in 2008.
The principal reason for the increase in interest rates payable on our interest-bearing deposits was the general increase in short-term market interest rates.rates payable on our interest-bearing deposits and other time deposits. Our other time deposits on average have maturities of more than one year, generally pay higher interest rates than demand deposits and savings deposits but lower than certificates of deposit, and accounted for 53.2% of our average interest-bearing deposits in 2008. The average interest rate paid on other time deposits increased by 39 basis points from 4.55% in 2007 to 4.94% in 2008, while the average interest rate paid on our certificates of deposit, which accounted for 14.2% of our average interest-bearing deposits in 2008, increased by 72 basis points from 5.22% in 2007 to 5.94% in 2008. The average interest rate paid on our savings deposits, which accounted for 31.7%27.2% of our average interest-bearing deposits in 2006,2008, increased by 11627 basis points from 0.96%2.05% in 20052007 to 2.12%2.32% in 2006. The average interest rate paid on our certificates of deposit, which accounted for 11.5% of our average interest-bearing deposits in 2006, increased by 85 basis points from 3.82% in 2005 to 4.67% in 2006. The average interest rate paid on our time deposits other than certificate of deposit, which generally have maturities of more than one year and accounted for 46.1% of our average interest-bearing deposits in 2006, decreased by 12 basis points from 3.69% in 2005 to 3.57% in 2006.2008.
The increase in the average volume of interest-bearing deposits iswas due primarily to a 4.5% increase in average volume of savings deposits from W26,100 billion in 2005 to W27,279 billion in 2006 and a 12.4%36.1% increase in the average volume of certificate ofother time deposits from W8,83844,397 billion in 20052007 to W9,93460,437 billion in 2006,2008 and a 4.4% increase in the average volume of our certificates of deposit from W15,475 billion in 2007 to W16,152 billion in 2008, which was partially offset by a 1.6%48.7% decrease in the average volume of mutual installment deposits from W567 billion in 2007 to W291 billion in 2008. The increase in the average volume of other time deposits was largely due to the aggressive marketing of other than certificates of deposit from W39,031 billion in 2005 to W39,644 billion in 2006 and a decreasetime deposits based on higher interests in the average volumesecond half of other deposit products.2008 as part of our funding strategy to meet increased demand for corporate loans in light of the global liquidity crisis in the second half of 2008.
The 17.9%22.4% increase in interest expense on long-term debt was primarily due to a 29.9%an increase in the average volume of long-term debt from W22,209 billion in 2005 to W28,839 billion in 2006 resulting from the issuance of financial debentures by Shinhan Bank to secure long-term funding for operations and the issuance of corporate debentures and long-term debt by our holding company to fund the operations of its non-banking subsidiaries, make repayments on the redeemable preferred shares and secure advance funding for the LG Card acquisition, which was partially offset by a decline by 1421 basis points in the average interest rates paid on our long-term debt from 5.32%5.33% in 20052007 to 4.83%5.54% in 2006,2008, primarily as a result of the general declineincrease in the market interest rates in the second half of 2008, and a 17.9% increase in the average market interestvolume of long-term debt from W42,316 billion in 2006.2007 to W49,876 billion in 2008, which mainly resulted from:
| | |
| • | the increase in issuance of Won-denominated corporate debentures by Shinhan Financial Group to support the operations of Shinhan Bank and Shinhan Card; and |
158
| | |
| • | the increase in the use of corporate debentures (which generally bear higher interests but provide longer-term funding relative to deposit products) as Shinhan Bank’s funding source due to the faster growth in the volume of loans compared to deposits. |
The 39.2%31.2% increase in interest expense on securedshort-term borrowings was due primarily to an increase by 46 basis points in the average interest rate paid from 3.65% in 2005 to 4.11% in 2006, resulting from an increase in interest rates payable on secured borrowings following the generala 29.2% increase in the average market interest rates.volume of short-term borrowings from W16,810 billion in 2007 to W21,713 billion in 2008 as a result of the increased use of short-term borrowings in light of the relative difficulties of sourcing long-term borrowings due to the global liquidity crisis in the second half of 2008.
Net interest margin. Net interest margin represents the ratio of net interest income to average interest earning assets. Our overall net interest margin increaseddecreased by 8 basis points from 2.70%2.82% in 20052007 to 2.75%2.74% in 2006,2008, primarily due to a 14.6%decrease in net interest spread by 11 basis points from 2.49% in 2007 to 2.38% in 2008, which more than offset a 21.3% increase in net interest income from W3,47412,149 billion in 20052007 to W3,98114,734 billion in 20062008 and a 12.7%15.0% increase in the average volume of our interest earning assets from W128,733183,652 billion in 20052007 to W145,037211,141 billion in 2006.2008. The decrease in net interest spread was largely due to a decrease in the interest rates for our interest-bearing assets whose interest rates are pegged to the base certificates of deposit rate, which base rate has decreased from 5.82% as of December 31, 2007 to 3.93% as of December 31, 2008, and the increase in the interest rates for our interest-bearing liabilities as a result of the general rise in the market interest rates due to the global liquidity crisis in the second half of 2008.
175
Provision for loan losses
For a discussion of our loan loss provisioning policy, see “Item 4.B. Business Overview — Description of Assets and Liabilities — Loans — Provisioning Policy.”
Our provision for loan losses wassignificantly increased to W2521,319 billion in 2006 as compared to reversal of provision for loan losses of2008 from W25540 billion in 2005,2007, primarily reflecting an increasethe deterioration in the total allowance for loan lossesoverall asset quality of our corporate loans due to the economic downturn in Korea in 2008, and particularly as a result of an increase inallowances made for construction and shipbuilding companies that are being restructured under the total loan balance, which was partially offset by a decrease by 14 basis points insupervision of creditor commercial banks and the rate of provision for loan losses, which is computed as the ratio of allowance for loan losses to the total loan balance. We decreased the rate of provision for loan losses in light of the continued improvement in the credit quality of our overall loan portfolio following the growth in Korean economy.
The total loan balance increased by W16,598 billion in 2006, and mortgage and home equity loans which are considered to have a lower credit risk than other types of loans accounted for W4,257 billion, or 25.6% of the increase in our total loan balance. On the other hand, our credit card portfolio which is with a higher credit risk decreased by W317 billion in 2006. Our ratio of non-performing loans over total loans decreased to 1.02% as of December 31, 2006 from 1.51% as of December 31, 2005. In addition, our nonaccrual loans, including the past due loans within the repayment grace period , increased to W2,099 billion, or 1.71% of total loans, as of December 31, 2006, from W2,052 billion, or 1.94% of total loans, as of December 31, 2005.
The foregoing contributed to a significant increase in our provision for loan losses in 2006, which may be further explained by reference to:
| | |
| • | an increase in the total amount of non-impaired corporate loans from W55,606 billion in 2005 to W66,592 billion in 2006, which more than offset an improvement in the loss ratio for non-impaired loans following the overall economic turnaround; and |
|
| • | an increase in the average loss rates from 30.8% in 2005 to 62.9% in 2006 for corporate loans, primarily resulting from the relatively high loss rates for corporate loans that were newly reclassified as impaired, which more than offset a decrease in the total amount of impaired loans from W2,285 billion in 2005 to W1,375 billion in 2006. |
The extent of provision for credit losses in 2006 were partially offset by a decrease in provision for credit losses in respect of unused portions of lines of credits that we extended to our customers, which are not immediately cancelable at our option. In 2005, our provision for credit losses on such unused portions of credit lines was W111 billion. In 2006, a reversal of provision for credit losses on such unused portions of credit lines amounted to W11 billion primarily due to a decrease in the loss rate of non-impaired loans.government.
The following table sets forth for the periods indicated the components of provision for loan and other credit losses by product type.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | | | As of December 31, | |
| | | 2005 | | 2006 | | % Change | | | 2007 | | 2008 | | % Change | |
| | | (In billions of Won, except percentages) | | | (In billions of Won, except percentages) | |
| |
| Total (reversal of) provision for loan losses (A): | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate | | W | (402 | ) | | W | 194 | | | | N/M | | | W | 182 | | | W | 1,288 | | | | N/M | |
| Mortgages and home equity | | | (1 | ) | | | (18 | ) | | | N/M | | | | (4 | ) | | | 8 | | | | N/M | |
| Other consumer | | | 76 | | | | 44 | | | | (42.1 | ) | | | 14 | | | | (3 | ) | | | N/M | |
| Credit cards | | | 72 | | | | 32 | | | | (55.5 | ) | | | (152 | ) | | | 26 | | | | N/M | |
| | | | | | | | | | | | | | | |
| | | | (255 | ) | | | 252 | | | | N/M | | | | 40 | | | | 1,319 | | | | N/M | |
| | | | | | | | | | | | | |
| Total (reversal of) provision for off-balance sheet credit instruments (B): | | | | | | | | | | | | | | | | | | | | | | | | |
| Guarantees and acceptances | | W | (39 | ) | | W | (15 | ) | | | (61.5 | )% | | W | (12 | ) | | W | 170 | | | | N/M | |
| Unused portions of credit line | | | 111 | | | | (11 | ) | | | N/M | | | | 52 | | | | (52 | ) | | | N/M | |
| | | | | | | | | | | | | | | |
| | | | 72 | | | | (26 | ) | | | N/M | | | | 40 | | | | 118 | | | | N/M | |
| | | | | | | | | | | | | | | |
| Total (reversal of) provision for credit losses (A+B) | | W | (183 | ) | | W | 226 | | | | N/M | | |
| Total provision for credit losses (A+B) | | | W | 80 | | | W | 1,437 | | | | N/M | |
| | | | | | | | | | | | | |
N/M = not meaningful
176159
Provision for loan losses for corporate loans increased significantly from W182 billion in 2007 to W1,288 billion in 2008, and loan loss allowance against our corporate loans increased by 74.2% from W1,406 billion as of December 31, 2007 to W2,449 billion as of December 31, 2008, in each case, primarily as a result of an increase in impaired loans and deterioration in the asset quality of our corporate loan portfolio as discussed above. Impaired corporate loans increased from W1,487 billion, or 1.85% as a percentage of the total corporate loans, in 2007 to W2,178 billion, or 2.30% as a percentage of the total corporate loans as a result of the economic downturn in the second half of 2008. Impaired loans include loans that are classified as “substandard” or below according to the asset classification guidelines of the Financial Services Commission, loans that are past due more than 90 days and loans that qualify as “troubled debt restructurings” under U.S. GAAP.
Specifically, in December 2008, the Korean government announced that it would promote swift restructuring of troubled companies in certain industries that have been disproportionately affected by the ongoing economic difficulties, such as construction and shipbuilding industries. These restructurings will be supervised primarily by the major commercial banks that are creditor financial institutions of such companies, with the Korean government having an oversight role. In February 2009, 12 construction companies and four shipbuilding companies became subject to workout following review by their creditor financial institutions and the Korean government, and Shinhan Bank was one of the creditor financial institutions for 11 construction companies and four shipbuilding companies. We established allowance for the loans and off-balance sheet credit instruments amounting to W90 billion and W121 billion, respectively, for such companies as of December 31, 2008.
We recorded reversal of provision for loan losses against corporatemortgage and home equity loans of W402 billion in 2005 compared to provision for loan losses of W194 billion in 2006. This was due primarily to an increase of provision for loans losses of impaired corporate loans. Our loan loss allowance against corporate loans increased by 18.2% from W1,074 billion as of December 31, 2005 to W1,269 billion as of December 31, 2006, due primarily to a higher loss rate for impaired corporate loans and an increase in the amount of total corporate loans, which more than offset decreasesW8 billion in the total amount of non-performing loans and net charge-offs.
Reversal2008 compared to a reversal of provision for loan losses against mortgage and home equity loans increased from W1 billion in 2005 to W18 billion in 2006 due primarily to the improved qualityamount of loans. Our loan loss allowance against mortgage and home equity loans decreased 78.95% from W19 billion as of December 31, 2005 to W4 billion as of December 31, 2006 whilein 2007, and total allowance for losses for our mortgage and home equity loans increased 16.47%by 100.0% from W25,8404 billion as of December 31, 2005in 2007 to W30,0978 billion in 2008, primarily as a result of December 31, 2006 reflecting increased demand for suchthe increase in the total volume of mortgage and home equity loans. The non-performing loan ratio for our mortgage and home equity loans decreased from 0.14% in 2007 to 0.11% in 2008, primarily as a result of non-performingimproved asset quality in the home and mortgage loans, which comprise the substantial majority of our total retail loans, due to total loans within this portfolio declined from 0.4%stricter lending policies involving more stringentloan-to-value anddebt-to-income ratios applied in 2005 to 0.2% in 2006.making such loans.
OurWe recorded a reversal of provision for loan losses against other consumerretail loans in the amount of W3 billion in 2008 compared to provision for loan losses against other retail loans in the amount of W14 billion in 2007, and total allowance for losses for our other retail loans decreased 42.1% from W76150 billion in 20052007 to W 44149 billion in 20062008, primarily reflectingas a result of the decrease in the total volume of other retail loans. The non-performing loan ratio for our other retail loans decreased from 0.33% in 2007 to 0.26% in 2008, due to a relatively larger amount of charge-off made in 2008 compared to 2007.
We recorded provision for loan losses against credit card loans of W26 billion in 2008 compared to reversal of provision for loan losses of W152 billion in 2007, primarily as a result of a deterioration of asset quality of our credit card receivables. The non-performing loan ratio of our credit card loans increased from 1.12% in 2007 to 1.17% in 2008, and total allowances for credit card loans increased by 10.4% from W539 billion in 2007 to W595 billions in 2008, in each case, primarily due to a decreased recovery rate for written-off credit card receivables in 2008 due to the difficult economic environment in Korea in 2008.
Provision for off-balance sheet credit instruments increased substantially from 2007 to 2008 due to an increase in provision for refund guarantees provided to shipbuilding companies in light of the financial difficulties these companies faced in 2008.
Provision for unused portions of credit line significantly decreased from 2007 to 2008 primarily due to a decrease in the amount of write-offs. Net charge-offs within the other consumer loan portfolio has decreased from W262 billioncredit lines provided in 20052008 mainly as a result of our banking subsidiaries’ overall efforts to W53 billionreduce credit exposure in 2006. Other consumer loans have increased 14.45% from W17,875 billion as of December 31, 2005 to W20,458 billion as of December 31, 2006. However, the allowance for loan losses has decreased 4.37% from W183 billion as of December 31, 2005 to W175 billion as of December 31, 2006, reflecting continued aggressive charge-offs of delinquent accounts, decreased levels of delinquencies within the loan portfolio, and improved credit quality of impaired loans. The ratio of non-performing loans to total loans within this portfolio decreased from 1.0% as of December 31, 2005 to 0.6% as of December 31, 2006.
Our provision for loan losses against credit cards decreased 55.5% from W72 billion in 2005 to W32 billion in 2006 reflecting a decrease in delinquencies during 2006 and a decrease in the sizelight of the loan portfolio. Net charge-offs within the credit card portfolio has decreased from W244 billiondifficult economic environment in 2005 to W141 billion in 2006. Our credit card balances resulted in a 7.50% decrease from W4,242 billion as of December 31, 2005 to W3,924 billion as of December 31, 2006. Our allowance for losses against credit cards has decreased 46.19% from W236 billion as of December 31, 2005 to W127 billion as of December 31, 2006, primarily due to an improvement in the overall quality of our credit card assets following continued charge-offs of delinquent accounts. The ratio of non-performing loans to total loans within our credit card portfolio decreased from 1.1% as of December 31, 2005 to 1.0% as of December 31, 2006.
Total provision for off-balance sheet credit instruments decreased from 2005 to 2006 due to reversal of unused portions of credit lines. The decrease in provision for unused portions of credit lines was primarily due to a decrease in loss rates of non-impaired corporate loans.Korea.
177160
Noninterest Income
The following table sets forth for the periods indicated the components of our noninterest income.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | | | As of December 31, | |
| | | 2005 | | 2006 | | % Change | | | 2007 | | 2008 | | % Change | |
| | | (In billions of Won, except percentages) | | | (In billions of Won, except percentages) | |
| |
| Commissions and fees from non-trust management: | | | | | | | | | | | | | | | | | | | | | | �� | | |
| Brokerage fees and commissions(1) | | W | 345 | | | W | 479 | | | | 38.8 | % | | W | 858 | | | W | 626 | | | | (27.0 | )% |
| Other fees and commissions(2) | | | 1,160 | | | | 1,032 | | | | (11.0 | ) | | | 1,754 | | | | 1,969 | | | | 12.3 | |
| Net trust management fees(3) | | | 100 | | | | 106 | | | | 6.0 | | | | 73 | | | | 69 | | | | (5.5 | ) |
| Net trading profits | | | 116 | | | | 141 | | | | 21.6 | | | | (210 | ) | | | 584 | | | | N/M | |
| Net gains (losses) on securities | | | 96 | | | | 31 | | | | (67.7 | ) | | | 169 | | | | (135 | ) | | | N/M | |
| Gain on other investment | | | 532 | | | | 324 | | | | (39.1 | ) | | | 181 | | | | 317 | | | | 75.1 | |
| Net gain on foreign exchange | | | 94 | | | | 229 | | | | 143.6 | | |
| Net gain (loss) on foreign exchange | | | | 146 | | | | (566 | ) | | | N/M | |
| Insurance income | | | 167 | | | | 1,109 | | | | 564.1 | | | | 1,119 | | | | 1,329 | | | | 18.8 | |
| Other | | | 335 | | | | 336 | | | | 0.3 | | | | 648 | | | | 379 | | | | (41.5 | ) |
| | | | | | | | | | | | | | | |
| Total noninterest income | | W | 2,945 | | | W | 3,787 | | | | 28.6 | % | | W | 4,738 | | | W | 4,572 | | | | (3.5 | )% |
| | | | | | �� | | | | | | | | | | |
N/M = Not material
Notes:
| | |
| (1) | | Consists of commissions, fees and markup on securities brokerage activities. |
| |
| (2) | | Includes commissions received on remittance, commissions received on imports and export letters of credit and commissions received from foreign exchange transactions. |
| |
| (3) | | Consists principally of fees from management of trust accounts in our banking operations. |
The 28.6% increase3.5% decrease in noninterestnon-interest income was mainly attributable to a significant increase in insurance income, which waslargely due to the acquisitionnet loss on foreign exchange related to the devaluation of Shinhan Life Insurancethe Won compared to the U.S. dollar and net losses on securities related to the downturn in November 2005.the Korea stock market, which more than offset the net trading profits related to an increase in the volume of foreign currency derivative transactions.
Noninterest Expenses
The following table shows, for the periods indicated, the components of our noninterest expense.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2005 | | 2006 | | % Change | | | 2007 | | 2008 | | % Change | |
| | | (In billions of Won, except percentages) | | | (In billions of Won, except percentages) | |
| |
| Employee compensation and other benefits | | W | 1,480 | | | W | 1,789 | | | | 20.9 | % | | W | 2,056 | | | W | 1,817 | | | | (11.6 | )% |
| Depreciation and amortization | | | 377 | | | | 471 | | | | 24.9 | | | | 812 | | | | 871 | | | | 7.3 | |
| General and administrative expenses | | | 516 | | | | 666 | | | | 29.1 | | | | 878 | | | | 882 | | | | 0.5 | |
| Credit card fees | | | 134 | | | | 205 | | | | 53.0 | | | | 665 | | | | 700 | | | | 5.3 | |
| Provision (reversal) for other losses | | | 113 | | | | (16 | ) | | | N/M | | | | 72 | | | | (18 | ) | | | N/M | |
| Insurance fees on deposits | | | 125 | | | | 128 | | | | 2.4 | | | | 131 | | | | 133 | | | | 1.5 | |
| Other fees and commission expenses | | | 292 | | | | 358 | | | | 22.6 | | | | 446 | | | | 422 | | | | (5.4 | ) |
| Taxes (except income taxes) | | | 110 | | | | 96 | | | | (12.7 | ) | | | 128 | | | | 179 | | | | 39.8 | |
| Insurance operating expense | | | 178 | | | | 1,147 | | | | 544.4 | | | | 1,351 | | | | 1,038 | | | | (23.2 | ) |
| Other | | | 332 | | | | 482 | | | | 45.2 | | | | 206 | | | | 703 | | | | N/M | |
| | | | | | | | | | | | | | | |
| Total noninterest expenses | | W | 3,657 | | | W | 5,326 | | | | 45.6 | % | | W | 6,745 | | | W | 6,727 | | | | (0.3 | )% |
| | | | | | | | | | | | | | | |
The 45.6% increase in noninterest expenses was mainly attributable to a significant increase in insurance operating expenses, which was due to the acquisition of Shinhan Life Insurance in November 2005, and an increase in employee compensation other benefits paid out after the merger of Shinhan Bank and Chohung Bank.
N/M = not meaningful
178161
The 0.3% decrease in non-interest expense was principally due to a decrease in employee compensation and other benefits and a decrease in insurance operating expense, which more than offset an increase in other expense related to the amortization of goodwill from the LG Card acquisition. Employee compensation and other benefits decreased by 11.6% mainly due to aggressive cost-cutting campaigns for wage and fringe benefits. Insurance operating expense decreased mainly due to an increase in policy reserve.
Income Tax Expense
Income tax expense decreased by 34.5%34.3% from W9421,058 billion in 20052007 to W617695 billion in 2006 to2008 as a result of a decrease in our decreased income and related tax expense.taxable income. The statutory tax rate was 27.5% in both 20052007 and 2006.2008. Our effective rate of income tax decreased to 29.2%31.8% in 20062008 from 35.0%34.3% in 2005. Our effective rate of income tax in 2005 was high compared to 2006 due to additional tax assessed by the Korean tax authority and provision of valuation allowance for deferred tax assets in 2005 and the reversal of the valuation allowance in 2006.2007.
Net Income Before Extraordinary ItemItems
As a result of the foregoing, our net income before extraordinary items decreased by 14.9%23.3% from W1,7391,930 billion in 20052007 to W1,4801,481 billion in 2006.2008.
Results by Principal Business Segment Under Korean GAAP
As of December 31, 2007,2009, we were organized into eight major business segments as follows:
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| | • | the following banking services, which are principally provided by Shinhan Bank: |
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| | • | retail banking; |
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| | • | corporate banking; |
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| | • | treasury and international banking; and |
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| | • | other banking services; |
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| | • | securities brokerage services, which are provided by Shinhan Investment; |
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| • | credit card services, which are provided by Shinhan Card; |
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| • | securities brokerage services, which are provided by Good Morning Shinhan Securities; |
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| | • | life insurance services, which are provided by Shinhan Life Insurance; and |
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| | • | others.other. |
The following discussion of our results of operations by principal business segment is provided on a Korean GAAP basis since this is the basis of accounting that we currently use to manage our business. Our chief operating decision makersenior management regularly makes decisions about resources to be allocated to these activities and assesses performance of the activities using this information, and consequently this forms the basis of our segment reporting included in Note 3334 in the notes to our consolidated financial statements included in this annual report.
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| | | Segment Results(1) | | Total Revenues(2) | | | Segment Results(1) | | Total Revenues(2) | |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2005 | | 2006 | | 2007 | | 2005 | | 2006 | | 2007 | | | 2007 | | 2008 | | 2009 | | 2007 | | 2008 | | 2009 | |
| | | | | (In billions of Won, except percentages) | | | | | (In billions of Won, except percentages) | |
| |
| Shinhan Bank(3): | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shinhan Bank: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Retail banking | | W | 1,085 | | | W | 1,149 | | | W | 1,680 | | | W | 2,735 | | | W | 2,860 | | | W | 3,295 | | | W | 1,681 | | | W | 1,124 | | | W | 527 | | | W | 3,296 | | | W | 4,310 | | | W | 2,915 | |
| Corporate banking | | | 796 | | | | 472 | | | | 525 | | | | 1,383 | | | | 1,056 | | | | 1,130 | | | | 525 | | | | 2,058 | | | | 157 | | | | 1,130 | | | | 7,815 | | | | 1,845 | |
| Treasury and international business | | | (93 | ) | | | 371 | | | | (695 | ) | | | 5,124 | | | | 5,958 | | | | 5,211 | | | | (696 | ) | | | (556 | ) | | | 141 | | | | 5,199 | | | | 27,383 | | | | 28,251 | |
| Other banking services | | | (177 | ) | | | 317 | | | | 1,344 | | | | 819 | | | | 1,644 | | | | 2,583 | | | | 1,345 | | | | (723 | ) | | | 242 | | | | 2,581 | | | | 2,907 | | | | 2,708 | |
| Shinhan Card(4) | | | 209 | | | | 184 | | | | 1,082 | | | | 1,057 | | | | 719 | | | | 3,001 | | |
| Good Morning Shinhan Securities | | | 121 | | | | 134 | | | | 252 | | | | 880 | | | | 1,326 | | | | 1,940 | | |
| Shinhan Investment | | | | 252 | | | | 209 | | | | 57 | | | | 1,940 | | | | 1,716 | | | | 1,470 | |
| Shinhan Card(3) | | | | 1,082 | | | | 1,324 | | | | 1,101 | | | | 3,001 | | | | 3,590 | | | | 3,134 | |
| Shinhan Life Insurance | | | 8 | | | | 166 | | | | 184 | | | | 259 | | | | 2,362 | | | | 2,694 | | | | 184 | | | | 186 | | | | 224 | | | | 2,694 | | | | 2,862 | | | | 3,417 | |
| Other subsidiaries | | | 30 | | | | 9 | | | | (157 | ) | | | 361 | | | | 256 | | | | 68 | | | | (115 | ) | | | (3 | ) | | | (91 | ) | | | 249 | | | | 657 | | | | 395 | |
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Total(5)(4) | | W | 1,979 | | | W | 2,802 | | | W | 4,215 | | | W | 12,618 | | | W | 16,181 | | | W | 19,922 | | | W | 4,258 | | | W | 3,619 | | | W | 2,358 | | | W | 20,090 | | | W | 51,240 | | | W | 44,135 | |
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162
Notes:
179
| | |
| (1) | | Represents income per segment before income taxes. |
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| (2) | | Represents net interest income plus noninterestnon-interest income. |
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| (3) | | Includes information for Chohung Bank, which became our consolidated subsidiary in April 2003 following our acquisition of its controlling equity interest and merged with Shinhan Bank in April 2006. |
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(4) | | Information for 2005 represents that of former Shinhan Card and does not include corresponding information for the credit card division of Chohung Bank. Information for 2006 represents that of former Shinhan Card for the period from January 1, 2006 through December 31, 2006 and that of the credit card division of Chohung Bank for the period from April 3, 2006, the date of the split-merger, through December 31, 2006, presented on a combined basis. Information for 2007 represents that of LG Card for the period from March 1, 2007 (the deemed acquisition date) through December 31, 2007 (including corresponding information for the assets and liabilities of former Shinhan Card (assumed by LG Card on October 1, 2007) for the period from October 1, 2007 through December 31, 2007), and corresponding information for former Shinhan Card from January 1, 2007 through September 30, 2007. Information for 2008 represents that of Shinhan Card. |
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(5)(4) | | BeforePresented on a reported basis before elimination or adjustments. |
Retail Banking
The retail banking segment primarily consists of banking and other services provided by Shinhan Bank’s businessretail banking branches to the branch customers, which principally consist of providingindividuals and households and, to a lesser extent, small businesses and non-corporate institutions such as government entities and hospitals. The retail banking products principally consist of mortgage and home equity loans and other consumerretail loans, deposits and other savings products and fees earned from the sale of investment and bancassurance products. The table below provides the income statement data for the retail banking segment for the periods indicated.
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| | | Year Ended December 31, | | % Change | | | Year Ended December 31, | | % Change | |
| | | 2005(1) | | 2006(2) | | 2007 | | 2005/2006 | | 2006/2007 | | | 2007 | | 2008 | | 2009 | | 2007/2008 | | 2008/2009 | |
| | | (In billions of Won) | | | | | | | (In billions of Won, except percentages) | |
| |
Income statement data | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | W | 2,040 | | | W | 2,232 | | | W | 2,325 | | | | 9.4 | % | | | 4.2 | % | | W | 2,328 | | | W | 2,311 | | | W | 2,245 | | | | (0.7 | )% | | | (2.9 | )% |
| Noninterest income | | | 695 | | | | 628 | | | | 970 | | | | (9.6 | ) | | | 54.5 | | |
| Non-interest income | | | | 968 | | | | 1,999 | | | | 670 | | | | 106.5 | | | | (66.5 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total revenues | | | 2,735 | | | | 2,860 | | | | 3,295 | | | | 4.6 | | | | 15.2 | | | | 3,296 | | | | 4,310 | | | | 2,915 | | | | 30.8 | | | | (32.4 | ) |
| Provision for credit losses | | | (257 | ) | | | (283 | ) | | | (223 | ) | | | 10.1 | | | | (21.2 | ) | |
| Noninterest expense including depreciation and amortization | | | (1,393 | ) | | | (1,428 | ) | | | (1,392 | ) | | | 2.5 | | | | (2.5 | ) | |
| Provision for loan losses | | | | 222 | | | | 362 | | | | 558 | | | | 63.1 | | | | 54.1 | |
| Non-interest expense including depreciation and amortization | | | | 1,393 | | | | 2,824 | | | | 1,830 | | | | 102.7 | | | | (35.2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
Segment results(3)(1) | | W | 1,085 | | | W | 1,149 | | | W | 1,680 | | | | 5.9 | % | | | 46.2 | % | | W | 1,681 | | | W | 1,124 | | | W | 527 | | | | (33.1 | )% | | | (53.1 | )% |
| | | | | | | | | | | | | | | | | | | | | | | |
Notes:Note:
| | |
| (1) | | The data for 2005 represents the data for Shinhan Bank and Chohung Bank presented on a combined basis. |
|
(2) | | The data for 2006 does not include the information for Chohung Bank from January 1, 2006 to April 6, 2006, the date of the merger between Chohung Bank and Shinhan Bank. |
|
(3) | | Net income per segment before income taxes. |
Comparison of 20072009 to 20062008
OurThe overall segment results increasedfor retail banking decreased by 46.2%53.1% from W1,1491,124 billion in 20062008 to W1,680527 billion in 2007.2009.
Net interest income decreased by 2.9% due primarily to a decrease in net interest spread, which more than offset an increase in the volume of lending to individuals and households and an increase in the volume of customer deposits. The decrease in net interest spread in 2009 was due primarily to the relatively longer time lag on average taken by the rates payable on interest-bearing deposits compared to the rates payable on interest-earning loans in reflecting the reduction in base rates set by the Government in 2009 in response to the global financial crisis. The increase in the volume of lending to individuals and households was primarily due to an increase in mortgage and home equity loans as a result of lower lending rates. The increase in customer deposits was primarily due to the increasing customer preference for safer depositary products compared to other investment products, such as stocks, in light of the volatility in stock markets during the recent global financial crisis, notwithstanding the lower interest rates paid on deposit products compared to those in prior periods.
Non-interest income decreased by 66.5% due primarily to a decrease in fees earned from the sale of investment fund and bancassurance products resulting from the volatility in stock markets and a decrease in fees earned from
163
the sale of foreign currency-related derivative products due to the relatively stability of the foreign exchange rates in 2009 following the initial shock of the global financial crisis.
Provision for loan losses on retail loans increased by 4.2%54.1% due primarily to the increase in ourthe average volume of retail loans and Shinhan Bank’s more prudent provisioning policy during the recent global financial crisis.
Non-interest expense including depreciation and amortization decreased by 35.2% due primarily to a decrease in expenses associated with foreign currency-related derivative products resulting from a decrease in the volume of related transactions. Such transaction volume decreased due to the relatively stability of the foreign exchange rates in 2009 following the initial shock of the global financial crisis.
Comparison of 2008 to 2007
The overall segment results for retail banking decreased by 33.1% from W1,681 billion in 2007 to W1,124 billion in 2008.
Net interest rateincome decreased by 0.7% due primarily to a decrease in line with the general rise of market interests in Korea and the increase innet interest margin, while the average volume of lending to individuals and households remained relatively stable. The decrease in net interest margin in 2008 was due primarily to the relatively higher rise in the borrowing rates as a result of greater consumer demandthe global liquidity crisis in the second half of 2008 compared to the lending rates which are pegged to a base rate determined by the Korean government, which declined in the second half of 2008 as part of the government effort to increase liquidity in the market.
Non-interest income increased significantly due primarily to an increase in fees from an increased volume of derivatives transactions related to interest rate hedging undertaken for funding for retail loans, reflecting the increasewhich more than offset an decrease in average market interest rates for such loans in Korea.
Noninterest income increased by 54.5% due primarily to the increase in the fees and commissions from the sales of investment fund products which gained popularity among consumersarising from the downturn in 2007 due to the bullishKorean stock market in Korea.the second half of 2008.
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Provision for creditloan losses on retail loans decreasedincreased by 21.2%63.1% due primarily to the non-recurrence of additional provisioning we were requiredincrease in corporate loans provided by our retail banking branches to undertake in 2006 to meet the new minimum required provisioning levels established by the Financial Services Commission for retail loans under Korean GAAP, as well as the overall improvement insmall businesses, the asset quality of our retail loan portfolio, which more than offset the effect from the increase in the total volume of retail lending.deteriorated.
Noninterest expense including depreciation and amortization decreased by 2.5% due primarily to the non-occurrence of fees related to credit card services performed by Chohung Bank in 2006 due to the split-off of Chohung Bank’s credit card division in April 2006.
Comparison of 2006 to 2005
Our overall segment results increased by 5.9% from W1,085 billion in 2005 to W1,149 billion in 2006.
The 9.4% increase in net interest income from retail banking activities was due primarily to an increase in the average volume of loans to individuals and households (particularly, mortgage and home equity loans) and an increase in the average volume of time deposits having a term of one year or less due to an increase in short-term market interest rates, which was partially offset by a decrease in net interest margin.
Noninterest income decreased by 9.6% due primarily to a decrease in the transaction volume of derivatives and a decrease in trust fees, which was partly due to the growing popularity of investment fund products.
Provision for credit losses on consumer loans increased by 10.1% due primarily to an increase in the total volume of loans to individuals and households (particularly, mortgage and home equity loans), which was partially offset by improved asset quality.
NoninterestNon-interest expense including depreciation and amortization increased by 2.5%102.7% due primarily to the return of deposits held in accounts which have been dormant for more than five years pursuant to recent regulatory requirements and mandatory contributions made to the court deposit management commission, as well as an increase in general and administrative expenses and salaries, wages and employee benefits paidrelated to employees, which was partially offset by a decrease in gross losses fromthe increased volume of derivatives transactions.
Corporate Banking
The corporate banking segment primarily consists of banking and other services provided by Shinhan Bank’s transactions with all of itscorporate banking branches to their corporate customers, includingmost of which are small- and medium-sized enterpriseschaebolsand public enterprises. Activities withinlarge corporations, including members of the segment include loans,chaebolgroups. The corporate banking services primarily consist of general lending and providing overdrafts and other credit facilities and gathering deposits. In 2005, investment banking activities (namely that provided by Shinhan Bank prior to the merger) were part of this segment. However, as a result of the merger-related restructuring, the investment banking activities were reclassified as part of the other banking segment beginning in 2006.facilities. The table below provides the income statement data for the corporate banking segment for the periods indicated.
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| | | Year Ended December 31, | | % Change | | | Year Ended December 31, | | % Change | |
| | | 2005(1) | | 2006(2) | | 2007 | | 2005/2006 | | 2006/2007 | | | 2007 | | 2008 | | 2009 | | 2007/2008 | | 2008/2009 | |
| | | (In billions of Won) | | | | | | | (In billions of Won, except percentages) | |
| |
Income statement data | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | W | 873 | | | W | 843 | | | W | 863 | | | | (3.4 | )% | | | 2.4 | % | | W | 864 | | | W | 2,476 | | | W | 876 | | | | 186.6 | % | | | (64.6 | )% |
| Noninterest income | | | 510 | | | | 213 | | | | 267 | | | | (58.2 | ) | | | 25.4 | | |
| Non-interest income | | | | 266 | | | | 5,339 | | | | 969 | | | | N/M | | | | (81.9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total revenues | | | 1,383 | | | | 1,056 | | | | 1,130 | | | | (23.6 | ) | | | 7.0 | | | | 1,130 | | | | 7,815 | | | | 1,845 | | | | N/M | | | | (76.4 | ) |
| Provision for credit losses | | | (123 | ) | | | (136 | ) | | | (137 | ) | | | 10.6 | | | | 0.7 | | |
| Noninterest expense including depreciation and amortization | | | (464 | ) | | | (448 | ) | | | (468 | ) | | | (3.4 | ) | | | 4.5 | | |
| Provision for loan losses | | | | 137 | | | | 326 | | | | 465 | | | | 138.0 | | | | 42.6 | |
| Non-interest expense including depreciation and amortization | | | | 468 | | | | 5,431 | | | | 1,223 | | | | N/M | | | | (77.5 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
Segment results(3)(1) | | W | 796 | | | W | 472 | | | W | 525 | | | | (40.7 | )% | | | 11.2 | % | | W | 525 | | | W | 2,058 | | | W | 157 | | | | N/M | | | | (92.4 | )% |
| | | | | | | | | | | | | | | | | | | | | | | |
164
Notes:N/M = not meaningful
Note:
| | |
| (1) | | The data for 2005 represents the data for Shinhan Bank and Chohung Bank presented on a combined basis. |
181
| | |
(2) | | The data for 2006 does not include the information for Chohung Bank from January 1, 2006 to April 6, 2006, the date of the merger between Chohung Bank and Shinhan Bank. |
|
(3) | | Net income per segment before income taxes. |
Comparison of 20072009 to 20062008
OurThe overall segment results increasedfor corporate banking decreased by 11.2%92.4% from W4722,058 billion in 20062008 to W525157 billion in 2007.2009.
Net interest income decreased by 64.6% due primarily to a decrease in net interest spread, which more than offset an increase in the volume of lending to corporations. The decrease in net interest spread in 2009 was due primarily to the reduction in base rates set by the Government in 2009 in response to the global financial crisis and the relatively higher funding rates for the interest-bearing liabilities in the corporate banking segment, which include a greater portion of borrowings and a lower portion of low-cost deposits compared to the retail banking segment. The increase in the volume of lending was primarily due to increased purchases by Shinhan Bank of call loans and loans bought under resale program as part of Shinhan Bank’s investment strategy. The volume of lending by Shinhan Bank’s corporate customers remained largely stable.
Non-interest income decreased by 81.9% due primarily to a decrease in fees earned from the sale of foreign currency-related derivative products due to the relatively stability of the foreign exchange rates following the initial shock of the global financial crisis.
Provision for loan losses on corporate loans increased by 2.4%42.6% due primarily to the increase in the average volume of lending to corporate customers,loans and Shinhan Bank’s more prudent provisioning policy during the recent global financial crisis, particularly small- to medium-sized enterprises, following our aggressive marketing to this segment, which more than offsetin anticipation of the increase in funding costs related tocorporate restructuring programs during the increasing flightfirst half of customer funds from depositary bank accounts to investment fund products.2009.
Noninterest income increased by 25.4% due primarily to valuation loss of currency forwards as a result of Won appreciation compared to other currencies.
Provision for credit losses on corporate loans remained relatively stable, mainly as a result of a decrease in charge-offs and an increase in recoveries of charged-off loans, which more or less offset the effect from additional provisioning we were required to undertake in 2007 to meet the new minimum required provisioning levels established by the Financial Services Commission for corporate loans under Korean GAAP.
NoninterestNon-interest expense including depreciation and amortization increaseddecreased by 4.5%77.5% due primarily to the increase in the number of employees related to new hiring, the increased depreciation and amortization expenses related to the integration of the information technology systems of Shinhan Bank and Chohung Bank in 2006 and valuation gains of currency forwards as a result of Won appreciation compared to other currencies.
Comparison of 2006 to 2005
Our overall segment results decreased by 40.7% from W796 billion in 2005 to W472 billion in 2006.
The 3.4% decrease in net interest income was due primarily to an increase in funding costs as a result of a decrease in the total volume of deposits by our corporate customers and an increase in the total volume of loans to small-and medium-sized enterprises.
The 58.2% decrease in noninterest income was due primarily to (i) a decrease in fees and commissions from investment banking activities including asset-backed securitization, as a result of the reclassification discussed above and (ii) a decrease in gross gains from derivatives transactionsexpenses associated with foreign currency-related derivative products resulting from a decrease in the volume of derivativesrelated transactions. Such transaction volumes decreased due to the relative stability of the foreign exchange rates in 2009 following the initial shock of the global financial crisis.
ProvisionComparison of 2008 to 2007
The overall segment results for credit losses on corporate loansbanking improved significantly from W525 billion in 2007 to W2,058 billion in 2008.
Net interest income increased by 10.6%significantly due primarily to an increase in the total volume of corporate lending due principally to increased reliance by large corporations on loans from banks for funding in light of the tightened liquidity in the credit markets in the second half of 2008 and our marketing campaigns to ourattract high-quality corporate customers, which was partially offset by improved asset quality.borrowers.
NoninterestNon-interest income increased significantly, due primarily to an increase in the sales volume of foreign currency-related derivatives as a result of an increase in volatility in exchange rates and an enlarged exposure to naked currency positions among our customers.
Provision for loan losses on corporate loans increased significantly, mainly as a result of additional allowance made for troubled construction and shipbuilding companies and the deterioration in asset quality for corporate loans.
Non-interest expense including depreciation and amortization decreased by 3.4%increased significantly, due primarily to a decrease in gross losses from derivatives transactions, resulting from a decrease in the volume of derivatives transactions, which more than offset an increase in salaries, wages and employee benefits paid to employees.the sales volume of foreign currency-related derivatives.
182
Treasury and International Banking
The treasury and international businessbanking segment primarily consists primarily of Shinhan Bank’s business ofnon-deposit funding activities, including trading of, and investment in, debt securities and, to a lesser extent, in equity securities for its own accounts, handling its treasury activities, such as correspondence banking,inter-segment lending and borrowing, and entering into
165
derivatives transactions. This segment also includes the results of operations of its overseas branches. The table below provides the income statement data for the treasury and international banking segment for the periods indicated.
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| | | Year Ended December 31, | | % Change | | | Year Ended December 31, | | % Change | |
| | | 2005(1) | | 2006(2) | | 2007 | | 2005/2006 | | 2006/2007 | | | 2007 | | 2008 | | 2009 | | 2007/2008 | | 2008/2009 | |
| | | (In billions of Won) | | | | | | | (In billions of Won, except percentages) | |
| |
Income statement data | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income (expense) | | W | (227 | ) | | W | (179 | ) | | W | (305 | ) | | | (21.1 | )% | | | 70.4 | % | | W | (265 | ) | | W | (578 | ) | | W | 337 | | | | 118.1 | % | | | N/M | |
| Noninterest income | | | 5,351 | | | | 6,137 | | | | 5,516 | | | | 14.7 | | | | (10.1 | ) | |
| Non-interest income | | | | 5,464 | | | | 27,961 | | | | 27,914 | | | | N/M | | | | (0.2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total revenues | | | 5,124 | | | | 5,958 | | | | 5,211 | | | | 16.3 | | | | (12.5 | ) | | | 5,199 | | | | 27,383 | | | | 28,251 | | | | N/M | | | | 3.2 | |
| Provision for credit losses | | | 40 | | | | 13 | | | | (37 | ) | | | (67.5 | ) | | | N/M | | |
| Noninterest expense including depreciation and amortization | | | (5,257 | ) | | | (5,600 | ) | | | (5,869 | ) | | | 6.5 | | | | 4.8 | | |
| Provision (reversal) for loan losses | | | | 38 | | | | (4 | ) | | | 51 | | | | (110.5 | ) | | | N/M | |
| Non-interest expense including depreciation and amortization | | | | 5,857 | | | | 27,943 | | | | 28,059 | | | | N/M | | | | 0.4 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Segment results(3)(1) | | W | (93 | ) | | W | 371 | | | W | (695 | ) | | | N/M | | | | N/M | | | W | (696 | ) | | W | (556 | ) | | W | 141 | | | | (20.1 | )% | | | N/M | |
| | | | | | | | | | | | | | | | | | | | | | | |
N/M = Notnot meaningful
Notes:Note:
| | |
| (1) | | The data for 2005 represents the data for Shinhan Bank and Chohung Bank presented on a combined basis. |
|
(2) | | The data for 2006 does not include the information for Chohung Bank from January 1, 2006 to April 6, 2006, the date of the merger between Chohung Bank and Shinhan Bank. |
|
(3) | | Net income (or loss) per segment before income taxes. |
Comparison of 20072009 to 20062008
OurThe overall segment results significantly deterioratedfor treasury and international banking changed from net loss before income taxes of W556 billion in 2008 to net income before income taxes of W371141 billion in 20062009.
The treasury and international banking segment recorded net interest income of W337 billion in 2009 compared to net interest expense of W578 billion in 2008 primarily due to a decrease in the average volume of, and interest rate payable on, corporate debentures and borrowings in 2009. The average volume of corporate debentures and borrowings decreased in 2009 as part of Shinhan Bank’s enhanced risk management policy to reduce the proportion of corporate debentures and borrowings relative to low-cost deposits in its overall funding portfolio in response to the global financial crisis. The decrease in interest rates payable on corporate debentures and borrowings was due to the general decline in market borrowing rates as a result of greater market liquidity following the initial shock of the global financial crisis.
Non-interest income and non-interest expense including depreciation and amortization remained largely stable.
Comparison of 2008 to 2007
The overall segment results for treasury and international banking increased by 20.1% from net loss of W696 billion in 2007 to net loss of W695556 billion in 2007.2008.
Net interest expense increased by 70.4%118.1% due primarily to an increase in foreign-currency denominated loans obtained by Shinhan Bank to reduce its long-termdeposits (including special high-interest deposit products) and the increased funding costs for corporate debentures issued by taking advantageus as a result of the appreciation of Korean Won, as well as the increasetightened credit market in the issuancesecond half of Won-denominated corporate bonds.2008.
NoninterestNon-interest income decreased by 10.1% due primarily to a decrease in gains from foreign currency transactions, largely due to the appreciation of Won against other currencies in 2007.
Noninterestand non-interest expense including depreciation and amortization increased by 4.8%significantly, in each case, due primarily to an increase in losses and other costs related to derivative products, which was mainlythe sales volume of foreign currency-related derivatives as a result of the increased number of interest rate derivatives transactions undertaken in 2007 in light of the general increase in market interest rates.
Comparison of 2006 to 2005
Our overall segment results recorded a gain of W371 billion in 2006 as compared to a loss of W93 billion in 2005.
The 21.1% decrease in net interest expense was due primarily to an increase in interestvolatility in exchange rates and dividend income from securities resulting from an increase in the volume of the investment securities, which was partially offset by an increase in borrowings, such as financial debentures.
Noninterest income increased by 14.7% due primarilyenlarged exposure to an increase in fees from an increase in the volume of derivatives transactions, principally foreign exchange hedging and advisory services, as well as an increase in gains from foreignnaked currency transactions resulting from the appreciation of the Korean Won against foreign currencies, which was partially offset by a decrease in gains from sale of available-for-sale securities.positions among our customers.
183166
The 67.5% decrease in reversal of provision for credit losses was due primarily to the improvement in our asset quality, in particular the quality of our foreign currency-denominated loans.
The 6.5% increase in noninterest expense including depreciation and amortization was due primarily to an increase in derivative liabilities resulting from an increase in the volume of back-to-back transactions to cover risk exposures arising in connection with Shinhan Bank’s transactions with customers.
Other Banking Services
This segment primarily consists primarily of Shinhan Bank’s trust account management services, cash management account (“CMA”) services, merchant banking businessservices and non-performing loan collection services. This segment also reflects the expenses and provision for credit losses of Shinhan Bank that are not, as a matter of management policy, allocated to either retail banking or corporate banking. In 2005, investment banking activities (namely that provided by Shinhan Bank prior to the merger) were part of the corporate banking segment. However, as a result of the merger-related restructuring, the investment banking activities were reclassified as part of the other banking segment beginning in 2006. The table below provides the income statement data for the other banking services segment for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | % Change | | | Year Ended December 31, | | % Change | |
| | | 2005(1) | | 2006(2) | | 2007 | | 2005/2006 | | 2006/2007 | | | 2007 | | 2008 | | 2009 | | 2007/2008 | | 2008/2009 | |
| | | (In billions of Won) | | | | | | | (In billions of Won, except percentages) | |
| |
Income statement data | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | W | 204 | | | W | 609 | | | W | 783 | | | | 198.5 | % | | | 28.6 | % | | W | 815 | | | W | 135 | | | W | 243 | | | | (83.4 | )% | | | 80.0 | % |
| Noninterest income | | | 615 | | | | 1,035 | | | | 1,800 | | | | 68.3 | | | | 73.9 | | |
| Non-interest income | | | | 1,766 | | | | 2,772 | | | | 2,465 | | | | 57.0 | | | | (11.1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total revenues | | | 819 | | | | 1,644 | | | | 2,583 | | | | 100.7 | | | | 57.1 | | | | 2,581 | | | | 2,907 | | | | 2,708 | | | | 12.6 | | | | (6.8 | ) |
| Provision for credit losses | | | (77 | ) | | | 37 | | | | (33 | ) | | | N/M | | | | N/M | | |
| Noninterest expense including depreciation and amortization | | | (919 | ) | | | (1,364 | ) | | | (1,206 | ) | | | 48.4 | | | | (11.6 | ) | |
| Provision for loan losses | | | | 62 | | | | 245 | | | | 133 | | | | N/M | | | | (45.7 | ) |
| Non-interest expense including depreciation and amortization | | | | 1,174 | | | | 3,385 | | | | 2,333 | | | | N/M | | | | (31.1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
Segment results(3)(1) | | W | (177 | ) | | W | 317 | | | W | 1,344 | | | | N/M | | | | 324.0 | | | W | 1,345 | | | W | (723 | ) | | W | 242 | | | | N/M | | | | N/M | |
| | | | | | | | | | | | | | | | | | | | | | | |
N/M = Notnot meaningful
Notes:Note:
| | |
| (1) | | The data for 2005 represents the data for Shinhan Bank and Chohung Bank presented on a combined basis. |
|
(2) | | The data for 2006 does not include the information for Chohung Bank from January 1, 2006 to April 6, 2006, the date of the merger between Chohung Bank and Shinhan Bank. |
|
(3) | | Net income (or loss) per segment before income taxes. |
For managementsegment reporting purposes, each of the retail banking and corporate banking segments computes andsegment result reflects provision for creditloan losses that are discountedallocated based on averagethe ending balances of loans for each segment in order to show a meaningful comparison of performance within such segment andvis-à-vis compared to other activities. This hassegments. In the effect of understating the“other banking” segment, provision for creditloan losses that are reflected in our segment reporting as comparedamounted to the bank-wide provision for credit losses reflected in Shinhan Bank’s financial statements. The excess provision for credit losses arising from the difference in computations is not allocated to retail banking or corporate banking but are reflected in this segment. In 2005, we recorded a reversal of provision for credit losses that were not allocated to either retail banking or corporate banking of W7762 billion, W245 billion and in 2006, we recorded excess provisions for credit losses that were not allocated to either retail banking or corporate banking of W37133 billion and in 2007, we recorded a reversal of provision for credit losses that were not allocated to either retail banking or corporate banking of W33 billion,2008 and 2009, respectively.
In addition, Shinhan Bank frequently issues subordinated debt securities, which carry interest rates that are higher than market interest rates. As subordinated debt securities have the overall effect of improving Shinhan Bank’s capital adequacy and benefit Shinhan Bank in its entirety, the management believes it is inappropriate to allocate the higher costs associated with issuing subordinated debt to a particular business segment. Accordingly, we allocateShinhan Bank allocates and reflectreflects the difference between the higher costs associated with subordinated debt and market interest rates in this segment as interest expenses.
184
Comparison of 20072009 to 20062008
OurThe overall segment results increased by 324.0%for “other banking” changed from net loss before income taxes of W317723 billion in 20062008 to net income before income taxes of W1,344242 billion in 2007.2009.
Net interest income increased by 28.6%80.0% due primarily to a net inter-segment transfer of interest income to the other banking segment from other business segments.
Non-interest income decreased by 11.1% due primarily to a decrease in fees earned from the sale of foreign currency-related derivative products due to the relatively stability of the foreign exchange rates following the initial shock of the global financial crisis.
Provision for loan losses decreased by 45.7% due primarily to a decrease in discounted bills and bills bought.
Non-interest expense including depreciation and amortization decreased by 31.1% due primarily to a reduction in the volume of foreign currency-related derivative transactions due to reduced volatility of foreign exchange rates in 2009.
Comparison of 2008 to 2007
The overall segment results for other banking decreased significantly from net income of W1,345 billion in 2007 to net loss of W723 billion in 2008.
167
We recorded net interest expense in 2008 compared to net interest income in 2007 due primarily to an aggressive marketing campaign by our merchant banking subsidiary to sell high interest-bearing deposit products to its corporate customers, which more than offset the increase in interest earned on commercial papers and debentures, which was partially offsetincome from increased lending by an increase in interests payable on certificates of deposit and other time deposits.large corporate borrowers.
NoninterestNon-interest income increased by 73.9%57.0% due primarily to an increase in gains from foreign currency derivative transactions by our merchant banking subsidiary, which largely resulted from the dispositionincreased volume of available-for-sale securities as a result ofsuch transactions due to the changewide fluctuations in the accounting method into an equity accounting method forexchange rates between Korean Won and the 7.15% equity interest previously held by us prior to the acquisition of the controlling equity interest in LG Card in March 2007.U.S. dollar.
Noninterest expense including depreciation and amortization decreased by 11.6% due primarily to the absence in 2007 in impairment in available-for-sale securities recorded in 2006.
Comparison of 2006 to 2005
Our overall segment results recorded a gain of W317 billion in 2006 as compared to a loss of W177 billion in 2005.
Net interest income increased significantly due primarily to a significant increase in the average volume of asset-backed commercial papers in merchant banking accounts and an increase in recoveries of interest onnon-performing loans.
Noninterest income increased by 68.3% due primarily to the gains from the sale of investment securities in Daewoo Construction which exited the workout in 2006 and the reversal of impairment losses related to the subordinated debt purchased by us in connection with the securitization of non-performing loans.
We recorded provision for credit losses in 2005 compared to reversal of provision of credit losses in 2006, due primarily to improved asset quality resulting from the collection of non-performing loans.
NoninterestNon-interest expense including depreciation and amortization increased by 48.4%significantly due primarily to an increase in salaries and wageslosses from foreign currency derivative transactions by our merchant banking subsidiary, which largely resulted from the increased volume of such transactions due to employees and increasethe wide fluctuations in severance benefits for a special program for voluntary retirementsthe exchange rates between Korean Won and the marketing expenses related to the increase in cross-selling of bancassurance, credit cards and investment products.U.S. dollar.
Credit Card Services
The credit card services segment consists of the credit card business of Shinhan Card, including its installment finance and automobile leasing businesses. The data below for periods preceding the split merger in April 2006 between former Shinhan Card and the credit card services division of Chohung Bank represent their combined data for such periods on reported and managed basis.
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | % Change | |
| | | 2005(1) | | | 2006(1) | | | 2007(1) | | | 2005/2006 | | | 2006/2007 | |
| | | (In billions of Won) | | | | | | | |
| |
Income statement data | | | | | | | | | | | | | | | | | | | | |
| Net interest income(2) | | W | 955 | | | W | 718 | | | W | 2,804 | | | | (24.8 | )% | | | N/M | |
| Noninterest income | | | 102 | | | | 1 | | | | 197 | | | | N/M | | | | N/M | |
| | | | | | | | | | | | | | | | | | | | | |
| Total revenues | | | 1,057 | | | | 719 | | | | 3,001 | | | | (32.0 | ) | | | N/M | |
| Provision for loan losses | | | (478 | ) | | | (92 | ) | | | (301 | ) | | | (80.8 | ) | | | N/M | |
| Noninterest expense | | | | | | | | | | | | | | | | | | | | |
| including depreciation | | | | | | | | | | | | | | | | | | | | |
| and amortization | | | (370 | ) | | | (443 | ) | | | (1,618 | ) | | | 19.7 | | | | N/M | |
| | | | | | | | | | | | | | | | | | | | | |
| Segment results(3) | | W | 209 | | | W | 184 | | | W | 1,082 | | | | (12.0 | )% | | | N/M | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | % Change | |
| | | 2007(1) | | | 2008 | | | 2009 | | | 2007/2008 | | | 2008/2009 | |
| | | (In billions of Won, except percentages) | |
| |
Income statement data | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | W | 2,804 | | | W | 2,958 | | | W | 2,854 | | | | 5.5 | % | | | (3.5 | )% |
| Non-interest income | | | 197 | | | | 632 | | | | 280 | | | | N/M | | | | (55.7 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Total revenues | | | 3,001 | | | | 3,590 | | | | 3,134 | | | | 19.6 | | | | (12.7 | ) |
| Provision for loan losses | | | 301 | | | | 43 | | | | 105 | | | | (85.7 | ) | | | 144.2 | |
| Non-interest expense including depreciation and amortization | | | 1,618 | | | | 2,223 | | | | 1,928 | | | | 37.4 | | | | (13.3 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Segment results(2) | | W | 1,082 | | | W | 1,324 | | | W | 1,101 | | | | 22.4 | % | | | (16.8 | )% |
| | | | | | | | | | | | | | | | | | | | | |
185
N/M = Notnot meaningful
Notes:
| | |
| (1) | | The information of former Shinhan Card for 2005 does not include information for the credit card division of Chohung Bank. The information of former Shinhan Card for 2006 includes that for the credit card division of Chohung Bank from April 1, 2006 to December 31, 2006 to reflect the split-merger in April 2006. The information of Shinhan Card for 2007 includes that of LG Card (renamed as Shinhan Card on October 1, 2007) for the period from March 1, 2007 through December 31, 2007 (including that for the assets and liabilities of former Shinhan Card assumed by LG Card on October 1, 2007) and that of former Shinhan Card for the period from January 1, 2007 through September 30, 2007, presented on an aggregated basis. |
| |
| (2) | | Includes net interest income from financial receivables that Shinhan Card sold in asset-backed securitization transactions. |
|
(3) | | Net income per segment before income taxes. |
Comparison of 20072009 to 20062008
OurThe overall segment results net interest income, provision for the credit losses and noninterest expense significantly increased from 2006 to 2007, due primarily to our acquisition of LG Card in March 2007.
Comparison of 2006 to 2005
Our overall segment resultscard business decreased by 12.0%16.8% from W2091,324 billion in 20052008 to W1841,101 billion in 2006.2009.
Net interest income decreased by 24.8%3.5% due primarily to a decrease in interest income from credit card services which resulted from a decrease in the transaction volume largely as a result of dampened consumer spending in the face of the recent global financial crisis and heightened concerns about an impending economic downturn, which was partially offset by a decrease in funding costs due to a decrease in the average volumebalance of cash advancesborrowings.
Non-interest income decreased significantly by 55.7% due primarily to a decrease in gains from interest rate swap-related derivative transactions as a result of the decrease in market interest rates in 2009.
Provision for loan losses increased by 144.2% due primarily to a significant increase in the average balance of loans as well as increased credit risks.
168
Non-interest expense including depreciation and amortization decreased by 13.3% due primarily to a decrease in severance benefits paid following the substantial completion of a voluntary early retirement program undertaken in 2008 and foreign currency translation gains in 2009 compared to foreign currency translation losses in 2008 as a result of the appreciation of the Korean Won against the U.S. dollar in the second half of 2009.
Comparison of 2008 to 2007
The overall segment results for the credit card loans, bothbusiness increased by 22.4% from W1,082 billion in 2007 to W1,324 billion in 2008.
Net interest income increased by 5.5% due primarily to an increase in interest income from credit card services as a result of which carry relatively high interest rates,an increase in the credit card balances, which more than offset an increase in funding costs due to the fees received from credit card transactions.general rise in market borrowing rates.
NoninterestNon-interest income increased significantly decreased from W102 billion in 2005 to W1 billion in 2006 due primarily to an increase in gains from salesforeign currency derivative transactions related to the wide fluctuations in exchange rates between Korean Won and the U.S. dollar in the second half of written-off credit card receivables in 2005 amounting to W93 billion in Chohung Bank credit card business.2008.
Provision for creditloan losses decreased by 80.8% from W478 billion in 2005 to W92 billion in 200685.7% due primarily to improvementsa significant increase of provision for loan losses made in 2007 as a result of reserve for unused credit limits set aside in 2008 pursuant to guidelines set by the qualityFinancial Supervisory Service, which reduced the need to make additional provision for credit losses in 2008. Shinhan Card adopted the change in provisioning policy for unused credit limits in 2008, which became effective at the end of credit card assets.2008.
NoninterestNon-interest expense including depreciation and amortization increased by 19.7% from W370 billion in 2005 to W443 billion in 200637.4% due primarily to an increase in fees paid on credit cardlosses from foreign currency derivative transactions related to the wide fluctuations in exchange rates between Korean Won and fees paidthe U.S. dollar in the second half of 2008, and to Shinhan Bank for handling miscellaneous credit card services anda lesser extent, an increase in general and administrative expenses from lump sum incentivesseverance benefits paid to employees transferring to Shinhan Card.in connection with a voluntary departure program.
186
Securities Brokerage Services
Securities brokerage services segment primarily reflects securities brokerage and dealing services on behalf of customers, which is conducted by Good Morning Shinhan Securities,Investment, our principal securities brokerage subsidiary.
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| | | Year Ended December 31, | | % Change | | | Year Ended December 31, | | % Change | |
| | | 2005 | | 2006 | | 2007 | | 2005/2006 | | 2006/2007 | | | 2007 | | 2008 | | 2009 | | 2007/2008 | | 2008/2009 | |
| | | (In billions of Won) | | | | | | | (In billions of Won, except percentages) | |
| |
Income statement data | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | W | 63 | | | W | 67 | | | W | 137 | | | | 6.3 | % | | | 104.5 | % | | W | 137 | | | W | 184 | | | W | 147 | | | | 34.3 | % | | | (20.1 | )% |
| Noninterest income | | | 817 | | | | 1,259 | | | | 1,803 | | | | 54.1 | | | | 43.2 | | |
| Non-interest income | | | | 1,803 | | | | 1,532 | | | | 1,323 | | | | (15.0 | ) | | | (13.6 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total revenues | | | 880 | | | | 1,326 | | | | 1,940 | | | | 50.7 | | | | 46.3 | | | | 1,940 | | | | 1,716 | | | | 1,470 | | | | (11.5 | ) | | | (14.3 | ) |
| Provision for loan losses | | | 4 | | | | (3 | ) | | | (7 | ) | | | N/M | | | | 133.3 | | | | 7 | | | | 29 | | | | 135 | | | | N/M | | | | 365.5 | |
| Noninterest expense including depreciation and amortization | | | (763 | ) | | | (1,189 | ) | | | (1,681 | ) | | | 55.8 | | | | 41.4 | | |
| Non-interest expense including depreciation and amortization | | | | 1,681 | | | | 1,478 | | | | 1,278 | | | | (12.1 | ) | | | (13.5 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Segment results(1) | | W | 121 | | | W | 134 | | | W | 252 | | | | 10.7 | % | | | 88.1 | % | | W | 252 | | | W | 209 | | | W | 57 | | | | (17.1 | )% | | | (72.7 | )% |
| | | | | | | | | | | | | | | | | | | | | | | |
N/M = Notnot meaningful
Note:
| | |
| (1) | | Net income per segment before income taxes. |
Comparison of 20072009 to 20062008
OurThe overall segment results increasedfor securities brokerage services decreased by 88.1%72.7% from W134209 billion in 20062008 toW57 billion in 2009.
169
Net interest income decreased by 20.1% due primarily to a decrease in interest income from loans and interest expense paid on deposits due to the general decrease in market interest rates in 2009, which was partially offset by a decrease in interest expenses on borrowings, including repurchase transactions and call moneys.
Non-interest income decreased by 13.6% due primarily to a decrease in income from derivative products which resulted from decreased volatility in stock markets.
Provision for loan losses increased by 365.5% due primarily to deterioration of asset quality of loans and receivables related to real estate project financing.
Non-interest expense including depreciation and amortization decreased by 13.5% due primarily to a decrease in income related to derivatives products which resulted from decreased volatility in stock markets.
Comparison of 2008 to 2007
The overall segment results for securities brokerage services decreased by 17.1% from W252 billion in 2007.2007 to W209 billion in 2008.
Net interest income increased by 104.5%34.3% due primarily to an increase in interest earnedincome from short-term trading securities, project financing loans and call money.government bonds which were purchased in large quantity in 2008 to take advantage of arbitrage opportunities vis-à-vis repurchase contracts used for the funding of cash management accounts.
NoninterestNon-interest income increaseddecreased by 43.2%15.0% due primarily to an increasea decrease in fees and commission earned from derivatives transactions.brokerage transactions as a result of the downturn in the Korean stock market in the second half of 2008.
NoninterestNon-interest expense including depreciation and amortization increaseddecreased by 41.4%12.1% due primarily to an increasea decrease in losses and other costs relatedpayment made upon the exercise of put options sold to derivatives transactions and valuation losses and disposition losses relatedcustomers as a result of the decrease in the amount of put options that are in the money due to trading securities.the downturn in the Korean stock market in the second half of 2008.
Comparison of 2006 to 2005
Our overall segment results decreased by 10.7% from W121 billion in 2005 to W134 billion in 2006.
The 6.3% increase in net interest income was due primarily to an increase in the balance of interest-accruing accounts receivables arising from trading of securities and margin lending.
The 54.1% increase in noninterest income was due primarily to gains from an increase in sales of marketable securities underlying investment trust company products and short-term marketable securities and an increase in gains from trading of derivatives.
The 55.8% increase in noninterest expense including depreciation and amortization was due primarily to an increase from losses from dispositions of marketable securities.
187
Life Insurance Services
Life insurance services segment consists of life insurance services provided by Shinhan Life Insurance.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | % Change | | | Year Ended December 31, | | % Change | |
| | | 2005 | | 2006 | | 2007 | | 2005/2006 | | 2006/2007 | | | 2007 | | 2008 | | 2009 | | 2007/2008 | | 2008/2009 | |
| | | (In billions of Won) | | | | | | | (In billions of Won, except percentages) | |
| |
Income statement data | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | W | 14 | | | W | 228 | | | W | 293 | | | | N/M | | | | 28.5 | % | | W | 293 | | | W | 357 | | | W | 419 | | | | 21.8 | % | | | 17.4 | % |
| Noninterest income | | | 245 | | | | 2,134 | | | | 2,401 | | | | N/M | | | | 12.5 | | |
| Non-interest income | | | | 2,401 | | | | 2,505 | | | | 2,998 | | | | 4.3 | | | | 19.7 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total revenues | | | 259 | | | | 2,362 | | | | 2,694 | | | | N/M | | | | 14.1 | | | | 2,694 | | | | 2,862 | | | | 3,417 | | | | 6.2 | | | | 19.4 | |
| Provision for loan losses | | | (1 | ) | | | (2 | ) | | | (1 | ) | | | 100.0 | % | | | (50.0 | )% | | | 1 | | | | 9 | | | | 13 | | | | N/M | | | | 44.4 | |
| Noninterest expense including depreciation and amortization | | | (250 | ) | | | (2,194 | ) | | | (2,509 | ) | | | N/M | | | | 14.4 | | |
| Non-interest expense including depreciation and amortization | | | | 2,509 | | | | 2,667 | | | | 3,180 | | | | 6.3 | | | | 19.2 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Segment results(1) | | W | 8 | | | W | 166 | | | W | 184 | | | | N/M | | | | 10.8 | % | | W | 184 | | | W | 186 | | | W | 224 | | | | 1.1 | % | | | 20.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
N/M = Notnot meaningful
Note:
| | |
| (1) | | Net income per segment before income taxes. |
Comparison of 20072009 to 20062008
OurThe overall segment results for life insurance services increased by 10.8%20.4% from W166186 billion in 20062008 toW224 billion in 2009.
170
Net interest income increased by 17.4% due primarily to an increase in the volume of interest earned on debt securities purchased as part of the asset management policy of Shinhan Life Insurance in relation to the increased sales of insurance contracts, which more than offset a decrease in the average interest rate on loans.
Non-interest income increased by 19.7% due primarily to an increase in insurance premium and income from special accounts, which was largely due to an increased sale of new general insurance contracts.
Non-interest expense including depreciation and amortization increased by 19.2% due primarily to an increase in policy reserves and other expenses related to the increased sales of new insurance contracts.
Comparison of 2008 to 2007
The overall segment results for life insurance services increased by 1.1% from W184 billion in 2007.2007 to W186 billion in 2008.
Net interest income increased by 28.5%21.8% due primarily to an increase in interest earned on long-term debt securities issued by financial institutions.which comprised a greater proportion of the asset portfolio for this segment in 2008.
NoninterestNon-interest income increased by 12.5%4.3% due primarily to an increase in insurance premium, which was largely due to an increase in the number and volume of insurance contracts with customers.
NoninterestNon-interest expense including depreciation and amortization increased by 14.4%6.3% due primarily to an increase in insurance payments, which was largelypremium repaid due to thean increase in the number and volume of insurance contracts with customers.early termination.
Comparison of 2006 to 2005
Since we acquired Shinhan Life Insurance in November 2005, the segment results for 2005 are available only for one month while the segment results for 2006 are available for the full year. Accordingly, further comparison of the two periods is neither meaningful nor available.
188
Other
Other segment primarily reflects all other activities of Shinhan Financial Group, as the holding company, and our other subsidiaries, including the results of operations of Jeju Bank, Shinhan Capital, SH&CCardif Life Insurance Company, Shinhan Credit Information, Shinhan BNP Paribas Investment Trust,Asset Management, Shinhan Macquarie Financial Advisory, Shinhan Private Equity and back-office functions maintained at the holding company as well as the addition of Shinhan Life Insurance in 2005. In 2006, due to an adoption of Statements of Korea Accounting Standards No. 18, “Interests in Joint Ventures,” effective starting in 2006, SH&C Life Insurance, Shinhan BNP Paribas Investment Trust and Shinhan Macquarie Financial Advisory are not longer included in our consolidated financial statements and are instead subject to equity method accounting.company.
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| | | Year Ended December 31, | | % Change | | | Year Ended December 31, | | % Change | |
| | | 2005 | | 2006 | | 2007 | | 2005/2006 | | 2006/2007 | | | 2007 | | 2008 | | 2009 | | 2007/2008 | | 2008/2009 | |
| | | (In billions of Won) | | | | | | | (In billions of Won, except percentages) | |
| |
Income statement data | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income (loss) | | W | 160 | | | W | 104 | | | W | (30 | ) | | | (35.0 | )% | | | N/M | | | W | (23 | ) | | W | (48 | ) | | W | (88 | ) | | | 108.7 | % | | | 83.3 | % |
| Noninterest income | | | 201 | | | | 152 | | | | 98 | | | | (24.4 | ) | | | (35.5 | ) | |
| Non-interest income | | | | 272 | | | | 705 | | | | 483 | | | | 159.2 | | | | (31.5 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total revenues | | | 361 | | | | 256 | | | | 68 | | | | (29.1 | ) | | | (73.4 | ) | | | 249 | | | | 657 | | | | 395 | | | | 163.9 | | | | (39.9 | ) |
| Provision for credit losses | | | (21 | ) | | | (15 | ) | | | (27 | ) | | | (28.6 | ) | | | 80.0 | | |
| Noninterest expense including depreciation and amortization | | | (310 | ) | | | (232 | ) | | | (198 | ) | | | (25.2 | ) | | | (14.7 | ) | |
| Provision for loan losses | | | | 27 | | | | 26 | | | | 55 | | | | (3.7 | ) | | | 111.5 | |
| Non-interest expense including depreciation and amortization | | | | 337 | | | | 634 | | | | 431 | | | | 88.1 | | | | (32.0 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Segment results(1) | | W | 30 | | | W | 9 | | | W | (157 | ) | | | (70.0 | )% | | | N/M | | | W | (115 | ) | | W | (3 | ) | | W | (91 | ) | | | (97.4 | )% | | | N/M | |
| | | | | | | | | | | | | | | | | | | | | | | |
N/M = not meaningful
Note:
| | |
| (1) | | Net income (or loss) per segment before income taxes. |
Comparison of 20072009 to 20062008
We recordedThe other segment results significantly increased from net interest loss of W303 billion in 2007 compared2008 to net interest incomeloss of W10491 billion in 2006, due primarily to an increased level of borrowings by our holding company from third parties to fund the acquisition of LG Card and the operating capital of our non-bank and non-card subsidiaries, which was partially offset by an increase in income earned on project-finance related loans and an increase on foreign currency-denominated loans.2009.
Noninterest income decreasedNet interest loss increased by 35.5%,83.3% due primarily to a decrease in noninterestShinhan Capital’s interest income, of Shinhan Capital, includingwhich resulted from a decrease in the lending rates in general.
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Non-interest income from operating leases and gains fromdecreased by 31.5% due primarily to a decrease in foreign currency translations.translation gains related to Shinhan Capital’s foreign-currency denominated assets, mainly as a result of appreciation of the Korean Won against the U.S. dollar.
Provision for creditloan losses increased by 80.0%111.5% due primarily to increased provisioning for leases made by Shinhan Capital to shipping companies, which suffered particular hardship from the increase in the provision ratio for credit losses for loans classified as “normal” as required by the Financial Supervisory Services from 0.70% to 0.85 ~0.90%, beginning in 2007.recent economic downturn.
NoninterestNon-interest expense including depreciation and amortization decreased by 14.7%32.0% due primarily to a decrease in noninterest expense of Shinhan Capital, includingCapital’s foreign currency-denominated liabilities and a decrease in fee payments and losses fromits foreign currency translations.translation losses, which resulted from the appreciation of the Korean Won against the U.S. dollar.
Comparison of 20062008 to 20052007
Our overallThe other segment results decreased by 70.0%97.4% from net loss of W115 billion in 2006, due primarily2007 to a decreaseW3 billion in net income before income taxes of our holding company.2008.
Net interest income decreasedloss increased by 35.0%,108.7% due primarily to an increased level of borrowingsincrease in interest expense related to the additional Won-denominated corporate debentures issued by our holding company from third parties in order to fund the operating capital of our non-bank subsidiaries, partial redemption of the redeemable preferred shares and advance funding for the LG Card acquisition and a decrease in net interest income of Shinhan Capital. SH&C Life Insurance, Shinhan BNP Paribas Investment Trust and Shinhan Macquarie Financial Advisory did not have material net interest income in 2005.Group.
NoninterestNon-interest income decreased by 24.4%,increased significantly due primarily to an increase in the exclusion of noninterest income of SH&C Life Insurance,transaction gains from foreign currency trading by Shinhan BNP Paribas Investment TrustCapital.
Non-interest expense including depreciation and amortization increased by 88.1% due primarily to an increase in the transaction losses from foreign currency trading by Shinhan Macquarie Financial Advisory from theCapital.
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consolidated results of operation due to the change in the accounting principle discussed above, which more than offset an increase in noninterest income resulting from valuation gains from the equity method of accounting in respect of such subsidiaries.
Provision for credit losses decreased by 28.6% due primarily to improvements in asset quality experienced at Jeju Bank.
Noninterest expense including depreciation and amortization decreased by 25.2% due primarily to the exclusion of noninterest expense of SH SH&C Life Insurance, Shinhan BNP Paribas Investment Trust and Shinhan Macquarie Financial Advisory from the consolidated results of operation.
Financial Condition
Assets
The following table sets forth, as of the dates indicated, the principal components of our assets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | | % Change | | | As of December 31, | | % Change | |
| | | 2005 | | 2006 | | 2007 | | 2005/2006 | | 2006/2007 | | | 2007 | | 2008 | | 2009 | | 2007/2008 | | 2008/2009 | |
| | | (In billions of Won, except percentages) | | | (In billions of Won, except percentages) | |
| |
| Cash and cash equivalents | | W | 2,434 | | | W | 1,691 | | | W | 3,580 | | | | (30.5 | )% | | | 111.7 | % | | W | 3,580 | | | W | 1,365 | | | W | 4,363 | | | | (61.9 | )% | | | 219.6 | % |
| Restricted cash | | | 3,644 | | | | 6,758 | | | | 4,745 | | | | 85.5 | | | | (29.8 | ) | | | 4,745 | | | | 7,049 | | | | 7,974 | | | | 48.6 | | | | 13.1 | |
| Interest-bearing deposits | | | 627 | | | | 725 | | | | 1,094 | | | | 15.6 | | | | 50.9 | | | | 1,094 | | | | 1,627 | | | | 2,164 | | | | 48.7 | | | | 33.0 | |
| Call loans and securities purchased under resale agreements | | | 1,499 | | | | 1,243 | | | | 802 | | | | (17.1 | ) | | | (35.5 | ) | | | 802 | | | | 3,066 | | | | 1,346 | | | | 282.3 | | | | (56.1 | ) |
| Trading assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Trading securities | | | 3,573 | | | | 3,474 | | | | 8,220 | | | | (2.8 | ) | | | 136.6 | | | | 8,220 | | | | 6,724 | | | | 6,681 | | | | (18.2 | ) | | | (0.6 | ) |
| Derivative assets | | | 934 | | | | 1,363 | | | | 1,962 | | | | 45.9 | | | | 43.9 | | | | 1,962 | | | | 11,977 | | | | 4,617 | | | | 510.4 | | | | (61.5 | ) |
| Securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale securities | | | 22,480 | | | | 16,939 | | | | 22,849 | | | | (24.6 | ) | | | 34.9 | | | | 22,626 | | | | 29,016 | | | | 27,612 | | | | 28.2 | | | | (4.8 | ) |
| Held-to-maturity securities | | | 2,963 | | | | 7,581 | | | | 8,224 | | | | 155.9 | | | | 8.5 | | | | 8,224 | | | | 8,696 | | | | 12,794 | | | | 5.7 | | | | 47.1 | |
| Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate | | | 57,891 | | | | 67,967 | | | | 71,651 | | | | 17.4 | | | | 5.4 | | | | 71,651 | | | | 94,695 | | | | 90,809 | | | | 32.2 | | | | (4.1 | ) |
| Consumer | | | 47,957 | | | | 54,479 | | | | 80,167 | | | | 13.6 | | | | 47.2 | | | | 80,167 | | | | 75,846 | | | | 78,446 | | | | (5.4 | ) | | | 3.4 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total loans, gross | | | 105,848 | | | | 122,446 | | | | 151,818 | | | | 15.7 | | | | 24.0 | | | | 151,818 | | | | 170,541 | | | | 169,255 | | | | 12.3 | | | | (0.8 | ) |
| Deferred origination costs | | | 110 | | | | 118 | | | | 4 | | | | 7.3 | | | | (96.6 | ) | |
| Less allowance for loan losses | | | 1,511 | | | | 1,575 | | | | 2,099 | | | | 4.2 | | | | 33.3 | | |
| Deferred origination costs (fees) | | | | 4 | | | | (32 | ) | | | (23 | ) | | | (900.0 | ) | | | (28.1 | ) |
| Less: allowance for loan losses | | | | 2,099 | | | | 3,201 | | | | 3,638 | | | | 52.5 | | | | 13.7 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total loans, net | | | 104,447 | | | | 120,989 | | | | 149,723 | | | | 15.8 | | | | 23.7 | | | | 149,723 | | | | 167,308 | | | | 165,594 | | | | 11.7 | | | | (1.0 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Customers’ liability on acceptances | | | 1,879 | | | | 1,417 | | | | 1,701 | | | | (24.6 | ) | | | 20.0 | | | | 1,701 | | | | 2,433 | | | | 2,780 | | | | 43.0 | | | | 14.3 | |
| Premises and equipment, net | | | 1,876 | | | | 2,097 | | | | 2,455 | | | | 11.8 | | | | 17.1 | | | | 2,455 | | | | 2,412 | | | | 2,437 | | | | (1.8 | ) | | | 1.0 | |
| Goodwill and intangible assets | | | 2,957 | | | | 2,584 | | | | 6,160 | | | | (12.6 | ) | | | 138.4 | | | | 6,160 | | | | 5,571 | | | | 5,072 | | | | (9.6 | ) | | | (9.0 | ) |
| Security deposits | | | 1,078 | | | | 1,108 | | | | 1,294 | | | | 2.8 | | | | 16.8 | | | | 1,294 | | | | 1,334 | | | | 1,323 | | | | 3.1 | | | | (0.8 | ) |
| Other assets | | | 4,688 | | | | 7,118 | | | | 8,813 | | | | 51.8 | | | | 23.8 | | | | 9,036 | | | | 12,395 | | | | 10,153 | | | | 37.2 | | | | (18.1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | W | 155,079 | | | W | 175,087 | | | W | 221,622 | | | | 12.9 | % | | | 26.6 | % | | W | 221,622 | | | W | 260,973 | | | W | 254,910 | | | | 17.8 | % | | | (2.3 | )% |
| | | | | | | | | | | | | | | | | | | | | | | |
20072009 Compared to 20062008
Our assets decreased by 2.3% from W260,973 billion as of December 31, 2008 to W254,910 billion as of December 31, 2009, principally due to decreases in derivative assets, corporate loans andavailable-for-sale securities, which were partially offset by increases inheld-to-maturity securities and consumer loans.
Our derivative assets decreased by 61.5%, from W11,977 billion as of December 31, 2008 to W4,617 billion as of December 31, 2009, largely due to a decrease in the transaction volume of foreign currency-related derivatives.
Our corporate loans decreased by 4.1% from W94,695 billion as of December 31, 2008 to W90,809 billion as of December 31, 2009, primarily due to increased repayment of loans by large corporate borrowers as a result of increased liquidity in the market.
Ouravailable-for-sale securities decreased by 4.8% from W29,016 billion as of December 31, 2008 to W27,612 billion as of December 31, 2009, primarily due to increased sale of financial debentures due to limits on
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the holdings of debt securities issued by other banks as a part of our enhanced risk management efforts, which was partially offset by an increase in the market value of stocks held by us due to improved stock market conditions in the second half of 2009.
Ourheld-to-maturity securities increased by 47.1% from W8,696 billion as of December 31, 2008 to W12,794 billion as of December 31, 2009, primarily due to an increase in investments by us in relatively stable assets such as government bonds as a result of enhanced risk management policy in the face of the recent global financial crisis.
Our consumer loans increased by 3.4% from W75,846 billion as of December 31, 2008 to W78,446 billion as of December 31, 2009, primarily due to an increase in the average balance of mortgage and home equity loans, which more than offset a decrease in unsecured consumer loans.
2008 Compared to 2007
Our assets increased by 26.6%17.8% fromW175,087 billion as of December 31, 2006 to W221,622 billion as of December 31, 2007 to W260,973 billion as of December 31, 2008 principally due to thean increase in the amount of loans.loans and derivative assets. The amount of our loans increased 23.7%by 11.7%, on a net basis, from W120,989 billion as of December 31, 2006 to W2007. This increase was due largely2007 to the increase in credit card and commercial and industrial loans. Credit card loans increased by 274.1% from W3,924167,308 billion as of December 31, 2006 to W14,681 billion as of December 31,
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2007, mainly2008, principally due to the acquisition of LG Cardan increase in April 2007. Commercial and industrialcorporate loans. Our corporate loans increased 21.0%by 32.2% from W40,063 billion as of December 31, 2006 to W48,47571,651 billion as of December 31, 2007 mainly due to increased lending to small- and medium-sized enterprises.
2006 Compared to 2005
Our assets increased by 12.9% from W155,07994,695 billion as of December 31, 20052008, mainly due to an increase in lending to large corporations. Loans to large corporations increased largely as a result of increased demand from large corporations for bank loans due to the relative scarcity of alternative financing arising from the global liquidity crisis in the second half of 2008. Derivative assets increased significantly from W175,0871,962 billion as of December 31, 2006 principally2007 to W11,977 billion as of December 31, 2008, largely due to an increase in loans. Our loans increased 15.8%, on a net basis, from W104,447 billion as of December 31, 2005 to W120,989 billion as of December 31, 2006. This increase was due largely to an increaseforeign currency related derivatives for hedging against the wide fluctuations in mortgage and home equity loans and other commercial loans. Mortgage and home equity loans increased by 16.47% from W25,840 billion as of December 31, 2005 to W30,097 billion as of December 31, 2006, mainly due to an increased demand for such loans. Other commercial loans increased 27.6% from W21,409 billion as of December 31, 2005 to W27,319 billion as of December 31, 2006, mainly due toforeign exchange rates in 2008, particularly the corporate customers’ increased demand for working capital loans.
For further information on our assets, see “Item 4. Information onWon against the Company — Description of Assets and Liabilities.”U.S. dollar.
Liabilities and Stockholders’ Equity
The following table sets forth, as of the dates indicated, the principal components of our liabilities.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | | % Change | | | As of December 31, | | % Change | |
| | | 2005 | | 2006 | | 2007 | | 2005/2006 | | 2006/2007 | | | 2007 | | 2008 | | 2009 | | 2007/2008 | | 2008/2009 | |
| | | (In billions of Won, except percentages) | | | (In billions of Won, except percentages) | |
| |
| Deposits: | | | | | | | | | | | | | | | | | | | | | |
| Interest bearing | | W | 83,278 | | | W | 91,578 | | | W | 103,241 | | | | 10.0 | % | | | 12.7 | % | | W | 103,241 | | | W | 119,762 | | | W | 140,809 | | | | 16.0 | % | | | 17.6 | % |
| Noninterest bearing | | | 3,143 | | | | 3,918 | | | | 3,162 | | | | 24.7 | | | | (19.3 | ) | | | 3,162 | | | | 2,942 | | | | 2,890 | | | | (7.0 | ) | | | (1.8 | ) |
| Trading liabilities | | | 1,048 | | | | 1,611 | | | | 2,509 | | | | 53.7 | | | | 55.7 | | | | 2,509 | | | | 11,831 | | | | 4,565 | | | | N/M | | | | (61.4 | ) |
| Acceptances outstanding | | | 1,879 | | | | 1,417 | | | | 1,701 | | | | (24.6 | ) | | | 20.0 | | | | 1,701 | | | | 2,433 | | | | 2,780 | | | | 43.0 | | | | 14.3 | |
| Short-term borrowings | | | 11,968 | | | | 10,995 | | | | 15,801 | | | | (8.1 | ) | | | 43.7 | | | | 15,801 | | | | 23,225 | | | | 9,715 | | | | 47.0 | | | | (58.2 | ) |
| Secured borrowings | | | 7,502 | | | | 8,103 | | | | 11,452 | | | | 8.0 | | | | 41.3 | | | | 11,452 | | | | 10,226 | | | | 7,944 | | | | (10.7 | ) | | | (22.3 | ) |
| Long-term debt | | | 26,172 | | | | 32,574 | | | | 46,496 | | | | 24.5 | | | | 42.7 | | | | 46,496 | | | | 49,652 | | | | 44,795 | | | | 6.8 | | | | (9.8 | ) |
| Future policy benefit | | | 4,778 | | | | 5,683 | | | | 6,769 | | | | 18.9 | | | | 19.1 | | | | 6,769 | | | | 7,260 | | | | 8,310 | | | | 7.3 | | | | (14.5 | ) |
| Accrued expenses and other liabilities | | | 7,078 | | | | 9,244 | | | | 13,369 | | | | 30.6 | | | | 44.6 | | | | 13,369 | | | | 15,678 | | | | 12,553 | | | | 17.3 | | | | (19.9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total liabilities | | | 146,846 | | | | 165,123 | | | | 204,500 | | | | 12.4 | | | | 23.8 | | | | 204,500 | | | | 243,009 | | | | 234,361 | | | | 18.8 | | | | (3.6 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Minority interest | | | 80 | | | | 162 | | | | 212 | | | | 102.5 | | | | 30.9 | | |
| Redeemable convertible preferred stock | | | 368 | | | | — | | | | — | | | | (100.0 | ) | | | — | | |
| Stockholders’ equity | | | 7,785 | | | | 9,802 | | | | 16,910 | | | | 25.9 | | | | 72.5 | | |
| The Group stockholders’ equity | | | | 16,910 | | | | 17,652 | | | | 20,218 | | | | 4.4 | | | | 14.5 | |
| Noncontrolling interest | | | | 212 | | | | 312 | | | | 331 | | | | 47.2 | | | | (6.1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total liabilities, minority interest and stockholders’ equity | | W | 155,079 | | | W | 175,087 | | | W | 221,622 | | | | 12.9 | % | | | 26.6 | % | |
| Total equity | | | | 17,122 | | | | 17,964 | | | | 20,549 | | | | 4.9 | | | | 14.4 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total liabilities and equity | | | W | 221,622 | | | W | 260,973 | | | W | 254,910 | | | | 17.8 | % | | | (2.3 | )% |
| | | | | | | | | | | | | |
N/M = Not meaningful.not meaningful
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2009 Compared to 2008
Our total liabilities decreased by 3.6% from W243,009 billion as of December 31, 2008 to W234,361 billion as of December 31, 2009, primarily due to a decrease in short-term borrowings and trading liabilities, which was partially offset by an increase in interest-bearing liabilities.
The decrease in short-term borrowings was primarily due to a greater groupwide emphasis on long term borrowings as opposed to short-term borrowings as part of an enhanced risk management policy to increase the proportion of customer deposits relative to short-term borrowings as our preferred source of funding, as customer deposits tend to be more stable source of funding as customers typically rollover their deposits upon maturity.
The decrease in trading liabilities was largely due to a decrease in the transaction volume of foreign currency related derivatives.
The increase in interest-bearing liabilities was primarily due to an increase in customer deposits which reflected an increase in preference for relatively safe investment products among customers in light of the increase volatility in the stock markets as a result of the recent global financial crisis and our active policy to increase the proportion of customer deposits as our preferred source of funding.
Our stockholders’ equity increased by 14.5% from W17,652 billion as of December 31, 2008 to W20,218 billion as of December 31, 2009, largely due to an increase in our equity and capital surplus as a result of the rights offering as well as retained earnings from net income in 2009.
20072008 Compared to 20062007
Our total liabilities increased by 23.8%18.8% fromW165,123 billion as of December 31, 2006 to W204,500 billion as of December 31, 2007 to W243,009 billion as of December 31, 2008, primarily due to an increase in long-term debt.deposits at Shinhan Bank largely as a result of an aggressive campaign to find funding for the increased volume of loans made by Shinhan Bank.
Our interest-bearingThe increase in deposits increased by 12.7% from W91,578 billion as of December 31, 2006 to W103,241 billion as of December 31, 2007was largely due primarily to an increase in saving depositshigh-interest savings and other deposits.time deposits, which were marketed heavily to attract deposit in light of the global liquidity crisis in the second half of 2008.
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Our long-term debtTo a lesser extent, our total liabilities increased by 42.7% from W32,574 billionalso as a result of December 31, 2006liabilities related to W46,496 billion asthe foreign currency-related derivative products, largely due to the increased use of December 31, 2007 due primarily to increased funding throughsuch derivatives for hedging against the issuance of financial debentures.wide fluctuations in foreign exchange rates in 2008, particularly the Won against the U.S. dollar.
Our stockholders’ equity increased by 72.5%4.4% fromW9,802 billion as of December 31, 2006 to W16,910 billion as of December 31, 2007.
2006 Compared2007 to 2005
Our total liabilities increased by 12.4% from W146,84617,652 billion as of December 31, 20052008, largely due to W165,123 billion as of December 31, 2006. This increase reflects anthe increase in interest-bearing deposits and long-term debt.retained earnings, which was partially offset by accumulated other comprehensive income related to the valuation losses ofavailable-for-sale securities.
Our interest-bearing deposits increased by 10.0% from W83,278 billion as of December 31, 2005 to W91,578 billion as of December 31, 2006 due primarily to an increased volume of demand deposits and certificate of deposits.
Our long-term debt increased by 24.5% from W26,172 billion as of December 31, 2005 to W32,574 billion as of December 31, 2006 due primarily to increased funding through issuance of financial debentures.
Our stockholders’ equity increased 25.9% from W7,785 billion as of December 31, 2005 to W9,802 billion as of December 31, 2006.
Liquidity and Capital Resources
| |
| ITEM 5.B. | Liquidity and Capital Resources |
We are exposed to liquidity risk arising from the funding of our lending, trading and investment activities and in the management of trading positions. The goal of liquidity management is for us to be able, even under adverse conditions, to meet all of our liability repayments on time and fund all investment opportunities. For an explanation of how we manage our liquidity risk, see “Item 4. Information on the Company4.B. Business Overview — Description of Assets and Liabilities —Risk Management ��� Market Risk Management — Market Risk Management of Shinhan Bankfor Non-trading Activities — Liquidity Risk Management.” In our opinion, the working capital is sufficient for our present requirements.
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The following table sets forth our capital resources as of December 31, 2007.2009.
| | | | | |
| | | As of December 31,
| |
| | 2007 2009 | |
| | | (In billions of Won) | |
| |
| Deposits | | W | 106,403143,699 | |
| Long-term debt | | | 46,49644,795 | |
| Call money | | | 1,6732,398 | |
| Borrowings from the Bank of Korea | | | 8831,434 | |
| Other short-term borrowings | | | 13,2455,883 | |
| Asset securitizations | | | 11,4527,944 | |
| Stockholders’ equity(1) | | | 2,2002,590 | |
| | | | | |
| Total | | W | 182,352208,743 | |
| | | | | |
Note:
| | |
| (1) | | Includes redeemable preferred stock and redeemable convertible preferred stock. See noteNote 21 in the notes to our consolidated financial statements included in this annual reportreport. |
Due to our history asWe obtain funding from a traditional commercial bank, our primaryvariety of sources, both domestic and foreign. Our principal source of funding is customer deposits obtained from our banking operations, and we from time to time issue equity and debt securities, including preferred shares to fund large-scale acquisitions such as Chohung Bank and LG Card and a recent rights offering in anticipation of greater liquidity and capital requirements during the recent global financial crisis. In addition, our subsidiaries acquire funding through call money, borrowings from the Bank of Korea, other short-term borrowings, corporate debentures, other long-term debt and asset-backed securitizations.
Our primary funding strategy has historically been and continues to beachieve low-cost funding by increasing the average balances of low-cost retail customer deposits. Deposits amounted to W95,496 billion and W106,403 billion as of December 31, 2006 and 2007, respectively, which represented approximately 60.1% and 58.4%, respectively,Customer deposits accounted for 59.1% of our total funding as of such dates.
Our banking subsidiaries meet mostDecember 31, 2007, 59.6% of theirour total funding requirements through short-term funding sources, which consist primarily of customer deposits. Asas of December 31, 2007, approximately 52.5%2008 and 68.8% of Shinhan Bank’sour total deposits had current maturitiesfunding as of one year or less.December 31, 2009. In the past, largely due to the lack of alternative investment opportunities for individuals and households in Korea, especially in light of thea low interest rate environment and
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volatile stock market conditions, a substantial portion of such customer deposits were rolled over upon maturity and accordingly provided a stable source of funding for our banking subsidiaries. However, due to the increasing popularityduring times of higher-yielding investment opportunities driven by the bullish stock marketmarkets, for instance in the recent past,2007, customers transferred an increasing portion of customerbank deposits maintained at banks have shifted to alternative investment vehicles, including money market funds and other brokerage accounts maintained at securities companies, which resultedcompanies. Largely as a result of their recent experience with the recent global financial crisis, customers, to a substantial degree, have come to place a priority in temporary difficultymaintaining the bulk of their liquid assets in finding sufficient funding for Korean banksbank deposits and have not demonstrated a large-scale exodus in general, includingsearch of alternative investment opportunities notwithstanding intermittent bullishness in stock markets, and such customer preference has enabled us to continue to rely on low-cost and stable customer deposits as the primary source of our funding.
While our banking subsidiaries currently are not facing liquidity difficulties in January 2008.any material respect, if we or our banking subsidiaries are unable to obtain the funding we need on terms commercially acceptable to us for an extended period of time for reasons of Won devaluation or otherwise, we may not be able to ensure our financial viability, meet regulatory requirements, implement our strategies or compete effectively. See “Item 3.D. Risk Factors — Risks Related to Our Overall Business — Changes in interest rates, foreign exchange rates, bond and equity prices, and other market factors have affected and will continue to affect our business.”
We may use secondaryAs of December 31, 2007, 2008 and other funding sources to complement,2009, W5,167 billion, W5,100 billion and W5,706 billion, or if necessary, replace5.20%, 4.54% and 4.38%, respectively, of Shinhan Bank’s total deposits in Korean Won were deposits made by litigants in connection with legal proceedings in Korean courts. Court deposits carry interest rates, which are generally lower than market rates.
In addition, we obtain funding through customer deposits.borrowings and the issuances of debt and equity securities, primarily through Shinhan Bank. Our borrowings consist mainly of borrowings from financial institutions, the Korean government and Korean government-affiliated funds. Call money, which is available in both Won and foreign currencies, is obtained from the domestic call loan market, a short-term loan market for loans with maturities of less
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than one month. As for our long-term debt, it is principally in the form of corporate debt securities issued by Shinhan Bank. Since 1999, Shinhan Bank has actively issued and continues to issue long-term debt securities with maturities of over one year in the Korean fixed-income market. Shinhan Bank and we have maintained one of the highest credit ratings in the domestic fixed-income market since their inception in 1999 and 2001, respectively. As Shinhan Bank maintains one of the highest debt ratingratings in the fixed-income market in Korea, we believe that Shinhan Bank will be able to obtain replacement funding through the issuance of long-term debt securities. Shinhan Bank’s interest rates on long-term debt securities are in general 20 to 30 basis points higher than the interest rates offered on their deposits. However, since long-term debt areis not subject to premiums paid for deposit insurance and the Bank of Korea reserves, we estimate that our funding costs on long-term debt securities are generally on a par with our funding costs on deposits.
We depend on long-term debt as a significant source of funding, principally in the form of corporate debt securities. Since 1999, we have actively issued and continue to issue long-term debt securities with maturities of over one year in the Korean fixed-income market. Shinhan Bank has maintained the highest credit rating in the domestic fixed-income market since 1999 and our holding company has also maintained the highest credit rating since its inception in 2001. In addition, Shinhan Bankwe and Shinhan CardBank may also issue long-term debt securities denominated in foreign currency in the overseas market. As of May 30,December 31, 2007, 2008 and 2009, our long-term debt amounted to W46,496 billion, W49,652 billion and W44,795 billion, respectively.
Furthermore, we have also issued preferred shares, such as redeemable preferred shares and redeemable convertible preferred shares, as part of funding for major acquisitions, such as those for Chohung Bank and LG Card. See “Item 10.B. Memorandum and Articles of Incorporation — Description of Preferred Stock — Redeemable Preferred Stock (Series 10)” and “— Description of Capital Stock — Redeemable Convertible Preferred Stock (Series 11).”
We also have funding requirements for our credit card activities. We obtain funding for our credit card activities from a variety of sources, primarily in Korea. The principal sources of funding for Shinhan Card are debentures, asset-backed securitization, commercial papers (including call money), borrowings from the holding company and third-parties, which amounted, on a managed basis under Korean GAAP, to W8,492 billion, W1,904 billion, W570 billion, W800 billion, W50 billion, or 71.9%, 16.1%, 4.8%, 6.8% and 0.4%, respectively, of the funding for our credit card activities, as of December 31, 2009. Unlike other credit card companies, Shinhan Card has the benefit of obtaining funding at favorable rates through loans from Shinhan Financial Group, which currently maintains a credit rating of AAA, the highest credit rating assigned by local rating agencies. Shinhan Card aims to further diversify its funding sources and more actively tap the domestic and international capital markets to ensure access to liquidity as needed.
Credit ratings affect the cost and other terms upon which we and our subsidiaries are able to obtain funding. Domestic and international rating agencies regularly evaluate us and our subsidiaries and their ratings of our and our subsidiaries’ long-term debt are based on a number of factors, including our financial strength as well as conditions affecting the financial services industry generally. In light of the risk that the global economy and financial markets may experience another onset of difficulties, there can be no assurance that the rating agencies will maintain the current ratings or outlooks for us or our subsidiaries. Our failure to maintain current credit ratings and outlooks could increase the cost of our funding, limit our access to capital markets and other borrowings, and require us to post additional collateral in financial transactions, any of which could adversely affect our liquidity, net interest margins and profitability.
As of June 11, 2010, the credit ratings by S&P, Moody’s and Fitch assigned to Shinhan Bank and Shinhan Card were as follows:
| | | | | | | | | | | | | |
| | | As of May 30, 2008June 11, 2010 |
| | | S&P | | Moody’s | | Fitch |
| |
| Shinhan Bank | | | A− | | | | A1 | | | | A | |
| Shinhan Card | | | BBB+ | | | | N/A— | | | | BBB+A− | |
N/A = not available
The cost and availability of unsecured financing are influenced by credit ratings. We expect our domestic credit ratings to remain at the highest level and, accordingly, do not anticipate any material increase in funding cost. Shinhan Bank’s overseas credit ratings have continued to improve since the financial crisis of late 1997 until 2002. During 2003, S&P lowered the debt ratings of Shinhan Bank one notch to BBB following the announcement of our acquisition of Chohung Bank. Chohung Bank’s credit rating, on the other hand, was upgraded to match that of Shinhan Bank to BBB from BBB− in April 2004. In September 2005, S&P upgraded the credit ratings of Shinhan Bank and Chohung Bank to A−. Following the merger between the two banks, Moody’s upgraded Shinhan Bank’s credit rating to A3 in August 2006 and further upgraded the rating to A1 in May 2007. Our holding company didhas not receivereceived ratings by eitherany of these credit rating agencies since it has not obtained fundingengaged in debt financing from overseas sources to date.
As of December 31, 2005, 2006 and 2007, our long-term debt amounted to W26,172 billion, W32,574 billion and W47,496 billion, respectively.
Secondary funding sources also include call money, borrowings from The Bank of Korea and other short-term borrowings which amounted to W11,96815,801 billion, W10,99523,225 billion and W15,8019,715 billion, as of December 31, 2005, 20062007, 2008 and 2007,2009, each representing 8.5%8.7%, 7.0%11.2% and 8.7%4.7%, respectively, of our total funding as of such dates.
AdditionalWe may also from time to time obtain funding flexibilitythrough issuance of equity securities.
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On February 2, 2009, our board of directors decided to issue 78,000,000 new common shares, or approximately 19.7% of our then outstanding common shares, to our existing shareholders in order to, among others, enhance our capital position to prepare for potential contingencies that might result from the prevailing economic environment, notwithstanding that we and our subsidiaries had fully satisfied (as also is providedthe case now) the capital adequacy ratios required under applicable laws and regulations and were not (as also is the case now) facing any significant liquidity constraints or financial distress. The subscription price per share was determined as W16,800 based on a pricing formula prescribed by the rules of the Financial Services Commission. On March 19, 2009, the offering was completed with substantially all of the rights shares subscribed by our ability to accessexisting shareholders, and following settlement on March 24, 2009, the repurchase and asset securitization markets. These alternatives are evaluated on an ongoing basis to achieve the appropriate balance of secured and unsecured funding. The ability to securitize loans, and the associated gains on those securitizations, are principally dependentnewly issued shares were listed on the credit qualityKorea Exchange on March 30, 2009. The aggregate proceeds from the rights offering was approximately W1,310,400,000,000 (prior to adjustments for underwriting commissions and yields onother offering expenses). The rights offering resulted in a capital increase of approximately 16.4%. The proceeds from the assets securitizedrights offering was used to support our existing business operations and are generally not dependent on the ratings of the issuing entity. Transactions between us and our securitization structures are reflected in our consolidated financial statements. See note 14 in the notes to our consolidated financial statements included in this annual report.other general corporate purposes.
In limited situations, we may also issue redeemable preferred shares and redeemable convertible preferred shares which are convertible into our common shares.
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For example, in August 2003, in order to partly fund our acquisition of Chohung Bank, we issued to Korea Deposit Insurance Corporation (i) 46,583,961 redeemable preferred shares with an aggregate redemption price offor W842,517,518,646843 billion and (ii) 44,720,603 redeemable convertible preferred shares with an aggregate redemption price offor W808,816,825,858, which were convertible into our common shares. In November 2005809 billion, and August 2006, Korea Deposit Insurance Corporation converted all of our redeemable convertible preferred shares held by it into 44,720,603 of our common shares in the aggregate. We are required to redeem the redeemable preferred shares issued to Korea Deposit Insurance Corporation in five equal annual installments commencing three years from the date of issuance. The dividend ratio on our redeemable preferred share is 4.04% of the subscription amount. In addition, in order to partly fund our acquisition of Chohung Bank, in August 2003, we raised W900 billion in cash through the issuance ofother domestic financial institutions 6,000,000 redeemable preferred shares all of which were sold in the domestic fixed-income market through Strider Securitization Specialty Co., Ltd., a special purpose vehicle. We are required to redeem these shares in three installments of infor W525 billion, W365 billion and W10 billion in August 2006, August 2008 and August 2010, respectively. The installment due in August 2006 was paid in full. See “Item 10. Additional Information — Articles of Incorporation — Description of Capital Stock — Description of Redeemable Preferred Stock.”
900 billion. In addition, in January 2007, partly to fund the acquisition of LG Card, we raised W3,750 billion in cash through private placements of 28,990,000 redeemable preferred shares at the purchase price of W100,000 per share and 14,721,000 redeemable convertible preferred shares at the purchase price of W57,806 per share to institutional investors and governmental entities in Korea. For further details on the terms of these preferred shares, including scheduled redemption dates, dividend rates and conversion ratios, see “Item 10.B. Memorandum and Articles of Incorporation — Description of Preferred Stock — Redeemable Preferred Stock (Series 10).”
These preferred shares have a term of 20 years and may be redeemed at our option from the fifth anniversary of the date of issuance to the maturity date. The redeemable convertible preferred shares may be converted into our common shares at a conversion ratio ofone-to-one from the first anniversary of the issue date to the fifth anniversary of the issue date. The dividend ratio on the redeemable preferred shares is 7% for the first five years and increases according to a preset formula. The dividend ratio on the redeemable convertible preferred shares is 3.25% for the first five years and increases according to a preset formula. These preferred shares have terms that are different from the preferred shares issued previously. See “Item 10. Additional Information10.B. Memorandum and Articles of Incorporation — Description of CapitalPreferred Stock — Description of Redeemable Preferred Stock — Series 10 Redeemable Preferred Stock”(Series 10)” and “— Description of Redeemable Convertible Preferred Stock — Series 11 Redeemable Preferred Stock.(Series 11).”
Pursuant to laws and regulations in Korea, we may redeem our preferred stock to the extent of our retained earnings of the previous fiscal year, net of certain reserves as determined under Korean GAAP. At this time, we expect that cash from our future operations should be adequate to provide us with sufficient capital resources to enable us to redeem our preferred stock pursuanton or prior to thetheir scheduled maturities as described in the table above.maturities. In the event there is a short-term shortage of liquidity to make the required cash payments for redemption as a result of, among other things, failure to receive dividend payments from our operating subsidiaries on time or as a result of significant expenditures resulting from future acquisitions, we plan to raise cash liquidity through the issuance of long-term debt in the Korean fixed-income market in advance of the scheduled maturity on our preferred stock. To the extent we need to obtain additional liquidity, we plan to do so through the issuance of long-term debt and the use of our other secondary funding sources.
For example, as part of obtaining the funding for the LG Card acquisition, from November 2006 to February 2007, we also issued corporate bonds in the aggregate principal amount of W2,550 billion and commercial papers in the aggregate principal amount of W380 billion. The corporate bonds have maturity ranging from 2.5 years to seven years from the issue date. The amounts due under the corporate bonds are W1,050 billion in 2009, W500 billion in 2010, W200 billion in each of 2011 and 2012 and W300 billion in each of 2013 and 2014. The commercial paper matures on the first anniversary of the issue date. In addition, in June 2007, as part of obtaining additional funding for the LG Card acquisition, we also issued corporate bonds in the aggregate principal amount of W550 billion. The amounts due under these corporate bonds are W200 billion in June, 2010, W250 billion in June 2012 and W100 billion in June 2014.
Our policy is to encourage our subsidiaries to secure their own funding and liquidity source.sources. With respect to Shinhan Capital and Shinhan Card, we have, in certain cases, provided funding through our holding company to take advantage of our lower cost of funding within regulatory limitations. For example, in 2007,2008 and 2009, we provided funding in the amount of W100850 billion and W800 billion, respectively, to Shinhan Card and W350 billion and W600 billion, respectively, to Shinhan Capital, in each case, in the form of capital contribution through our holding company.
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Under However, under the Monopoly Regulation and Fair Trade Act of Korea, however, a financial holding company is prohibited from borrowing funds in excess of 100%200% of its total stockholders’ equity. In addition, pursuant to our liquidity risk management policies designed to ensure compliance with required capital adequacy and liquidity ratios, we have set limits to the amount of liquidity support by our holding company to our subsidiaries
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to 70% of our total stockholders’ equity and the amount of liquidity support to a single subsidiary to 35% of our total stockholders’ equity.
We generally may not acquire our own shares except in certain limited circumstances including, without limitation, a reduction in capital. However, pursuant to the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act and regulations under the Financial Holding Companies Act, we may purchase our own shares on the StockKRX KOSPI Market Division of the Korea Exchange or through a tender offer, or retrieve our own shares from a trust company upon termination of a trust agreement subject to the restrictions that (1) the aggregate purchase price of such shares may not exceed the total amount available for distribution of dividends at the end of the preceding fiscal year less the amounts of dividends and reserves for such fiscal year, subtracted by the sum of (a) the purchase price of treasury stock acquired if any treasury stock has been purchased after the end of the preceding fiscal year pursuant to the Commercial Act or the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act, (b) the amount subject to a trust contract, and (c) the amount of dividends approved at the ordinary general shareholders’ meeting after the end of the preceding fiscal year and the amount of retained earnings reserve required under the Commercial Act; plus if any treasury stock has been disposed of after the end of the preceding fiscal year, the acquisition cost of such treasury stock, and (2) the purchase of such shares shall meet the requisite ratio under the Financial Holding Companies Act and regulations thereunder. We may purchase our own shares for the purpose of cancellation with profits through the StockKRX KOSPI Market Division of the Korea Exchange, or through a tender offer acquire interests in our own shares through agreements with trust companies, subject to the same restrictions on the purchase price as described in this paragraph. In addition, pursuant to the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act, of Korea, in certain limited circumstances, dissenting holders of shares have the right to require us to purchase their shares.
We do not use derivatives contracts to hedge the risk relating to these repurchases.
Contractual Obligations, Commitments and Guarantees
In the ordinary course of our business, we have certain contractual cash obligations and commitments which extend for several years. As we are able to obtain liquidity and funding through various sources as described in “— Liquidity and Capital Resources” above, we do not believe that these contractual cash obligations and commitments will have a material effect on our liquidity or capital resources.
Contractual Cash Obligations
The following table sets forth our contractual cash obligations as of December 31, 2007.2009.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2007
| | | As of December 31, 2009
| |
| | | Payments Due by Period | | | Payments Due by Period | |
| | | Less Than
| | | | | | More Than
| | | | | Less Than
| | | | | | More Than
| | | |
| | | 1 Year | | 1-3 Years | | 3-5 Years | | 5 Years | | Total | | | 1 Year | | 1-3 Years | | 3-5 Years | | 5 Years | | Total | |
| | | | | | | (In billions of Won) | | | | | (In billions of Won) | |
| |
Long-term debt(1)(2) | | W | 12,678 | | | W | 17,125 | | | W | 5,080 | | | W | 11,613 | | | W | 46,496 | | | W | 13,336 | | | W | 18,373 | | | W | 7,007 | | | W | 8,315 | | | W | 47,031 | |
Secured borrowings | | | 8,477 | | | | 2,121 | | | | 555 | | | | 299 | | | | 11,452 | | | | 4,851 | | | | 2,284 | | | | 62 | | | | 1,076 | | | | 8,273 | |
Provisions for accrued severance indemnities(2)(6) | | | 31 | | | | 28 | | | | 42 | | | | 183 | | | | 284 | | | | 2 | | | | 3 | | | | 11 | | | | 95 | | | | 111 | |
Deposits(3)(5) | | | 56,823 | | | | 7,970 | | | | 528 | | | | 507 | | | | 65,828 | | | | 87,794 | | | | 6,362 | | | | 1,131 | | | | 490 | | | | 95,777 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total | | W | 78,009 | | | W | 27,244 | | | W | 6,205 | | | W | 12,602 | | | W | 124,060 | | | W | 105,983 | | | W | 27,022 | | | W | 8,211 | | | W | 9,976 | | | W | 151,192 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Notes:
| | |
| (1) | | Includes estimated future interest payments. The future interest payment have been estimated using the weighted average interest rates paid for 2009 for each category and their scheduled contractual maturities. |
|
| (2) | | Long-term debt includes senior debt, subordinated debt and Redeemable Preferred Stock.Stock, as contained in Note 15 to our consolidated financial statements. |
| |
(2)(3) | | See Note 14 to our consolidated financial statements included in this annual report. |
|
| (4) | | This amount represents the amount of severance payment we are obligated to pay to the employees who are scheduled to retire during the indicated periods, as determined based on the employees’ current salary rates and the number of service years that will be accumulated upon their retirement date. In accordance with our policy |
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| | |
| | and the Korean Labor Standard Law, employees with one year or more of service are entitled, upon termination of employment, to receive a lump sum severance payment based upon the length |
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| | |
| | of their service and the average of the last three months’ wages. We make provisions for accrued severance indemnities based upon the assumption that all employees terminate their employment with us at the same time. |
| |
(3)(5) | | Deposits include certificate of deposits, other time deposits and mutual installment deposits.deposits, as contained in Note 12 to our consolidated financial statements. |
|
| (6) | | This amount represents provisions for accrued severance indemnities for a period of 10 years or less. |
The above table does not include uncertain tax benefits of W20053 billion associated with ASC740-10 (formerly FIN 4848) and tax-related interest and penalties of W3711 billion.
Commitments and Guarantees
The following table sets forth our commitments and guarantees as of December 31, 2007. These commitments, apart from certain guarantees and acceptances, are not included within our consolidated balance sheet. Guarantees issued after December 31, 2003 are recorded at their fair value at inception, which is amortized over the life of guarantees.
| | | | | | | | | | | | | | | | | |
| | | As of December 31, 2007
| |
| | | Commitment Expiration by Period | |
| | | Less Than
| | | | | | More Than
| | | | |
| | | 1 Year | | | 1-5 Years | | | 5 Years | | | Total | |
| | | (In billions of Won) | |
| |
| Commitments to extend credit: | | | | | | | | | | | | | | | | |
| Corporate | | W | 52,112 | | | W | 10,148 | | | W | 3,351 | | | W | 65,611 | |
| Credit card lines(1) | | | 1,020 | | | | 44,284 | | | | 775 | | | | 46,079 | |
| Consumer(2) | | | 6,825 | | | | 140 | | | | 3 | | | | 6,968 | |
| Commercial letters of credit(3) | | | 3,518 | | | | — | | | | — | | | | 3,518 | |
| Financial standby letters of credit | | | 187 | | | | — | | | | — | | | | 187 | |
| Other financial guarantees | | | 1,046 | | | | 3 | | | | — | | | | 1,049 | |
| Performance letters of credit and guarantees | | | 8,003 | | | | 12 | | | | 3 | | | | 8,018 | |
| Liquidity facilities to SPEs | | | 469 | | | | 2,574 | | | | 276 | | | | 3,319 | |
| Acceptances | | | 1,701 | | | | — | | | | — | | | | 1,701 | |
| Loans sold with recourse | | | — | | | | 1 | | | | — | | | | 1 | |
| Guarantee on trust accounts | | | 454 | | | | 462 | | | | 2,644 | | | | 3,560 | |
| Credit derivatives | | | — | | | | 66 | | | | — | | | | 66 | |
| | | | | | | | | | | | | | | | | |
| Total | | W | 75,335 | | | W | 57,690 | | | W | 7,052 | | | W | 140,077 | |
| | | | | | | | | | | | | | | | | |
Notes:
| | |
(1) | | Relates to the unused portion of credit card limits that may be cancelled by us after notice to the borrower if we determine that the borrower’s repayment ability is significantly impaired. |
|
(2) | | Excludes credit cards. |
|
(3) | | These are generally short-term and collateralized by the underlying shipments of goods to which they relate. |
Commitments to extend credit represent unfunded portions of authorizations to extend credit in the form of loans. The commitments expire on fixed dates and a customer is required to comply with predetermined conditions to draw funds under the commitments.
Commercial letters of credit are undertakings on behalf of customers authorizing third parties to draw drafts on us up to a stipulated amount under specific terms and conditions. Commitments to extend credit, including credit lines, are in general subject to provisions that allow us to withdraw such commitments in the event there are material adverse changes affecting an obligor.
Financial standby letters of credit are irrevocable obligations to pay third party beneficiaries when our customers fail to repay loans or debt instruments, which are generally in foreign currencies. A substantial portion of these standby letters of credit are secured by underlying assets, including trade-related documents.
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Other financial guarantees are used in various transactions to enhance the credit standing of our customers. They represent irrevocable assurance, subject to satisfaction of certain conditions, that we will make payment in the event that our customers fail to fulfill their obligations to third parties. Such financial obligations include a return of security deposits and the payment of service fees.
Performance letters of credit and guarantees are issued to guarantee customers’ tender bids on construction or similar projects or to guarantee completion of such projects in accordance with contractual terms. They are also issued to support a customer’s obligation to supply products, commodities, maintenance or other services to third parties.
Liquidity facilities to SPEs represent irrevocable commitments to provide contingent credit lines including commercial paper purchase agreements to SPEs for which we serve as the administrator.
Loans sold with recourse represent certain non-performing loans we sold to Korea Asset Management Corporation prior to 1999. The sales agreements contain a recourse obligation under which Korea Asset Management Corporation can obligate us to repurchase the related loans. The recourse obligation has no expiration date.
Guarantees on trust funds represent guarantee of principal issued to trust fund investors.
Our holding company entered into certain guarantee contracts that meet the characteristics of a derivative under SFAS No. 133. Such derivatives effectively guarantee the return on the counterparty’s referenced portfolio of assets.
Acceptances are a guarantee by us to pay a bill of exchange drawn on a customer. We expect most acceptances to be presented, but reimbursement by the customer is normally immediate.
Details of our credit commitments and obligations under guarantees are provided in Note 31 in the notes to our consolidated financial statements included in this annual report.
Off-Balance Sheet Arrangements
We have several types of off-balance sheet arrangements, including guarantees for loans, debentures, trade financing arrangements, guarantees for other financings, credit lines, letters of credit and credit commitments. In the normal course of business, our banking activities, wesubsidiaries make various commitments and guarantees to meet the financing needs of our customers. Commitments and guarantees are usually in the form of, among others, commitments to extend credit, commercial letters of credit, standby letter of credit and performance guarantees. The contractual amount of these financial instruments represents the maximum possible loss amount if the account partycounter-party draws down the commitment or we should fulfill our obligation under the guarantee and the accountcounter party fails to perform under the contract. See “Item 4. Information on the Company — History and Development of Shinhan Financial Group4.B. Business Overview — Description of Assets and Liabilities — Credit-Related Commitments and Guarantees.”
The following table sets forth our commitments and guarantees as of December 31, 2009. These commitments, apart from certain guarantees and acceptances, are not included within our consolidated balance sheet.
| | | | | | | | | | | | | | | | | |
| | | As of December 31, 2009
| |
| | | Commitment Expiration by Period | |
| | | Less Than
| | | | | | More Than
| | | | |
| | | 1 Year | | | 1-5 Years | | | 5 Years | | | Total | |
| | | (In billions of Won) | |
| |
| Commitments to extend credit(1): | | | | | | | | | | | | | | | | |
| Corporate | | W | 44,474 | | | W | 3,808 | | | W | 1,308 | | | W | 49,590 | |
| Credit card lines(2) | | | 3,413 | | | | 61,491 | | | | — | | | | 64,904 | |
| Consumer(3) | | | 8,575 | | | | 219 | | | | 1 | | | | 8,795 | |
| Commercial letters of credit(4) | | | 3,126 | | | | 193 | | | | — | | | | 3,319 | |
| Financial standby letters of credit(5) | | | 431 | | | | 44 | | | | — | | | | 475 | |
| Other financial guarantees(6) | | | 880 | | | | 15 | | | | 22 | | | | 917 | |
| Performance letters of credit and guarantees(7) | | | 6,434 | | | | 3,855 | | | | 42 | | | | 10,331 | |
| Liquidity facilities to SPEs(8) | | | 260 | | | | 1,203 | | | | 206 | | | | 1,669 | |
| Acceptances(9) | | | 2,750 | | | | 30 | | | | — | | | | 2,780 | |
| Guarantee on trust accounts(10) | | | 437 | | | | 3,043 | | | | 16 | | | | 3,496 | |
| | | | | | | | | | | | | | | | | |
| Total | | W | 70,780 | | | W | 73,901 | | | W | 1,595 | | | W | 146,276 | |
| | | | | | | | | | | | | | | | | |
Notes:
| | |
| (1) | | Commitments to extend credit represent unfunded portions of authorizations to extend credit in the form of loans. The commitments expire on fixed dates and a customer is required to comply with predetermined conditions to draw funds under the commitments. |
|
| (2) | | Credit card commitments relate to unused portion of credit card limits that may be cancelled by us, after notice to the customer, if we determine that the customer’s repayment ability is significantly impaired. Prior to April 2008, we were able to change credit card limits of all customers whose accounts are inactive for more than 12 months without their approval. However, following a change in the Korea Fair Trade Commission’s policy related to credit card limits effective April 2008, we now require the customer’s agreement before changing the credit card limits for customers whose repayment ability is not significantly impaired. |
|
| (3) | | Excludes credit cards. |
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| | |
| (4) | | Commercial letters of credit are undertakings on behalf of customers authorizing third parties to draw drafts on us up to a stipulated amount under specific terms and conditions. These are generally short-term and collateralized by the underlying shipments of goods to which they relate. Commitments to extend credit, including credit lines, are in general subject to provisions that allow us to withdraw such commitments in the event there are material adverse changes affecting an obligor. |
|
| (5) | | Financial standby letters of credit are irrevocable obligations to pay third party beneficiaries when our customers fail to repay loans or debt instruments, which are generally in foreign currencies. A substantial portion of these standby letters of credit are secured by underlying assets, including trade-related documents. |
|
| (6) | | Other financial guarantees are used in various transactions to enhance the credit standing of our customers. They provide irrevocable assurance, subject to satisfaction of certain conditions, that we will make payment in the event that our customers fail to fulfill their obligations to third parties. These financial obligations include a return of security deposits and the payment of service fees. |
|
| (7) | | Performance letters of credit and guarantees are issued to guarantee customers’ tender bids on construction or similar projects or to guarantee completion of such projects in accordance with contractual terms. They are also issued to support a customer’s obligation to supply products, commodities, maintenance or other services to third parties |
|
| (8) | | Liquidity facilities to SPEs represent irrevocable commitments to provide contingent credit lines including commercial paper purchase agreements to special purpose entities for which we serve as the administrator. |
|
| (9) | | Acceptances represent guarantees by us to pay a bill of exchange drawn on a customer. We expect most acceptances to be presented, but reimbursement by the customer is normally immediate. |
|
| (10) | | Guarantees on trust accounts represent guarantee of principal issued to trust fund investors. |
Our holding company entered into certain guarantee contracts that meet the characteristics of a derivative under SFAS No. 133. Such derivatives effectively guarantee the return on the counterparty’s referenced portfolio of assets.
Details of our off-balance sheet arrangementscredit commitments and obligations under guarantees are provided in Note 31 in the notes to our consolidated financial statements included in this annual report.
Selected Financial Information under Korean GAAP
The selected consolidated financial and other data shown below have been derived from our consolidated financial statements, prepared in accordance with Korean GAAP not presented herein.
Under Korean GAAP, consolidated financial statements include the accounts of fully or majority owned subsidiaries and substantially controlled affiliates that have assets in the amount equal to or more than W710 billion as of the end of the previous fiscal year. Substantial control is deemed to exist when the investor is the largest shareholder and owns more than 30% of the investee’s voting shares. Korean GAAP does not require the consolidation of subsidiaries, or substantially controlled affiliates, where activities are dissimilar from ours.
Under Korean GAAP effective since 1994, financial statements of our trust accounts, on which we guarantee a fixed rate of returnand/or the repayment of principal, are consolidated, whereby assets and liabilities of third parties held by such trusts are reflected as assets and liabilities, and revenues and expenses generated from such
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third party assets are reflected in the statement of operations. Activities between trust accounts and us are eliminated.
Beginning January 1, 1999, the Korean GAAP financial statements are prepared in accordance with financial accounting standards generally accepted for banking institutions issued by the Korean Securities and Futures Commission.
Capital adequacy ratios have been calculated from the financial statements prepared in accordance with Korean GAAP and using the guidelines issued by the Financial Services Commission.
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We have included narrative disclosure in the footnotes to the Korean GAAP financial statements more clearly identify where significant accounting policy changes have taken place, which line items would be affected and how the balances would be affected. The areas where such significant changes have occurred are as follows:
| | |
| | • | Allowance for loan losses; |
| |
| | • | Allowance for unused loan commitments; |
| |
| | • | Allowance for guarantees and acceptances; and |
| |
| | • | Deferred taxation. |
Consolidated Income Statement Data
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2003 | | | 2004 | | | 2005 | | | 2006 | | | 2007 | | | 2007(1) | |
| | | (In billions of Won and millions of US$, except per share data) | |
| |
| Interest income | | W | 4,996 | | | W | 7,016 | | | W | 7,881 | | | W | 9,263 | | | W | 13,321 | | | $ | 14,235 | |
| Interest expense | | | 2,997 | | | | 3,986 | | | | 3,843 | | | | 4,782 | | | | 6,868 | | | | 7,339 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | 1,999 | | | | 3,030 | | | | 4,038 | | | | 4,481 | | | | 6,453 | | | | 6,896 | |
| Provision for credit losses | | | 1,150 | | | | 1,317 | | | | 667 | | | | 576 | | | | 746 | | | | 797 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income after provision for credit losses | | | 849 | | | | 1,713 | | | | 3,371 | | | | 3,905 | | | | 5,707 | | | | 6,099 | |
| Noninterest revenue(2) | | | 3,185 | | | | 7,487 | | | | 7,888 | | | | 11,236 | | | | 13,158 | | | | 14,061 | |
| Noninterest expenses(3) | | | 3,445 | | | | 7,738 | | | | 9,518 | | | | 12,716 | | | | 15,174 | | | | 16,215 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating income | | | 589 | | | | 1,462 | | | | 1,741 | | | | 2,425 | | | | 3,691 | | | | 3,945 | |
| Non-operating income (loss), net | | | 42 | | | | (128 | ) | | | 83 | | | | 88 | | | | 195 | | | | 208 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income before income tax expense | | | 631 | | | | 1,334 | | | | 1,824 | | | | 2,513 | | | | 3,886 | | | | 4,153 | |
| Income tax expenses | | | 254 | | | | 213 | | | | 257 | | | | 670 | | | | 537 | | | | 574 | |
| Pre-acquisition income in subsidiary | | | — | | | | — | | | | — | | | | — | | | | (874 | ) | | | (934 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income before consolidation adjustment | | | 377 | | | | 1,121 | | | | 1,567 | | | | 1,843 | | | | 2,475 | | | | 2,645 | |
| Minority interest in loss (earnings) of consolidated subsidiaries | | | (14 | ) | | | (71 | ) | | | (6 | ) | | | (10 | ) | | | (79 | ) | | | (84 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | W | 363 | | | W | 1,050 | | | W | 1,561 | | | W | 1,833 | | | W | 2,396 | | | $ | 2,561 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Per common share data (in currency unit): | | | | | | | | | | | | | | | | | | | | | | | | |
| Earnings per share-basic | | W | 1,022 | | | W | 3,197 | | | W | 4,874 | | | W | 4,776 | | | W | 5,562 | | | $ | 5.94 | |
| Earnings per share-diluted | | | 1,063 | | | | 2,820 | | | | 4,591 | | | | 4,776 | | | | 5,424 | | | | 5.80 | |
| Cash dividends per common share | | | 600 | | | | 750 | | | | 800 | | | | 900 | | | | 900 | | | | 0.96 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2005 | | | 2006 | | | 2007 | | | 2008 | | | 2009 | | | 2009(1) | |
| | | (In billions of Won and millions of US$, except per share data) | |
| |
| Interest income and dividends | | W | 8,090 | | | W | 9,473 | | | W | 13,958 | | | W | 16,681 | | | W | 13,980 | | | $ | 12,014 | |
| Interest expense | | | 3,842 | | | | 4,782 | | | | 6,868 | | | | 8,865 | | | | 7,286 | | | | 6,261 | |
| Net interest income | | | 4,248 | | | | 4,691 | | | | 7,090 | | | | 7,816 | | | | 6,694 | | | | 5,753 | |
| Provision for loan losses | | | 649 | | | | 575 | | | | 739 | | | | 1,044 | | | | 1,579 | | | | 1,357 | |
| Non-interest income(2) | | | 7,917 | | | | 11,316 | | | | 12,886 | | | | 43,277 | | | | 37,302 | | | | 32,056 | |
| Non-interest expense(3) | | | 9,676 | | | | 12,924 | | | | 15,324 | | | | 47,055 | | | | 40,422 | | | | 34,737 | |
| Income tax expenses | | | 264 | | | | 670 | | | | 549 | | | | 968 | | | | 667 | | | | 573 | |
| Pre-acquisition income in subsidiaries | | | — | | | | — | | | | (874 | ) | | | — | | | | — | | | | — | |
| Net income attributable to noncontrolling interest | | | 15 | | | | 16 | | | | 94 | | | | 7 | | | | 23 | | | | 20 | |
| Net income attributable to the Group | | W | 1,561 | | | W | 1,822 | | | W | 2,396 | | | W | 2,019 | | | W | 1,305 | | | $ | 1,122 | |
| Earnings per share, basic(5) | | W | 4,136 | | | W | 4,530 | | | W | 5,276 | | | W | 4,236 | | | W | 2,303 | | | $ | 1.98 | |
| Earnings per share, diluted(5) | | | 3,910 | | | | 4,530 | | | | 5,155 | | | | 4,152 | | | | 2,290 | | | | 1.97 | |
| Cash dividends per common share | | | 800 | (4) | | | 900 | (4) | | | 900 | (4) | | | — | (4) | | | 400 | (4) | | | 0.34 | |
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Notes:
| | |
| (1) | | Won amounts are expressed in U.S. dollars at the rate of W935.81,163.65 per US$1.00, the noon buying rateNoon Buying Rate in effect on December 31, 2007 as quoted by the Federal Reserve Bank of New York in the United States.2009. |
| |
| (2) | | Noninterest revenueincome includes fees and commissions income, dividends on securities, gains on security valuations and disposals, gains on foreign currency transaction and gains from derivative transactions. |
| |
| (3) | | Noninterest expense is composed of fees & commissions paid or payable, general and administrative expenses, losses on securities valuations and disposals, losses on foreign currency transactions and losses from derivative transactions. |
|
| (4) | | Represents dividends declared on the common shares of Shinhan Financial Group. |
|
| (5) | | The computations of basic and diluted earnings per share (“EPS”) were adjusted retrospectively to include the effects of a discount offered to shareholders in connection with the rights offering in March 2009, which was due to the fact that the shares offered in the rights offering were issued and sold at a discount to the market price. |
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Consolidated Balance Sheet Data
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2003 | | | 2004 | | | 2005 | | | 2006 | | | 2007 | | | 2007(1) | |
| | | (In billions of Won and millions of US$) | |
| |
| Cash and due from banks | | W | 6,418 | | | W | 6,859 | | | W | 8,429 | | | W | 11,274 | | | W | 9,600 | | | $ | 10,259 | |
| Loans(2) | | | 97,757 | | | | 99,277 | | | | 108,389 | | | | 124,183 | | | | 150,881 | | | | 161,232 | |
| Less allowance for doubtful accounts(3) | | | (2,836 | ) | | | (1,917 | ) | | | (1,741 | ) | | | (1,881 | ) | | | (2,954 | ) | | | (3,157 | ) |
| Trading securities | | | 4,877 | | | | 7,066 | | | | 5,496 | | | | 5,517 | | | | 11,741 | | | | 12,546 | |
| Investment securities | | | 23,127 | | | | 20,468 | | | | 24,729 | | | | 25,768 | | | | 31,707 | | | | 33,882 | |
| Premises and equipments(4) | | | 1,879 | | | | 1,859 | | | | 1,885 | | | | 2,212 | | | | 2,405 | | | | 2,570 | |
| Other assets(5) | | | 7,999 | | | | 13,248 | | | | 13,031 | | | | 10,753 | | | | 17,496 | | | | 18,697 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | | 139,221 | | | | 146,860 | | | | 160,218 | | | | 177,826 | | | | 220,876 | | | | 236,029 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | 87,593 | | | | 87,529 | | | | 91,538 | | | | 99,760 | | | | 110,821 | | | | 118,424 | |
| Borrowings(6) | | | 17,209 | | | | 14,895 | | | | 15,916 | | | | 18,174 | | | | 24,205 | | | | 25,866 | |
| Debentures | | | 17,748 | | | | 20,114 | | | | 22,840 | | | | 29,485 | | | | 42,586 | | | | 45,508 | |
| Other liabilities(7) | | | 10,552 | | | | 16,486 | | | | 19,713 | | | | 18,895 | | | | 25,089 | | | | 26,809 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total liabilities | | | 133,102 | | | | 139,024 | | | | 150,007 | | | | 166,314 | | | | 202,701 | | | | 216,607 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Minority interests in consolidated subsidiaries | | | 596 | | | | 88 | | | | 74 | | | | 151 | | | | 197 | | | | 211 | |
| Stockholders’ equity | | | 5,523 | | | | 7,748 | | | | 10,137 | | | | 11,361 | | | | 17,978 | | | | 19,211 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total liabilities, minority interest and stockholders’ equity | | W | 139,221 | | | W | 146,860 | | | W | 160,218 | | | W | 177,826 | | | W | 220,876 | | | $ | 236,029 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | |
| | | 2005 | | | 2006 | | | 2007 | | | 2008 | | | 2009 | | | 2009(1) | |
| | | (In billions of Won and millions of US$) | |
| |
| Cash and due from banks | | W | 8,476 | | | W | 11,347 | | | W | 9,677 | | | W | 13,079 | | | W | 15,855 | | | $ | 13,625 | |
| Trading securities | | | 5,496 | | | | 5,513 | | | | 11,740 | | | | 8,838 | | | | 9,229 | | | | 7,931 | |
| Investment securities | | | 24,746 | | | | 25,658 | | | | 31,638 | | | | 38,647 | | | | 42,062 | | | | 36,147 | |
| Loans | | | 108,390 | | | | 124,264 | | | | 150,926 | | | | 173,662 | | | | 170,561 | | | | 146,574 | |
| Less allowance for doubtful accounts | | | (1,741 | ) | | | (1,881 | ) | | | (2,953 | ) | | | (3,317 | ) | | | (3,597 | ) | | | (3,091 | ) |
| Property and equipment, net | | | 1,887 | | | | 2,214 | | | | 2,407 | | | | 2,411 | | | | 2,324 | | | | 1,997 | |
| Goodwill, net | | | 1,587 | | | | 1,437 | | | | 4,986 | | | | 4,528 | | | | 4,075 | | | | 3,502 | |
| Other assets | | | 12,097 | | | | 10,168 | | | | 13,816 | | | | 26,167 | | | | 14,509 | | | | 12,469 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | | 160,938 | | | | 178,720 | | | | 222,237 | | | | 264,015 | | | | 255,018 | | | | 219,154 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | 91,521 | | | | 99,744 | | | | 110,582 | | | | 126,764 | | | | 147,737 | | | | 126,960 | |
| Borrowings | | | 15,917 | | | | 18,173 | | | | 24,205 | | | | 27,731 | | | | 18,098 | | | | 15,553 | |
| Debentures, net | | | 22,840 | | | | 29,485 | | | | 42,586 | | | | 49,181 | | | | 39,905 | | | | 34,293 | |
| Retirement and severance benefits, net | | | 178 | | | | 243 | | | | 335 | | | | 381 | | | | 177 | | | | 152 | |
| Other liabilities | | | 20,230 | | | | 19,520 | | | | 26,303 | | | | 42,006 | | | | 27,978 | | | | 24,043 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total liabilities | | | 150,686 | | | | 167,165 | | | | 204,011 | | | | 246,063 | | | | 233,895 | | | | 201,001 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity | | | 10,252 | | | | 11,555 | | | | 18,226 | | | | 17,952 | | | | 21,123 | | | | 18,153 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total liabilities and equity | | W | 160,938 | | | W | 178,720 | | | W | 222,237 | | | W | 264,015 | | | W | 255,018 | | | $ | 219,154 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Notes:Note:
| | |
| (1) | | Won amounts are expressed in U.S. dollars at the rate of W935.81,163.65 per US$1.00, noon buying ratethe Noon Buying Rate in effect on December 31, 20072009. The Noon Buying Rate has been highly volatile recently and the U.S. Dollar amounts referred to in this report should not be relied upon as quoted by the Federal Reserve Bankan accurate reflection of New Yorkour results of operations. We expect this volatility to continue in the United States. |
|
(2) | | Loans represent the gross amount of loans, before adjustment for the allowance for loan losses. Accrued interest income is included within other assets. The amount of credit card loans was W4,931 billion, W4,248 billion, W3,861 billion, W3,518 billion and W12,564 billion in 2003, 2004, 2005, 2006 and 2007, respectively. The amount of payment in guarantees was W108 billion, W31 billion, W25 billion, W21 billion and W13 billion in 2003, 2004, 2005, 2006 and 2007, respectively. The amount of bonds purchased under the resale agreement was W470 billion, W160 billion, W140 billion, W785 billion and W66 billion in 2003, 2004, 2005, 2006 and 2007, respectively. |
|
(3) | | The allowance for loan losses is recorded at the higher of (i) the amount determined using the expected loss method, which estimates the potential exposure at default, or EAD, based on the probability of default, or PD, and loss given default, or LGD, and (ii) the amount determined using the guidelines promulgated by the |
199
| | |
| | Financial Services Commission, which estimates the allowance by multiplying a certain percentage as determined by the Financial Services Commission to loan balances in each classification. |
|
(4) | | Accumulated depreciation is recorded as a deduction from premises and equipment. |
|
(5) | | Other assets include leasehold deposits, accounts receivables, accrued interest income, prepaid expenses and unsettled debit of domestic exchange (which represents outstanding balances due from other banks generated in the process of fund settlements of domestic exchange, such as checks, bills, drafts, remittance exchange, ATM use and credit card network). |
|
(6) | | Borrowings consist mainly of borrowings from Bank of Korea, the Korean government and banking institutions. |
|
(7) | | Under Korean GAAP, contingent losses with respect to guarantees and acceptances are recognized by applying the same classification methods and provision percentages used in determining the allowance for loan losses. Previously, provisions were only applied to acceptances and guarantees classified as substandard, doubtful and estimated loss. Effective in 2005, provisions are applied to all acceptances and guarantees, including those classified as normal and precautionary as well as those classified as substandard or below. The amounts of provisions as of December 31, 2003, 2004, 2005, 2006 and 2007 were W57 billion, W37 billion, W60 billion, W52 billion and W60 billion, respectively. These amounts are included in other liabilities.near future. |
Profitability Ratios
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2003 | | 2004 | | 2005 | | 2006 | | 2007 | | | 2005 | | 2006 | | 2007 | | 2008 | | 2009 | |
| | | (Percentages) | | | (Percentages) | |
| |
| Net income as a percentage of: | | | | | | | | | | | | | | | | | | | | | |
| Net income attributable to the Group as a percentage of: | | | | | | | | | | | | | | | | | | | | | |
| Average total assets(1) | | | 0.37 | % | | | 0.72 | % | | | 0.93 | % | | | 1.09 | % | | | 1.13 | % | | | 0.93 | | | | 1.09 | % | | | 1.14 | % | | | 0.81 | % | | | 0.59 | % |
| Average stockholders’ equity(1)(2) | | | 8.42 | | | | 14.08 | | | | 17.96 | | | | 15.88 | | | | 11.56 | | |
| Average total equity(1)(2) | | | | 17.96 | | | | 15.53 | | | | 11.61 | | | | 9.40 | | | | 6.62 | |
| Dividend payout ratio(3) | | | 66.34 | | | | 22.16 | | | | 17.82 | | | | 18.39 | | | | 14.88 | | | | 17.11 | | | | 18.96 | | | | 16.75 | | | | — | | | | 14.56 | |
| Net interest spread(4) | | | 2.25 | | | | 2.09 | | | | 2.60 | | | | 2.75 | | | | 3.31 | | | | 2.60 | | | | 2.94 | | | | 3.60 | | | | 3.29 | | | | 2.71 | |
| Net interest margin(5) | | | 2.30 | | | | 2.28 | | | | 2.74 | | | | 3.02 | | | | 3.59 | | | | 2.74 | | | | 3.20 | | | | 3.93 | | | | 3.69 | | | | 3.01 | |
| Efficiency ratio(6) | | | 61.85 | | | | 73.09 | | | | 79.13 | | | | 82.66 | | | | 77.37 | | | | 79.54 | | | | 80.74 | | | | 76.71 | | | | 92.10 | | | | 91.88 | |
| Cost-to average assets ratio(7) | | | 3.19 | | | | 5.18 | | | | 5.50 | | | | 7.36 | | | | 7.18 | | |
Cost-to-average assets ratio(7) | | | | 5.50 | | | | 7.74 | | | | 7.27 | | | | 18.89 | | | | 15.64 | |
| Equity to average asset ratio(8): | | | 4.38 | | | | 5.10 | | | | 5.20 | | | | 6.83 | | | | 9.81 | | | | 5.20 | | | | 6.99 | | | | 9.79 | | | | 8.62 | | | | 7.63 | |
Notes:
| | |
| (1) | | Average balances are based on (a) daily balances for Shinhan Bank (for each year ended December 31, 2003, 2004, 2005, 2006 and 2007, including Chohung Bank) and Jeju Bank and (b) quarterly balances for other subsidiaries. |
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| (2) | | Includes redeemable preferred shares and redeemable convertible preferred shares issued by us (i) in August 2003 as part of funding for the acquisition of Chohung Bank and (ii) in January 2007 as part of funding for the acquisition of LG Card. These preferred shares are treated as stockholders’ equity under Korean GAAP. Under U.S. GAAP, only the preferred shares issued in connection with the acquisition of LG Card are treated as stockholders’ equity. For a more detailed description of the preferred shares issued by us, see “Item 10. Additional Information —10.B. Memorandum and Articles of Incorporation — Description of CapitalPreferred Stock — Description of Redeemable Convertible Preferred Stock.Stock (Series 11).” |
| |
| (3) | | The dividend payout ratio represents the ratio of total dividends paid on common stock as a percentage of net income attributable to common stock. |
| |
| (4) | | Net interest spread represents the difference between the yield on average interest earning assets and cost of average interest bearing liabilities. |
| |
| (5) | | Net interest margin represents the ratio of net interest income to average interest earning assets. |
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| (6) | | Efficiency ratio represents the ratio of noninterestnon-interest expense to the sum of net interest income and noninterestnon-interest income, a measure of efficiency for banks and financial institutions. Efficiency ratio may be reconciled to comparable line-items in our income statement for the periods indicated as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | Year Ended December 31, |
| | | 2003 | | 2004 | | 2005 | | 2006 | | 2007 | | 2005 | | 2006 | | 2007 | | 2008 | | 2009 |
| | | (In billions of Won, except percentages) | | (In billions of Won, except percentages) |
| |
| Non-interest expense (A) | | W | 3,139 | | | W | 7,570 | | | W | 9,198 | | | W | 12,424 | | | W | 15,174 | | | W | 9,676 | | | W | 12,924 | | | W | 15,324 | | | W | 47,055 | | | W | 40,422 | |
Divided by | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| The sum of net interest income and noninterest income (B) | | | 5,075 | | | | 10,357 | | | | 11,624 | | | | 15,029 | | | | 19,611 | | |
| The sum of net interest income and non-interest income (B) | | | | 12,165 | | | | 16,007 | | | | 19,976 | | | | 51,093 | | | | 43,996 | |
| Net interest income | | | 1,999 | | | | 3,030 | | | | 4,038 | | | | 4,470 | | | | 6,453 | | | | 4,248 | | | | 4,691 | | | | 7,090 | | | | 7,816 | | | | 6,694 | |
| Noninterest revenue | | | 3,076 | | | | 7,327 | | | | 7,586 | | | | 10,549 | | | | 13,158 | | |
| Efficiency ratio ((A) as a percentage of(B)) | | | 61.85 | % | | | 73.09 | % | | | 79.13 | % | | | 82.66 | % | | | 77.37 | % | |
| Non-interest income | | | | 7,917 | | | | 11,316 | | | | 12,886 | | | | 43,277 | | | | 37,302 | |
| Efficiency ratio ((A) as a percentage of (B)) | | | | 79.54 | % | | | 80.74 | % | | | 76.71 | % | | | 92.10 | % | | | 91.88 | % |
| | |
| (7) | | Cost-to-average-assets ratio, a measure of cost of funding used by banks and financial institutions, represents the ratio of noninterestnon-interest expense to average total assets. |
| |
| (8) | | Equity to average asset ratio represents the ratio of average stockholders’ equity to average total assetsassets. |
Capital Ratios
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | | As of December 31, |
| | | 2003 | | 2004 | | 2005 | | 2006 | | 2007 | | 2005 | | 2006 | | 2007 | | 2008 | | 2009 |
| | | (Percentages) | | (Percentages) |
| |
| Requisite capital ratio(1) | | | 118.41 | | | | 129.41 | | | | 132.81 | | | | 139.28 | | | | N/A | | | | 132.81 | % | | | 139.28 | % | | | N/A | | | | N/A | | | | N/A | |
| BIS ratio(1) | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | 9.85 | | | | N/A | | | | N/A | | | | 9.85 | % | | | 10.19 | % | | | 12.6 | % |
| Total capital adequacy ratio for Shinhan Bank(2) | | | 10.49 | | | | 11.94 | | | | 12.23 | | | | 12.01 | | | | 12.09 | | |
| Tier I capital adequacy ratio | | | 6.34 | | | | 7.45 | | | | 8.16 | | | | 7.81 | | | | 7.64 | | |
| Tier II capital adequacy ratio | | | 4.15 | | | | 4.49 | | | | 4.07 | | | | 4.20 | | | | 4.45 | | |
| Total capital adequacy ratio for Chohung Bank(2) | | | 8.87 | | | | 9.40 | | | | 10.94 | | | | N/A | | | | N/A | | |
| Total capital adequacy ratio of Shinhan Bank(2) | | | | 12.23 | | | | 12.01 | | | | 12.09 | | | | 13.43 | | | | 15.13 | |
| Tier I capital adequacy ratio | | | 4.47 | | | | 4.99 | | | | 6.52 | | | | N/A | | | | N/A | | | | 8.16 | | | | 7.81 | | | | 7.64 | | | | 9.30 | | | | 11.61 | |
| Tier II capital adequacy ratio | | | 4.40 | | | | 4.41 | | | | 4.42 | | | | N/A | | | | N/A | | | | 4.07 | | | | 4.20 | | | | 4.45 | | | | 4.13 | | | | 3.52 | |
| Adjusted equity capital ratio of Shinhan Card(3) | | | 13.78 | | | | 16.48 | | | | 17.68 | | | | 17.47 | | | | 25.31 | | | | 17.68 | | | | 17.47 | | | | 25.31 | | | | 20.32 | | | | 26.73 | |
| Solvency ratio for Shinhan Life Insurance(4) | | | 224.69 | | | | 265.69 | | | | 232.12 | | | | 232.60 | | | | 226.05 | | | | 232.12 | | | | 232.60 | | | | 226.05 | | | | 209.47 | | | | 212.40 | |
N/A = Not available
Notes:
| | |
| (1) | | We were restructured as a financial holding company on September 1, 2001, and until 2006, under the guidelines issued by the Financial Services Commission applicable to financial holding companies, were required to maintain minimum capital as measured by the requisite capital ratio. For 2003, 2004, 2005 and 2006, the minimum requisite capital ratio applicable to us as a holding company was 100%. Starting 2007, under the revised guidelines, the minimum requisite capital ratio applicable to us changed to the Bank for International Settlement (“BIS”)BIS ratio of 8%. Requisite capital ratio is computed as the ratio of net aggregate amount of our equity capital to aggregate amounts of requisite capital. This computation is based on our consolidated financial statement in accordance |
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| | with Korean GAAP. See “Item 4. Information on the Company4.B. Business Overview — Supervision and Regulation — Principal Regulations Applicable to Financial Holding Companies — Capital Adequacy.” |
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| (2) | | For 2005, represents information of former Shinhan Bank prior to its merger into Chohung Bank in 2006. For 2005, the total capital adequacy ratio, Tier I capital adequacy ratio and Tier II capital adequacy ratio of Chohung Bank was merged with Shinhan Bank in April 2006. Accordingly, the capital adequacy ratio10.94%, 6.52% and 4.42%, respectively. The information for 2006 and afterwards is not available for Chohung Bank.thereafter represents the information of the surviving entity following the merger. |
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| (3) | | RepresentsAdjusted equity capital ratio is the ratio of total adjusted shareholders’stockholders’ equity to total adjusted assets and is computed in accordance with the guidelines issued by the Financial Services Commission for credit card companies. Under these regulations, a credit card company is required to maintain a minimum adjusted equity capital ratio of 8%. This computation is based on the nonconsolidatednon-consolidated financial statements of the credit card company prepared in accordance with Korean GAAP. See “Item 4.B. Business Overview — Supervision and Regulation — Principal Regulations Applicable to Financial Holding Companies — Capital Adequacy.” |
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| | The information as of December 31, 2003, 2004 and 2005, includes the information of former Shinhan Card and does not include the information of the credit card division of Chohung Bank. The information as of December 31, 2006, represents the information of former Shinhan Card (including that of the credit card division of Chohung Bank, which was split-merged into former Shinhan Card on April 3, 2006). The information as of December 31, 2007, represents the information for LG Card, renamed Shinhan Card on October 1, 2007 (including that of the assets and liabilities of former Shinhan Card, which were transferred to LG Card on October 1, 2006)2007). The information as of December 31, 2008, represents the information for Shinhan Card. |
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| | For comparison, the adjusted equity capital ratio of LG Card as of December 31, 2003, 2004, 2005 and 2006 was −28.08%, −6.89%, 25.55% and 34.25%, respectively. |
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| (4) | | Solvency ratio is the ratio of the solvency margin to the standard amount of solvency margin as defined and computed in accordance with the regulations issued by the Financial Services Commission for life insurance companies. Under these regulations Shinhan Life Insurance is required to maintain a minimum solvency ratio of 100%. Shinhan Life Insurance’s solvency ratio as of the end of its latest fiscal year on March 31, 2008 was 222.74%.See “Item 4.B. Business Overview — Supervision and Regulation — Principal Regulations Applicable to Financial Holding Companies — Capital Adequacy.” |
In conformity with the FSC regulations on financial holding companies, the Group applied the net equity to requisite capital ratio calculated under the FSC guidelines to evaluate its capital adequacy. All Korean financial holding companies must meet the minimum requisite capital ratio of 100%, as regulated by the FSC. Requisite capital, as required and defined by FSC, represents the sum of (a) the minimum equity capital amount necessary to meet the FSC guidelines for Shinhan Bank, and Jeju Bank, (b) 8% of its total assets on its balance sheet (including off-balance assets, if any) for other subsidiaries, and (c) 8% of its total assets on its balance sheet (including off-balance assets, if any, but excluding the book value of investments in and financial supports to its direct and indirect subsidiaries) for the Group.Asset Quality Ratios
The FSC regulations also require that the computation be based on the Group’s consolidated financial statements under Korean GAAP and regulatory guidelines, which vary in certain significant respects from US GAAP.
| | | | | | | | | |
| | | As of December 31, | |
| | | 2006 | | | 2007 | |
| | | (In millions of Won, except percentages) | |
| |
| Equity capital | | W | 14,184,052 | | | | N/A | |
| Requisite capital | | | 10,183,478 | | | | N/A | |
| Requisite capital ratio | | | 139.28 | % | | | N/A | |
| Tier 1 capital | | | N/A | | | W | 8,389,075 | |
| Tier 2 capital | | | N/A | | | | 7,556,865 | |
| | | | | | | | | |
| Total risk-adjusted capital | | | N/A | | | W | 15,945,940 | |
| | | | | | | | | |
| Total risk-adjusted assets | | | N/A | | | W | 161,849,385 | |
| | | | | | | | | |
| Capital adequacy ratio(%) | | | N/A | | | | 9.85 | % |
| Tier 1 capital ratio(%) | | | N/A | | | | 5.18 | % |
| Tier 2 capital ratio(%) | | | N/A | | | | 4.67 | % |
| | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, |
| | | 2005 | | 2006 | | 2007 | | 2008 | | 2009 |
| | | (In billions of Won, except percentages) |
| |
| Substandard and below loans(1) | | W | 1,195 | | | W | 1,064 | | | W | 1,513 | | | W | 1,979 | | | W | 2,359 | |
| Substandard and below loans as a percentage of total loans | | | 1.09 | % | | | 0.87 | % | | | 1.03 | % | | | 1.18 | % | | | 1.40 | % |
| Substandard and below loans as a percentage of total assets | | | 0.74 | | | | 0.60 | | | | 0.68 | | | | 0.75 | | | | 0.93 | |
| Precautionary loans as a percentage of total loans(2) | | | 2.57 | | | | 1.16 | | | | 1.16 | | | | 1.29 | | | | 1.78 | |
| Precautionary and below loans as a percentage of total loans(2) | | | 3.66 | | | | 2.03 | | | | 2.19 | | | | 2.47 | | | | 3.18 | |
| Precautionary and below loans as a percentage of total assets(2) | | | 2.49 | | | | 1.40 | | | | 1.46 | | | | 1.57 | | | | 2.10 | |
| Allowance for loan losses as a percentage of substandard and below loans | | | 143.43 | | | | 172.98 | | | | 184.63 | | | | 165.22 | | | | 149.81 | |
| Allowance for loan losses as a percentage of precautionary and below loans(2) | | | 42.76 | | | | 73.88 | | | | 86.50 | | | | 79.08 | | | | 66.07 | |
| Allowance for loan losses as a percentage of total loans | | | 1.57 | | | | 1.50 | | | | 1.89 | | | | 1.95 | | | | 2.10 | |
| Substandard and below credits as a percentage of total credits(3) | | | 1.07 | | | | 0.84 | | | | 0.98 | | | | 1.15 | | | | 1.35 | |
| Loans in Korean Won as a percentage of deposits in Korean Won(4) | | | 107.79 | | | | 115.05 | | | | 126.58 | | | | 125.43 | | | | 102.90 | |
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Asset Quality Ratios
| | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | |
| | | 2003 | | | 2004 | | | 2005 | | | 2006 | | | 2007 | |
| | | (In billions of Won, except percentages) | |
| |
| Substandard and below loans(1) | | W | 3,207 | | | W | 1,660 | | | W | 1,195 | | | W | 1,064 | | | W | 1,513 | |
| Substandard and below loans as a percentage of total loans | | | 3.37 | % | | | 1.70 | % | | | 1.09 | % | | | 0.87 | % | | | 1.03 | % |
| Substandard and below loans as a percentage of total assets | | | 2.30 | | | | 1.13 | | | | 0.74 | | | | 0.60 | | | | 0.68 | |
| Precautionary loans as a percentage of total loans(2) | | | 3.55 | | | | 3.18 | | | | 2.75 | | | | 1.29 | | | | 1.16 | |
| Precautionary and below loans as a percentage of total loans(2) | | | 6.92 | | | | 4.88 | | | | 3.84 | | | | 2.16 | | | | 2.19 | |
| Precautionary and below loans as a percentage of total assets(2) | | | 4.73 | | | | 3.25 | | | | 2.61 | | | | 1.49 | | | | 1.46 | |
| Allowance for loan losses as a percentage of substandard and below loans | | | 85.85 | | | | 112.63 | | | | 143.43 | | | | 172.99 | | | | 184.64 | |
| Allowance for loan losses as a percentage of precautionary and below loans(2) | | | 41.80 | | | | 39.21 | | | | 40.75 | | | | 69.52 | | | | 86.50 | |
| Allowance for loan losses as a percentage of total loans | | | 2.89 | | | | 1.91 | | | | 1.57 | | | | 1.50 | | | | 1.89 | |
| Substandard and below credits as a percentage of total credits(3) | | | 3.57 | | | | 1.66 | | | | 1.07 | | | | 0.84 | | | | 0.93 | |
| Loans in Korean Won as a percentage of deposits in Korean Won(4) | | | 99.37 | | | | 99.30 | | | | 107.79 | | | | 115.05 | | | | 126.58 | |
Notes:
| | |
| (1) | | Substandard and below loans are defined in accordance with regulatory guidance in Korea, except excludes(other than loans provided from Shinhan Bank’sour trust accounts and confirmed guarantees and acceptances (including bills purchased and privately placed debentures). In 1999, as well as classifying credit quality into five categories, whichacceptances) are normal, precautionary, substandard, doubtful and estimated loss,defined in accordance with standards defined by the Financial Services Commission, we also took into account the repayment capability of borrowers.regulatory guidance in Korea. See “Item 4. Information on the Company4.B. Business Overview — Supervision and Regulation — Principal Regulations Applicable to Banks.” |
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| (2) | | As defined by the Financial Services Commission. |
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| (3) | | Credits include loans provided from our trust accounts (including bills purchased and privately placed debentures) and confirmed guarantees and acceptances, as well as the total loan portfolio of the banking accounts. |
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| (4) | | Under Korean GAAP, loansLoans in Korean Won do not include bills bought in Won, advances for customers, credit card accounts, bonds purchased under resale agreements, call loans, private placement corporate bonds and loans in restructurings that have been swapped for equity in the restructured borrower. |
Recently Adopted Accounting Pronouncements and New Accounting Pronouncements (U.S. GAAP)
Please refer to Note 2 in the footnotes to our financial statements.
Reconciliation with Korean Generally Accepted Accounting Principles
Our consolidated financial statements and related footnotes appearing in “Item 18. Financial Statements,” which are prepared in accordance with U.S. GAAP, and other financial data appearing in Items 3, 4 and 5 are presented on a consolidated basis underprepared in accordance with U.S. GAAP, unless otherwise specifically mentioned. Our consolidated financial statements prepared in accordance with U.S. GAAP, differ in certain significant respects from Korean GAAP, the basis on whichof the
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consolidated financial data appearing in “— Selected Financial Information under Korean GAAP” are presented. Differences between Korean GAAP and U.S. GAAP, which have significant effects onThe following are reconciliations of net income attributable to the consolidated net incomeGroup and stockholders’ equity of Shinhan Financial Group, are summarized as follows:from our consolidated financial statements under U.S. GAAP to Korean GAAP.
| | | | | |
| | | 2007 | 2009 |
| | | (In millions of Won) | |
| |
U.S. GAAP net income attributable to the Group | | W | 1,929,6121,133,852 | |
| 1. Provision for credit losses | | | (562,430747,247 | ) |
| 2. Sale of loans to the Korea Asset Management Corporation | | | (1,707764 | ) |
| 3. Deferred loan fees and costs | | | 36,2268,660 | |
| 4. Securities and derivatives for hedging purposes | | | | |
| a. Impairment loss and reclassification of securities | | | 49,151(260,905 | ) |
| b. Reversal of hedge accounting treatment for derivatives | | | 325,638217,238 | |
c. Changes in foreign exchange rates onavailable-for-sale securities | | | 25,436(128,012 | ) |
| d. Credit risk adjustments on derivatives | | | (172,398 | ) |
5. Stock basedStock-based compensation | | | 2,030 | |
6. Formation of Shinhan Financial Group | | | — | |
7. Derecognition and amortization and impairment of goodwill | | | (382,6803,731 | ) |
8. Sale6. Difference related to the accounting treatment of Shinhan Securities | | | — | |
9. Amortization ofgoodwill and intangible assets | | | 472,48316,696 | |
10.7. Recognition of minoritynoncontrolling interest | | | 10,39313,876 | |
11.8. Reversal of asset revaluation | | | (9,72213,206 | ) |
12.9. Adjustments for redeemable (convertible) preferred shares | | | 76,95624,732 | |
13. Sale-leaseback | | | — | |
14. Fair valuation of long-term debt and bonds | | | (15,114 | ) |
15.10. Consolidation Scope | | | 41,361124,811 | |
16.11. Measurement of common stock issued for acquisition of subsidiaries | | | — | |
17.12. Adoption ofASC 740-10 (formerly FIN No. 4848) | | | 25,025(177,454 | ) |
18.13. Difference related to the accounting treatment of the LG Card acquisition | | | 416,068— | |
19.14. Shinhan Life Insurance deferred policy acquisition costs | | | (111,339 | ) |
| 15. Others | | | 60,901(20,160 | ) |
| Total adjustments | | | 570,015265,291 | |
| Tax effect of adjustments | | | (103,25193,832 | ) |
| | | | | |
Korean GAAP net income attributable to the Group | | W | 2,396,3761,305,311 | |
| | | | | |
U.S. GAAP stockholders’ equity
| | W | 16,910,092 | |
1. Provision for credit losses | | | (1,642,615 | ) |
2. Sale of loans to the Korea Asset Management Corporation | | | (38,303 | ) |
3. Deferred loan fees and costs | | | (60,249 | ) |
4. Securities and derivatives for hedging purposes
a. Impairment loss and reclassification of securities | | | 1,040,856 | |
b. Reversal of hedge accounting treatment for derivatives | | | 484,910 | |
c. Changes in foreign exchange rates on available-for-sale securities | | | — | |
5. Stock based compensation | | | 18,406 | |
6. Formation of Shinhan Financial Group | | | (40,366 | ) |
7. Derecognition and amortization and impairment of goodwill | | | (517,224 | ) |
8. Sale of Shinhan Securities | | | (10,642 | ) |
9. Amortization of intangible assets | | | 1,186,227 | |
10. Minority interest | | | 211,450 | |
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| | | | | |
| | | 2007 | 2009 |
| | | (In millions of Won) | |
| |
11.U.S. GAAP the Group stockholders’ equity | | W | 20,218,199 | |
| 1. Provision for credit losses | | | (293,664 | ) |
| 2. Sale of loans to the Korea Asset Management Corporation | | | (39,906 | ) |
| 3. Deferred loan fees and costs | | | (3,253 | ) |
| 4. Securities and derivatives for hedging purposes | | | | |
| a. Impairment loss and reclassification of securities | | | 913,533 | |
| b. Reversal of hedge accounting treatment for derivatives | | | (66,759 | ) |
c. Changes in foreign exchange rates onavailable-for-sale securities | | | — | |
| d. Credit risk adjustments on derivatives | | | 85,623 | |
| 5. Stock-based compensation | | | 12,167 | |
| 6. Difference related to the accounting treatment of goodwill and intangible assets | | | 825,103 | |
| 7. Noncontrolling interest | | | 331,191 | |
| 8. Reversal of asset revaluation | | | 63,54947,499 | |
12.9. Adjustments for Redeemable (Convertible) Preferred Stock | | | 386,163 | |
13. Sale-leaseback | | | — | |
14. Fair valuation of long-term debt and bonds | | | (154,599307,941 | ) |
15.10. Consolidation Scope | | | (613,805376,704 | ) |
16.11. Measurement of common stock issued for acquisition of subsidiaries | | | 137,738 | |
17.12. Adoption of FIN No. 48ASC 740-10 | | | 21,210(116,520 | ) |
18.13. Difference related to the accounting treatment of the LG Card acquisition | | | 202,552 | |
19.14. Shinhan Life Insurance’s deferred policy acquisition costs | | | (525,574 | ) |
| 15. Others | | | 47,876(101,451 | ) |
| Total of adjustments | | | 723,134723,634 | |
| Tax effect of adjustments | | | 541,189181,193 | |
| | | | | |
Korean GAAP the Group stockholders’ equity | | W | 18,174,41521,123,026 | |
| | | | | |
The following is a summary of the significant adjustments made to consolidated net income attributable to the Group and stockholders’ equity to reconcile the U.S. GAAP results with those under Korean GAAP. The numbered paragraphs below refer to the corresponding item numbers set forth above.
1. Under U.S. GAAP, the allowance for loan losses for specifically identified impaired loans is based on (i) the present value of expected future cash flows discounted at the loan’s effective interest rate or as a practical expedient, (ii) the loansloan’s observable market price or (iii) the fair value of the collateral if the loan is collateral dependent.
For homogeneous pools of corporate and consumerretail loans, allowances are based on historical losses using a risk rating migration model adjusted for qualitative factors, while a delinquency roll-rate model adjusted for qualitative factors is used for homogeneous pools of credit cards.
Under Korean GAAP, the allowance for loan losses is recorded at the higher of (i) the amount determined using the expected loss method, which estimates the potential exposure at default, or EAD, based on the probability of default, or PD, and loss given default, or LGD, and (ii) the amount determined using the guidelines promulgated by the Financial Services Commission, which estimates the allowance by multiplying a certain percentage as determined by the Financial Services Commission to loan balances in each classification.
The following percentages represent guidelines required by the Financial Services Commission as of December 31, 2007:2009:
| | | | | | | | | | | | | | | | | | | | | | |
| | | Corporate Loans | | Consumer Loans | | Credit Card Balances | | Corporate Loans | | Retail Loans | | Credit Card Balances |
| |
| Normal(1)(2) | | | 0.85 | % or more | | | 1.00 | % or more | | | 1.50 | % or more | | 0.85% or more | | 1.00% or more | | 1.50% or more | |
| Precautionary(2) | | | 7.00 | % or more | | | 10.00 | % or more | | | 15.00 | % or more | | 7.00% or more | | 10.00% or more | | 15.00% or more | |
| Substandard | | | 20.00 | % or more | | | 20.00 | % or more | | | 20.00 | % or more | | 20.00% or more | | 20.00% or more | | 20.00% or more | |
| Doubtful | | | 50.00 | % or more | | | 55.00 | % or more | | | 60.00 | % or more | | 50.00% or more | | 55.00% or more | | 60.00% or more | |
| Estimated Loss | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | |
| Estimated loss | | | 100.00% | | 100.00% | | 100.00% | |
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Notes:
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| (1) | | In the case of normal credits comprising loans to borrowers in the construction, wholesale and retail, accommodation and restaurant or real estate and housing industries (as classified under the Korean Industry Classification Standard), the applicable figure is 0.90% or more. |
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| (2) | | In the case of credit card assets classified as normal and precautionary, the amount of provisions set aside is based on the revised provisioning rates under the Regulation on Specialized Credit Financial Business Act, which, effective as of February 11, 2008, increased the minimum provisioning requirements from 1.00% to |
205
| | |
| | 1.50% in respect of credit card assets classified as “normal” and from 12.00% to 15.00% in respect of credit card assets classified as “precautionary.” |
This adjustment reflects the differences in the methodologies used to determine the allowance for loan losses under U.S. GAAP and Korean GAAP. It also includes the offsetting effects of (i) the consolidation of our trust accounts, which include loans and related reserves under Korean GAAP and (ii) the deconsolidation of certain securitized loans and related reserves, which it recorded as sales under Korean GAAP.
2. We sold a number of non-performing loans to the Korea Asset Management Corporation. For those loans sold to the Korea Asset Management Corporation prior to fiscal year 2001, based on the sales agreement, there was a recourse liability for the obligation to repurchase such loans. The Korea Asset Management Corporation can return certain loans to us when the performance requirements of such loans are not met. We recognize a recourse liability for the obligation to repurchase such loans. The adjustment reflects the differences in classification of loans and methodologies used to determine the loan losses as discussed above.
3. Under U.S. GAAP loan origination fees and the related costs are deferred and amortized over the life of the loan as an adjustment to the yield of the loan. Under Korean GAAP, origination costs related to wages and salaries were recognized as expense when paid and did not provide for the deferred costs.
4a. Under U.S. GAAP,other-than-temporary-impairment (“OTTI”) must be recognized if an investor has the intent to sell the debt security or if it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. In addition, the guidance changes the amount of impairment to be recognized in current-period earnings when an investor does not have the intent to sell, or if it is more likely than not that it will not be required to sell the debt security, as in these cases only the amount of the impairment associated with credit losses is recognized in income, while the rest of the fair value loss is recognized in other comprehensive income. But declines in the fair value of held-to-maturity and available-for-sale (“AFS”) equity securities below their cost that are deemed to beother-than-temporary are recorded in earnings. Various quantitative and qualitativeWhen we do not intend to sell AFS equity or debt securities in an unrealized loss position, potential OTTI is considered using a variety of factors, are assessed to determine whether impairment is other-than-temporary such asincluding the durationlength of time and extent to which the market value has been less than cost; adverse conditions specifically related to the industry, geographic area or financial condition of the decline,issuer or underlying collateral of a security; payment structure of the current operatingsecurity; changes to the rating of the security by a rating agency; the volatility of the fair value changes; and future expected performance, market values of comparable companies, changes in industry and market prospects, andfair value of the security after the balance sheet date. For equity securities, we consider the above factors, as well as our intent and ability of the holder to hold the securityretain our investment for a sufficient period of time sufficient to allow for subsequent expectedany anticipated recovery in market value, and whether evidence exists to support a realizable value equal to or greater than the carrying value. Under Korean GAAP, declines in the fair value that are deemed to be permanent are recorded in earnings. The determination of whether a decline in the fair value of a security is permanent is generally based on whether investees are in bankruptcy or liquidation. This item reflects the recognition of additional losses, adjustment of the proper cost basis for the disposal gains or losses and reclassification of securities that are not within the scope ofASC 320-10 (formerly SFAS No. 115115) into proper categories under U.S. GAAP.
4b. Under U.S. GAAP, for a derivative to qualify for hedge accounting, it must be highly effective at reducing the risk associated with the exposure being hedged. The hedging relationship must be designated and formally documented at inception along with the particular risk management objective and strategy for the hedge, identification of the derivative used as the hedging instrument, the hedged item and the risk exposure being hedged, and the method of assessing hedge effectiveness. As the criteria for documenting the designation of hedging relationships and hedge effectiveness are more rigorous under U.S. GAAP, the majority of the derivatives
188
accounted for as hedges under Korean GAAP do not qualify for hedge accounting under U.S. GAAP. This item reflects the reversal of the hedge accounting treatment applied under Korean GAAP.
4c. Under U.S. GAAP, effects of changes in foreign exchange rates of foreignavailable-for-sale securities are reflected as a component of other comprehensive income. Under Korean GAAP, effects of such changes in foreign exchange rates are reflected in earnings. This item reflects the adjustment of such effects from earnings to other comprehensive income.
4d. Under U.S. GAAP, valuation of derivative assets takes into consideration counterparty credit risk and valuation of the derivative liabilities reflects the impact of the Group’s credit quality as required byASC 820-10 (formerly SFAS No. 157). Under Korean GAAP, there is no specific guidance as such. This item represents the valuation adjustment recognized for counterparty credit risk and the Group’s own credit quality.
5. Under Korean GAAP, Wewe recognize the compensation costs using intrinsic value remeasured each reporting period. Under U.S. GAAP, we recognize the compensation costs using fair value remeasured each reporting period by option pricing model according to FAS 123R.ASC 718 (formerly SFAS No. 123R). The income statement adjustment represents the difference in valuation method of share options.
6. Under Korean GAAP, the formation of a holding company results in changes in Shinhan Bank’s original investment cost basis in its investees, whereas under U.S. GAAP, the transaction is accounted for under the purchase method with Shinhan Bank being the accounting acquirer, resulting in no change to Shinhan Bank’s original investment costs in Shinhan Capital, Shinhan Securities and Shinhan Investment Trust Management Company. In addition, under Korean GAAP, the value of consideration was measured based on the stock price on the consummation date of the acquisition, whereas under U.S. GAAP, the value of consideration was measured based on our average closing price on the Korea Exchange two days before and after the date the formation was agreed to and announced. Furthermore, costs that were directly related to the formation were expensed under Korean GAAP,
206
whereas such costs were included in the cost of the formation under the U.S. GAAP. This adjustment reflects differences in the accounting related to the formation of the holding company under U.S. GAAP.
7. Under Korean GAAP, goodwill is amortized over its useful life during which future economic benefits are expected to flow to the enterprise, not exceeding twenty years. We amortize goodwill over ten years. Under U.S. GAAP, goodwill is not amortized, but rather it is tested for impairment at least annually. The income statement adjustment reflects goodwill impairment charge recorded under U.S. GAAP, net of the goodwill amortization that was recorded under Korean GAAP. Under Korean GAAP, acquisition of the remaining interest in its consolidated subsidiary is accounted for under the book basis with no goodwill recognized, rather, any excess amount paid results in a reduction of capital surplus. Furthermore, consolidation is required when the investor owns more than 30% of the investee’s voting shares and is also the largest shareholder. Under U.S. GAAP, acquisition of the remaining interest in its equity investee is accounted for under the purchase method with the excess cost over the fair value of the net assets acquired recognized as goodwill. The stockholders’ equity adjustment reflects the additional amount of goodwill recognized under U.S. GAAP.
8. Under Korean GAAP, the merger of Shinhan Securities and Good Morning Shinhan Securities is accounted for as a common control merger with no gain or loss recognized on this transaction. Under U.S. GAAP, the merger was accounted for in accordance withEITF 90-13 which accounts for the transaction as a sale of portion of the Shinhan Financial Group’s interest in Shinhan Securities to the minority interest holders of the Good Morning Shinhan Securities and acquisition of additional interest in Good Morning Shinhan Securities. A gain is recognized to the extent that Good Morning Shinhan Securities was sold.
9. Under Furthermore, under U.S. GAAP, finite-lived intangible assets which meet certain criteria are recognized in a business combination transaction and amortized over their useful lives. Under Korean GAAP, because the criteria that must be met in order to recognize intangible assets is not clearly specified, in practice, they are included as part of goodwill. We did not recognize any intangible assets in connection with the formation of the Shinhan Financial Group and the acquisitions of LG Card, Chohung Bank Jeju Bank and Good Morning Shinhan SecuritiesInvestment under Korean GAAP. However, finite-lived and indefinite-lived intangible assets were recognized under U.S. GAAP in connection with the above transactions. The income statement adjustment representsincludes the amortization of the finite-lived intangible assets under U.S. GAAP.
10.7. The operating results of each of our subsidiaries have been affected by the conversion to U.S. GAAP from Korean GAAP. Consequently, the minoritynoncontrolling interest holders’ share of the difference in the results of the respective subsidiaries’ operations under U.S. GAAP and Korean GAAP affect our consolidated stockholders’ equity while net income is not affected, as under both Korean GAAP and stockholders’ equity.U.S. GAAP, net income shall be attributed to the parent and the noncontrolling interest.
Under Korean GAAP, minority interest is treated as a component of stockholders’ equity. Under U.S. GAAP, minority interest is not considered part of stockholders’ equity and is disclosed in the consolidated balance sheet between the liability section and the stockholders’ equity section.
11.8. Under Korean GAAP, certain fixed assets were revalued upward in 1998. As a result, the revaluation gain is included in stockholders’ equity, and depreciation expense related to revalued fixed assets is determined based on the new cost basis. Under U.S. GAAP, upward revaluation of fixed assets is not permitted, and depreciation expense is based on the historical cost basis adjusted for any impairment loss. This adjustment is to reverse the revaluation effects on the fixed assets under Korean GAAP, and to adjust the gain or loss relating to subsequent disposals of those fixed assets under the different cost basis.
12.9. Under Korean GAAP, the Redeemable Preferred Stocks and Redeemable Convertible Preferred Stocks were recorded in stockholders’ equity. Under U.S. GAAP, certain financial instruments previously classified as “mezzanine” equity,redeemable preferred stocks are classified as liabilities on the balance sheet pursuant to ASC 480 (formerly SFAS No. 150.150). Accordingly, the Redeemable Preferred Stockssome of redeemable preferred stocks are classified as equity and others are classified as liabilities. In case that redeemable preferred stocks are classified as liabilities, and Redeemable Convertible Preferred Stocks are classified as “mezzanine” equity. Dividendsdividends paid to holders of Redeemable Preferred Stocks are recognized as interest expense rather than reduction from the retained earnings.
13. Under U.S. GAAP, a seller-lessee in a sale-leaseback transaction of assets, such as equipment, accounts for the lease meeting certain criteria as a capital lease, otherwise, as an operating lease. Any profit or loss on the sale of the asset is generally deferred and amortized in proportion to the amortization of the leased asset, if capital lease,
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or in proportion to the related gross rental charged to expense over the lease term, if operating lease. Under Korean GAAP, if sale-leaseback transaction of used assets meets certain criteria as an operating lease, which differs in certain respects from U.S. GAAP, any profit or loss on the sale of the asset is recognized immediately in the income statement.
14. With respect our acquisition of the remaining interest in a consolidated subsidiary, under U.S. GAAP, assets and liabilities of such subsidiary are to be assigned with the difference between acquisition cost and underlying equity in net assets based on their fair value and any unassigned difference will be designated as goodwill, whereas under Korean GAAP, the difference is recognized as changes in shareholders’ equity and no fair valuation of assets and liabilities are recorded. The item reflects the difference between the fair values and book values of long-term debt and bonds from additional acquisition of a consolidated subsidiary and the difference is recognized as interest expense in earnings for the remaining life of long-term debt and bonds.
15.10. Under Korean GAAP, a special purpose company and a company undergoing liquidation are not within the scope of consolidation. Under U.S. GAAP, such companies could be within the scope of consolidation in accordance with either ASC 810 (formerly FIN No. 46R46(R)) or SFAS No. 94.
16.11. Under Korean GAAP, the value of consideration paid for Chohung Bank, Good MorningLG Card, Shinhan SecuritiesInvestment and Shinhan Life Insurance was measured based on our stock price on the consummation date of the merger, whereas under U.S. GAAP, the value of consideration was measured based on our average closing stock price on the StockKRX KOSPI Market Division of the Korea Exchange two days before and after the date the merger was agreed to and announced.
17.12. Under Korean GAAP, additional tax assessments or tax refunds are recorded as expenses when tax assessment or tax refund actually occurs except when contingent liabilities are recorded for tax contingencies. The adoption ofASC 740-10 (formerly FIN No. 4848) results in the change of retained earnings and income tax expenses since under FIN No. 48, tax positions are required to be evaluated and tax benefits can be recognized only when the technical merits of uncertain tax positions meet the more-likely-than-not recognition threshold and to be measured as the largest amount of tax benefit that is more than 50% likely of being recognized.
18.13. Under Korean GAAP, when the control over an entity is acquired through a series of transactions, such acquisition is accounted under the lump-sum method. Under U.S. GAAP, for business combinations for which the acquisition date is before January 1, 2009, SFAS No. 141 is applied and such serial acquisition istransactions are accounted under the step-acquisition method, and the minoritynoncontrolling interest in the entity prior to the acquisition of control is accounted retroactively under the equity method.
14. Under Korean GAAP, acquisition costs are those costs that are related to insurance contracts and agent operation. Such costs are amortized on the straight-line basis over the estimated life of the insurance contracts, not to exceed seven years. Under U.S. GAAP, costs directly attributable to new and renewal insurance contracts are deferred and amortized over the estimated life of the underlying insurance contract in proportion to estimated gross margins. This adjustment is to reverse the GAAP difference relating to acquisition cost range and to adjust the amortized deferred acquisition cost charged in the period under the different cost and useful life basis.
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| ITEM 5.C. | Research and Development, Patents and Licenses |
Not applicable.
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| ITEM 5.D. | Trend Information |
These matters are discussed under Items 4.B, 5.A and 5.B above where relevant.
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| ITEM 5.E. | Off-Balance Sheet Arrangements |
We have several types of off-balance sheet arrangements, including guarantees for loans, debentures, trade financing arrangements, guarantees for other financings, credit lines, letters of credit and credit commitments. In the normal course of our banking activities, we make various commitments and guarantees to meet the financing needs of our customers. Commitments and guarantees are usually in the form of, among others, commitments to extend credit, commercial letters of credit, standby letter of credit and performance guarantees. The contractual amount of these financial instruments represents the maximum possible loss amount if the account party draws down the commitment or we should fulfill our obligation under the guarantee and the account party fails to perform under the contract. See “Item 4.B. Business Overview — Description of Assets and Liabilities — Credit-Related Commitments and Guarantees.”
Details of our off-balance sheet arrangements are provided in Note 31 in the notes to our consolidated financial statements included in this annual report.
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| ITEM 5.F. | Tabular Disclosure of Contractual Obligations |
See “Item 5.B. Liquidity and Capital Resources — Contractual Obligations, Commitments and Guarantees.”
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| ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
DIRECTORS AND SENIOR MANAGEMENT
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| ITEM 6.A. | Directors and Senior Management |
Executive Directors
Our executive directors are as follows.follows:
| | | | | | | | | | | |
Name | | Age | | Position | | Director Since | | Date Term Ends(1) |
| |
Eung Chan Ra | | | 7071 | | | Chairman of the Board of Directors andChairman; Head of Board Steering Committee | | September 1, 2001 | | March 20102013 |
In Ho LeeSang Hoon Shin
| | | 6461 | | | President and Chief Executive Officer and aOfficer; member of the Board Steering Committee | | September 1, 2001March 17, 2009 | | March 20092011 |
Note:
| | |
| (1) | | The date on which each term will end will be the date of the general stockholders’ meeting in the relevant year. |
Eung Chan Rais the Chairman of our board of directors.Shinhan Financial Group. Prior to being elected to his current position in 2001, he was the Vice-Chairman of Shinhan Bank and also served as President and Chief Executive Officer of Shinhan Bank. Mr. Ra also currently serves as Vice-Chairman of Korea-Japan Economy Association and the chief of
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committee in the Economy and Science Division of the Advisory Council on Democratic and Peaceful Unification. Mr. Ra was a director of Cheil Investment Finance from 1977 until 1982, when he first jointedjoined us as an executive vice president of Shinhan Bank. Mr. Ra graduated from Seonrin Commercial High School.
In Ho LeeSang Hoon Shinis our President and Chief Executive Officer. Prior to being elected to his current position on MayMarch 17, 2005,2009, he haswas formerly the President and CEO of Shinhan Bank. Mr. Shin also served as a non-executive directorthe Managing Director of Shinhan Financial Group sincein 2001 and as the date of our inception. Mr. Lee previously served as President and Chief Executive OfficerManaging Director of Shinhan Bank.Bank in 1999. Mr. Lee first joined us as one of Shinhan Bank’s incorporators in 1982. Mr. LeeShin received a B.A. in economicsbusiness administration from Sungkyunkwan University and a M.B.A. from Yonsei University.
Non-Executive Directors
Non-executive directors are directors who are not our employees and do not hold executive officer positions inwith us. Outside directors are non-executive directors who also satisfy the requirements set forth under the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act to be independent of our major shareholders, affiliates and the management. Our non-executive directors are selected based on the candidates’ talents and skills in diverse areas, such as law, finance, economy, management and accounting. Currently, 1310 non-executive directors are in office, all of whom were nominated by our board of directors.
Our non-executive directors are as follows.follows:
| | | | | | | | | | | |
Name | | Age | | Position | | Director Since | | Date Term Ends(1) |
| |
Sang Hoon ShinBaek Soon Lee
| | | 5957 | | | Non-Executive Director | | March 17, 2009 | | March 2012 |
Shee Yul Ryoo | | | 71 | | | Non-Executive Director | | March 30, 2005 | | March 2011 |
Sung Bin Chun | | | 57 | | | Chairman of the board | | March 20, 2007 | | March 2011 |
Pyung Joo KimHaeng Nam Chung
| | | 69 | | | Outside Director | | March 20, 200721, 2006 | | March 20092011 |
Si Jong KimKe Sup Yun
| | | 7165 | | | Outside Director | | March 30, 200517, 2009 | | March 20092011 |
Young WooYo Koo Kim
| | | 5660 | | | Outside Director | | March 20, 200717, 2009 | | March 20092011 |
Shee Yul RyooByung-Il Kim
| | | 6964 | | | Outside Director | | March 30, 200524, 2010 | | March 20092011 |
Byung Hun ParkHui Mook Kim
| | | 79 | | | Outside Director | | September 1, 2001 | | March 2009 |
Yong Woong Yang
| | | 5952 | | | Outside Director | | March 25, 200424, 2010 | | March 20092011 |
Sung Bin ChunYoji Hirakawa
| | | 5557 | | | Outside Director | | March 20, 200724, 2009 | | March 20092011 |
Haeng Nam ChungPhilippe Aguignier
| | | 6752 | | | Outside Director | | March 21, 200624, 2010 | | March 2009 |
Bong Youn Cho
| | | 59 | | | Outside Director | | March 19, 2008 | | March 2009 |
Young Hoon Choi
| | | 79 | | | Outside Director | | March 30, 2005 | | March 2009 |
Young Sup Huh
| | | 66 | | | Outside Director | | March 19, 2008 | | March 2009 |
Philippe Reynieix
| | | 59 | | | Outside Director | | March 25, 2004 | | March 20092011 |
Note:
| | |
| (1) | | The date on which each term will end will be the date of the general stockholders’ meeting in the relevant year. |
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Sang Hoon ShinBaek Soon Leehas been aour non-executive director since March 20, 2007.17, 2009. Mr. Shin has worked atLee currently also serves as the President and Chief Executive Director of Shinhan Bank since 1982 and has previouslyBank. Prior to his current position, Mr. Lee served as ourthe Deputy President of Shinhan Financial Group and as the Senior Executive Vice President and a director of Shinhan Bank. Mr. Shin receivedLee is a B.A. in business administration from Sungkyunkwan University and a M.B.A. from Yonsei University.graduate of Duksu Commercial High School.
Pyung Joo KimShee Yul Ryoohashad been an outside director since March 20, 2007. Mr. Kim is currently a professor of public policy and management at Korea Development Institute and chief executive officer of the Korean Investor Education Foundation. Mr. Kim received a Ph.D. in economics from Princeton University.
Si Jong Kimhas been anour outside director since March 30, 2005. Mr. Kim currently serves2005 and was appointed as a standing advisor to Kanagawa Prefecture branch of Korean Residents Union in Japan and as chairman of Star Limited Corporation.
Young Woo Kimhas been an outsidenon-executive director sinceon March 20, 2007. Mr. Kim is currently the chief executive officer of Hanil Electronic and New Hanil Electronic. Mr. Kim received a B.A. in political economy from Waseda University.
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Shee Yul Ryoohas been an outside director since March 30, 2005.24, 2010. Mr. Ryoo currently serves as an advisor ofto Shin & Kim, a Korean law firm. Mr. Ryoo previously served as President of Korea First Bank and as chairman of the Korea Federation of Banks. Mr. Ryoo received an LL.B degree from Seoul National University.
Byung Hun Parkhas been an outside director since the date of our inception. Mr. Park currently serves as the chairman of Daeseong Electric Industries Co., Ltd. Mr. Park previously served as the chairman of the Korean Residents Union in Japan. Mr. Park received a B.A. in economics from Meiji University of Japan. Mr. Park also received an honorary Ph.D. in political science from Chung Ang University.
Yong Woong Yanghas been an outside director as of March 20, 2007. Mr. Yang was a non-executive director from March 2004 to March 2007. Mr. Yang is currently the President of Doen. Mr. Yang previously served as an outside director of Shinhan Bank and Shinhan Financial Group. He received a B.A. from Chosun University.
Sung Bin Chunhas been an outside director since March 20, 2007.2007 and was appointed as the chairman of board of directors on March 24, 2010. Ms. Chun is currently a professor of business administration at Sogang University. Ms. Chun received a B.A. in English literature from Sogang University and a Ph.D. in accounting from University of California at Berkeley. Ms. Chun was formerly the director and vice president of the Korean Accounting Association.
Haeng Nam Chunghas been anour outside director since March 21, 2006. Mr. Chung served as a director of Asuka Credit Union and as an advisor of the Korean Chamber of Commerce and Industry in Japan.
Bong Youn ChoKe Sup Yunhas been anour outside director since March 19, 2008.17, 2009. Mr. ChoYun is currently a professor of business administration at Seoul National University and also serves as the Chairman of Pan Asia Capital Manager Limited, Hong Kong and Presidentthe Seoul Economist Club. Mr. Yun received a Ph. D. from the graduate school of Pan Asia Capital Limited. Mr. Cho previously served as President of Oriens Capital Limited and received B.A. in statistics from KoreaSeoul National University.
Young Hoon ChoiYo Koo Kimhas been anour outside director since March 30, 2005.17, 2009. Mr. ChoiKim currently serves as chairman of Eishin Group. Mr. Choi previously served as a non-executivethe director of Shinhan Bank. Mr. Choi received an LL.B degree from Ritsumeikan University of Japan.
Young Sup Huhhas been an outside director since March 19, 2008. Mr. Huh is currently the Chairman and CEO for Green Cross Corporation. Mr. Huh previously served as Chairman of the Korean-GermanKorea Chamber of Commerce and Industry Chairman of the Korea Industrial Technology Association and Vice Chairman of the Federation of Korean Industries.in Aichi Province. Mr. HuhKim received a B.A. in engineeringIndustrial and Systems Engineering from Aoyama Gakuin University.
Byung-Il Kimhas been our outside director since March 24, 2010. Mr. Kim is currently serves as the head of Korean Studies Advisement Center. Mr. Kim received a MA in Government Affairs from Seoul National UniversityUniversity.
Hui Mook Kimhas been our outside director since March 24, 2010. Mr. Kim is currently the managing director of Sankei Transportation Co., Ltd. Mr. Kim received a B.A. in Economics from Seikei University.
Yoji Hirakawahas been our outside director since March 24, 2010. Mr. Hirakawa currently serves as the President and a Dipl.Ing.CEO of Sun East Place Corporation. Mr. Hirakwa received B.A. in engineeringBusiness Administration from Aachen University in Germany.Ritsumeikan University.
Philippe ReynieixAguinierhas been anour outside director since March 25, 2004.24, 2010. Mr. ReynieixAguignier was nominated by BNP Paribas and elected to our board of directors pursuant to the alliance agreement dated December 2001 which we entered into withbetween us and BNP Paribas. See “Item 7. Major Shareholders and Related Party Transactions —7.B. Related Party Transactions.” HeMr. Aguignier is currently CEO and General Managerthe Head of BNP Paribas Korea.Asia Retail Banking. Mr. ReynieixAguignier received a Master of Business LawPh. D in Far Eastern Studies from Universite Paris II University.III (Inalco).
Any director wishing to enter into a transaction with Shinhan Financial Group including the subsidiaries in his or her personal capacity is required to obtain the prior approval of our Board of Directors. The director having an interest in the transaction may not vote at the meeting of our Board of Directors at which the relevant transaction is subject to vote for approval.
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Executive Officers
In addition to the executive directors who are also our executive officers, we currently have the following executive officers.
| | | | | | | |
Name
| | Age
| |
| Name | | Age | | Position | | | | In charge of |
| |
Baek Soon LeeBuhmsoo Choi | | | 53 | | | Deputy President and Chief
Financial Officer | | — | | Finance Management Team |
| | | | | | | | — | | Investor Relations Team |
| | | | | | | | — | | Strategic Planning Team |
| | | | | | | | — | | Global Business Strategy Team |
| | | | | | | | — | | Shinhan FSB Research Institute |
|
|
| Sung Ho Wi | | | 52 | | | Deputy President | | — | | General Affairs Team |
| | | | | | | | — | | Business Management Team |
| | | | | | | | — | | Public Relations Team |
| | | | | | | | — | | CSR & Culture Management Team |
|
|
| Chan Hee Jin | | | 55 | | | Deputy President; General Affairs Team, BusinessPresident | | — | | Synergy Management Team and Public Relations Team |
Jae Woon Yoon | | | 54 | | | Deputy President; Synergy Management Team, | | — | | Information &and Technology Planning Team Audit & Compliance Team, Risk Management Team |
Buhmsoo Choi | | | 50 | | | Deputy President, Chief Financial Officer; Finance Management Team, Investor Relations Team, Strategic Planning | | — | | Audit Team |
None of the executive officers have any significant activities outside Shinhan Financial Group.
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Baek Soon Leehas been Deputy President since August 28, 2007. Mr. Lee previously served as Deputy President of Retail Banking Group of Shinhan Bank. Mr. Lee also served as Senior Executive Vice President of Shinhan Financial Group in 2004.
Jae Woon Yoonhas been Deputy President since August 26, 2005. Mr. Yoon currently serves as an outside director of Good Morning Shinhan Securities and Shinhan Card and as a non-executive director of Shinhan Capital and Shinhan Credit Information. Mr. Yoon received a B.A. in education from Seoul National University.
Buhmsoo Choihas been our Deputy President and Chief Financial Officer since May 28, 2007. Mr. Choi previously served as vice president of Korea Credit Bureau. Mr. Choi received a B.A. in economics from Seoul National University and a Ph.DPh.D. in economics from Yale University. Mr. Choi also serves as a non-executive director of Shinhan Macquarie Financial Advisors and as an outside director of Shinhan Life Insurance and Shinhan BNPP AM.
AnySung Ho Wihas been our Deputy President since August 28, 2008. Mr. Wi currently also serves as a non-executive director wishing to enter intoof Shinhan PE and as an outside director of Shinhan Bank and Shinhan Investment Mr. Wi received a transaction with Shinhan Financial Group includingB.A. in economics from Korea University.
Chan Hee Jinhas been appointed as our Deputy President on February 12, 2009. Mr. Jin formerly served as the subsidiariesExecutive Vice President in his or her personal capacity is required to obtain the prior approvalcharge of the BoardTreasury & Global Banking Group of Directors. TheShinhan Bank. Mr. Jin also serves as a non-executive director havingof Shinhan PE and as an interestoutside director of Shinhan Card. Mr. Jin received a B.A. in the transaction may not vote at the meeting of the Board of Directors to approve the transaction.Statistics from Korea University.
There are no family relationships among our directorsCOMPENSATIONand/or executive officers.
The aggregate remuneration paid andbenefits-in-kind paid by us to our chairman, our president and chief executive officer, our other executive directors, our non-executive directors and our executive officers for the year ended December 31, 20072009 was W4.65.1 billion, consisting of W3.32.3 billion in salaries and wages and W1.32.8 billion in bonus payments.
We do not have service contracts with any of our directors or officers providing for benefits upon termination of their employment with us.
We have granted stock options to our chairman, our president and chief executive officer and other directors and executive officers as described below in “— Share Ownership — Stock Options.” For our options granted prior to March 30, 2005,20, 2007, we are required to pay in cash the difference between the exercise and the market price at the date of exercise. For those options issued on or after March 30, 2005,20, 2007, we may either issue common stock or pay in cash the difference between the exercise and the market price at the date of exercise. These options are subject to a
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vesting period of two years from the grant date and require continued employment for a specified period. Upon vesting, options may be exercised during a period of two to seven years from the grant date. In 2007,2009, we recognized W10452 billion as compensation expense for the stock options granted under our incentive stock option plan.
Beginning on March 20, 2007, we began granting “performance units” to certain high-ranking officers of select group companies. The grant of performance units is in addition to the grant of stock options, and in connection with the grant of performance units, we have reduced the size of stock options available for grant by approximately 50%. Currently, performance-based compensation for these officers takes the form of both performance units and stock options, in roughly equal proportions. The performance units represent cash payments to be made per each unit on the third anniversary of the grant date based on the performance of the relevant group company during the three years. The number of performance units to be granted at the third anniversary of the grant date is equal to the number of performance units initially granted multiplied by a percentage which equals (i) 0% if the company at which the grantee fails to meet 80% of the performance target, (ii) 80% to 120% corresponding to the percentage of the performance target met by such company, and (iii) a maximum of 120% even if such company outperforms its original performance target by more than 120%. The performance target consists of, in equal measures, net income and return on equity over the three years. The performancePerformance units have a vesting period of three years, althoughand the grantee thereof will be entitled to prorated benefits in case they are no longer employed with us or our subsidiaries prioramount of compensation payable under each performance unit is tied to the endperformance of the relevant group company over the three-year period from the issue date to the vesting period. From March 20, 2007 to May 31, 2008, a total of 901,620 performance units, each with an initial value of W54,560 per unit, have been granted to senior officers of Shinhan Financial Group, Shinhan Bank, Shinhan Card, Good Morning Shinhan Securities, Shinhan Life Insurance, Shinhan Capital and Shinhan Credit Information. As of May 31, 2008, the total number of outstanding performance units was 851,320.date. In 2007,2009, we recognized W8.61.7 billion as compensation expense in respect of the performance units. Our current plan is to grant the next series ofWe have granted additional performance units in April, 2010. In December 2008 and March 2010 and every three years thereafter. We believe that the performance units provide our officers with long-term incentives to improve their work performance while enabling us to have definitive projections as2009, in light of growing concerns relating to the maximum amount payable onglobal financial crisis, directors and officers of us and our performance-based compensation.
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Beginning on April 1, 1999, assubsidiaries voluntarily returned stock options exercisable into a resulttotal of an amendment of the Korean National Pension Law, we have contributed an amount equal to 4.5% of employee wages85,840 shares and contribute 4.5% of employees’ wages614,735 shares, respectively, which are deducted from such wages to the National Pension Management Corporation. In accordance with our policy and the Korean Labor Standard Law, employees with one year or more of service are entitled, upon termination of employment, to receive a lump sum severance payment based upon the length of their service and the average of the last three months’ wages. We make provisions for accrued severance indemnities based upon the assumption that all employees terminate their employment with us at the same time. As of December 31, 2007, the provisions for accrued severance benefits were W480 billion (US$513 million), which represents 100.6% of the amount required under the Korean Labor Standard Law. Under Korean law, we may not terminate full time employees except under certain circumstances.subsequently rescinded.
CORPORATE GOVERNANCE
We are committed to high standards of corporate governance. We complied throughout the year with the corporate governance provisions of the Korean Commercial Code, the Financial Holding Companies Act of Korea, the Securities and Exchange Act and the Listing Rules of the Korea Exchange. We, like all other companies in Korea, must comply with the corporate governance provisions of the Korean Commercial Code. In addition, as a listed company, we are subject to the Securities and Exchange Act, and as a holding company, we are also subject to the Financial Holding Companies Act. In addition, each financial institution that is our subsidiary must comply with the corporate governance provisions of the relevant laws under which it was established.
Differences in Korean/New York Stock Exchange Corporate Governance Practices
In November 2003, the U.S. Securities and Exchange Commission approved new corporate governance rules of the New York Stock Exchange (“NYSE”) for listed companies. Under these new rules, as a NYSE-listed foreign private issuer, we must disclose any significant ways in which its corporate governance practices differ from those followed by U.S. companies under NYSE listing standards. We believe the following to be the significant differences between our corporate governance practices and NYSE corporate governance rules applicable to U.S. companies.
U.S. companies listed on the NYSE are required to adopt and disclose corporate governance guidelines. The listing rules of the Korea Exchange require each company, at the time of its initial listing, to disclose information related to its corporate governance, such as its board of directors, internal audit, shareholder voting, and remuneration of officers and directors. The Korea Exchange, among other things, will review the corporate governance practices of the company in determining whether to approve such company for listing. Under the Korea Exchange listing rules and in accordance with the requirements prescribed under the Securities and Exchange Act, at least one-fourth of a listed company’s directors must be outside directors provided that there must be at least three outside directors. In the case of “Large Listed Company,” which is defined as a company that has total assets as of the end of the most recent fiscal year of W2 trillion or more, at least one-half of its directors must be outside directors and, pursuant to an amendment to the Securities and Exchange Act, more than one-half of a Large Listed Company’s directors must be outside directors effective from July 1, 2004. A Large Listed Company must also establish an audit committee of which at least two-thirds of its members must be outside directors and whose chairman must be an outside director. In addition, effective from December 31, 2003, at least one member of the audit committee who is an outside director must also be an accounting or financial expert,providedthat companies have until the first occasion when its existing audit committee member is replaced for any reason or a new member is appointed to implement this change. A company that has failed to satisfy any of the foregoing requirements continuously for the past two years are prescribed by the Securities and Exchange Act to be delisted from the Korea Exchange. We qualify as a Large Listed Company under the Securities and Exchange Act and have complied with these corporate governance requirements since 2003.
Majority of Independent Directors on the Board
Under the NYSE listing standards, independent directors must comprise a majority of the board of directors of a U.S. company listed on the NYSE. As a foreign private issuer, we are exempt from this requirement. The NYSE
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rules include detailed tests for determining director independence while the Financial Holding Companies Act of Korea, which we follow, prescribes a different standard for determining “outside” directors. An “outside director” for purposes of the Financial Holding Companies Act and the Securities and Exchange Act means a director who does not engage in the regular affairs of the financial holding company, and who is elected at a shareholders meeting, after having been nominated by the outside director nominating committee. None of the largest shareholder, those persons “specially related” to the largest shareholder of such company, persons who during the past two years have served as an officer or employee of such company, the spouses and immediate family members of an officer of such company, and certain other persons specified by law may qualify as an outside director of such company. Currently, our board of directors consists of fifteen directors, including 12 outside directors. Of our fifteen directors, 12 directors satisfy the requirements of “independence” as set forth inRule 10A-3 under the Exchange Act.
Executive Sessions
Pursuant to the NYSE listing standards, non-management directors of U.S. companies listed on the NYSE must meet on a regular basis without management present and independent directors must meet separately at least once per year. While no such requirement currently exists under applicable Korean law or listing standards, pursuant to the bylaws governing our board of directors, outside directors are required to hold two exclusive sessions each year in order to promote the exchange of diverse opinions by outside directors.
Nominating and Corporate Governance Committee
Under the NYSE listing standards, U.S. companies listed on the NYSE are required to have a nominating/corporate governance committee, composed entirely of independent directors. In addition to identifying individuals qualified to become board members, this committee must develop and recommend to the board a set of corporate governance principles. Under the Securities and Exchange Act, large listed companies, financial holding companies, commercial banks, and certain other financial institutions are required to have an outside director nominating committee of which at least one-half of its members must be outside directors. However, there is no requirement to establish a corporate governance committee under applicable Korean law. We currently have an outside director recommendation committee and a board steering committee which manage corporate governance practices applicable to us. The outside director recommendation committee consists of five directors, including four outside directors. The chairman of the committee must be an outside director pursuant to our outside director recommendation committee regulations. The board steering committee consists of five directors, including four outside directors.
Compensation Committee
Under the NYSE listing standards, U.S. companies listed on the NYSE are required to have a compensation committee, composed entirely of independent directors. While no such requirement currently exists under applicable Korean law or listing standards, we have a compensation committee composed of five outside directors. Each member of the compensation committee satisfies the independent director requirements as set forth inRule 10A-3 under the Exchange Act.
Establish Corporate Governance Guidelines and Adopt Code of Business Conduct and Ethics
The NYSE listing standards require U.S. companies listed on the NYSE to establish corporate governance guidelines and to adopt a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. As a foreign private issuer, we are exempt from this requirement. While we have not adopted official corporate governance guidelines, our board of directors, outside director recommendation committee and the board steering committee review and determine corporate policies as needed to ensure efficient and transparent corporate governance practices. Pursuant to the requirements of the Sarbanes-Oxley Act, effective July 1, 2005, we adopted a code of ethics applicable to our Chairman & Chief Executive Officer and all other directors and executive officers including the Chief Financial Officer and the Chief Accounting Officer, as well as all financial, accounting and other officers of Shinhan Financial Group and its subsidiaries that are involved in the preparation and disclosure of Shinhan Financial Group’s consolidated financial
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statements and internal control of financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. On the same date, we also adopted an insider reporting system in compliance with Section 301 of the Sarbanes-Oxley Act. The code of ethics applicable to our executive officers as well as the financial officers of the holding company and its subsidiaries are available on our websitewww.shinhangroup.com. Several of our subsidiaries, including Shinhan Bank, Good Morning Shinhan Securities and Shinhan Life Insurance, currently also have their own codes of business conduct and ethics.
Shareholder Approval of Equity Compensation Plans
The NYSE listing standards require the shareholders of U.S. companies listed on the NYSE to approve all equity compensation plans. We currently have two equity compensation plans, consisting of a stock option plan for directors and key employees and the Employee Stock Ownership Plan for all employees. Stock options may be granted up to 20% of the total number of outstanding shares in accordance with the relevant rules set forth in our Articles of Incorporation. Under applicable Korean laws, granting of stock options requires a shareholder resolution at the extraordinary shareholders’ meeting, which requires the approval of the holders of the shares representing at least two-thirds of those shares present or represented at such meeting and also representing at least one-third of the total issued and outstanding shares. Under applicable Korean laws and our Articles of Incorporation, stock options may be granted up to 1% of the total number of outstanding shares by a board of director, subject to the approval at the next shareholders’ meeting. Shares under the Employee Stock Ownership Plan may be granted up to the lower of 1% of the total number of issued and outstanding shares and W300 million in aggregate purchase price of such shares, and without a shareholder resolution pursuant to applicable Korean laws.
Effective October 2005, the amended Framework Act on Workers’ Welfare and the Enforcement Decree thereunder allow a company to issue stock options up to 20% of its issued and outstanding shares by a resolution at the shareholders’ meeting with an individual limit of W6 million per each member of the employee stock ownership association, if otherwise permitted by the Articles of Incorporation. In addition, if a company is issuing stock options by a 10% of its issued and outstanding shares, only a board of director resolution is required for such issuance if otherwise permitted by the Articles of Incorporation. However, we have not adopted such provision in our Articles of Incorporation.
Annual Certification of Compliance
Lastly, a chief executive officer of a U.S. company listed on the NYSE must annually certify that he or she is not aware of any violation by the company of NYSE corporate governance standards. In accordance with NYSE listing rules applicable to foreign private issuers, we are not required to provide the NYSE with this annual compliance certification. However, in accordance with rules applicable to both U.S. companies and foreign private issuers, we are required to promptly notify the NYSE in writing after any executive officer becomes aware of any material noncompliance with the NYSE corporate governance standards applicable to us. Beginning in 2005, foreign private issuers, including us, are required to submit to the NYSE an annual written affirmation relating to compliance with Sections 303A.06 and 303A.11 of the NYSE listed company manual, which are the NYSE corporate governance standards applicable to foreign private issuers. All written affirmations must be executed in the form provided by the NYSE, without modification. We plan to submit the annual written affirmation to the NYSE within 30 days of filing with the SEC our annual report onForm 20-F for the fiscal year ended December 31, 2007.
BOARD PRACTICES
Board of Directors
Our board of directors, which currently consists of two executive directors, onetwo non-executive directordirectors and 128 outside directors, has the ultimate responsibility for the management of our affairs.
Our Articles of Incorporation provide for no less than three but no more than 15 directors and the number of executive directors must be less than 50% of the total number of directors. At least half of our directors must be outside directors, and we must maintain at least three outside directors. All directors are elected for a term not
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exceeding three years as determined by the board of directors, except that outside directors who have been elected as “outside experts” at a general meeting of shareholders will serve for a term of one year.
Terms are renewable and are subject to the Korean Commercial Code, the Financial Holding Companies Act and related regulations. See “Item 6.A. Directors and Senior Management” above for information concerning the terms of office of our directors and executive officers.
Our board of directors meets on a regular basis to discuss and resolve material corporate matters. Additional extraordinary meetings may also be convened at the request of the president and chief executive officer or a director designated by the board.
Currently, there are no outstanding service contracts between any of our directors or executive officers and us or any of our subsidiaries providing for benefits upon termination of employment by such director or executive officer.
Committees of the Board of Directors
We currently have six management committees that serve under the board:
| | |
| | • | the Board Steering Committee; |
| |
| | • | the Risk Management Committee; |
| |
| | • | the Audit Committee |
| |
| | • | the Outside Director Recommendation Committee; |
| |
| | • | the Compensation Committee; and |
| |
| | • | the Audit Committee Member Recommendation Committee. |
Each committee member is appointed by the board of directors, except for members of the Audit Committee, who are elected at the general meeting of stockholders.shareholders.
Board Steering Committee
The Board Steering Committee currently consists of fourfive directors, namely Young Sup Huh, Pyung Joo Kim, Byung Hun Park and Shee Yul Ryoo, Sung Bin Chun, Haeng Nam Chung, Byung-Il Kim, together with the chairman of our Board of Directors.group. The committee is responsible for ensuring the efficient operations of the board and the facilitation of the board’s functions. The committee’s responsibilities also include reviewing and assessing the board’s structure and the effectiveness of that structure in fulfilling the board’s fiduciary responsibilities. The committee holds regular meetings every quarter.
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Risk Management Committee
The Risk Management Committee currently consists of three outside directors, namely Bong Youn Cho, Pyung Joo KimShee Yul Ryoo, Ke Sup Yun and Philippe Reynieix.Aguignier. The committee oversees and makes determinations on all issues relating to our comprehensive risk management function. In order to ensure our stable financial condition and to maximize our profits, the committee monitors our overall risk exposure and reviews our compliance with risk policies and risk limits. In addition, the committee reviews risk and control strategies and policies, evaluates whether each risk is at an adequate level, establishes or abolishes risk management divisions, reviews risk-based capital allocations, and reviews the plans and evaluation of internal control. The committee holds regular meetings every quarter.
Audit Committee
The Audit Committee currently consists of fourthree outside directors, namely Bong Youn Cho,Ke Sup Yun, Sung Bin Chun Young Sup Huh and Young WooYo Koo Kim. The committee oversees our financial reporting and approves the appointment of and interaction with our independent auditors and our internal audit-related officers. The committee also reviews our financial information, audit examinations, key financial statement issues and the administration of our financial affairs by the board of directors. In connection with the general meetings of stockholders, the committee examines the agenda for, and financial statements and other reports to be submitted by, the board of directors for each general meeting of stockholders. The committee holds regular meetings every quarter.
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Outside Director Recommendation Committee
From February 4, 2008 to March 19, 2008, the Outside Director Recommendation Committee consisted of Sung Bin Chun, Pyung Joo Kim, Byung Hun Park, Eung Chan Ra and Shee Yul Ryoo. Members of this committee will be appointed by our board of directors if and when necessary. This committee is responsible for recommendingonly to the extent necessary to recommend and nominatingnominate candidates for our outside director positions and related matters. The committee meetings are called by the chairman of this committee, who must be an outside director.
Compensation Committee
The Compensation Committee currently consists of five outsidethree directors, namely Bong Youn Cho, Sung Bin Chun, Young Sup Huh, Pyung JooByung-Il Kim, and Shee Yul Ryoo.Ryoo and Ke Sup Yun. At least one-half of the members of this committee must be outside directors. This committee is responsible for reviewing and approving the management’s evaluation and compensation programs. The committee meetings are called by the chairman of this committee, who must be an outside director.
Audit Committee Member Recommendation Committee
Established on March 19, 2008,Members of this committee will be appointed by our board of directors if and only to the Audit Committee Member Recommendation Committee is requiredextent necessary to consist of all outside directors.recommend and nominate candidates for our audit committee member positions and related matters. This committee recommends candidates for the members of the Audit Committee and is required to act on the basis of a two-thirds vote of the members present.
EMPLOYEES
As of December 31, 2007, atAt the holding company level, we had approximately 85, 97 and 129 regular employees as of December 31, 2007, 2008 and 2009, respectively, almost all of whom are employed within Korea. AsOur subsidiaries had 16,349, 17,110 and 16,628 regular employees as of December 31, 2007, our subsidiaries had approximately 16,400 regular employees,2008 and 2009, respectively, almost all of whom are employed within Korea. In addition, we had 3, 1 and 6 non-regular employee at the holding company level as of December 31, 2007, we had three non-regular employees at the holding company level2008 and approximately 4,7002009, respectively, and 4,696, 3,501 and 3,369 non-regular employees at the subsidiary level.level as of December 31, 2007, 2008 and 2009, respectively. Of the total number of regular and non-regular employees at both the holding company and subsidiaries, 57.5%approximately 49.3% were managerial or executive employees.
7,4687,610 employees atof Shinhan Bank, (including the271 employees of former Chohung Bank), 270 employees at Jeju Bank and 2862,683 employees of Shinhan Card who were employees of former Shinhan Card were members of Korea Financial Industry Union and 1,268 employees at Good Morning Shinhan SecuritiesInvestment were members of Korea Securities Trade Union as of December 31, 2007. 2,8622009. 2,683 employees of Shinhan Card who were employees of LG Card were members of the Korean Federation of Clerical and Financial Labor Union as of December 31, 2007.
Following the merger of Chohung Bank and Shinhan Bank, the employees of former Chohung Bank maintained a separate labor union from the labor union for the employees of Shinhan Bank. On October 16, 2007, the labor union for the employees of former Chohung Bank merged into that for the employees of Shinhan Bank.
Following the transfer of assets and liabilities into LG Card (since renamed Shinhan Card), the employees of former Shinhan Card maintained a separate labor union from the labor union for the employees of LG Card. As of December 31, 2007, 286 employees of Shinhan Card were members of the labor union of former Shinhan Card, while 2,862 other employees of Shinhan Card who were employees of LG Card at the time of the merger were members of the labor union of LG Card. The two unions are currently in discussion to merge them together. We have not experienced any significant difficulty due to the existence of the two labor unions.2009.
Since our acquisition of Chohung Bank in 2003, we have not experienced any general employee work stoppages and consider our employee relations to be good.
SHARE OWNERSHIPUnder the Korean National Pension Law, we annually contribute an amount equal to 4.5% of employee wages and contribute 4.5% of employees’ wages which are deducted from such wages to the National Pension Management Corporation. In accordance with our policy and the Korean Labor Standard Law, employees with one year or more of service are entitled, upon termination of employment, to receive a lump sum severance payment
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based upon the length of their service and the average of the last three months’ wages. We make provisions for accrued severance indemnities based upon the assumption that all employees terminate their employment with us at the same time. As of December 31, 2009, the provisions for accrued severance benefits were W404 billion, which represents 100.5% of the amount required under the Korean Labor Standard Law. Under Korean law, we may not terminate full time employees except under certain circumstances.
As of December 31, 2007,2009, the persons who are currently our directors or executive officers, as a group, beneficially held an aggregate of 5,185,0621,027,399 shares of our common stock representing approximately 1.31%0.22% of our outstanding common stock as of such date. None of these persons individually held more than 1% of our outstanding common stock as of such date.
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Stock Options
We have granted stock options to certain of the directors and officers of the holding company and its subsidiaries. For options granted prior to March 30, 2005, we are required to pay in cash the difference between the exercise and the market price at the date of exercise. For options issued on or after March 30, 2005, we may either issue common stock or pay in cash the difference between the exercise and the market price at the date of exercise. The following table is the breakdown of outstanding stock options with respect to our common stock that we have granted to our directors and officers, describing the grant dates, positions held by such directors and officers, exercise period, price and the number of options as of May 26, 2008.June 11, 2010.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Number of
| | Percentage of
| | Number of
|
| | | Grant
| | Exercise Period | | Exercise
| | Granted
| | Shares
| | Exercised
|
| | | Date | | From | | To | | Price | | Options | | Outstanding | | Options |
| | | | | | | | | (In Won) | | | | (Percentage) | | |
| |
Shinhan Financial Group | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Eung Chan Ra | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 94,416 | | | | 0.02 | % | | | 94,416 | |
| (Chairman of the | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 95,390 | | | | 0.02 | % | | | 95,390 | |
| Board of Directors) | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 100,000 | | | | 0.03 | % | | | 100,000 | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 99,447 | | | | 0.03 | % | | | — | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 120,000 | | | | 0.03 | % | | | — | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 60,000 | | | | 0.02 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 55,000 | | | | 0.01 | % | | | — | |
In Ho Lee | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 32,162 | | | | 0.01 | % | | | 32,162 | |
| (President and Chief | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 186,500 | | | | 0.05 | % | | | — | |
Executive Officer) | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 54,000 | | | | 0.01 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 49,500 | | | | 0.01 | % | | | — | |
Pyung Joo Kim | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 8,770 | | | | 0.00 | % | | | — | |
| (Outside Director) | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 10,000 | | | | 0.00 | % | | | — | |
Shee Yul Ryoo | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 9,944 | | | | 0.00 | % | | | — | |
| (Outside Director) | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 10,000 | | | | 0.00 | % | | | — | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 10,000 | | | | 0.00 | % | | | — | |
Sung Bin Chun | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 10,000 | | | | 0.00 | % | | | — | |
| (Outside Director) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Baek Soon Lee | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 20,000 | | | | 0.01 | % | | | — | |
| (Deputy President) | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 19,889 | | | | 0.01 | % | | | — | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 24,000 | | | | 0.01 | % | | | — | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 11,000 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 11,000 | | | | 0.00 | % | | | — | |
Jae Woon Yoon | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 22,000 | | | | 0.01 | % | | | — | |
| (Deputy President) | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 11,000 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 11,000 | | | | 0.00 | % | | | — | |
Buhmsoo Choi | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 11,000 | | | | 0.00 | % | | | — | |
| (Deputy President) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shinhan Bank | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sang Hoon Shin | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 28,325 | | | | 0.01 | % | | | 28,325 | |
| (President & CEO) | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 77,160 | | | | 0.02 | % | | | 77,160 | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 80,000 | | | | 0.02 | % | | | 80,000 | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 80,000 | | | | 0.02 | % | | | — | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 88,000 | | | | 0.02 | % | | | — | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 48,000 | | | | 0.01 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 44,000 | | | | 0.01 | % | | | — | |
Hyu Won Lee | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 2,500 | | | | 0.00 | % | | | 2,500 | |
| (Deputy President) | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 2,200 | | | | 0.00 | % | | | 2,200 | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 1,800 | | | | 0.00 | % | | | 1,800 | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 20,000 | | | | 0.01 | % | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Exercise Period | | | | | | |
| | | | | | | | | Exercise
| | | | |
| | | | | | | | | Period
| | Number of Granted
| | Number of Options
|
| | | Grant Date | | From | | To | | (In Won) | | Options | | Outstanding |
| |
Shinhan Financial Group | | | | | | | | | | | | | | | | | | | | | | | | |
Eung Chan Ra | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 94,416 | | | | — | |
| (Chairman) | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 95,390 | | | | — | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 100,000 | | | | — | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 99,447 | | | | 99,447 | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 112,794 | | | | 112,794 | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 60,000 | | | | 60,000 | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 55,000 | | | | 55,000 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 35,000 | | | | — | |
| |
| |
Sang Hoon Shin | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 28,325 | | | | — | |
| (President & Chief | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 77,160 | | | | — | |
| Executive Officer) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 80,000 | | | | — | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 80,000 | | | | 80,000 | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 83,173 | | | | 83,173 | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 48,000 | | | | 48,000 | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 44,000 | | | | 44,000 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 31,500 | | | | — | |
| |
| |
Shee Yul Ryoo | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 9,944 | | | | — | |
| (Non-Executive Director) | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 9,399 | | | | — | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 10,000 | | | | 10,000 | |
| |
| |
Sung Bin Chun | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 10,000 | | | | 10,000 | |
| (Chairman of the Board of Directors) | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| |
Buhmsoo Choi | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 11,000 | | | | 11,000 | |
| (Deputy President) | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 9,000 | | | | — | |
| |
| |
217196
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Number of
| | Percentage of
| | Number of
|
| | | Grant
| | Exercise Period | | Exercise
| | Granted
| | Shares
| | Exercised
|
| | | Date | | From | | To | | Price | | Options | | Outstanding | | Options |
| | | | | | | | | (In Won) | | | | (Percentage) | | |
| |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 22,000 | | | | 0.01 | % | | | — | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 11,000 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 11,000 | | | | 0.00 | % | | | — | |
Won Suck Choi | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 5,000 | | | | 0.00 | % | | | — | |
| (Deputy President) | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 22,000 | | | | 0.01 | % | | | — | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 11,000 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 11,000 | | | | 0.00 | % | | | — | |
Nam Lee | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 2,000 | | | | 0.00 | % | | | — | |
| (Deputy President) | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 22,000 | | | | 0.01 | % | | | — | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 11,000 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 11,000 | | | | 0.00 | % | | | — | |
Chang Kee Hur | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 2,500 | | | | 0.00 | % | | | 2,500 | |
| (Deputy President) | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 1,700 | | | | 0.00 | % | | | | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 1,800 | | | | 0.00 | % | | | | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 1,800 | | | | 0.00 | % | | | — | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 22,000 | | | | 0.01 | % | | | — | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 11,000 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 11,000 | | | | 0.00 | % | | | — | |
Jeum Joo Gweon | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 1,500 | | | | 0.00 | % | | | 1,500 | |
| (Deputy President) | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 1,700 | | | | 0.00 | % | | | 1,700 | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 1,800 | | | | 0.00 | % | | | 1,800 | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 2,500 | | | | 0.00 | % | | | — | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 7,000 | | | | 0.00 | % | | | — | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 7,500 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 11,000 | | | | 0.00 | % | | | — | |
Sung Woo Kim | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 1,600 | | | | 0.00 | % | | | — | |
| (Deputy President) | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 7,000 | | | | 0.01 | % | | | — | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 7,000 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 10,000 | | | | 0.00 | % | | | — | |
Hak Joo Kim | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 1,700 | | | | 0.00 | % | | | — | |
| (Deputy President) | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 1,800 | | | | 0.00 | % | | | — | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 1,800 | | | | 0.01 | % | | | — | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 7,000 | | | | 0.01 | % | | | — | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 7,000 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 10,000 | | | | 0.00 | % | | | — | |
Joo Won Park | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 2,000 | | | | 0.00 | % | | | — | |
| (Deputy President) | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 2,100 | | | | 0.01 | % | | | — | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 7,000 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 10,000 | | | | 0.00 | % | | | — | |
Chan Park | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 1,800 | | | | 0.00 | % | | | — | |
| (Executive Vice | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 7,000 | | | | 0.01 | % | | | — | |
| President) | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 7,000 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 8,250 | | | | 0.00 | % | | | — | |
Jung Won Lee | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 2,500 | | | | 0.00 | % | | | 2,500 | |
| (Executive Vice | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 1,700 | | | | 0.00 | % | | | — | |
| President) | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 2,000 | | | | 0.00 | % | | | — | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 2,500 | | | | 0.00 | % | | | — | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 2,500 | | | | 0.00 | % | | | — | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 3,000 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 8,250 | | | | 0.00 | % | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Exercise Period | | | | | | |
| | | | | | | | | Exercise
| | | | |
| | | | | | | | | Period
| | Number of Granted
| | Number of Options
|
| | | Grant Date | | From | | To | | (In Won) | | Options | | Outstanding |
| |
Sung Ho Wi | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 2,500 | | | | — | |
| (Deputy President) | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 1,700 | | | | — | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 2,000 | | | | — | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 1,800 | | | | 1,800 | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 2,500 | | | | 2,500 | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 3,000 | | | | 3,000 | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 8,250 | | | | 8,250 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 9,000 | | | | — | |
| |
| |
Chan-Hee Jin | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 2,000 | | | | 2,000 | |
| (Deputy President) | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 1,800 | | | | 1,800 | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 8,250 | | | | 8,250 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 9,000 | | | | — | |
| |
| |
Shinhan Bank | | | | | | | | | | | | | | | | | | | | | | | | |
Baek Soon Lee | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 1,500 | | | | — | |
| (President & Chief | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 2,200 | | | | — | |
| Executive Officer) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 20,000 | | | | — | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 19,889 | | | | 19,889 | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 22,683 | | | | 22,683 | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 11,000 | | | | 11,000 | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 11,000 | | | | 11,000 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 28,000 | | | | — | |
| |
| |
Jeum Joo Gweon | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 1,500 | | | | — | |
| (Deputy President) | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 1,700 | | | | — | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 1,800 | | | | — | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 2,500 | | | | — | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 6,616 | | | | 6,616 | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 7,500 | | | | 7,500 | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 11,000 | | | | 11,000 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 9,000 | | | | — | |
| |
| |
Chan Park | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 1,800 | | | | 1,800 | |
| (Deputy President) | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 6,616 | | | | 6,616 | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 7,000 | | | | 7,000 | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 8,250 | | | | 8,250 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 9,000 | | | | — | |
| |
| |
Hyung Jin Kim | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 1,200 | | | | — | |
| (Deputy President) | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 2,000 | | | | — | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 3,400 | | | | 3,400 | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 4,100 | | | | 4,100 | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 3,000 | | | | 3,000 | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 7,500 | | | | 7,500 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | | | | | 23,405 | | | | 12,500 | | | | — | |
| |
| |
Young Hoon Lee | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 1,500 | | | | — | |
| (Deputy President) | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 1,200 | | | | — | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 2,000 | | | | — | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 2,500 | | | | 2,500 | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 6,616 | | | | 6,616 | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 3,000 | | | | 3,000 | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 7,500 | | | | 7,500 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 9,000 | | | | — | |
| |
| |
218197
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Number of
| | Percentage of
| | Number of
|
| | | Grant
| | Exercise Period | | Exercise
| | Granted
| | Shares
| | Exercised
|
| | | Date | | From | | To | | Price | | Options | | Outstanding | | Options |
| | | | | | | | | (In Won) | | | | (Percentage) | | |
| |
Chan Hee Jin | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 2,000 | | | | 0.00 | % | | | — | |
| (Executive Vice | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 1,800 | | | | 0.00 | % | | | — | |
| President) | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 8,250 | | | | 0.00 | % | | | — | |
Hyung Jin Kim | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 1,200 | | | | 0.00 | % | | | — | |
| (Executive Vice | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 2,000 | | | | 0.00 | % | | | — | |
| President) | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 1,800 | | | | 0.00 | % | | | — | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 2,500 | | | | 0.00 | % | | | — | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 3,000 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 7,500 | | | | 0.00 | % | | | — | |
Young Hoon Lee | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 1,500 | | | | 0.00 | % | | | 1,500 | |
| (Executive Vice | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 1,200 | | | | 0.00 | % | | | 1,200 | |
| President) | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 2,000 | | | | 0.00 | % | | | 2,000 | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 2,500 | | | | 0.00 | % | | | — | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 7,000 | | | | 0.00 | % | | | — | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 3,000 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 7,500 | | | | 0.00 | % | | | — | |
Shinhan Card | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Jae Woo Lee | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 18,873 | | | | 0.00 | % | | | 18,873 | |
| (President) | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 19,290 | | | | 0.01 | % | | | — | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 20,000 | | | | 0.01 | % | | | — | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 19,889 | | | | 0.01 | % | | | — | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 24,000 | | | | 0.01 | % | | | — | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 11,000 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 22,000 | | | | 0.01 | % | | | — | |
In Sup Kim | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 8,250 | | | | 0.00 | % | | | — | |
| (Statutory Auditor) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Hong Kyu Kang | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 8,250 | | | | 0.00 | % | | | — | |
| (Deputy CEO) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Soo Ik Park | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 2,500 | | | | 0.00 | % | | | 2,500 | |
| (Deputy CEO) | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 2,200 | | | | 0.00 | % | | | 2,200 | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 1,800 | | | | 0.00 | % | | | 1,800 | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 2,500 | | | | 0.00 | % | | | 2,500 | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 7,000 | | | | 0.00 | % | | | — | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 7,000 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 7,500 | | | | 0.00 | % | | | — | |
Doo Hwan Jun | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 15,000 | | | | 0.00 | % | | | — | |
| (Deputy CEO) | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 8,250 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 8,250 | | | | 0.00 | % | | | — | |
Hee Geon Kim | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 15,000 | | | | 0.00 | % | | | — | |
| (Deputy CEO) | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 8,250 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 8,250 | | | | 0.00 | % | | | — | |
Jong Kyun Sin | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 7,500 | | | | 0.00 | % | | | — | |
| (Deputy CEO) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Chun Kuk Lee | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 1,000 | | | | 0.00 | % | | | — | |
| (Managing Director) | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 1,200 | | | | 0.00 | % | | | — | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 1,400 | | | | 0.00 | % | | | — | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 7,500 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 6,600 | | | | 0.00 | % | | | — | |
Il Hwan Kim | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 6,600 | | | | 0.00 | % | | | — | |
| (Managing Director) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Exercise Period | | | | | | |
| | | | | | | | | Exercise
| | | | |
| | | | | | | | | Period
| | Number of Granted
| | Number of Options
|
| | | Grant Date | | From | | To | | (In Won) | | Options | | Outstanding |
| |
Sung Rack Lee | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 1,000 | | | | — | |
| (Executive Vice President) | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 1,200 | | | | — | |
| | | | 3/25/2004 | | �� | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 2,000 | | | | — | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 2,500 | | | | 2,500 | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 2,500 | | | | 2,500 | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 3,000 | | | | 3,000 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 9,000 | | | | — | |
| |
| |
Dong Dae Lee | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 1,500 | | | | — | |
| (Executive Vice President) | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 1,700 | | | | — | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 2,500 | | | | — | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 2,500 | | | | 2,500 | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 2,500 | | | | 2,500 | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 3,000 | | | | 3,000 | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 3,500 | | | | 3,500 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 6,750 | | | | — | |
| |
| |
Se Il Oh | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 1,500 | | | | — | |
| (Executive Vice President) | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 2,200 | | | | — | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 1,800 | | | | — | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 1,800 | | | | 1,800 | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 1,800 | | | | 1,800 | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 3,500 | | | | 3,500 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 6,750 | | | | — | |
| |
| |
Yong Byoung Cho | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 2,500 | | | | — | |
| (Executive Vice President) | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 1,700 | | | | — | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 1,800 | | | | — | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 1,800 | | | | 1,800 | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 2,500 | | | | 2,500 | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 3,000 | | | | 3,000 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 6,750 | | | | — | |
| |
| |
Jong Bok Moon | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 1,500 | | | | 1,500 | |
| (Executive Vice President) | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 1,800 | | | | 1,800 | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 3,000 | | | | 3,000 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 6,750 | | | | — | |
| |
| |
In Jong Joo | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 1,800 | | | | 1,800 | |
| (Executive Vice President) | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 2,000 | | | | 2,000 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 3,500 | | | | — | |
| |
| |
Young Oh Seol | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 1,500 | | | | — | |
| (Executive Vice President) | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 1,200 | | | | — | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 1,600 | | | | — | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 1,600 | | | | 1,600 | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 2,000 | | | | 2,000 | |
| |
| |
219198
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Number of
| | Percentage of
| | Number of
|
| | | Grant
| | Exercise Period | | Exercise
| | Granted
| | Shares
| | Exercised
|
| | | Date | | From | | To | | Price | | Options | | Outstanding | | Options |
| | | | | | | | | (In Won) | | | | (Percentage) | | |
| |
Jae Gwang Soh | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 6,000 | | | | 0.00 | % | | | — | |
| (Managing Director) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ihl Soon Cho | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 6,000 | | | | 0.00 | % | | | — | |
| (Managing Director) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
In Chang Rou | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 6,000 | | | | 0.00 | % | | | — | |
| (Managing Director) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Good Morning Shinhan Securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dong Girl Lee | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 26,953 | | | | 0.01 | % | | | 26,953 | |
| (President & CEO) | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 30,000 | | | | 0.01 | % | | | — | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 30,000 | | | | 0.01 | % | | | — | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 40,000 | | | | 0.01 | % | | | — | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 48,000 | | | | 0.01 | % | | | — | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 20,000 | | | | 0.01 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 20,000 | | | | 0.01 | % | | | — | |
Ki Seung Jung | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 7,500 | | | | 0.00 | % | | | — | |
| (Chief Auditor) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Jin Kook Lee | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 14,080 | | | | 0.00 | % | | | — | |
| (Vice President) | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 15,000 | | | | 0.00 | % | | | — | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 7,500 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 8,250 | | | | 0.00 | % | | | — | |
Yoo Shin Jung | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 14,080 | | | | 0.00 | % | | | — | |
| (Vice President) | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 7,500 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 7,500 | | | | 0.00 | % | | | — | |
Seung Hee Hyun | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 5,000 | | | | 0.00 | % | | | — | |
| (Vice President) | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 7,500 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 7,500 | | | | 0.00 | % | | | — | |
Shinhan Life Insurance | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Jin Won Suh | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 2,500 | | | | 0.00 | % | | | 2,500 | |
| (CEO) | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 2,200 | | | | 0.00 | % | | | — | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 20,000 | | | | 0.01 | % | | | — | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 20,000 | | | | 0.01 | % | | | — | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 22,000 | | | | 0.01 | % | | | — | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 11,000 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 22,000 | | | | 0.01 | % | | | — | |
Seung Choo Kang | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 16,500 | | | | 0.00 | % | | | — | |
| (Statutory Auditor) | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 8,250 | | | | 0.00 | % | | | — | |
Byung Chan Lee | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 15,000 | | | | 0.00 | % | | | — | |
| (Deputy President) | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 8,250 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 8,250 | | | | 0.00 | % | | | — | |
Keun Jong Lee | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 15,000 | | | | 0.00 | % | | | — | |
| (Deputy President) | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 8,250 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 8,250 | | | | 0.00 | % | | | — | |
Young Chul Bae | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 15,000 | | | | 0.00 | % | | | — | |
| (Deputy President) | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 8,250 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 7,500 | | | | 0.00 | % | | | — | |
Sam Suck Rho | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 12,000 | | | | 0.00 | % | | | — | |
| (Deputy President) | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 8,250 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 7,500 | | | | 0.00 | % | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Exercise Period | | | | | | |
| | | | | | | | | Exercise
| | | | |
| | | | | | | | | Period
| | Number of Granted
| | Number of Options
|
| | | Grant Date | | From | | To | | (In Won) | | Options | | Outstanding |
| |
Shinhan Card | | | | | | | | | | | | | | | | | | | | | | | | |
Jae Woo Lee | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 18,873 | | | | — | |
| (President & Chief | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 19,290 | | | | — | |
| Executive Officer) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 20,000 | | | | — | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 19,889 | | | | 19,889 | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 22,559 | | | | 22,559 | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 11,000 | | | | 11,000 | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 22,000 | | | | 22,000 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 17,600 | | | | — | |
| |
| |
Hee Geon Kim | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 14,937 | | | | 14,937 | |
| (Deputy CEO) | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 8,250 | | | | 8,250 | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 8,250 | | | | 8,250 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 7,425 | | | | — | |
| |
| |
Chun Kuk Lee | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 1,000 | | | | — | |
| (Deputy CEO) | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 1,200 | | | | 1,200 | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 1,400 | | | | 1,400 | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 7,500 | | | | 7,500 | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 6,600 | | | | 6,600 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 6,750 | | | | — | |
| |
| |
Jae-Gwang Soh | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 6,000 | | | | 6,000 | |
| (Deputy CEO) | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 5,940 | | | | — | |
| |
| |
Jeong Cheol Kim | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 1,500 | | | | — | |
| (Deputy CEO) | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 1,700 | | | | — | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 1,400 | | | | — | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 2,500 | | | | 2,500 | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 2,500 | | | | 2,500 | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 7,000 | | | | 7,000 | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 3,850 | | | | 3,850 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 6,750 | | | | — | |
| |
| |
Byung Gook Song | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 2,500 | | | | — | |
| (Deputy CEO) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 2,200 | | | | — | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 2,500 | | | | — | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 2,500 | | | | 2,500 | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 1,800 | | | | 1,800 | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 3,500 | | | | 3,500 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 3,500 | | | | — | |
| |
| |
Shinhan Investment Corp. | | | | | | | | | | | | | | | | | | | | | | | | |
Hyu Won Lee | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 2,500 | | | | — | |
| (Chief Executive Officer) | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 2,200 | | | | — | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 1,800 | | | | — | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 20,000 | | | | 20,000 | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 20,793 | | | | 20,793 | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 11,000 | | | | 11,000 | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 11,000 | | | | 11,000 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 16,000 | | | | — | |
| |
| |
220199
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Number of
| | Percentage of
| | Number of
|
| | | Grant
| | Exercise Period | | Exercise
| | Granted
| | Shares
| | Exercised
|
| | | Date | | From | | To | | Price | | Options | | Outstanding | | Options |
| | | | | | | | | (In Won) | | | | (Percentage) | | |
| |
Jung Kun Lee | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 1,500 | | | | 0.00 | % | | | 1,500 | |
| (Deputy President) | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 1,200 | | | | 0.00 | % | | | 1,200 | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 1,800 | | | | 0.01 | % | | | 1,800 | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 2,500 | | | | 0.01 | % | | | — | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 7,000 | | | | 0.01 | % | | | — | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 7,500 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 7,500 | | | | 0.00 | % | | | — | |
Ki Won Kim | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 12,000 | | | | 0.00 | % | | | — | |
| (Deputy President) | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 6,000 | | | | 0.00 | % | | | — | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 6,600 | | | | 0.00 | % | | | — | |
| Total | | | | | | | | | | | | | | | | | | | 2,929,818 | | | | 0.82 | % | | | 593,679 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Exercise Period | | | | | | |
| | | | | | | | | Exercise
| | | | |
| | | | | | | | | Period
| | Number of Granted
| | Number of Options
|
| | | Grant Date | | From | | To | | (In Won) | | Options | | Outstanding |
| |
Ki Seung Jung | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 1,600 | | | | — | |
| (Standing Auditor) | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 1,600 | | | | — | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 1,600 | | | | 1,600 | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 7,500 | | | | 7,500 | |
| |
| |
Jin Kook Lee | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 14,080 | | | | — | |
| (Vice President) | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 13,190 | | | | 7,000 | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 7,500 | | | | 7,500 | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 8,250 | | | | 8,250 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 6,750 | | | | — | |
| |
| |
Byung Kuk Rhee | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 1,400 | | | | 1,400 | |
| (Vice President) | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 1,600 | | | | 1,600 | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 5,000 | | | | 5,000 | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 2,750 | | | | 2,750 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 2,500 | | | | — | |
| |
| |
Kyoung Eun Yoon | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 1,600 | | | | — | |
| (Vice President) | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 4,397 | | | | — | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 5,000 | | | | 5,000 | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 2,500 | | | | 2,500 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 2,750 | | | | — | |
| |
| |
Shinhan Life Insurance | | | | | | | | | | | | | | | | | | | | | | | | |
Jin Won Suh | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 2,500 | | | | — | |
| (President & Chief | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 2,200 | | | | — | |
| Executive Officer) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 20,000 | | | | — | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 20,000 | | | | 20,000 | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 20,679 | | | | 20,679 | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 11,000 | | | | 11,000 | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 22,000 | | | | 22,000 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 16,000 | | | | — | |
| |
| |
Byung Chan Lee | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 14,939 | | | | 14,939 | |
| (Vice President) | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 8,250 | | | | 8,250 | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 8,250 | | | | 8,250 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 6,750 | | | | — | |
| |
| |
Jung Kun Lee | | | 5/22/2002 | | | | 5/23/2004 | | | | 5/22/2008 | | | | 18,910 | | | | 1,500 | | | | — | |
| (Vice President) | | | 5/15/2003 | | | | 5/16/2005 | | | | 5/15/2009 | | | | 11,800 | | | | 1,200 | | | | — | |
| | | | 3/25/2004 | | | | 3/25/2006 | | | | 3/25/2009 | | | | 21,595 | | | | 1,800 | | | | — | |
| | | | 3/30/2005 | | | | 3/30/2008 | | | | 3/29/2012 | | | | 28,006 | | | | 2,500 | | | | 2,500 | |
| | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 6,616 | | | | 6,616 | |
| | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 7,000 | | | | 7,000 | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 7,500 | | | | 7,500 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 6,750 | | | | — | |
| |
| |
Ki Won Kim | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | �� | | 11,952 | | | | 11,952 | |
| (Vice President) | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 6,000 | | | | 6,000 | |
| | | | 3/19/2008 | | | | 3/19/2011 | | | | 3/18/2015 | | | | 49,053 | | | | 6,600 | | | | 6,600 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 6,750 | | | | — | |
| |
| |
Ho Kyung Bae | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 1,000 | | | | 1,000 | |
| (Vice President) | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 5,400 | | | | — | |
| |
| |
200
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Exercise Period | | | | | | |
| | | | | | | | | Exercise
| | | | |
| | | | | | | | | Period
| | Number of Granted
| | Number of Options
|
| | | Grant Date | | From | | To | | (In Won) | | Options | | Outstanding |
| |
Jae Gun Bae | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 1,200 | | | | 1,200 | |
| (Vice President) | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 1,800 | | | | 1,800 | |
| | | | 3/17/2009 | | | | 3/17/2012 | | | | 3/16/2016 | | | | 23,405 | | | | 5,400 | | | | — | |
| |
| |
Choun Sik Lee | | | 3/21/2006 | | | | 3/21/2009 | | | | 3/20/2013 | | | | 38,829 | | | | 1,200 | | | | 1,200 | |
| (Vice President) | | | 3/20/2007 | | | | 3/20/2010 | | | | 3/19/2014 | | | | 54,560 | | | | 1,800 | | | | 1,800 | |
| |
| |
Total | | | | | | | | | | | | | | | | | | | 2,291,277 | | | | 1,265,998 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
In addition, members of the employee stock ownership association have certain pre-emptive rights in relation to our shares that are publicly offered under the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act. As of May 21, 2008, ourDecember 31, 2009, the employee stock ownership association owned 6,038,34422,875,759 shares of our common stock.
| |
| ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
MAJOR SHAREHOLDERS
| |
| ITEM 7.A. | Major Shareholders |
The following table sets forth certain information relating to the beneficial ownership of our common shares as of December 31, 2007.2009.
| | | | | | | | | |
| | | Number of Common
| | Percentage of Total
|
Name of Shareholder | | Shares Held | | Common Shares |
| |
| BNP Paribas Group(1) | | | 33,682,104 | | | | 8.50 | % |
| Korea National Pension Fund | | | 17,520,648 | | | | 4.42 | |
| Citibank, N.A. (ADR Department) | | | 17,322,158 | | | | 4.37 | |
| Mirae Asset Investments | | | 12,819,741 | | | | 3.24 | |
| Capital World Growth and Income Fund | | | 11,967,200 | | | | 3.02 | |
| Euro-Pacific Growth Fund | | | 9,075,000 | | | | 2.29 | |
| Mizuho | | | 5,955,000 | | | | 1.50 | |
| Daekyo Co., Ltd. | | | 5,639,402 | | | | 1.42 | |
| Shinhan Financial Group Employee Stock Ownership Association | | | 5,572,131 | | | | 1.41 | |
| SSB-THBG INV (Thornburg) | | | 5,299,636 | | | | 1.34 | |
| Others | | | 271,346,567 | | | | 68.49 | |
| | | | | | | | | |
| Total | | | 396,199,587 | | | | 100.00 | % |
| | | | | | | | | |
Note:
| | |
(1) | | Includes 26,288,081 common shares held by BNP Paribas S.A. and 7,394,023 common shares held by BNP Paribas Luxembourg. |
221
The following table sets forth certain information relating to the beneficial ownership of our redeemable preferred shares as of December 31, 2007. On January 25, 2007, we issued Series 10 redeemable preferred shares and Series 11 redeemable convertible preferred shares to fund a portion of our acquisition of LG Card.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Number of
| | Number of
| | | | Number of
| | | | |
| | | Series 2,
| | Series 7
| | Number of
| | Series 11
| | | | |
| | | 3, 4 and 5
| | and 8
| | Series 10
| | Redeemable
| | Total
| | Percentage
|
| | | Redeemable
| | Redeemable
| | Redeemable
| | Convertible
| | Number of
| | of Total
|
| | | Preferred
| | Preferred
| | Preferred
| | Preferred
| | Preferred
| | Preferred
|
Name of Shareholder | | Shares | | Shares | | Shares | | Shares | | Shares | | Shares |
| |
| Korea Deposit Insurance Corporation | | | 27,950,377 | | | | — | | | | — | | | | — | | | | 27,950,377 | | | | 37.69 | % |
| Private Investment Trust managed by Seoul Asset Management | | | — | | | | — | | | | 10,400,000 | | | | 4,497,800 | | | | 14,897,800 | | | | 20.09 | |
| Korea Local Administrative Officials’ Mutual Fund | | | — | | | | — | | | | 2,520,000 | | | | 1,868,300 | | | | 4,388,300 | | | | 5.92 | |
| Korean Federation of Community Credit Cooperative | | | — | | | | — | | | | 2,520,000 | | | | 1,089,800 | | | | 3,609,800 | | | | 4.87 | |
TY 2nd Co., Ltd. | | | — | | | | — | | | | 2,100,000 | | | | 926,900 | | | | 3,026,900 | | | | 4.08 | |
| HungKuk Life Insurance | | | — | | | | — | | | | 2,000,000 | | | | 864,900 | | | | 2,864,900 | | | | 3.86 | |
| Strider Securitization Specialty Co., Ltd. | | | — | | | | 2,500,000 | | | | — | | | | — | | | | 2,500,000 | | | | 3.37 | |
| True Friend 5th | | | — | | | | — | | | | 2,160,000 | | | | — | | | | 2,160,000 | | | | 2.91 | |
| Shin Young Securities | | | — | | | | — | | | | 1,140,000 | | | | 882,200 | | | | 2,022,200 | | | | 2.73 | |
| Korea Exchange Bank | | | — | | | | — | | | | 1,300,000 | | | | — | | | | 1,300,000 | | | | 1.75 | |
| Government Employees Pension Corporation | | | — | | | | — | | | | 700,000 | | | | 518,900 | | | | 1,218,900 | | | | 1.64 | |
| Woori Securities | | | — | | | | — | | | | 1,200,000 | | | | — | | | | 1,200,000 | | | | 1.62 | |
| JP Morgan SECS Ltd. | | | — | | | | — | | | | — | | | | 1,098,900 | | | | 1,098,900 | | | | 1.48 | |
TY 3rd Securitization Limited | | | — | | | | — | | | | 1,050,000 | | | | — | | | | 1,050,000 | | | | 1.42 | |
| Ministry of Information and Communication Korea Post | | | — | | | | — | | | | — | | | | 1,037,900 | | | | 1,037,900 | | | | 1.40 | |
| Korea Investment & Securities | | | — | | | | — | | | | — | | | | 934,100 | | | | 934,100 | | | | 1.26 | |
| Daegu Bank | | | — | | | | — | | | | 700,000 | | | | — | | | | 700,000 | | | | 0.94 | |
| HungKuk Ssangyong Fire & Marine Insurance | | | — | | | | — | | | | 400,000 | | | | 172,900 | | | | 572,900 | | | | 0.77 | |
| Tong Yang Insurance | | | — | | | | — | | | | — | | | | 528,400 | | | | 528,400 | | | | 0.71 | |
| Daewoo Securities | | | — | | | | — | | | | 300,000 | | | | — | | | | 300,000 | | | | 0.41 | |
| National Federation of Fishers Cooperatives | | | — | | | | — | | | | 300,000 | | | | — | | | | 300,000 | | | | 0.41 | |
| UBS AG-Asia Equity | | | — | | | | — | | | | — | | | | 300,000 | | | | 300,000 | | | | 0.41 | |
| Kyobo Life Insurance | | | — | | | | — | | | | 100,000 | | | | — | | | | 100,000 | | | | 0.13 | |
| Kyongnam Bank | | | — | | | | — | | | | 100,000 | | | | — | | | | 100,000 | | | | 0.13 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | 27,950,377 | | | | 2,500,000 | | | | 28,990,000 | | | | 14,721,000 | | | | 74,161,377 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | | Number of Common
| | | | |
| | | Shares Beneficially
| | | Beneficial
| |
| Name of Shareholder | | Owned | | | Ownership % | |
| |
| BNP Paribas | | | 30,106,276 | | | | 6.35 | % |
| Shinhan Financial Group Employee Stock Ownership Association | | | 22,875,759 | | | | 4.82 | % |
| Korea National Pension Fund | | | 21,105,762 | | | | 4.45 | % |
| Citibank, N.A. (ADR Department) | | | 14,590,644 | | | | 3.08 | % |
| Saudi Arabian Monetary Agency | | | 12,683,185 | | | | 2.67 | % |
| Mirae Asset Management | | | 11,650,166 | | | | 2.46 | % |
| Lazard Asset Management | | | 7,315,720 | | | | 1.54 | % |
| Mizuho Corporate Bank | | | 5,955,000 | | | | 1.26 | % |
| Samsung Life Insurance | | | 5,821,621 | | | | 1.23 | % |
| Government of Singapore Investment Corporation | | | 5,578,128 | | | | 1.18 | % |
| Abu Dhabi Investment Authority | | | 5,244,283 | | | | 1.11 | % |
| DaeGyoo | | | 4,993,907 | | | | 1.05 | % |
| Others | | | 326,279,136 | | | | 68.80 | % |
| | | | | | | | | |
| Total | | | 474,199,587 | | | | 100.00 | % |
| | | | | | | | | |
Other than those listed above, no other shareholdersperson or entity known by us, jointly or severally, directly or indirectly own more than 1% of our issued and outstanding shares.voting securities or otherwise exercise control or could exercise control over us. None of our shareholders have different voting rights.
A total of 14,721,000 Series 11 non-voting redeemable convertible preferred shares, all of which were issued on January 25, 2007 in registered form and subscribed by institutional investors and government agencies in Korea. The holders of these shares may, at their option, convert all or part of any outstanding such shares into our common shares at any time from the date after the first anniversary of the issuance date until the fifth anniversary of the issuance date, at a conversion rate ofone-to-one with the conversion strike price of W57,806.
As of the date hereof, our total authorized share capital is 1,000,000,000 shares, par value W5,000 per share. As of May 23,December 31, 2008, 396,199,587 common shares and 74,161,37762,411,251 preferred shares were issued and
201
outstanding, and as of June 10, 2009 and following the rights offering of 78,000,000 common shares in March 2009, 474,199,587 common shares and 53,094,459 preferred shares were issued and outstanding. There are no common shares held in treasury.
As of December 31, 2007,2009, the latest date available on which we closed our shareholders’ registry, 457454 shareholders of record were in the United States,chartered as U.S. persons, holding in the aggregate 24.2%17.6% of our then total outstanding shares
222
(including (including Citibank, N.A., as the depositary for our globalAmerican depositary shares, each representing two shares of our common stock).
| |
| ITEM 7.B. | Related Party Transactions |
RELATED PARTY TRANSACTIONS
NoneSince the beginning of the preceding three financial years, none of our directors or officers havehas or had any interest in any transactions effected bywith us that are or were unusual in their nature or conditions or significant to our business, which were effected during the current or immediately preceding year or were effected during an earlier yearother than as set forth below and remainalso described in any respect outstanding or unperformed.note 33 to our consolidated financial statements included in this annual report.
In December 2001, BNP Paribas acquired 4.00% of our common stock in return for an investment of approximately W155 billion in cash pursuant to an alliance agreement. Under the terms of the alliance agreement, for so long as BNP Paribas does not sell or otherwise transfer (except to any of its wholly-owned subsidiaries) any portion of its ownership interest in our common stock and maintains, after any issuances of new shares by us from time to time, its shareholding percentage of not less than 3.5% of our issued common stock, we are required to call a meeting of our shareholders to recommend that one nominee of BNP Paribas be elected to our board of directors. In addition, under the alliance agreement, BNP Paribas has the right to subscribe for new issuances of our common shares in the event that such new issuances would result in the dilution of the shareholding percentage of BNP Paribas below 3.5%. As of December 31, 2007,September 2, 2009, BNP Paribas Group owned 33,682,104held 30,106,276 shares, or 8.50%6.35%, of our total common stock.
As of December 31, 2007,2009, the outstanding balance of beneficiary certificates invested into Shinhan BNP Paribas Investment Trust wereAsset Management was W1,35146 billion.
In April 2006, Korea Deposit Insurance Corporation2002, we entered into a joint venture agreement with BNP Paribas Asset Management, the asset management affiliate of BNP Paribas, under which we sold 22,360,302to BNP Paribas Asset Management 50% interest minus one share of our wholly-owned subsidiary, Shinhan Investment Trust Management, after which Shinhan Investment Trust Management was renamed Shinhan BNP Paribas Investment Trust Management Co., Ltd. In January 2009, we and BNP Paribas agreed to merge Shinhan BNP Paribas Investment Trust Management and SH Asset Management, our wholly-owned subsidiary, to form Shinhan BNP Paribas Asset Management, of which we and BNP Paribas Investment Partners hold 65:35 equity interest, respectively.
On June 26, 2009, we sold 4,700,001 common shares, representing 6.22%or approximately 35%, of our then total issued common stock held by it to third parties through an after-trading-hours block sale. Of such shares, 20,124,272 shares or 5.60% of total outstanding common shares were sold to theCardif Life Insurance Company, a 50:50 joint venture with BNP Paribas group. In August 2006, Korea Deposit Insurance Corporation converted into our common shares 22,360,301Assurance (formerly known as Cardif S.A.), to BNP Paribas Assurance for W23 billion. Following this transaction, BNP Paribas Assurance owns approximately 85% of our redeemable preferred shares held by it at a one-to-one conversion rate. In February 2007, Korea Deposit Insurance sold 19,446,312 of such converted shares to investors in Korea and overseas through an after-trading-hours block sale.
In December 2005, in a series of related transactions, we acquired 100% of ShinhanCardif Life Insurance Company. Since we as a financial holding company are not allowed to maintain an insurance company, through a “small scale share exchange” mechanism provided under applicable Korean law, pursuant to whichequity interest of less than 50% in an entity, we issued 17,528,000 newtransferred our remaining shares of our common stock to the shareholders of Shinhanin Cardif Life Insurance in exchange for all outstanding common stock of Shinhan Life Insurance held by them for an aggregate purchase price of W612 billion, or W15,300 per share. As part of this share exchange,Company to Shinhan Bank exchanged 5,524,772 common shares of Shinhan Life Insurance previously held by it into 2,420,955 of our common shares and Good Morning Shinhan Securities exchanged 464,800 common shares of Shinhan Life Insurance previously held by it into 203,675 of our common shares, all of which were sold in the market in June 2006. Similarly, as part of this transaction, Shinhan Life Insurance also exchanged 9,000 of its common shares, which Shinhan Life Insurance acquired as a result of the exercise of appraisal rights by dissenting shareholders of Shinhan Life Insurance, into 3,943 shares of our common stock. All of such shares of our common stock received by Shinhan Life Insurance were sold in the market on December 29, 2005.for W7.26 billion.
As of December 31, 2005, 20062007, 2008 and 20072009 and May 31, 2008,2010, we had principal loans outstanding to our directors, executive officers and their affiliates in the principal amount of W181110 billion, W172 billion, W110254 billion and W1277.7 billion and W4.8 billion,, which were made in the ordinary course of business on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectibilitycollectability or present other unfavorable features.
| |
| ITEM 7.C. | Interests of Experts and Counsel |
In April 2006, the newly merged Shinhan Bank granted to its employees 1,708,050 out of 2,420,955 treasury shares of our common stock held by it in accordance with the Financial Holding Company Act of Korea, which requires that the treasury shares must be disposed of within six months of acquisition. The remaining 712,905 ungranted treasury shares of our common stock held by Shinhan Bank were sold in the market in June 2006.
223
In June 2006, Mr. Shee Yul Ryoo, one of our outside directors, was appointed as an outside director of Hankook Computer, a computer company in Korea. Since the date of Mr. Ryoo’s such appointment at Hankook Computer, we purchased card processing equipment in the amount of W75 million in 2006 and W943 million in 2007. For the first half of 2008, we have contracts for such equipment in the amount of W3,195 million, of which W510 million has been paid.Not applicable.
| |
| ITEM 8. | FINANCIAL INFORMATION |
| |
| ITEM 8.A. | Consolidated Statements and Other Financial Information |
See “Item 18. Financial Statements” and our consolidated financial statements included in this annual report.
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CONSOLIDATED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATIONLegal Proceedings
Consolidated Financial StatementsAs of December 31, 2009, we and our subsidiaries were defendants in pending lawsuits (including any government proceedings) in the aggregate claim amount of W412.5 billion, for which we recorded a provision of W103.5 billion. Our management believes that these lawsuits will not have a material adverse effect on our financial condition, equity or results of operation.
Our consolidated financial statements are set forth under “Item 18. Financial Statements.”
Dividend Policy
SeeFor a detailed description on the dividend policy, please see “Item 10. Additional Information —10.B. Memorandum and Articles of Incorporation — Description of Share Capital Stock — Dividends.” For a description of tax consequences of dividends paid to our shareholders, see “Item 10. Additional Information — Taxation — Korean Taxation — Dividends on Shares of Common Stock or American Depositary Shares” and “Item 10. Additional Information — Taxation — United States Taxation — Distributions on Shares or American Depositary Shares.”
Legal Proceedings | |
| ITEM 8.B. | Significant Changes |
Not applicable.
In October 2001, the trustees of the TRA Rights Trust (as sole successor in interest to Seagate) instituted litigation against several defendants, including Shinhan Bank. The plaintiff argued that Shinhan Bank is jointly and severally liable for damages as it had actively participated in certain financing activities that contributed to the fraudulent inflation of the revenues, income and assets as reflected in the financial statements of L&H Korea, a principal subsidiary of Lernout & Hauspie (“L&H”). The plaintiff sought damages for the impact of the fraud on the price of L&H shares and, in particular, treble damages in the amount of approximately US$167 million under Racketeer Influenced and Corrupt Organizations, one of its alleged causes of claim (“Filler Case”). In addition, in November 2001, Stonington Partners Inc., Stonington Capital Appreciation 1994 Fund L.P. and Stonington Holdings, L.L.C., the former shareholders of L&H, instituted litigation against several defendants, including Shinhan Bank, alleging the same causes of action against Shinhan Bank under the same operative facts as the above-described litigation (“Stonington Case”). These plaintiffs sought compensatory damages for the impact of the fraud on the price of L&H shares, and punitive damages to be determined at trial. Alleging the same cause of action, Janet Baker, James Baker, JKBaker LLC and JMBaker LLC also instituted litigation against several defendants, including Shinhan Bank, in March 2002 (“Baker Case”). All of these cases have been decided by courts of relevant jurisdiction in favor of the defendant, and, as the relevant statutes of limitations have passed without further appeal by the plaintiffs, we believe that these lawsuits have been concluded. In August 2005, Scott L. Baena, as the trustee of L&H, also instituted litigation (the “Baena Case”) in the Southern District of New York against several defendants, including Shinhan Bank and Chohung Bank, alleging substantially the same causes of action against Shinhan Bank and Chohung Bank under the same operative facts as the Baker Case, the Filler Case and the Stonington Case for a damage claim of US$50 million. No assurances can be given the court will rule in favor of the defendants in the Baena Case. While we are unable to predict the ultimate disposition of the foregoing claims, its ultimate disposition will not, in the opinion of management, have a material adverse effect on us. We believe that the transactions with L&H Korea were conducted in the ordinary course of our banking practices, where the transaction involved a customary secured lending without any financing for receivables. We intend to vigorously defend against any additional claims or appeals.
Other than as discussed above, neither we nor any of our subsidiaries is involved in any material litigation, arbitration or administrative proceedings relating to claims which may have a significant effect on our financial condition or results of operations, including the financial condition or results of operations of Shinhan Bank or our other consolidated subsidiaries, and we are not aware of any such litigation, arbitration or administrative proceeding that is pending or threatened.
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| |
| ITEM 9. | THE OFFER AND LISTING |
MARKET PRICE INFORMATION AND TRADING MARKET
| |
| ITEM 9.A. | Offer and Listing Details |
Market Prices of Common Stock and ADSsAmerican Depositary Shares
Shares of our common stock were listed on the Korea Exchange on September 10, 2001. The Korea Exchange is the principal trading market for our common shares is the KRX KOSPI Market Division of the Korea Exchange, where our common stock. As of December 31, 2007, thereshares were 396,199,587 shares of common stock issued.listed on September 10, 2001. Our American depositary shares have been listed on the New York Stock Exchange since September 16, 2003 and are identified by the symbol “SHG.”
The table below sets forth, for the periods indicated, the high and low closing prices and the average daily volume of trading activity on the Korea Exchange for our common stock since 2003,2005, and their high and low closing prices and the average daily volume of trading activity on the New York Stock Exchange for our American depositary shares since 2004.2005.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Korea Exchange | | New York Stock Exchange | | Korea Exchange | | New York Stock Exchange | |
| | | Closing Price per
| | | | Closing Price
| | | | Closing Price per
| | | | Closing Price
| | | |
| | | Common Stock | | Average Daily
| | per ADS | | Average Daily
| | Common Stock | | Average Daily
| | per ADS | | Average Daily
| |
| | | High | | Low | | Trading Volume | | High | | Low | | Trading Volume | | High | | Low | | Trading Volume | | High | | Low | | Trading Volume | |
| | | | | | | (Shares) | | | | | | (ADSs) | | | | | | (Shares) | | | | | | (ADSs) | |
| |
2003 | | | 19,700 | | | | 9,500 | | | | 1,408,358 | | | | — | | | | — | | | | — | | |
2004 | | | 23,400 | | | | 15,200 | | | | 1,372,443 | | | | 45.65 | | | | 26.50 | | | | 6,039 | | |
2005 | | | 43,100 | | | | 24,100 | | | | 1,210,054 | | | | 74.31 | | | | 51.78 | | | | 14,419 | | | | 43,100 | | | | 24,100 | | | | 1,210,054 | | | | 74.31 | | | | 51.78 | | | | 14,419 | |
2006 | | | 49,500 | | | | 36,800 | | | | 1,385,417 | | | | 106.08 | | | | 74.05 | | | | 26,422 | | | | 49,500 | | | | 36,800 | | | | 1,385,417 | | | | 106.08 | | | | 74.05 | | | | 26,422 | |
2007 | | | | 66,200 | | | | 45,450 | | | | 1,696,165 | | | | 148.29 | | | | 96.75 | | | | 36,042 | |
2008 | | | | 58,900 | | | | 25,600 | | | | 2,206,295 | | | | 118.35 | | | | 32.68 | | | | 79,215 | |
| First Quarter | | | 43,500 | | | | 36,800 | | | | 1,466,513 | | | | 88.10 | | | | 74.05 | | | | 35,619 | | | | 52,500 | | | | 45,150 | | | | 1,567,340 | | | | 113.45 | | | | 90.97 | | | | 66,619 | |
| Second Quarter | | | 49,500 | | | | 40,400 | | | | 1,685,916 | | | | 106.08 | | | | 81.15 | | | | 29,752 | | | | 58,900 | | | | 44,550 | | | | 1,867,102 | | | | 118.35 | | | | 86.79 | | | | 52,614 | |
| Third Quarter | | | 47,100 | | | | 42,100 | | | | 1,155,628 | | | | 100.98 | | | | 88.95 | | | | 20,819 | | | | 50,300 | | | | 41,500 | | | | 2,021,075 | | | | 98.07 | | | | 68.47 | | | | 74,154 | |
| Fourth Quarter | | | 48,500 | | | | 41,450 | | | | 1,236,040 | | | | 106.00 | | | | 86.56 | | | | 19,644 | | | | 42,000 | | | | 25,600 | | | | 3,369,664 | | | | 71.00 | | | | 32.68 | | | | 122,474 | |
2007 | | | 66,200 | | | | 45,450 | | | | 1,696,165 | | | | 148.29 | | | | 96.75 | | | | 36,042 | | |
2009 | | | | 49,550 | | | | 20,500 | | | | 3,219,298 | | | | 86.42 | | | | 26.25 | | | | 115,649 | |
| First Quarter | | | 57,800 | | | | 45,450 | | | | 1,545,883 | | | | 123.65 | | | | 96.75 | | | | 35,510 | | | | 32,950 | | | | 20,500 | | | | 4,361,545 | | | | 50.34 | | | | 26.25 | | | | 166,528 | |
| Second Quarter | | | 59,200 | | | | 50,600 | | | | 1,733,756 | | | | 129.90 | | | | 110.08 | | | | 25,733 | | | | 34,000 | | | | 25,750 | | | | 3,983,458 | | | | 56.66 | | | | 38.24 | | | | 130,567 | |
| Third Quarter | | | 66,200 | | | | 52,800 | | | | 1,513,898 | | | | 148.29 | | | | 113.10 | | | | 40,386 | | | | 48,950 | | | | 32,900 | | | | 2,750,514 | | | | 82.87 | | | | 50.56 | | | | 85,639 | |
| Fourth Quarter | | | 64,700 | | | | 46,850 | | | | 1,991,125 | | | | 143.43 | | | | 99.25 | | | | 42,541 | | | | 49,550 | | | | 43,200 | | | | 1,840,262 | | | | 86.42 | | | | 74.28 | | | | 82,481 | |
2008(through June 16) | | | 57,900 | | | | 45,150 | | | | 1,583,466 | | | | 116.47 | | | | 90.97 | | | | 36,211 | | |
2010(through June 11) | | | | 49,100 | | | | 39,250 | | | | 1,753,680 | | | | 88.35 | | | | 66.31 | | | | 62,520 | |
| January | | | 52,000 | | | | 45,150 | | | | 1,933,100 | | | | 109.65 | | | | 93.51 | | | | 48,110 | | | | 45,700 | | | | 39,250 | | | | 2,197,759 | | | | 81.37 | | | | 68.42 | | | | 78,115 | |
| February | | | 52,400 | | | | 47,800 | | | | 1,189,964 | | | | 113.45 | | | | 101.27 | | | | 31,575 | | | | 43,250 | | | | 39,650 | | | | 1,565,404 | | | | 75.26 | | | | 66.37 | | | | 64,563 | |
| March | | | 52,500 | | | | 47,000 | | | | 1,507,628 | | | | 106.90 | | | | 90.97 | | | | 36,325 | | | | 45,050 | | | | 42,200 | | | | 1,533,837 | | | | 80.31 | | | | 73.61 | | | | 64.591 | |
| April | | | 57,900 | | | | 53,100 | | | | 1,703,175 | | | | 116.47 | | | | 108.60 | | | | 28,836 | | | | 49,100 | | | | 45,150 | | | | 1,867,368 | | | | 88.35 | | | | 81.51 | | | | 44,962 | |
| May | | | 58,900 | | | | 49,300 | | | | 2,176,255 | | | | 118.35 | | | | 94.29 | | | | 27,890 | | | | 49,100 | | | | 41,050 | | | | 1,653,366 | | | | 85.14 | | | | 66.31 | | | | 60,620 | |
| June (through June 16) | | | 51,300 | | | | 44,550 | | | | 2,131,470 | | | | 99.04 | | | | 86.79 | | | | 33,503 | | |
| June (through June 11) | | | | 46,300 | | | | 43,300 | | | | 1,620,812 | | | | 77.69 | | | | 69.44 | | | | 65,178 | |
Source: Korea Exchange; New York Stock Exchange
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| |
| ITEM 9.B. | Plan of Distribution |
Not applicable.
The Korean Securities Market
The Korea Exchange
Pursuant to the Korea Stock and Futures Exchange Act, as of January 27, 2005, Korea Exchange unified the Korea Stock Exchange, which began its operations in 1956, the Korea Securities Dealers Automated Quotation (“KOSDAQ”),KRX KOSDAQ, which began its operation in July 1, 1996, by the Korea Securities Dealers Association, and the Korea Futures Exchange (as an exchange operating futures market and options market), which began its operation in February 1, 1999.1999, were unified to form the Korea Exchange.
225
The Korea Exchange was established in a form of a limited liability stock company in accordance with the Korean Commercial Code with the minimum paid-in capital of W100 billion in accordance with the Korea StockFinancial Investment Services and Futures ExchangeCapital Markets Act. The Korea Exchange is presently the only exchange in Korea that serves as a spot market and a futures market. It operates and supervises three market divisions, the StockKRX KOSPI Market Division, the KRX KOSDAQ Market Division, and the KRX Futures Market Division. It has its principal office in Pusan.
TheAs of December 31, 2009, the aggregate market value of equity securities listed on the Korea Exchange has been introduced to support the national economy by (i) making the capital market more effective, (ii) reducingwas approximately W887.9 trillion. The average daily trading volume of equity securities for 2009 was approximately 485.7 million shares with an average transaction fees to investors or users and (iii) integrating computer networks used for transaction.value of W5.8 trillion.
Even though the Korea StockFinancial Investment Services and Futures ExchangeCapital Markets Act prescribed that the Korea Exchange be established in a form of a limited liability stock company, the Korea Exchange is expected to play a public role as a public organization. In order to safeguard against a possible conflict, the Korea StockFinancial Investment Services and Futures ExchangeCapital Markets Act has placed restrictions on the ownership and operation of the Korea Exchange as follows:
| | |
| | • | Any person’s ownership of shares in the Korea Exchange is limited to 5% or less except for an investment trust company or investment company established under the IndirectFinancial Investment Asset Management Business Acts,Services and Capital Markets Act, or the Korean government. However, upon prior approval from the Financial Services Commission, more than 5% ownership in Korea Exchange is permitted if necessary for forming strategic alliance with a foreign stock or futures exchange; |
| |
| | • | The number of outside directors on the board of directors of the Korea Exchange shall be more than half of the total number of directors; |
| |
| | • | Any amendment to the Articles of Incorporation, transfer or consolidation of business, spin off, stock swap in its entirety or transfer of shares in its entirety of the Korea Exchange will receive prior approval from the Minister of the Ministry of Strategy and Finance;Financial Services Commission; and |
| |
| | • | In the event the Minister of the Ministry of Strategy and FinanceFinancial Services Commission determines that the chief executive officer of the Korea Exchange is not appropriate for the position, the Minister of the Ministry of Strategy and FinanceFinancial Services Commission can request the Korea Exchange upon reasonable cause, within one month from the chief executive officer’s election, to dismiss the chief executive officer. Subsequently, the chief executive officer will be suspended from performing his duties and the Korea Exchange will elect a new chief executive officer within two months from the request. |
As of June 16, 2008, the aggregate market value of equity securities listed on the Stock Market Division of the Korea Exchange was approximately W894 trillion. The average daily trading volume of equity securities for 2007 was approximately 364 million shares with an average transaction value of W5.5 trillion.
The Korea Exchange has the power in some circumstances to suspend trading in the shares of a given company or to de-list a security. The Korea Exchange also restricts share price movements. All listed companies are required to file accounting reports annually, semiannually and quarterly and to release immediately all information that may affect trading in a security.
The Government has in the past exerted, and continues to exert, substantial influence over many aspects of the private sector business community which can haveof the intentionKorean economy and its actions may depress or effect of depressing or boostingboost the stock market. In the past, the Government has informally both encouraged and restricted the declaration and payment of dividends, induced mergers to reduce what it considers excess capacity in a particular industry and induced private companies to offer publicly their securities.
204
The Korea Exchange publishes the Korea Composite Stock Price Index (“KOSPI”) every ten seconds, which is an index of all equity securities listed on the Korea Exchange. On January 4, 1983, the method of computing KOSPI was changed from the Dow Jones method to the aggregate value method. In the new method, the market capitalizations of all listed companies are aggregated, subject to certain adjustments, and this aggregate is expressed as a percentage of the aggregate market capitalization of all listed companies as of the base date, January 4, 1980.
226
Historical movements in KOSPI are set out in the following.
| | | | | | | | | | | | | | | | | |
| | | Opening | | High | | Low | | Closing |
| |
| 1980 | | | 100.00 | | | | 119.36 | | | | 100.00 | | | | 106.87 | |
| 1981 | | | 97.95 | | | | 165.95 | | | | 93.14 | | | | 131.37 | |
| 1982 | | | 123.60 | | | | 134.49 | | | | 106.00 | | | | 127.31 | |
| 1983 | | | 122.52 | | | | 134.46 | | | | 115.59 | | | | 121.21 | |
| 1984 | | | 116.73 | | | | 142.46 | | | | 114.37 | | | | 142.46 | |
| 1985 | | | 139.53 | | | | 163.37 | | | | 131.40 | | | | 163.37 | |
| 1986 | | | 161.40 | | | | 279.67 | | | | 153.85 | | | | 272.61 | |
| 1987 | | | 264.82 | | | | 525.11 | | | | 264.82 | | | | 525.11 | |
| 1988 | | | 532.04 | | | | 922.56 | | | | 527.89 | | | | 907.20 | |
| 1989 | | | 919.61 | | | | 1,007.77 | | | | 844.75 | | | | 909.72 | |
| 1990 | | | 908.59 | | | | 928.82 | | | | 566.27 | | | | 696.11 | |
| 1991 | | | 679.75 | | | | 763.10 | | | | 586.51 | | | | 610.92 | |
| 1992 | | | 624.23 | | | | 691.48 | | | | 459.07 | | | | 678.44 | |
| 1993 | | | 697.41 | | | | 874.10 | | | | 605.93 | | | | 866.18 | |
| 1994 | | | 879.32 | | | | 1,138.75 | | | | 855.37 | | | | 1,027.37 | |
| 1995 | | | 1,013.57 | | | | 1,016.77 | | | | 847.09 | | | | 882.94 | |
| 1996 | | | 888.85 | | | | 986.84 | | | | 651.22 | | | | 651.22 | |
| 1997 | | | 653.79 | | | | 792.29 | | | | 350.68 | | | | 376.31 | |
| 1998 | | | 385.49 | | | | 579.86 | | | | 280.00 | | | | 562.46 | |
| 1999 | | | 587.57 | | | | 1,028.07 | | | | 498.42 | | | | 1,028.07 | |
| 2000 | | | 1,059.04 | | | | 1,059.04 | | | | 500.60 | | | | 504.62 | |
| 2001 | | | 520.95 | | | | 704.50 | | | | 468.76 | | | | 693.70 | |
| 2002 | | | 724.95 | | | | 937.61 | | | | 584.04 | | | | 627.55 | |
| 2003 | | | 635.17 | | | | 822.16 | | | | 515.24 | | | | 810.71 | |
| 2004 | | | 821.26 | | | | 936.06 | | | | 719.59 | | | | 895.92 | |
| 2005 | | | 893.71 | | | | 1,379.37 | | | | 870.84 | | | | 1,379.37 | |
| 2006 | | | 1,382.32 | | | | 1,464.70 | | | | 1,203.86 | | | | 1,434.46 | |
| 2007 | | | 1,438.89 | | | | 2,085.45 | | | | 1,345.08 | | | | 1,897.13 | |
| 2008 (through June 16) | | | 1,853.45 | | | | 1,888.88 | | | | 1,574.44 | | | | 1,760.82 | |
| | | | | | | | | | | | | | | | | |
| | | Opening(1) | | | High | | | Low | | | Closing | |
| |
| 2000 | | | 1,028.33 | | | | 1,066.18 | | | | 483.58 | | | | 504.62 | |
| 2001 | | | 503.31 | | | | 715.93 | | | | 463.54 | | | | 693.70 | |
| 2002 | | | 698.00 | | | | 943.54 | | | | 576.49 | | | | 627.55 | |
| 2003 | | | 633.03 | | | | 824.26 | | | | 512.30 | | | | 810.71 | |
| 2004 | | | 821.26 | | | | 939.52 | | | | 713.99 | | | | 895.92 | |
| 2005 | | | 893.71 | | | | 1383.14 | | | | 866.17 | | | | 1,379.37 | |
| 2006 | | | 1,389.27 | | | | 1,464.70 | | | | 1,192.09 | | | | 1,434.46 | |
| 2007 | | | 1,435.26 | | | | 2,085.45 | | | | 1,345.08 | | | | 1,897.13 | |
| 2008 | | | 1,853.45 | | | | 1,901.13 | | | | 892.16 | | | | 1,124.47 | |
| 2009 | | | 1,157.40 | | | | 1,723.17 | | | | 992.69 | | | | 1,682.77 | |
| 2010 (through June 11) | | | 1,696.14 | | | | 1,757.76 | | | | 1,532.68 | | | | 1,675.34 | |
Source: The Korea Exchange
Note:
| | |
| (1) | | The figures represent the daily closing price of the first trading day of the respective year. |
Shares are quoted “ex-dividend” on the first trading day of the relevant company’s accounting period. “Ex-dividend”“Ex-dividend” refers to a share no longer carrying the right to receive the following dividend payment because the settlement date occurs after the record date for determining which shareholders are entitled to receive dividends. “Ex-rights” refers to shares no longer carrying the right to participate in the following rights offering or bonus issuance because the settlement date occurs after the record date for determining which shareholders are entitled to new shares. The calendar year is the accounting period for the majority of listed companies, this may account for the drop in KOSPI between its closing level at the end of one calendar year and its opening level at the beginning of the following calendar year.
227
With certain exceptions, principally to take account of a share being quoted “ex-dividend” and “ex-rights,” permitted upward and downward movements in share prices of any category of shares on any day are limited under the rules of the Korea Exchange to 15% of the previous day’s closing price of the shares, rounded down as set out below:
| | | | | |
| | Rounded
|
Previous Day’s Closing Price | | Rounded Down to Won |
| |
| Less than 5,000 | | | 5 | |
| 5,000 to less than 10,000 | | | 10 | |
| 10,000 to less than 50,000 | | | 50 | |
| 50,000 to less than 100,000 | | | 100 | |
| 100,000 to less than 500,000 | | | 500 | |
| 500,000 or more | | | 1,000 | |
As a consequence, if a particular closing price is the same as the price set by the fluctuation limit, the closing price may not reflect the price at which persons would have been prepared, or would be prepared to continue, if so permitted, to buy and sell shares. Orders are executed on an auction system with priority rules to deal with competing bids and offers.
Due to deregulation of restrictions on brokerage commission rates, the brokerage commission rate on equity securities transactions may be determined by the parties, subject to commission schedules being filed with the Korea Exchange by the securities companies.financial investment companies with brokerage licenses. In addition, a securities transaction tax of 0.15% of the sales price will generally be imposed on the transfer of shares or certain securities representing rights to subscribe for shares on the Korea Exchange. A special agricultural and fishery tax of 0.15% of
205
the sales prices will also be imposed on transfer of these shares and securities on the Korea Exchange. See “Item 10. Additional Information —10.E. Taxation — Korean Taxation.”
The number of companies listed on the Korea Exchange,KRX KOSPI Market, the corresponding total market capitalization at the end of the periods indicated and the average daily trading volume for those periods are set forth in the following table.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Number of
| | Total Market Capitalization | | Average Daily Trading Volume, Value |
| | | Listed
| | (Millions of
| | (Thousands of
| | Thousands of
| | (Millions of
| | (Thousands of
|
Year | | Companies | | Won) | | Dollars)(1) | | Shares | | Won) | | Dollars)(1) |
| |
| 1981 | | | 343 | | | | 2,959,057 | | | | 4,224,207 | | | | 10,565 | | | | 8,708 | | | | 12,433 | |
| 1982 | | | 334 | | | | 3,000,494 | | | | 4,407,711 | | | | 9,704 | | | | 6,667 | | | | 8,904 | |
| 1983 | | | 328 | | | | 3,489,654 | | | | 4,386,743 | | | | 9,325 | | | | 5,941 | | | | 7,468 | |
| 1984 | | | 336 | | | | 5,148,460 | | | | 6,222,456 | | | | 14,847 | | | | 10,642 | | | | 12,862 | |
| 1985 | | | 342 | | | | 6,570,404 | | | | 7,380,818 | | | | 18,925 | | | | 12,315 | | | | 13,834 | |
| 1986 | | | 355 | | | | 11,994,233 | | | | 13,924,115 | | | | 31,755 | | | | 32,870 | | | | 38,159 | |
| 1987 | | | 389 | | | | 26,172,174 | | | | 33,033,162 | | | | 20,353 | | | | 70,185 | | | | 88,584 | |
| 1988 | | | 502 | | | | 64,543,685 | | | | 94,348,318 | | | | 10,367 | | | | 198,364 | | | | 289,963 | |
| 1989 | | | 626 | | | | 95,476,774 | | | | 140,489,660 | | | | 11,757 | | | | 280,967 | | | | 414,431 | |
| 1990 | | | 669 | | | | 79,019,676 | | | | 110,301,055 | | | | 10,866 | | | | 183,692 | | | | 256,500 | |
| 1991 | | | 686 | | | | 73,117,833 | | | | 96,182,364 | | | | 14,022 | | | | 214,263 | | | | 281,850 | |
| 1992 | | | 688 | | | | 84,711,982 | | | | 107,502,515 | | | | 24,028 | | | | 308,246 | | | | 391,175 | |
| 1993 | | | 693 | | | | 112,665,260 | | | | 139,419,948 | | | | 35,130 | | | | 574,048 | | | | 676,954 | |
| 1994 | | | 699 | | | | 151,217,231 | | | | 191,729,721 | | | | 36,862 | | | | 776,257 | | | | 984,223 | |
| 1995 | | | 721 | | | | 141,151,399 | | | | 182,201,367 | | | | 26,130 | | | | 487,762 | | | | 629,614 | |
| 1996 | | | 760 | | | | 117,369,988 | | | | 139,031,021 | | | | 26,571 | | | | 486,834 | | | | 575,733 | |
| 1997 | | | 776 | | | | 70,988,897 | | | | 50,161,742 | | | | 41,525 | | | | 555,759 | | | | 392,707 | |
| 1998 | | | 748 | | | | 137,798,451 | | | | 114,090,455 | | | | 97,716 | | | | 660,429 | | | | 471,432 | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Number of
| | Total Market Capitalization | | Average Daily Trading Volume, Value | | Number of
| | Total Market Capitalization | | Average Daily Trading Volume, Value | |
| | | Listed
| | (Millions of
| | (Thousands of
| | Thousands of
| | (Millions of
| | (Thousands of
| | Listed
| | | | (Thousands of
| | Thousands of
| | (Millions of
| | (Thousands of
| |
Year | | Companies | | Won) | | Dollars)(1) | | Shares | | Won) | | Dollars)(1) | | Companies | | (Millions of Won) | | Dollars)(1) | | Shares | | Won) | | Dollars)(1) | |
| |
| 1999 | | | 725 | | | | 349,503,966 | | | | 305,137,040 | | | | 278,551 | | | | 3,481,620 | | | | 3,039,654 | | |
| 2000 | | | 704 | | | | 188,041,490 | | | | 148,393,204 | | | | 306,154 | | | | 2,602,159 | | | | 2,053,796 | | | | 704 | | | | 188,041,490 | | | | 148,393,204 | | | | 306,163 | | | | 2,602,211 | | | | 2,053,796 | |
| 2001 | | | 589 | | | | 255,850,070 | | | | 192,934,221 | | | | 473,241 | | | | 1,947,420 | | | | 1,506,236 | | | | 689 | | | | 255,850,070 | | | | 192,934,221 | | | | 473,241 | | | | 1,997,420 | | | | 1,506,236 | |
| 2002 | | | 683 | | | | 258,680,756 | | | | 215,445,465 | | | | 857,245 | | | | 3,041,598 | | | | 2,533,820 | | | | 683 | | | | 258,680,756 | | | | 215,445,465 | | | | 857,245 | | | | 3,041,598 | | | | 2,533,820 | |
| 2003 | | | 684 | | | | 355,362,626 | | | | 298,121,331 | | | | 542,010 | | | | 2,216,636 | | | | 1,859,594 | | | | 684 | | | | 355,362,626 | | | | 298,121,331 | | | | 542,010 | | | | 2,216,636 | | | | 1,859,594 | |
| 2004 | | | 683 | | | | 412,588,139 | | | | 398,597,371 | | | | 372,895 | | | | 2,232,109 | | | | 2,156,419 | | | | 683 | | | | 412,588,139 | | | | 398,597,371 | | | | 372,895 | | | | 2,232,109 | | | | 2,156,419 | |
| 2005 | | | 702 | | | | 655,074,514 | | | | 648,588,628 | | | | 467,629 | | | | 3,157,662 | | | | 3,126,398 | | | | 702 | | | | 655,074,595 | | | | 648,588,628 | | | | 467,629 | | | | 3,157,662 | | | | 3,126,398 | |
| 2006 | | | 731 | | | | 704,587,508 | | | | 757,620,976 | | | | 279,096 | | | | 3,435,180 | | | | 3,693,742 | | | | 731 | | | | 704,587,508 | | | | 757,620,976 | | | | 279,096 | | | | 3,435,180 | | | | 3,693,742 | |
| 2007 | | | 745 | | | | 951,900,447 | | | | 1,016,010,724 | | | | 363,732 | | | | 5,539,588 | | | | 5,912,677 | | | | 745 | | | | 951,900,447 | | | | 1,016,010,724 | | | | 363,732 | | | | 5,539,588 | | | | 5,912,677 | |
| 2008 (through June 16) | | | 758 | | | | 894,229,268 | | | | 860,249,416 | | | | 299,444 | | | | 5,328,572 | | | | 5,126,091 | | |
| 2008 | | | | 763 | | | | 576,887,540 | | | | 457,121,664 | | | | 355,205 | | | | 5,189,644 | | | | 4,112,238 | |
| 2009 | | | | 770 | | | | 887,935,183 | | | | 763,060,356 | | | | 486,232 | | | | 5,802,506 | | | | 4,986,470 | |
| 2010 (through June 11) | | | | 771 | | | | 932,189,643 | | | | 748,205,830 | | | | 408,558 | | | | 5,275,137 | | | | 4,233,997 | |
Source: The Korea Exchange
Note:
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| (1) | | Converted at the Market Average ExchangeNoon Buying Rate at the end of the periods indicated. |
The Korean securities markets are principally regulated by the Financial Services Commission and the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act. The Securities and Exchange Act was amended fundamentally numerous times in recent years to broaden the scope and improve the effectiveness of official supervision of the securities markets. As amended, the law imposes restrictions on insider trading and price manipulation, requires specified information to be made available by listed companies to investors and establishes rules regarding margin trading, proxy solicitation, takeover bids, acquisition of treasury shares and reporting requirements for shareholders holding substantial interests. Beginning on February 4, 2008, the Korean securities markets will become subject to the Financial Investment Services and Capital Market Act.
Further Opening of the Korean Securities Market
A stock index futures market was opened on May 3, 1996, and a stock index option market was opened on July 7, 1997, in each case at the Korea Exchange. Remittance and repatriation of funds in connection with investment in stock index futures and options are subject to regulations similar to those that govern remittance and repatriation in the context of foreign portfolio investment in Korean stocks.
In addition, the Korea Exchange opened new option markets for seven individual stocks (Samsung Electronics, SK Telecom, KT, KEPCO, POSCO, Kookmin Bank and Hyundai Motor Company) in January 2002. Non-Koreans are permitted to invest in such options for individual stocks subject to certain procedural requirements.
Starting from May 1, 1996, foreign investors were permitted to invest in warrants representing the right to subscribe for shares of a company listed on the Stock Market Division or the KOSDAQ Market Division of the Korea Exchange, subject to certain investment limitations. A foreign investor may not acquire warrants with respect to the class of shares of a company for which the ceiling on aggregate investment by foreigners has been reached or exceeded.
As of December 30, 1997, foreign investors were permitted to invest in all types of corporate bonds, bonds issued by national or local governments and bonds issued in accordance with certain special laws without being subject to any aggregate or individual investment ceiling. The Financial Services Commission sets forth procedural requirements for such investments. The Government announced on February 8, 1998, its plans for the liberalization of the money market with respect to investment in money market instruments by foreigners in 1998. According to the plan, foreigners have been permitted to invest in money market instruments issued by corporations, including commercial paper, starting February 16, 1998, with no restrictions as to the amount. Starting May 25, 1998, foreigners have been permitted to invest in certificates of deposit and repurchase agreements.
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Currently, foreigners are permitted to invest in securities including shares of all Korean companies which are not listed on the Stock Market Division or the KOSDAQ Market Division of the Korea Exchange and in bonds which are not listed.
Protection of Customer’s Interest in Case of Insolvency of SecuritiesFinancial Investment Companies
Under Korean law, the relationship between a customer and a securitiesfinancial investment company in connection with a securities sell or buy order is deemed to be consignment and the securities acquired by a consignment agent (i.e., the securities company) through such sell or buy order are regarded as belonging to the customer in so far as the customer and the consignment agent’s creditors are concerned. Therefore, in the event of a bankruptcy or reorganization procedure involving a securitiesfinancial investment company, the customer of the securitiesfinancial investment company is entitled to the proceeds of the securities sold by the securitiesfinancial investment company. In addition, the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act recognizes the ownership of a customer in securities held by a securitiesfinancial investment company in such customer’s account.
When a customer places a sell order with a securitiesfinancial investment company which is not a member of the Korea Exchange and this securitiesfinancial investment company places a sell order with another securitiesfinancial investment company which is a member of the Korea Exchange, the customer is still entitled to the proceeds of the securities sold received by the non-member company from the member company regardless of the bankruptcy or reorganization of the non-member company.
Likewise, when a customer places a buy order with a non-member company and the non-member company places a buy order with a member company, the customer has the legal right to the securities received by the non-member company from the member company because the purchased securities are regarded as belonging to the customer in so far as the customer and the non-member company’s creditors are concerned.
In addition, under the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act, the Korea Exchange is obliged to indemnify any loss or damage incurred by a counterparty as a result of a breach by its members. If a securitiesfinancial
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investment company which is a member of the Korea Exchange breaches its obligation in connection with a buy order, the Korea Exchange is obliged to pay the purchase price on behalf of the breaching member. Therefore, the customer can acquire the securities that have been ordered to be purchased by the breaching member.
As the cash deposited with a securitiesfinancial investment company is regarded as belonging to the securitiesfinancial investment company, which is liable to return the same at the request of its customer, the customer cannot take back deposited cash from the securitiesfinancial investment company if a bankruptcy or reorganization procedure is instituted against the securitiesfinancial investment company and, therefore, can suffer from loss or damage as a result. However, the Depositor Protection Act provides that the Korea Deposit Insurance Corporation will, upon the request of the investors, pay each investor up to W50 million per financial institution in case of the securitiesfinancial investment company’s bankruptcy, liquidation, cancellation of securities business license or other insolvency events. The premiums related to this insurance are paid by securitiesfinancial investment companies. Pursuant to the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act, as amended, securities companies area financial investment company with a dealing or brokerage license is required to deposit the cash received from its customers with the Korea Securities Finance Corporation, a special entity established pursuant to the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act. Set-off or attachment of cash deposits by securities companies with the Korea Securities Finance Corporation is prohibited. In addition, in the event of bankruptcy or dissolution of the securitiesfinancial investment company, the cash so deposited shall be withdrawn and paid to the customer prior to payment to other creditors of the financial investment company.
Restrictions Applicable to ADSs
No Korean governmental approval is necessary for the sale and purchase of our ADSs in the secondary market outside Korea or for the withdrawal of shares of our common stock underlying the ADSs and the delivery inside Korea of shares in connection with the withdrawal, provided that a foreigner who intends to acquire the shares must obtain an investment registration card from the Financial Supervisory Service as described below. The acquisition of the shares by a foreigner must be immediately reported to the governor of the Financial Services Commission, either by the foreigner or by his standing proxy in Korea.
Persons who have acquired shares of our common stock as a result of the withdrawal of shares underlying our ADSs may exercise their preemptive rights for new shares, participate in free distributions and receive dividends on shares without any further Korean governmental approval.
Under current Korean laws and regulations, the depositary is required to obtain our prior consent for the number of shares of our common stock to be deposited in any given proposed deposit that exceeds the difference between:
(1) the aggregate number of shares of our common stock deposited by us for the issuance of our ADSs (including deposits in connection with the initial issuance and all subsequent offerings of our ADSs and stock dividends or other distributions related to these ADSs); and
(2) the number of shares of our common stock on deposit with the depositary at the time of such proposed deposit. We have agreed to grant such consent to the extent that the total number of shares on deposit with the depositary would not exceed 20,216,314 at any time.
Reporting Requirements for Holders of Substantial Interests
Under the Financial Investment Services and Capital Markets Act, any person whose direct or beneficial ownership of our common stock with voting rights, whether in the form of shares of common stock or ADSs, certificates representing the rights to subscribe for shares and equity-related debt securities including convertible bonds and bonds with warrants (which we refer to collectively as “Equity Securities”), together with the Equity Securities beneficially owned by certain related persons or by any person acting in concert with the person, accounts for 5% or more of the total outstanding shares (including Equity Securities of us held by such persons) is required to report the status of the holdings and the purpose of the holdings (for example, whether intend to seek management control) to the Financial Services Commission and the Korea Exchange within five business days after reaching the 5% ownership level. In addition, any change in the ownership interest subsequent to the report that
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equals or exceeds 1% of the total outstanding Equity Securities or change in the purpose of the holdings is required to be reported to the Financial Services Commission and the Korea Exchange within five business days from the date of the change (within ten days of the end of the month in which the change occurred, in the case of a person with no intent to seek management control and within ten days of the end of the quarter in which the change occurred, in the case of an institutional investor prescribed by the Financial Services Commission).
Violation of these reporting requirements may subject a person to criminal sanctions such as fines or imprisonmentand/or a loss of voting rights with respect to the portion of ownership of Equity Securities exceeding 5% of the total outstanding shares. In addition, the Financial Services Commission may order the disposal of the unreported Equity Securities. Any persons who reports management control as the purpose for its holdings is prohibited from acquiring additional shares or from exercising voting rights during the following five days following the reporting date.
In addition to the reporting requirements described above, any person whose direct or beneficial ownership of our stock accounts for 10% or more of the total issued and outstanding shares (which we refer to as a “major stockholder”) must report the status ofhis/her shareholding to the Korea Securities Futures Commission and the Korea Exchange within five days afterhe/she becomes a major stockholder. In addition, any change in the ownership interest subsequent to the report must be reported to the Korea Securities Futures Commission and the Korea Exchange within five days after the change occurred. Violation of these reporting requirements may subject a person to criminal sanctions such as fines or imprisonment. Any single stockholder or persons who have a special relationship with such stockholder that jointly acquire more than 10% (4% in case of non-financial business group companies) of the voting stock of a Korean financial holding company who controls national banks will be subject to reporting or approval requirements pursuant to the Financial Holding Company Act. See “Item 4.B. Business Overview — Supervision and Regulation — Principal Regulations Applicable to Financial Holding Companies — Restrictions on Financial Holding Company Ownership.”
Restrictions Applicable to Shares
As a result of amendments to the Foreign Exchange Transaction Laws and Financial Services Commission regulations (which we refer to collectively as the “Investment Rules”) adopted in connection with the stock market opening from January 1992 and after that date, foreigners may invest, with limited exceptions and subject to procedural requirements, in all shares of Korean companies, whether listed on the Stock Market Division of the Korea Exchange or on the KOSDAQ Market Division of the Korea Exchange, unless prohibited by specific laws. Foreign investors may trade shares listed on the Stock Market Division of the Korea Exchange or on the KOSDAQ Market Division of the Korea Exchange only through the Stock Market Division of the Korea Exchange or the KOSDAQ Market Division of the Korea Exchange, except in limited circumstances, including:
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| • | odd-lot trading of shares; |
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| • | acquisition of shares (which we refer to as “Converted Shares”) by exercise of warrants, conversion rights or exchange rights under bonds with warrants, convertible bonds or exchangeable bonds or withdrawal rights under depositary receipts issued outside of Korea by a Korean company; |
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| • | acquisition of shares as a result of inheritance, donation, bequest or exercise of stockholders’ rights, including preemptive rights or rights to participate in free distributions and receive dividends; |
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| • | over-the-counter transactions between foreigners of a class of shares for which the ceiling on aggregate acquisition by foreigners, as explained below, has been reached or exceeded subject to certain exceptions; and |
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| • | sale and purchase of shares at fair value between foreigners who are part of an investor group comprised of foreign companies investing under the control of a common investment manager pursuant to applicable laws or contract. |
Forover-the-counter transactions of shares between foreigners outside the Stock Market Division of the Korea Exchange or the KOSDAQ Market Division of the Korea Exchange for shares with respect to which the limit on aggregate foreign ownership has been reached or exceeded, a securities company licensed in Korea must act as an
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intermediary. Odd-lot trading of shares outside the Stock Market Division of the Korea Exchange or the KOSDAQ Market Division of the Korea Exchange must involve a licensed securities company in Korea as the other party. Foreign investors are prohibited from engaging in margin transactions with respect to shares that are subject to a foreign ownership limit.
The Investment Rules require a foreign investor who wishes to invest in shares on the Stock Market Division of the Korea Exchange or the KOSDAQ Market Division of the Korea Exchange (including Converted Shares and shares being issued for initial listing on the Stock Market Division of the Korea Exchange or on KOSDAQ Market Division of the Korea Exchange) to register its identity with the Financial Supervisory Service prior to making any such investment. The registration requirement does not, however, apply to foreign investors who acquire Converted Shares with the intention of selling such Converted Shares within three months from the date of acquisition. Upon registration, the Financial Supervisory Service will issue to the foreign investor an investment registration card, which must be presented each time the foreign investor opens a brokerage account with a securities company. Foreigners eligible to obtain an investment registration card include foreign nationals who have not been residing in Korea for a consecutive period of six months or more, foreign governments, foreign municipal authorities, foreign public institutions, international financial institutions or similar international organizations, corporations incorporated under foreign laws and any person in any additional category designated by decree of the Ministry of Strategy and Finance under the Korean Securities and Exchange Act. All Korean offices of a foreign corporation as a group are treated as a separate foreigner from the offices of the corporation outside Korea for the purpose of investment registration. However, a foreign corporation or depositary issuing depositary receipts may obtain one or more investment registration cards in its name in certain circumstances as described in the relevant regulations.
Upon a foreign investor’s purchase of shares through the Stock Market Division of the Korea Exchange or the KOSDAQ Market Division of the Korea Exchange, no separate report by the investor is required because the investment registration card system is designed to control and oversee foreign investment through a computer system. However, a foreign investor’s acquisition or sale of shares outside the Stock Market Division of the Korea Exchange or the KOSDAQ Market Division of the Korea Exchange (as discussed above) must be reported by the foreign investor or his standing proxy to the governor of the Financial Supervisory Service at the time of each such acquisition or sale. A foreign investor must ensure that any acquisition or sale by it of shares outside the Stock Market Division of the Korea Exchange or the KOSDAQ Market Division of the Korea Exchange in the case of trades in connection with a tender offer, odd-lot trading of shares, trades of a class of shares for which the aggregate foreign ownership limit has been reached or exceeded, is reported to the governor of the Financial Supervisory Service by himself or his standing proxy, or, in the case of sale and purchase of shares at fair value between foreigners, who are part of an investor group comprised of foreign companies investing under the control of a common investment manager pursuant to applicable laws or contract. A foreign investor may appoint a standing proxy from among the Korea Securities Depository, foreign exchange banks (including domestic branches of foreign banks), securities companies (including domestic branches of foreign securities companies), asset management companies, futures trading companies and internationally recognized custodians which will act as a standing proxy to exercise stockholders’ rights or perform any matters related to the foregoing activities if the foreign investor does not perform these activities himself. Generally, a foreign investor may not permit any person, other than its standing proxy, to exercise rights relating to his shares or perform any tasks related thereto on his behalf. However, a foreign investor may be exempted from complying with these standing proxy rules with the approval of the governor of the Financial Supervisory Service in cases deemed inevitable by reason of conflict between laws of Korea and the home country of the foreign investor.
Certificates evidencing shares of Korean companies must be kept in custody with an eligible custodian in Korea. Only foreign exchange banks (including domestic branches of foreign banks), securities companies (including domestic branches of foreign securities companies), the Korea Securities Depository, asset management companies, futures trading companies and internationally recognized custodians are eligible to act as a custodian of shares for a non-resident or foreign investor. A foreign investor must ensure that his custodian deposits his shares with the Korea Securities Depository. However, a foreign investor may be exempted from complying with this deposit requirement with the approval of the governor of the Financial Supervisory Service in circumstances where compliance with that requirement is made impracticable, including cases where compliance would contravene the laws of the home country of such foreign investor.
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Under the Investment Rules, with certain exceptions, foreign investors may acquire shares of a Korean company without being subject to any foreign investment ceiling. As one such exception, designated public corporations are subject to a 40% ceiling on the acquisition of shares by foreigners in the aggregate. Designated public corporations may set a ceiling on the acquisition of shares by a single person in their articles of incorporation. Currently, Korea Electric Power Corporation is the only designated public corporation that has set such a ceiling. Furthermore, an investment by a foreign investor in 10% or more of the issued and outstanding shares with voting rights of a Korean company is defined as a foreign direct investment under the Foreign Investment Promotion Act of Korea. Generally, a foreign direct investment must be reported to the Ministry of Commerce, Industry and Energy of Korea. The acquisition of shares of a Korean company by a foreign investor may also be subject to certain foreign or other shareholding restrictions in the event that the restrictions are prescribed in a specific law that regulates the business of the Korean company. For a description of such restrictions applicable to Korean banks, see “Item 4.B. Business Overview — Supervision and Regulation — Principal Regulations Applicable to Banks — Restrictions on Bank Ownership.”
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| ITEM 9.D. | Selling Shareholders |
Not applicable.
Not applicable.
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| ITEM 9.F. | Expenses of the Issue |
Not applicable.
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| ITEM 10. | ADDITIONAL INFORMATION |
ARTICLES OF INCORPORATIONNot applicable.
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| ITEM 10.B. | Memorandum and Articles of Incorporation |
We are a financial holding company established under the Financial Holding Company Act. As set forth in our Articles of Incorporation, our objects and purposes as a financial holding company are, among others, to operate and manage financial companies or companies engaged in similar lines of business, to provide financial support to, or investments in, our subsidiaries and to develop and jointly sell products with our subsidiaries. We are registered with the commercial registry office of Seoul Central District Court.
Description of Share Capital Stock
This section provides information relating to our capital stock, including brief summaries of material provisions of our Articles of Incorporation, the Korean Commercial Code, the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act, the Financial Holding Companies Act and certain related laws of Korea, all as currently in effect. The following summaries are intended to provide only summaries and are subject to the full text of the Articles of Incorporation and the applicable provisions of the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act, the Korean Commercial Code, and certain other related laws of Korea.
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General
As of December 31, 20072009 and as of the date hereof, our authorized share capital is 1,000,000,000 shares. Our Articles of Incorporation provide that we are authorized to issue shares of preferred stock up to one-half of all of the issued and outstanding shares of common stock.shares. Furthermore, through an amendment of the Articles of Incorporation, we have created new classes of shares in addition to the common shares and the preferred shares. See “— Description of Preferred Stock — Redeemable Preferred Stock”Stock (Series 10)” and “— Description of Preferred Stock —
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Redeemable Convertible Preferred Stock.Stock (Series 11).” As of December 31, 2007, the date on which our shareholders registry was last closed2009 and the latest practicable date on which the common shareholding information is available,June 11, 2010, the number of our issued and outstanding common shares was 396,199,587.474,199,587 and 474,199,587, respectively.
As of December 31, 2007,2009, the number of issued and outstanding redeemable preferred shares issued in August 2003 as part of our funding for the acquisition of Chohung Bank was 30,450,377.9,383,459. On January 25, 2007, we issued 28,990,000 redeemable preferred shares and 14,721,000 redeemable convertible preferred shares as part of our funding for the acquisition of LG Card.Card, all of which were outstanding as of December 31, 2009 following scheduled redemptions. The terms of the preferred shares issued in connection with the acquisition of Chohung Bank are different from those of the preferred shares issued in connection with the acquisition of LG Card. See “— Description of Preferred Stock — Redeemable Preferred Stock”Stock (Series 10)” and “— Description of Preferred Stock — Redeemable Convertible Preferred Stock.Stock (Series 11).” Other than these preferred shares, there are no other preferred shares authorized, issued or outstanding as of the date hereof.
All of the issued and outstanding shares are fully-paid and non-assessable, and are in registered form. As of the date hereof, our authorized but unissued share capital consists of 529,639,036384,784,849 shares. We may issue the unissued shares without further shareholder approval but subject to a board resolution as provided in the Articles of Incorporation. See “— Preemptive Rights and Issuance of Additional Shares” and “— Distribution of Free Shares.” Share certificates are issued in denominations of one, five, ten, 50, 100, 500, 1,000 and 10,000 shares.
As set forth in The par value of our Articles of Association, our objects and purposes as a financial holding company are, among others, to operate and manage financial companies or companies engaged in similar lines of business, to provide financial support to, or investments in, our subsidiaries and to develop and jointly sell products with our subsidiaries.common shares per share is Won 5,000.
Dividends
Dividends are distributed to shareholders in proportion to the number of shares of the relevant class of capital stock owned by each shareholder following approval by the shareholders at an annual general meeting of shareholders. We pay full annual dividends on newly issued shares (such as the common shares representing the American depositary shares)shares (“ADSs”)) for the year in which the new shares are issued. We declare our dividend annually at the annual general meeting of shareholders which is held within three months after the end of the fiscal year. The annual dividend must be paid to the shareholders of record as of the end of the preceding fiscal year within one month after the annual general meeting. Annual dividends may be distributed either in cash or in shares provided that shares must be distributed at par value and, if the market price of the shares is less than their par value, dividends in shares may not exceed one-half of the annual dividend.dividends. Under the Korean Commercial Code we do not have an obligation to pay any annual dividend unclaimed for five years from the scheduled payment date.
In addition, under the Korean Commercial Code and our Articles of Incorporation, provide that we may pay interim dividends once during each fiscal year (in addition to the annual dividends). Unlike annual dividends, interim dividends may be paid upon the resolution of the board of directors and are not subject to shareholder approval. The interim dividends, if any, will be paid to the shareholders of record at 12:00 a.m. midnight, July 1 of the relevant fiscal year in cash.
Under the Korean Commercial Code, an interim dividend shallmay not be more than the net assets on the balance sheet of the immediately preceding fiscal period, after deducting (i) the capital of the immediately preceding fiscal period, (ii) the sum of the capital reserve and legal reserve accumulated up to the immediately preceding fiscal period, (iii) the amount of earnings for dividend payment approved at the general shareholders’ meeting of the immediately preceding fiscal period, (iv) other special reserves accumulated up to the immediately preceding fiscal period, either pursuant to the provisions of our Articles of Incorporation or to the resolution of the general meeting
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of shareholders, and (v) amount of legal reserve that should be set aside for the current fiscal period following the interim dividend payment.
TheUnder the Financial Holding Companies Act and the regulations thereunder, provide that a financial holding company shallmay not pay an annual dividend unless it has set aside as its legal reserve an amount equal to at least one-tenth of its net income after tax and shall set aside such amount as its legal reserve until its legal reserve reaches at least the aggregate amount of its stated capital.
Other than as set forth above and the dividend rights granted to preferred shareholders as further described in “— Description of Preferred Shares,” our articles of incorporation do not provide special rights to our common or preferred shareholders to share in our profits. For information regarding Korean taxes on dividends, see “— Taxation — Korean Taxation.”
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Distribution of Free Shares
In addition to permitting dividends in the form of shares to be paid out of retained or current earnings, the Korean Commercial Code permits a company to distribute to its shareholders, in the form of free shares, an amount transferred from the capital surplus or legal reserve to stated capital. These free shares must be distributed to all of the shareholders pro rata. Our Articles of Incorporation require the same types of preferred shares to be distributed to the holders of preferred shares in case of distribution of free shares. For information regarding the treatment under Korean tax laws of free share distributions, see “—“Item 10.F. Taxation — Korean Taxation — Taxation of Dividends on Shares of Common Stock or American Depositary Shares.” Holders of American depositary shares will be able to participate in distributions of free shares to the extent described in “Item 12. Description of Securities other than Equity Securities — Description of the American Depositary Shares — Dividends and Distributions.”
Preemptive Rights and Issuance of Additional Shares
Unless otherwise provided in the Korean Commercial Code, a company may issue authorized but unissued shares at such times and upon such terms as the board of directors of the company may determine. The company must offer the new shares on uniform terms to all shareholders who have preemptive rights and who are listed on the shareholders’ register as of the record date. Our shareholders are entitled to subscribe for any newly issued shares in proportion to their existing shareholdings. However, as provided in the Articles of Incorporation, we may issue new shares by resolution of board of directors to persons other than existing shareholders if those shares are (1) publicly offered pursuant to relevant provisions of the Securities and Exchange Act (where the number of such shares so offered may not exceed 50% of our total number of issued and outstanding shares); (2) preferentially allocated to the members of our employee stock ownership associationthe ESOA pursuant to relevant provisions of the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act; (3) issued for the purpose of issuing depositary receipts pursuant to relevant provisions of the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act (where the number of such shares so issued may not exceed 50% of our total number of issued and outstanding shares); (4) issued to directors or employees as a result of exercise of stock options we granted to them pursuant to the Securities and Exchange Act;Korean Commercial Code; (5) issued to a securitiesfinancial investment company, authorized to exclusively engage in the financial business pursuant toa private equity fund or a special purpose company under the Financial Holding CompaniesInvestment Services and Capital Markets Act; or (6) issued to any specified foreign investors, foreign or domestic financial institutions or alliance companies for operational needs such as introduction of advanced financial technology, improvement of its or subsidiaries’ financial structure and funding or strategic alliance (where such number of shares so issued may not exceed 50% of our total number of issued and outstanding shares). Under the Korean Commercial Code, a company may vary, without stockholders’ approval, the terms of such preemptive rights for different classes of shares. Public notice of the preemptive rights to new shares and the transferability thereof must be given not less than two weeks (excluding the period during which the shareholders’ register is closed) prior to the record date. We will notify the shareholders who are entitled to subscribe for newly issued shares of the deadline for subscription at least two weeks prior to the deadline. If a shareholder fails to subscribe on or before such deadline, the shareholder’s preemptive rights will lapse. Our board of directors may determine how to distribute shares in respect of which preemptive rights have not been exercised or where fractions of shares occur.
Under the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act, members of a company’s employee stock ownership association, whether or not they are shareholders, have a preemptive right, subject to certain exceptions, to subscribe for up to 20% of the shares publicly offered pursuant to the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act. However, this right is exercisable only to the extent that the total number of shares so acquired and held by such members does not exceed 20% of the
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total number of shares to be newly issued and shares then outstanding. As of May 21, 2008, our employee stock ownership associationDecember 31, 2009, the ESOA owned 6,038,34422,875,759 shares of our common stock.
General Meeting of Shareholders
There are two types of general meetings of shareholders: annual general meetings and extraordinary general meetings. We are required to convene our annual general meeting within three months after the end of each fiscal year. Subject to a board resolution or court approval, an extraordinary general meeting of shareholders may be held when necessary or at the request of the holders of an aggregate of 3% or more of our outstanding common shares or at the request of our audit committee. In addition, under the Securities and Exchange Act of Korea,Korean Commercial Code, an extraordinary general meeting of shareholders may be held at the request of the shareholders holding shares for at least 6 months of an aggregate of 3% (1.5% in case of a listed company whose capital at the end of the latest operating year is W100 billion or more)1.5% or more of the outstanding shares with voting rights of the listed company, subject to a board resolution or court approval. Notwithstanding the regulation, the Korean Supreme Court has ruled that the 6 months holding period is not necessary for the shareholders to exercise its right to call the extraordinary general meeting of the shareholders. Furthermore, under the Financial Holding Companies Act of Korea, an extraordinary general meeting of shareholders may be held at the request of the shareholders holding shares for
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at least 6 months of an aggregate of 1.5% (0.75% in the case of a financial holding company (i) whose total assets at the end of the latest fiscal year is W5 trillion or more and (ii) who is in control of two or more subsidiaries, each with total assets of W2 trillion or more) or more of the outstanding shares of the company, subject to a board resolution or court approval. Holders of non-voting shares may be entitled to request a general meeting of shareholders only to the extent the non-voting shares have become enfranchised as described under “— Voting Rights” below (hereinafter referred to as “enfranchised non-voting shares”). Meeting agendas are determined by the board of directors or proposed by holders of an aggregate of 3% or more of the outstanding shares with voting rights by way of a written proposal to the board of directors at least six weeks prior to the meeting. In addition, under the Securities and Exchange Act,Korean Commercial Code, the meeting agenda may be proposed by the shareholders holding shares for at least 6 months of an aggregate of 1% (0.5% in the case of a listed company whose capital at the end of the latest operating year is W100 billion or more) or more of the outstanding shares of the listed company. Furthermore, under the Financial Holding Companies Act, the meeting agenda may be proposed by the shareholders holding shares for at least 6 months of an aggregate of 0.5% (0.25% in the case of a financial holding company (i) whose total assets at the end of the latest fiscal year is W5 trillion or more and (ii) who is in control of two or more subsidiaries, each with total assets of W2 trillion or more) or more of the outstanding shares of the company. Written notices stating the date, place and agenda of the meeting must be given to the shareholders at least two weeks prior to the date of the general meeting of shareholders; provided, that, notice may be given to holders of 1% or less of the total number of issued and outstanding shares which are entitled to vote, by placing at least two public notices at least two weeks in advance of the meeting in at least two daily newspapers.newspapers or by using an electronic method defined under the Korean Commercial Code and related regulations at least two weeks in advance of the meeting. Currently, we useThe Korea Economic DailyandMaeil Business Newspaperfor the publication of such notices. Shareholders who are not on the shareholders’ register as of the record date are not entitled to receive notice of the general meeting of shareholders, and they are not entitled to attend or vote at such meeting. Holders of enfranchised non-voting shares who are on the shareholders’ register as of the record date are entitled to receive notice of the general meeting of shareholders and they are entitled to attend and vote at such meeting. Otherwise, holders of non-voting shares are not entitled to receive notice of or vote at general meetings of shareholders.
The general meeting of shareholders is held at our executive office (which is our registered executive office) or, if necessary, may be held anywhere in the vicinity of our executive office.
Voting Rights
Holders of common shares are entitled to one vote for each share. However, voting rights with respect to common shares that we hold and common shares that are held by a corporate shareholder, more than one-tenth of the outstanding capital stock of which is directly or indirectly owned by us, may not be exercised. Unless stated otherwise in a company’s Articles of Incorporation, the Korean Commercial Code permits holders of an aggregate of 3% (1% under the Securities and Exchange Act,, in case of a company whose total capitalassets as at the end of the latest fiscal year is W2 trillion or more) or more of the outstanding shares with voting rights to request cumulative voting
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when electing two or more directors. Our Articles of Incorporation currently do not prohibit cumulative voting. In addition, under the Korean Commercial Code, in case of appointment of an audit committee member who is an outside director, any shareholder holding more than 3% of the outstanding shares with voting rights shall not exercise its voting rights with respect to any portion of its shares exceeding the 3% limit; and in case of appointment of an audit committee member who is a non-outside director, the largest shareholder (together with certain related persons) holding more than 3% of the outstanding shares with voting rights shall not exercise its voting rights with respect to any portion of its shares exceeding the 3% limit.
The Korean Commercial Code and our Articles of Incorporation provide that an ordinary resolution may be adopted if approval is obtained from the holders of at least a majority of those common shares present or represented at such meeting and such majority also represents at least one-fourth of the total of our issued and outstanding common shares. Holders of non-voting shares (other than enfranchised non-voting shares) are not entitled to vote on any resolution or to receive notice of any general meeting of shareholders unless the agenda of the meeting includes consideration of a resolution on which such holders are entitled to vote. If our general shareholders’ meeting resolves not to pay to holders of preferred shares the annual dividend as determined by the board of directors at the time of issuance of such shares, the holders of preferred shares will be entitled to exercise
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voting rights from the general shareholders’ meeting immediately following the meeting adopting such resolution until the end of the meeting to declare to pay such dividend with respect to the preferred shares. Holders of such enfranchised preferred shares have the same rights as holders of common shares to request, receive notice of, attend and vote at a general meeting of shareholders.
The Korean Commercial Code provides that to amend the Articles of Incorporation (which is also required for any change to the authorized share capital of the company) and in certain other instances, including removal of a director of a company, dissolution, merger or consolidation of a company, transfer of the whole or a significant part of the business of a company, acquisition of all of the business of any other company or issuance of new shares at a price lower than their par value, a special resolution must be adopted by the approval of the holders of at least two-thirds of those shares present or represented at such meeting and such special majority must also represent at least one-third of the total issued and outstanding shares with voting rights of the company.
In addition, in the case of amendments to the Articles of Incorporation or any merger or consolidation of a company or in certain other cases which affect the rights or interest of the shareholders of the preferred shares, a resolution must be adopted by a separate meeting of shareholders of the preferred shares. Such a resolution may be adopted if the approval is obtained from shareholders of at least two-thirds of the preferred shares present or represented at such meeting and such preferred shares also represent at least one-third of the total issued and outstanding preferred shares of the company.
A shareholder may exercise his voting rights by proxy given to another shareholder. If a particular shareholder intends to obtain proxy from another shareholder, a reference document specified by the Financial Supervisory Service must be sent to the shareholder giving proxy, with a copy furnished to the company’s executive office or the branch office, transfer agent and the Financial Services Commission. The proxy must present the power of attorney prior to the start of the general meeting of shareholders.
Rights of Dissenting Shareholders
Pursuant to the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act, in certain limited circumstances (including, without limitation, if we transfer all or any significant part of our business or if we merge or consolidate with another company), dissenting holders of shares have the right to require us to purchase their shares. Pursuant to the Financial Holding Companies Act, the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act and the Korean Commercial Code, if a financial holding company acquires a new direct or indirect subsidiary through the exchange or transfer of shares except in limited circumstances, the dissenting holders of such shares have the right to require us to purchase their shares. To exercise such a right, shareholders must submit to us a written notice of their intention to dissent prior to the general meeting of shareholders. Within 20 days (or 10 days under certain circumstances according to the Financial Holding Companies Act) after the date on which the relevant resolution is passed at such meeting, such dissenting shareholders must request in writing that we purchase their shares. We are obligated to purchase the shares of dissenting shareholders within one month after the end of such request period at a price to be determined by negotiation between the shareholder and us. If we cannot agree on a price with the shareholder through such negotiations, the purchase price will be the arithmetic mean of (1) the weighted average of the daily closing share prices on the StockKRX KOSPI Market Division of the Korea Exchange for two months prior to the date of the adoption of the relevant board of directors’ resolution, (2) the weighted average of the daily closing share prices on the StockKRX KOSPI Market Division of the Korea Exchange for one month prior to the date of the adoption of the relevant board of directors’ resolution and (3) the weighted average of the daily closing share prices on the StockKRX KOSPI Market Division of the Korea Exchange for one week prior to the date of the adoption of the relevant
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board of directors’ resolution. However, the Financial Services Commission may adjust such price ifIf we or at least 30% of the dissenting shareholdersshareholder who requested purchase of their shares do not accept such purchase price, we or the shareholder may request to the court to adjust such purchase price.
Register of Shareholders and Record Dates
We maintain the register of our shareholders at our transfer agent’s in Seoul, Korea. The Korea Securities Depository as our transfer agent, registers transfers of shares on the register of shareholders upon presentation of the share certificates.
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The record date for annual dividends is December 31. For the purpose of determining the holders of shares entitled to annual dividends, the register of shareholders may be closed for the period from January 1 of each year up to January 15 of such year. Further, the Korean Commercial Code and the Articles of Incorporation permit us upon at least two weeks’ public notice to set a record dateand/or close the register of shareholders for not more than three months for the purpose of determining the shareholders entitled to certain rights pertaining to the shares. The trading of shares and the delivery of certificates in respect thereof may continue while the register of shareholders is closed.
Other Shareholder Rights
Our articles of incorporation do not have sinking fund provisions or provisions creating liability to further capital calls. Other than to amend our articles of incorporation in accordance with the Korean Commercial Code, no particular action is necessary to change the rights of holders of our capital stock. In addition, our articles of incorporation do not have specific provisions for governing changes in capital or which would have an effect of delaying, deferring or preventing a change in control of us and that would operate only with respect to a merger, acquisition or corporate restructuring involving us or any of our subsidiaries.
Directors
Under the Korean Commercial Code and our articles of incorporation, any director wishing to enter into a transaction with us or our subsidiaries in his or her personal capacity is required to obtain the prior approval of the Board of Directors, and any director having an interest in the transaction may not vote at the meeting of the Board of Directors to approve the transaction.
Neither our articles of incorporation nor applicable Korean laws have provisions relating to (i) the directors’ power, in the absence of an independent quorum, to vote compensation to themselves or any members of their body (ii) borrowing powers exercisable by the directors and how such borrowing powers can be varied; (iii) retirement or non-retirement of directors under an age limit requirement; or (iv) the number of shares required for a director’s qualification.
Description of Redeemable Preferred Stock
Series 1/2/3/4/5Redeemable Preferred Stock (Series 1 through 8)
On July 9,In 2003, as part of obtaining funds for thefunding our acquisition of Chohung Bank, our board of directors authorized the issuance of 46,583,961we issued non-voting redeemable preferred shares, consisting of 9,316,792stock, designated Series 1 redeemable preferred shares, 9,316,792 Series 2 redeemable preferred shares, 9,316,792 Series 3 redeemable preferred shares, 9,316,792 Series 4 redeemable preferred shares and 9,316,793 Series 5 redeemable preferredthrough 8, in an aggregate of 52,583,961 shares. All ofOf these shares, were issued on August 19, 2003 in registered form and were initially subscribed by Korea Deposit Insurance Corporation.
The dividends payable on these43,200,502 shares are an amount equal to 4.04% of the subscription price per share. The dividend right held by holders of such shares rank senior to the dividend right held by holders of our common shares. If in any fiscal year we do not pay any dividend as provided above, the holders of these shares are entitled to receive such accumulated unpaid dividend prior to the holders of our common shares from the dividends payable in respect of the next fiscal year. If dividends are not paid to the holders of these shares, voting rights attach to such shares. See “— Voting Rights.”
The redemption period for these shares is (i) for the Series 1 shares, from the first anniversary of the issuance date until the third anniversary of the issuance date; (ii) for the Series 2 shares, from the second anniversary of the issuance date until the fourth anniversary of the issuance date; (iii) for the Series 3 shares Stock, from the third anniversary of the issuance date until the fifth anniversary of the issuance date; (iv) for the Series 4 shares, from the fourth anniversary of the issuance date until the sixth anniversary of the issuance date; and (v) for the Series 5 shares, from the fifth anniversary of the issuance date until the seventh anniversary of the issuance date;provided that, if such shares are nothave been redeemed in full withinaccordance with the redemption period or the dividends to suchschedule (including 9,316,792 shares are not paid in full, the redemption period will be extended until all such shares are redeemed in full. We are obligated to redeem all of the redeemable preferred2009 and 0 shares that are outstanding at the end of the relevant redemption period to the extent that distributable profits are available for such redemption. Furthermore, we may, at our option, elect to redeem all or part of any outstanding such shares at any time during the redemption period to the extent that distributable profits are available for such redemption.
The Series 1 redeemable preferred shares were redeemed in entirety on August 21, 2006.2010 to-date), and 9,383,459 shares remain currently outstanding. The Series 2 redeemable preferred shares were redeemed in entirety on August 20, 2007. The Series 3 redeemable preferredoutstanding shares are scheduled to be redeemed in entirety inby August 2008.21, 2010 at an aggregate redemption price of W182.8 billion.
Redeemable Convertible Preferred Stock (Series 9)
In 2003, as part of funding our acquisition of Chohung Bank, we also issued Series 6/7/89 redeemable convertible preferred shares all of which were converted into our common shares in 2005 and 2006 in accordance with the terms of such shares.
Redeemable Preferred Stock (Series 10)
On July 29, 2003,January 25, 2007, as part of obtaining funds for our acquisition of Chohung Bank, our board of directors authorized an additional issuance of 6,000,000 non-voting redeemable preferred shares, consisting of 3,500,000
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Series 6 redeemable preferred shares, 2,433,334 Series 7 redeemable preferred shares and 66,666 Series 8 redeemable preferred shares. All of these shares were issued on August 19, 2003 in a public offering.
The dividends payable on these shares are (i) for the Series 6 shares, an amount equal to 7.00% of the subscription price per share, (ii) for the Series 7 shares, an amount equal to 7.46% of the subscription price per share and (iii) for the Series 8 shares, an amount equal to 7.86% of the subscription price per share. The dividend right held by holders of such shares rank senior to the dividend right held by holders of our common shares. If in any fiscal year we do not pay any dividend as provided above, the holders of these shares are entitled to receive such accumulated unpaid dividend prior to the holders of our common shares from the dividends payable in respect of the next fiscal year. If dividends are not paid to the holders of these shares, voting rights attach to such shares. See “— Voting Rights.”
The redemption period for these shares is (i) for the Series 6 shares, from one (1) month immediately preceding the third anniversary date of the issuance date until the third anniversary date of the issuance date; (ii) for the Series 7 shares, from one month immediately preceding the fifth anniversary date of the issuance date until the fifth anniversary date of the issuance date; and (iii) for the Series 8 shares, from one month immediately preceding the seventh anniversary date of the issuance date until the seventh anniversary date of the issuance date; provided that, if such shares are not redeemed in full within the redemption period or the dividends on such shares are not paid in full, the redemption period will be extended until all such shares are redeemed in full. We are obligated to redeem all of the redeemable preferred shares that are outstanding at the end of the relevant redemption period to the extent that distributable profits are available for such redemption. Furthermore, we may, at our option, elect to redeem all or part of any outstanding such shares at any time during the redemption period to the extent that distributable profits are available for such redemption.
The Series 6 redeemable preferred shares were redeemed in entirety on August 21, 2006. The Series 7 redeemable preferred shares are scheduled to be redeemed in entirety in August 2008.
Series 10 Redeemable Preferred Stock
On December 18, 2006, as part of obtaining funds forfunding our acquisition of LG Card, our board of directors authorized the issuance ofwe issued 28,990,000 Series 10 non-voting redeemable preferred shares of non-voting stock. All these shares were issued on January 25, 2007 in registered form and were subscribed by 12 government entities and institutional investors in Korea.
The dividend rate for theseshares. These shares are as follows:currently entitled to dividends at the following rate: (i) for the fiscaleach year 2007, an amount equal to 7.00% of the subscription price per share multiplied by the number of days elapsed from January 25, 2007, the date of issuance, to December 31, 2007until and divided by 365; (ii) for each of the fiscal years 2008 throughincluding 2011, an amount equal to 7.00% of the subscription price per share; (iii)(ii) for fiscal year 2012, an amount equal to (x) 7.00% of the subscription price per share multiplied by the number of days elapsed from January 1, 2012 to January 25, 2012 and divided by 365, plus (y) ‘R’’R’% of the subscription price, multiplied by the number of days from January 26, 2012 through December 31, 2012 and divided by 365, where R% means the sum of (A) the five-year treasury rate effective on January 25, 2011, (B) 100 basis points and (C) a spread equal to 7.00% less the five-year treasury rate effective on January 25, 2007; and (iv) for each of the fiscal years 2013 and each year thereafter, an amount equal to R% of the subscription price.
The dividend
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right held by holders of these shares rank senior to the dividend right held by holders of our common shares. If in any fiscal year we do not pay any dividend as provided above, the holders of these shares are entitled to receive such accumulated unpaid dividend prior to the holders of our common shares from the dividends payable in respect of the next fiscal year. If dividends are not paid to the holders of these shares, voting rights attach to such shares. See “— Voting Rights.”
The redemption period for We may redeem these shares is fromat any time during the period commencing on the fifth anniversary of the issuance date until the 20th anniversary of the issuance date;provided that, we may, at our option, elect to redeem all or part of any outstanding such shares at any time during the redemption perioddate to the extent that distributable profits are available for such redemption. None of these shares may be redeemed except during the redemption period. There is no maturity date for these shares.
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Description of Redeemable Convertible Preferred Stock
Series 9 Redeemable Convertible Preferred Stock (Series 11)
On July 9, 2003,January 25, 2007, as part of obtaining funds forfunding our acquisition of Chohung Bank, our board of directors authorized the issuance of 44,720,603LG Card, we issued 14,721,000 Series 911 non-voting redeemable convertible preferred shares. These shares are currently entitled to dividends at the following rate: (i) for each of which is convertible into one share of our common stock. Allyear until and including 2011, 3.25% of the Series 9 redeemable convertible preferred shares were converted into our common shares through a series of conversions in November 2005 and August 2006.
The dividends payable on these shares are (i)subscription price per share; (iii) for the fiscal year 2007, an amount equal to 2.02%2012, 3.25% of the subscription price per share multiplied by the number of days elapsed from the date of issuanceJanuary 1, 2012 to December 31, 2007January 25, 2012 and divided by 365, and (ii) thereafter, an amount equal to 2.02%plus ’R’% of the subscription price, per share. The dividend right heldmultiplied by holdersthe number of such shares rank seniordays from January 26, 2012 through December 31, 2012 and divided by 365, where R% means the sum of (A) the five-year treasury rate effective on January 25, 2011, (B) 100 basis points and (C) a spread equal to 7.00% less the dividend right held by holdersfive-year treasury rate effective on January 25, 2007; and (iv) for 2013 and each year thereafter, R% of our common shares.the subscription price. If in any fiscal year we do not pay any dividend as provided above, the holders of these shares are entitled to receive such accumulated unpaid dividend prior to the holders of our common shares from the dividends payable in respect of the next fiscal year. If dividends are not paid to the holders of these shares, voting rights attach to such shares. See “— Voting Rights.”
The redemption period for We may redeem these shares is from the third anniversary of the issuance date until the fifth anniversary of the issuance date;provided that, if these shares are not redeemed in full within the redemption period or the dividends on such shares are not paid in full, the redemption period will be extended until all such shares are redeemed in full. We are obligated to redeem all of these shares outstanding at the end of the redemption period to the extent that distributable profits are available for such redemption. Furthermore, we may, at our option, elect to redeem all or part of any outstanding such shares at any time during the redemption period to the extent that distributable profits are available for such redemption.
The holders of these shares may, at their option, convert all or part of any outstanding such shares into our common shares at any time from the first anniversary of the issuance date until the fourth anniversary of the issuance date, at a conversion rate of one-to-one.
Series 11 Redeemable Convertible Preferred Stock
On December 18, 2006, as part of obtaining funds for our acquisition of LG Card, our board of directors authorized the issuance of 14,721,000 Series 11 non-voting redeemable convertible preferred shares. All of these shares were issuedcommencing on January 25, 2007 in registered form and subscribed by institutional investors and government agencies in Korea.
The dividend rate for these shares are as follows: (i) for the fiscal year 2007, an amount equal to 7.00% of the subscription price per share multiplied by the number of days elapsed from January 25, 2007, the date of issuance, to December 31, 2007 and divided by 365; (ii) for each of the fiscal years 2008 through 2011, an amount equal to 3.25% of the subscription price per share; (iii) for fiscal year 2012, an amount equal to (x) 3.25% of the subscription price per share multiplied by the number of days elapsed from January 1, 2012 to January 25, 2012 and divided by 365, plus (y) ‘R’% of the subscription price multiplied by the number of days from January 26, 2012 through December 31, 2012 and divided by 365, where R% means the sum of (A) the five-year treasury rate effective on January 25, 2011, (B) 100 basis points and (C) a spread equal to 7.00% less the five-year treasury rate effective on January 25, 2007; and (iv) for each of the fiscal years 2013 and thereafter, an amount equal to R% of the subscription price.
If in any fiscal year we do not pay any dividend as provided above, the holders of these shares are entitled to receive such accumulated unpaid dividend prior to the holders of our common shares from the dividends payable in respect of the next fiscal year. If dividends are not paid to the holders of these shares, voting rights attach to such shares. See “— Voting Rights.”
The redemption period for these shares is from the fifth anniversary of the issuance date until the 20th anniversary of the issuance date;provided that, we may, at our option, elect to redeem all or part of any outstanding such shares at any time during the redemption perioddate to the extent that distributable profits are available for such redemption. None of these shares may be redeemed except during the redemption period. There is no maturity date for these shares.
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The holders of these shares may, at their option, convert all or part of any outstanding such shares into our common shares at any time from the day after the first anniversary of the issuance date until the fifth anniversary of the issuance date, at a conversion rate ofone-to-one. None of these shares may be converted except during the conversion period.
Annual Report
At least one week before the annual general meeting of shareholders, we must make our annual report written in the Korean language and audited nonconsolidated financial statements prepared under Korean GAAP available for inspection at our principal office and at all of our branch offices. Copies of annual reports, the audited nonconsolidated financial statements and any resolutions adopted at the general meeting of shareholders will be made available to our shareholders.
Under the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act, we must file with the Financial Services Commission and the Korea Exchange an annual report within 90 days after the end of our fiscal year, a semiannual report within 45 days (or 60 days if the report is prepared based on consolidated financial statements for filing) after the end of the first six months of our fiscal year and quarterly reports within 45 days (or 60 days if the report is prepared based on consolidated financial statements for filing) after the end of the first three months and nine months of our fiscal year, respectively. Copies of such reports are available for public inspection at the Financial Services Commission and the Korea Exchange.
Transfer of Shares
Under the Korean Commercial Code, the transfer of shares is effected by the delivery of share certificates. In order to exercise shareholders’ rights, the transferee must have his name and address registered on the register of shareholders. For this purpose, shareholders are required to file with us their name, address and seal. Nonresident shareholders must notify us of the name of their proxy in Korea to which our notice can be sent. Under the Financial Services Commission regulations, nonresident shareholders may appoint a standing proxy and may not allow any
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person other than the standing proxy to exercise rights regarding the acquired share or perform any task related thereto on his behalf, subject to certain exceptions. Under current Korean regulations, certain qualified securities companies and banks in Korea (including licensed branches of non-Korean securities companies and banks) and the Korea Securities Depository, foreign exchange banks (including domestic branches of foreign banks), financial investment companies with a dealing, brokerage or collective investment license and internationally recognized custodians are authorized to act as standing proxy and provide related services. Certain foreign exchange controls and securities regulations apply to the transfer of shares by nonresidents or non-Koreans. See “—“Korean Foreign Exchange Controls.and Securities Regulations.” As to the ceiling on the aggregate shareholdings of a single shareholder and persons who have a special relationship with such shareholder, please see “Item 4. Information on the Company4.B. Business Overview — Supervision and Regulation — Principal Regulations Applicable to Financial Holding Companies — RestrictionRestrictions on Financial Holding Company Ownership.”
Acquisition of Treasury Shares
We generally may not acquire our own shares except in certain limited circumstances, including, without limitation, a reduction in capital.
Notwithstanding the foregoing restrictions, pursuant to the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act and regulations under the Financial Holding Companies Act, we may purchase our own shares on the StockKRX KOSPI Market Division of the Korea Exchange, through a tender offer, or through a trust agreement with a trust company, or retrieve our own shares from a trust company upon termination of a trust agreement, subject to the restrictions that (1) the aggregate purchase price of such shares may not exceed the total amount available for distribution of dividends at the end of the preceding fiscal year less the amounts of dividends and reserves for such fiscal year, subtracted by the sum of (a) the purchase price of treasury stock acquired if any treasury stock has been purchased after the end of the preceding fiscal year pursuant to the Commercial Act or the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act, (b) the amount subject to trust agreements, and (c) the amount of dividends approved at the ordinary general shareholders’ meeting after the end of the preceding fiscal year and the amount of retained earnings reserve required under the Commercial Act; plus if any treasury stock has been disposed of after the end of the preceding fiscal year, the acquisition cost of such treasury stock and (2) the purchase of such shares shall meet the requisite capital ratio under the Financial Holding Companies Act and the guidelines issued by the Financial Services Commission.
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In general, under the Financial Holding Companies Act, our subsidiaries are not permitted to acquire our shares.
Liquidation Rights
In the event we are liquidated, the assets remaining after the payment of all debts, liquidation expenses and taxes will be distributed to shareholders in proportion to the number of shares held by such shareholders. Holders of preferred shares may have preferences over holders of common shares in liquidation.
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| ITEM 10.C. | Material Contracts |
MATERIAL CONTRACTSNone.
In connection with the acquisition of the controlling equity interest in LG Card, in December 2005 we entered into a stock purchase agreement with the creditors of LG Card. See “Item 4. Information on the Company — Acquisition of LG Card.” An English translation of the stock purchase agreement is filed as part of this annual report as Exhibit 4.7.
EXCHANGE CONTROLS
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| ITEM 10.D. | Exchange Controls |
General
The Foreign Exchange Transaction Act of Korea the related Presidential Decree and the regulations under such Act and Decree (collectively the “Foreign Exchange Transaction Laws”) herein, regulate investment in Korean securities by nonresidents and issuance of securities by Korean companies outside Korea. Under the Foreign Exchange Transaction Laws, nonresidents may invest in Korean securities only to the extent specifically allowed by these laws or otherwise permitted by the Ministry of Strategy and Finance of Korea. The Financial Services Commission has also adopted, pursuant to its authority under the SecuritiesFinancial Investment Services and ExchangeCapital Markets Act, regulations that restrict investment by foreigners in Korean securities and regulate issuance of securities by Korean companies outside Korea.
Under the Foreign Exchange Transaction Laws, (1) if the Korean government determines that it is inevitable due to the outbreak of natural calamities, wars, conflict of arms or grave and sudden changes in domestic or foreign economic circumstances or other situations equivalent thereto, the Ministry of Strategy and Finance may
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temporarily suspend payment, receipt or the whole or part of transactions to which the Foreign Exchange Transaction Laws apply, or impose an obligation to safekeep,safe keep, deposit or sell means of payment in or to certain Korean governmental agencies or financial institutions; and (2) if the Korean government determines that international balance of payments and international finance face or are likely to face serious difficulty or the movement of capital between Korea and abroad will cause or is likely to cause serious obstacles in carrying out its currency policies, exchange rate policies and other macroeconomic policies, the Ministry of Strategy and Finance may take measures to require any person who intends to perform capital transactions to obtain permission or to require any person who performs capital transactions to deposit part of the payments received in such transactions at certain Korean governmental agencies or financial institutions, in each case subject to certain limitations.
Reporting Requirements for Holders of Substantial Interests
Under the Securities and Exchange Act, any person whose direct or beneficial ownership of our common stock with voting rights, whether in the form of shares of common stock or American depositary shares, certificates representing the rights to subscribe for shares and equity-related debt securities including convertible bonds and bonds with warrants (which we refer to collectively as “Equity Securities”), together with the Equity Securities beneficially owned by certain related persons or by any person acting in concert with the person, accounts for 5% or more of the total outstanding shares (including Equity Securities of us held by such persons) is required to report the status of the holdings and the purpose of the holdings (for example, whether the intent is to seek management control) to the Financial Services Commission and the Korea Exchange within five business days after reaching the 5% ownership level. In addition, any change in the ownership interest subsequent to the report that equals or exceeds 1% of the total outstanding Equity Securities or change in the purpose of the holdings is required to be reported to
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the Financial Services Commission and the Korea Exchange within five business days from the date of the change (within ten days of the end of the month in which the change occurred, in the case of an institutional investor with no intent to seek management control). Furthermore, the above reporting requirement applies to a person who has already reported the ownership of the stock accounting for 5% or more of the total outstanding shares (plus equity securities of us held by such persons) but has changed its intent to seek management control.
Violation of these reporting requirements may subject a person to criminal sanctions such as fines or imprisonmentand/or a loss of voting rights with respect to the portion of ownership of Equity Securities exceeding 5% of the total outstanding shares. In addition, the Financial Services Commission may order the disposal of the unreported Equity Securities. Any persons who reports management control as the purpose for its holdings is prohibited from acquiring additional shares of Shinhan Card or from exercising voting rights during the following five days following the reporting date.
In addition to the reporting requirements described above, any person whose direct or beneficial ownership of our stock accounts for 10% or more of the total issued and outstanding shares (which we refer to as a “major stockholder”) must report the status ofhis/her shareholding to the Korea Securities Futures Commission and the Korea Exchange within ten days afterhe/she becomes a major stockholder. In addition, any change in the ownership interest subsequent to the report must be reported to the Korea Securities Futures Commission and the Korea Exchange by the 10th day of the month following the month in which the change occurred. Violation of these reporting requirements may subject a person to criminal sanctions such as fines or imprisonment. Any single stockholder or persons who have a special relationship with such stockholder that jointly acquire more than 10% (4% in case of non-financial business group companies) of the voting stock of a Korean financial holding company who controls national banks will be subject to reporting or approval requirements pursuant to the Financial Holding Company Act. See “Item 4. Information on the Company — Supervision and Regulation — Principal Regulations Applicable to Financial Holding Companies — Restriction on Financial Holding Company Ownership.”
Restrictions Applicable to Shares
As a result of amendments to the Foreign Exchange Transaction Laws and Financial Services Commission regulations (which we refer to collectively as the “Investment Rules”) adopted in connection with the stock market opening, from January 1992 and thereafter, foreigners may invest, with limited exceptions and subject to procedural requirements, in any shares of any Korean companies, whether listed on the Stock Market Division or the KOSDAQ Market Division of the Korea Exchange, unless prohibited by specific laws. Foreign investors may trade shares listed on the Stock Market Division or the KOSDAQ Market Division of the Korea Exchange only through the Korea Exchange, except in limited circumstances, including:
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| • | odd-lot trading of shares; |
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| • | acquisition of shares by foreign companies as a result of a merger; |
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| • | acquisition of shares (which we refer to as “Converted Shares”) by exercise of warrants, conversion rights, exchange rights or options under bonds with warrants, convertible bonds, exchangeable bonds, stock options or withdrawal rights under depositary receipts issued by a Korean company outside of Korea; |
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| • | acquisition of shares by exercise of rights as a shareholder; |
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| • | acquisition of shares as a result of inheritance, donation, bequest or exercise of stockholders’ rights, including preemptive rights or rights to participate in free distributions and receive dividends; |
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| • | sale or purchase of securities through a public bidding among large number of bidders; |
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| • | acquisition of shares by exercising rights granted under a covered warrant; |
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| • | over-the-counter transactions between foreigners of a class of shares for which the ceiling on aggregate acquisition by foreigners, as explained below, has been reached or exceeded subject to certain exceptions; and |
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| • | acquisition or disposition of shares in connection with a tender offer. |
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For over-the-counter transactions of shares between foreigners outside the Stock Market Division or the KOSDAQ Market Division of the Korea Exchange for shares with respect to which the limit on aggregate foreign ownership has been reached or exceeded, a securities company licensed in Korea must act as an intermediary. Odd-lot trading of shares outside the Stock Market Division or the KOSDAQ Market Division of the Korea Exchange must involve a licensed securities company in Korea as the other party. Foreign investors are prohibited from engaging in margin transactions involving borrowed securities with respect to which shares are subject to a foreign ownership limit.
The Investment Rules require a foreign investor who wishes to invest in shares on the Stock Market Division or the KOSDAQ Market Division of the Korea Exchange (including Converted Shares and shares being issued for initial listing on the Stock Market Division or the KOSDAQ Market Division of the Korea Exchange) to register its identity with the Financial Supervisory Service prior to making any such investment; however, the registration requirement does not apply to foreign investors who acquire Converted Shares with the intention of selling such Converted Shares within three months from the date of acquisition of the Converted Shares. Upon registration, the Financial Supervisory Service will issue to the foreign investor an investment registration card, which must be presented each time the foreign investor opens a brokerage account with a securities company. Foreigners eligible to obtain an investment registration card include foreign nationals who have not resided in Korea for a consecutive period of six months or more, foreign governments, foreign municipal authorities, foreign public institutions, international financial institutions or similar international organizations, corporations incorporated under foreign laws and any person in any additional category designated by decree of the Ministry of Strategy and Finance under the Securities and Exchange Act. All Korean branch offices of a foreign corporation as a group are treated as a separate foreigner from the offices of the corporation outside Korea for the purpose of investment registration. However, a foreign corporation or depository issuing depositary receipts may obtain one or more investment registration cards in its name in certain circumstances as described in the relevant regulations.
Upon a foreign investor’s purchase of shares through the Stock Market Division or the KOSDAQ Market Division of the Korea Exchange, no separate report by the investor is required because the investment registration card system is designed to control and oversee foreign investment through a computer system. However, a foreign investor’s acquisition or sale of shares outside the Stock Market Division or the KOSDAQ Market Division of the Korea Exchange (as discussed above) must be reported by the foreign investor or his standing proxy to the governor of the Financial Supervisory Service at the time of each such acquisition or sale; provided, however, that a foreign investor must ensure that any acquisition or sale by it of shares outside the Stock Market Division or the KOSDAQ Market Division of the Korea Exchange in the case of trades in connection with a tender offer, odd-lot trading of shares or trades of a class of shares for which the aggregate foreign ownership limit has been reached or exceeded, is reported to the governor of the Financial Supervisory Service by the securities company engaged to facilitate such transaction. A foreign investor may appoint a standing proxy from among the Korea Securities Depository, foreign exchange banks (including domestic branches of foreign banks), securities companies (including domestic branches of foreign securities companies), asset management companies, futures trading companies and internationally recognized custodians which will act as a standing proxy to exercise stockholders’ rights or perform any matters related to the foregoing activities if the foreign investor does not perform these activities himself. Generally, a foreign investor may not permit any person, other than its standing proxy, to exercise rights relating to his shares or perform any tasks related thereto on his behalf. However, a foreign investor may be exempted from complying with these standing proxy rules with the approval of the governor of the Financial Supervisory Service in such cases as determined to be inevitable by reason of conflict between laws of Korea and those of the home country of the foreign investor.
Certificates evidencing shares of Korean companies must be kept in custody with an eligible custodian in Korea. Only foreign exchange banks (including domestic branches of foreign banks), securities companies (including domestic branches of foreign securities companies), the Korea Securities Depository, asset management companies, futures trading companies and internationally recognized custodians are eligible to act as a custodian of shares for a nonresident or foreign investor. A foreign investor must ensure that his custodian deposits his shares with the Korea Securities Depository. However, a foreign investor may be exempted from complying with this deposit requirement with the approval of the governor of the Financial Supervisory Service in circumstances where
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compliance with that requirement is made impracticable, including cases where compliance would contravene the laws of the home country of such foreign investor.
Under the Investment Rules, with certain exceptions, foreign investors may acquire shares of a Korean company without being subject to any foreign investment ceiling. One exception to such rules is investment in designated public corporations, which is subject to a 40% ceiling on the acquisition of shares by foreigners in the aggregate. With certain exceptions, companies designated by the Korean government as a “public corporation” may set a ceiling on the acquisition of shares by a single person within 3% of the total number of shares. A foreigner who has acquired shares in excess of any ceiling may not exercise his voting rights with respect to the shares exceeding the limit, and the Financial Services Commission may take necessary corrective action against such foreigner pursuant to the Securities and Exchange Act. Currently, Korea Electric Power Corporation is the only designated public corporation which has set such a ceiling. Furthermore, an investment by a foreign investor in 10% or more of the outstanding shares with voting rights of a Korean company is defined as a foreign direct investment under the Foreign Investment Promotion Act of Korea. Generally, a foreign direct investment must be reported to the Minister of the Ministry of Knowledge Economy (renamed as such as of February 29, 2008 from the Ministry of Commerce, Industry and Energy) of Korea, which delegates its authority to receive such reports to foreign exchange banks or the Korea Trade Investment Promotion Agency under relevant regulations. The acquisition of shares of a Korean company by a foreign investor may also be subject to certain foreign or other shareholding restrictions in the event that any restrictions are prescribed in a specific law that regulates the business of the subject Korean company. For a description of such restrictions applicable to Korean banks, see “Item 4. Information on the Company — Supervision and Regulation — Principal Regulations Applicable to Banks — Restrictions on Bank Ownership.”
Under the Foreign Exchange Transaction Laws, a foreign investor who intends to acquire shares must designate a foreign exchange bank at which he must open a foreign currency account and a Won account exclusively for stock investments. No approval is required for remittance into Korea and deposit of foreign currency funds in the foreign currency account. Foreign currency funds may be transferred from the foreign currency account at the time required to make a deposit for, or settle the purchase price of, a stock purchase transaction to a Won account opened at a financial investment company with a securities company.dealing or brokerage license. Funds in the foreign currency account may be remitted abroad without any Korean governmental approval.
Dividends on shares of Korean companies are paid in Won. No Korean governmental approval is required for foreign investors to receive dividends on, or the Won proceeds of the sale of, any shares to be paid, received and retained in Korea. Dividends paid on, and the Won proceeds of the sale of, any shares held by a nonresident of Korea must be deposited either in a Won account with the investor’s financial investment company with a securities companydealing or brokerage license or in his Won account. Funds in the investor’s Won account may be transferred to his foreign currency account or withdrawn for local living expenses, provided that any withdrawal of local living expenses by any one person exceeding US$10,000 per day needs to be reported to the governor of the Financial Supervisory Service by the foreign exchange bank at which the Won account is maintained. Funds in the Won account may also be used for future investment in shares or for payment of the subscription price of new shares obtained through the exercise of preemptive rights.
SecuritiesFinancial investment companies and asset management companieswith a securities dealing, brokerage or collective investment license are allowed to open foreign currency accounts with foreign exchange banks exclusively for accommodating foreign investors’ stock investments in Korea. Through these accounts, financial companies with a securities companies and asset management companiesdealing, brokerage or collective investment license may enter into foreign exchange transactions on a limited basis, such as conversion of foreign currency funds and Won funds, either as a counterparty to or on behalf of foreign investors, without the investors having to open their own accounts with foreign exchange banks.
TAXATION
The following summary is based upon tax laws, regulations, rulings, decrees, income tax conventions (treaties), administrative practice and judicial decisions of Korea and the United States and the Republicas of Korea as in effect on the date of this Annual Report onForm 20-F,annual report, and is subject to any change in Korean or United States or Korean law that may come into effect after such date. Investors in shares of common stock or American depositary shares are advised to consult their own tax advisers as to the Korean, United States Korean or other tax consequences of the purchase, ownership and disposition of such securities, including the effect of any national, state or local tax laws.
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Korean Taxation
The following summary of Korean tax considerations applies to you so long as you are not:
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| | • | a resident of Korea; |
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| | • | a corporation organized underhaving its head office, principal place of business, or place of effective management in Korea (a Korean law;corporation); or |
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| | • | engaged in a trade or business in Korea through a permanent establishment or a fixed base to which the relevant income is attributable or with which the relevant income is effectively connected. |
Taxation of Dividends on Shares of Common Stock or American Depositary Shares
We will deduct Korean withholding tax from dividends (whether in cash or in shares) paid to you at a rate of 27.5%22% (including resident surtax). If you are a qualified resident in a country that has entered into a tax treaty with Korea, you may qualify for a reduced rate of Korean withholding tax. See “— Tax Treaties” below for a discussion of treaty benefits. If we distribute to you free shares representing a transfer of certain capital reserves or asset revaluation reserves into paid-in capital, thatsuch distribution may be subject to a Korean withholding tax.
In order to obtain a reduced rate of withholding tax pursuant to an applicable tax treaty, you must submit to us, prior to the dividend payment date, such evidence of tax residence as the Korean tax authorities may require in order to establish your entitlement to the benefits of the applicable tax treaty. A holder of American depositary shares (“ADSs”) may submit evidence of tax residence to us through the depositary.
Taxation of Capital Gains from Transfer of Shares of Common StockShares or American Depositary Shares
As a general rule, capital gains earned by non-residents upon transfer of shares of our common stockshares or American depositary sharesADSs are subject to a Korean withholding tax at the lower of (1) 11% (including resident surtax) of the gross proceeds realized or (2) 22% (including resident surtax) of the net realized gain, subject to the production of satisfactory evidence of acquisition costs and certain direct transaction costs of theassociated with common shares or American depositary shares, 27.5% (including resident surtax) of the net realized gain,ADSs, unless exempt from Korean income taxation under thean applicable Korean tax treaty withbetween Korea and the non-resident’s country of your tax residence. See “— Tax Treaties” below for a discussion on treaty benefits. Even if you do not qualify for anthe exemption under a tax treaty, you will not be subject to the foregoing withholding tax on capital gains if you qualifymeet certain requirements for the exemption under the relevant Korean domestic tax law exemptionslaws discussed in the following paragraphs.
With respect to shares of our common stock, youYou will not be subject to the Korean income taxation on capital gains realized upon thea transfer of suchour common shares through the Korea Exchange if you (1) have no permanent establishment in Korea and (2) diddo not own orand have notnever owned (together with any shares owned by any entity with which you have a certain special relationship and possibly including the shares represented by the American depositary shares)ADSs) 25% or more of our total issued and outstanding shares at any time during the calendar year in which the sale occurs and during the five consecutive calendar years prior to the calendar year in which the sale occurs.
Under the tax law amendments effective for capital gains recognized or to be recognized from disposition of American depositary shares on or after January 1, 2008, American depositary shares are viewed as shares of stock for capital gains tax purposes. Accordingly, capital gains from sale or disposition of American depositary shares are taxed (if taxable) as if such gains are from sale or disposition of shares of our common stock. It should be noted that (i) capital gains earned by you (regardless of whether you have a permanent establishment in Korea) from a transfer of American depositary shares outside Korea will be exempt from Korean income taxation by virtue of the Special Tax Treatment Control Law of Korea, or the STTCL, provided that the issuance of American depositary shares is deemed to be an overseas issuance under the STTCL, but (ii) in the case where an owner of the underlying shares of stock transfers American depositary shares after conversion of the underlying shares into American depositary shares, the exemption under the STTCL described in (i) will not apply. In the case where an owner of the underlying shares of stock transfers the American depositary shares after conversion of the underlying shares of stock into American depositary shares, such person is obligated to file corporate income tax returns and pay tax unless a purchaser or a licensed securities company, as applicable, withholds and pays the tax on capital gains derived from transfer of American depositary shares, as discussed below.
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If you are subject to tax on capital gains with respect to thea sale of American depositarycommon shares or of shares of common stock which you acquired as a result of a withdrawal,ADSs, the purchaser or, in the case of thea sale of shares of common stockshares on the Korea Exchange or through a licensed securitiesfinancial investment company with a brokerage license in Korea, the licensed securitiesfinancial investment company is required to withhold Korean tax from the sales priceproceeds in an amount equal to 11% (including resident surtax) of the gross realization proceeds and to make payment of these amountsremit the withheld tax to the Korean tax authority, unless you establish your entitlement to an exemption under an applicable tax treaty or domestic tax law or produce satisfactory evidence of your acquisition costcosts and certain direct transaction costs for theassociated with common shares of common stock or the American depositary shares.ADSs. To obtain the benefit of ana tax exemption from tax pursuant to a tax treaty, you must submit to the purchaser, the financial investment company or the securities company, or through the American depositary shareADR depositary, as the case may be, prior to or at the time of payment, such evidence of your tax residence as the Korean tax authorities may require in support of your claim for treaty benefits. See the discussion under “— Tax Treaties” below for an additional explanation of claiming treaty benefits.
Tax Treaties
Korea has entered into a number of income tax treaties with other countries, including the United States, which reduce or exempt Korean withholding tax on dividendthe income and capital gains on transferderived by residents of shares of common stock or American depositary shares.such treaty countries. For example, under the Korea-U.S. income tax treaty, reduced rates of Korean withholding tax on dividends of 16.5% or 11.0%, respectively (including resident surtax), depending on your shareholding ratio, and an exemption from Korean withholding tax on capital gains are generally available to residents of the United States that are beneficial owners of the relevant dividend income or capital gains. However, under Article 17 (Investment ofor Holding Companies) of the Korea-U.S. income tax treaty, such reduced rates and exemption do not apply if (1) you are a United States corporation, (2) by reason of any special measures the tax imposed on you by the United States with respect to such
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dividends or capital gains is substantially less than the tax generally imposed by the United States on corporate profits, and (3) 25% or more of your capital is held of record or is otherwise determined, after consultation between competent authorities of the United States and Korea, to be owned directly or indirectly by one or more persons who are not individual residents of the United States. Also, under Article 16 (Capital Gains) of the Korea-U.S. income tax treaty, the exemption on capital gains does not apply if you are an individual, and (a) you maintain a fixed base in Korea for a period or periods aggregating 183 days or more during the taxable year and your American depositarycommon shares, or shares of common stockADSs giving rise to capital gains are effectively connected with such fixed base or (b) you are present in Korea for a period or periods of 183 days or more during the taxable year.
You should inquire for yourself whether you are entitled to the benefit of an income tax treaty with Korea. It is the responsibility of the party claiming the benefits of an income tax treaty in respect of dividend payments or capital gains to submit to us, the purchaser, the financial investment company, or other withholding agent, as the securities company, as applicable,case may be, a certificate as to his tax residence. In the absence of sufficient proof, we, the purchaser, the financial investment company, or other withholding agent, as the securities company, as applicable,case may be, must withhold tax at the normal rates. Furthermore, effective from July 1, 2002, in order for you to obtain the benefit of a tax exemption on certain Korean source income (e.g., dividends andor capital gains) under an applicable tax treaty, Korean tax law requires you (or your agent) to submit thean application for tax exemption along with a certificate of your tax residency issued by athe competent authority of your country of tax residence, subject to certain exceptions. For example, a U.S. resident would be required provide Form 6166 as a certificate of tax residency with the application for tax exemption. Such application should be submitted to the relevantan appropriate district tax office by the ninth day of the month following the date of the first payment of such income.
Inheritance Tax and Gift Tax
If you die while holding an American depositary shareADS or donate an American depositary share,ADS, it is unclear whether, for Korean inheritance and gift tax purposes, you willwould be treated as the owner of the shares of common stock underlying the American depositary shares.ADSs. If the tax authority interprets depositary receipts as the underlying share certificates, you may be treated as the owner of the shares of common stock and your heir or the donee (or in certain circumstances, you as the donor) will be subject to Korean inheritance or gift tax, presently at the rate ofwhich ranges from 10% to 50% recently, assessable based on the value of the American depositary sharesADSs or shares of common stock and the identity of the individual against whom the tax is assessed.
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If you die while holding a share of common stockshare or donate a share ofsubscription right or a common stock,share, your heir or donee (or in certain circumstances, you as the donor) will be subject to Korean inheritance or gift tax at the same rate as indicated above.
At present, Korea has not entered into any tax treaty relating to inheritance or gift taxes.
Securities Transaction Tax
If you transfer common shares of common stock onthrough the Korea Exchange, you will be subject to a securities transaction tax at the rate of 0.15% and an agriculture and fishery special surtax at the rate of 0.15% of the salesales price of the shares of common stock.shares. If your transfer of thecommon shares of common stock is not made onthrough the Korea Exchange, subject to certain exceptions, you will be subject to a securities transaction tax at the rate of 0.5% andbut will not be subject to an agriculture and fishery special surtax.
With respect to transfers of American depositary shares,ADSs, a tax ruling issued in 2004 by the Korean tax authority appears to hold that depositary receipts, which the American depositary sharesADSs fall under, constitute share certificates subject to the securities transaction tax; provided that, under the Securities Transaction Tax Law, the transfer of depositary receipts listed on the New York Stock Exchange, the Nasdaq National Market or other qualified foreign exchanges is exempt from the securities transaction tax. In May 2007, the Seoul Administrative Court held that depositary receipts do not constitute share certificates subject to the securities transaction tax. However, the decision madeThe case was upheld by the Seoul AdministrativeHigh Court, mayand the Supreme Court in 2008 dismissed the tax authorities’ appeal against the High Court decision, making the High Court decision final for the case. However, having dismissed the tax authorities’ appeal without ruling on the substantive law, it is not be final andclear if the Supreme Court’s decision for this case will serve as the Supreme Court’s precedent on the issue. Even if depositary receipts, which the ADSs fall under, constitute share certificates subject to the securities transaction tax under the Securities Transaction Tax Law, a higher court may take a different positiontransfer of depositary receipts listed on the New York Stock Exchange, NASDAQ National Market or other qualified foreign exchanges is exempt from the Seoul Administrative Court upon further appeal. Depending on the outcome of such appeal, tax consequences may change upon transfers of American depositary shares.securities transaction tax.
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In principle, the securities transaction tax, if applicable, must be paid by thea transferor of the shares or certain rights including rights to subscribe to eachcommon shares. When thea transfer is effected through a securities settlement company, such settlement company is generally required to withhold and payremit the tax to the tax authorities. When such transfer is made through a securitiesfinancial investment company only, such securitiesfinancial investment company is required to withhold and payremit the tax. Where thea transfer is effected by a non-resident without awho has no permanent establishment in Korea by a method other than through a securities settlement company or a securitiesfinancial investment company, the transferee is required to withhold the securities transaction tax.
Non-reporting or underreporting of securities transaction tax will generally result in the imposition of penalties equal to 20% to 40% of the non-reported or 10% to 40% of underreported tax amount and a failure to timely pay securities transaction tax due will result in penalties of 10.95% per annum of the due but unpaid tax. The penalty is imposed on the party responsible for paying the securities transaction tax or, if the securities transaction tax is to be withheld, on the party that has the withholding obligation.
Certain United States TaxationFederal Income Tax Consequences
The following summary describes the material United Statescertain U.S. federal income tax considerations for beneficial owners of our common shares or American depositary sharesADSs that hold the common shares or American depositary sharesADSs as capital assets and are “U.S. holders.” You are a “U.S. holder” if you are for U.S. federal income tax purposes:
(i) an individuala citizen or individual resident of the United States;
(ii) a corporation, or other entity treated as a corporation, for U.S. federal income tax purposes, created or organized in or under the laws of the United States, any state thereof or District of Columbia;
(iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source;
(iv) a trust that is subject to the primary supervision of a court within the United States and has one or more U.S. persons with authority to control all substantial decisions of the trust; or
(v) a trust that has a valid election in effect under applicable U.S. Treasury Department regulations to be treated as a U.S. person.
In addition, this summary only applies to you if you are a U.S. holder that is a resident of the United States for purposes of the current income tax treaty between the United States and Korea (the “Treaty”), your common shares or American depositary sharesADSs are not, for purposes of the treaty,Treaty, effectively connected with a permanent establishment in Korea and you otherwise qualify for the full benefits of the treaty.Treaty.
This summary is based upon the provisions of the Internal Revenue Code of 1986, as amended (the “Code”) and regulations (including proposed regulations), rulings and judicial decisions thereunder as of the date hereof, as well as the Treaty, all of which are subject to change, perhaps retroactively. It is for general purposes only and you should not consider it to be tax advice. In addition, it is based in
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part on representations by the ADS depositary bank and assumes that each obligation under the deposit agreement will be performed in accordance with its terms. This summary does not represent a detailed description of all the U.S. federal income tax consequences to you in light of your particular circumstances.circumstances, and does not address the effects of any state, local ornon-U.S. tax laws. In addition, it does not represent a detailed description of the U.S. federal income tax consequences applicable to you if you are subject to special treatment under the U.S. federal income tax laws, including if you are:
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| | • | a bank; |
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| | • | a dealer in securities or currencies; |
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| | • | a financial institution or an insurance company;company or one of certain financial institutions; |
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| | • | a regulated investment company; |
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| | • | a real estate investment trust; |
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| | • | a tax-exempt entity; |
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| | • | a trader in securities that has elected to use amark-to-market method of accounting for your securities holdings; |
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| | • | a person holding common shares or American depositary sharesADSs as part of a hedging, conversion, constructive sale or integrated transaction or a straddle; |
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| | • | a person liable for the alternative minimum tax; |
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| | • | a partnership or other pass-through entity for U.S. federal income tax purposes; |
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| | • | a person who owns or is deemed to own 10% or more of our voting stock; or |
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| | • | a person whose functional currency is not the U.S. dollar. |
If a partnership holds our common shares or American depositary shares,ADSs, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our common shares or American depositary shares,ADSs, you are urged to consult youyour tax advisor.
We cannot assure you that a later change in law will not alter significantly the tax considerations that we describe in this summary.
You should consult your own tax advisor concerning the particular U.S. federal tax consequences to you of the ownership and disposition of common shares or American depositary sharesADSs as well as any consequences arising under the laws of any other taxing jurisdiction.
American Depositary Shares
In general,If you hold ADSs, for U.S. federal income tax purposes, a holder of American depositary sharesyou generally will be treated as the owner of the underlying common shares that are represented by such American depositary shares. DepositsADSs. Accordingly, deposits or withdrawalwithdrawals of common shares for American depositary shares generallyADSs will not be subject to U.S. federal income tax.
The U.S. Treasury Department has expressed concerns that intermediaries in the chain of ownership between the holderholders of an American depositary shareADSs and the issuer of the securitysecurities underlying the American depositary shareADSs may be taking actions that are inconsistent with the claiming of foreign tax credits for U.S. holders of American depositary shares.ADSs. Such actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate U.S. holders. Accordingly, the analysis of the creditability of Korean taxes and the availability of the reduced rate of tax rate for dividends received by certain non-corporate U.S. holders, each as described below, could be affected by actions taken by intermediaries in the chain of ownership between the holder of an American depositary shareADS and our company.
Distributions on Common Shares or American Depositary Shares
Subject to the discussion below under “Passive Foreign Investment Company Rules,” the gross amount of distributions on our common shares or American depositary sharesADSs (including amounts withheld to reflect Korean withholding
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tax) will be taxable as dividends to the extent paid out of our current andor accumulated earnings and profits (as determined under U.S. federal income tax principles). Such income (including withheld taxes) will be includable in your gross income as ordinary income on the day you activelyactually or constructively receive it, in the case of our common shares, or the day activelyactually or constructively received by the ADS depositary, bank, in the case of American depositary shares.ADSs. Such dividends will not be eligible for the dividends-received deduction allowed to corporations under the Code.
With respect to non-corporate U.S. holders, certain dividends received in taxable years beginning before January 1, 2011 from a qualified foreign corporation may be subject to reduced rates of taxation. A qualified foreign corporation includes a foreign corporation that is eligible for the benefits of a comprehensive income tax treaty with the United States which the U.S. Treasury Department determines to be satisfactory for these purposes and which includes an exchange of information provision. The U.S. Treasury Department has determined that the current income tax treaty between the United States and KoreaTreaty meets these requirements, and we believe we are eligible for the benefits of that treaty.the Treaty. A foreign corporation is also treated as a qualified foreign corporation with respect to dividends paid by that corporation on shares (or American depositary sharesADSs backed by such shares) that are readily tradable on an established securities market in the United States. Our common shares will generally not be considered readily tradable for these purposes. U.S. Treasury Department guidance indicates that securities such as our American depositary shares,ADSs, which are listed on the New York Stock Exchange, are treated as readily tradable on an established securities market in the United States.States for these purposes. There can be no assurance that our American depositary sharesADSs will be considered readily tradable on an established securities market in later years. Non-corporateNon-
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corporate U.S. holders that do not meet a minimum holding period requirement during which they are not protected from a risk of loss or that elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation regardless of our status as a qualified foreign corporation. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. Furthermore, non-corporate U.S. holders will not be eligible for the rate reduction if we are a passive foreign investment company (as discussed below under “Passive Foreign Investment Company Rules”) in the taxable year in which such dividends are paid or were a passive foreign investment company in the preceding taxable year. If you are a non-corporate U.S. holder, you should consult your own tax advisor regarding the application of these rules given your particular circumstances.
The amount of any dividend paid in Korean Won will equal the U.S. dollar value of the Korean Won received calculated by reference to the exchange rate in effect on the date you receive the dividend, in the case of our common shares, or the date received by the ADS depositary, bank, in the case of American depositary shares,ADSs, regardless of whether the Korean Won are converted into U.S. dollars. If the Korean Won received are not converted into U.S. dollars on the day of receipt, you will have a basis in the Korean Won equal to their U.S. dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of the Korean Won will be treated as U.S.United States source ordinary income or loss.
Subject to certain significant conditions and limitations, Korean taxes withheld from dividends (at a rate not exceeding the rate provided in the treaty between the United States and Korea) mayTreaty) will be treated as foreign income taxes eligible for credit against your U.S. federal income tax liability. See “— Korean Taxation — Taxation of Dividends on Shares of Common Stock or American Depositary Shares” for a discussion of the treatyTreaty rate. Korean taxes withheld in excess of the rate provided in the treatyTreaty will not be eligible for credit against your U.S. federal income tax until you exhaust all effective and practical remedies to recover such excess withholding, including the seeking of competent authority assistance from the U.S. Internal Revenue Service. For purposes of the foreign tax credit, dividends paid on our common shares or American depositary sharesADSs will be treated as income from sources withoutoutside the United States and will generally constitute passive category income. If you do not elect to claim a credit for any foreign taxes paid during a taxable year, you may instead elect, subject to certain limitations, to claim a deduction in respect of such foreign taxes, provided that you apply this election to all foreign taxes paid or accrued in the taxable year.
Further, in certain circumstances, if you have held our common shares or American depositary sharesADSs for less than a specified minimum period during which you are not protected from risk of loss, or are obligated to make payments related to the dividends, you will not be allowed a foreign tax credit for foreign taxes imposed on dividends paid on our common shares or American depositary shares.ADSs. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances.
To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxable year, as determined under U.S. federal income tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction in theof your adjusted basis ofin our common shares or the American depositary sharesADSs (thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized by you on a subsequent
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disposition of our common shares or American depositary shares)ADSs), and the balance in excess of adjusted basis will be taxed as capital gain recognized on a sale or exchange. Consequently, such distributions in excess of our current and accumulated earnings and profits would generally not give rise to foreign source income and you would generally not be able to use the foreign tax credit arising from any Korean withholding tax imposed on such distributions unless such credit can be applied (subject to applicable limitations) against U.S. federal income tax due on other foreign source income in the appropriate category for foreign tax credit purposes. However, we do not expect to keepdetermine earnings and profits in accordance with U.S. federal income tax principles. Therefore, you should expect that a distribution will be reported and generally be treated as a dividend (as discussed above).
Distributions of our common shares (including ADSs) or rights to subscribe for our common shares that are received as part of a pro rata distribution to all of our shareholders (including holders of ADSs) generally will not be subject to U.S. federal income tax.tax to recipient common shareholders (including holders of ADSs). Consequently, such distributions will not give rise to foreign source income and you will not be able to use the foreign tax credit
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arising from any Korean withholding tax unless such credit can be applied (subject to applicable limitations) against U.S. tax due on other income derived from foreign sources. The basis of the new common stock or rights so received will be determined by allocating your basis in our old shares between our old shares and our new shares or rights received, based on their relative fair market value on the date of distribution. However, the basis of the rights will be zero if (i) the fair market of the rights is less than 15 percent of the fair market value of our old shares at the time of distribution, unless the taxpayer elects to determine the basis of our old shares and of the rights by allocating between the old shares and the rights the adjusted basis of our old shares or (ii) the rights are not exercised and thus expire.
Disposition of Common Shares or American depositary sharesDepositary Shares
Subject to the discussion under “— Passive Foreign Investment Company Rules,” upon the sale, exchange or other disposition of our common shares or American depositary shares,ADSs, you generally will recognize capital gain or loss equal to the difference between the amount realized upon the sale, exchange or other disposition and your adjusted tax basis in our common shares or American depositary shares,ADSs, as the case may be. The capital gain or loss will be long-term capital gain or loss if at the time of sale, exchange or other disposition, our common shares or American depositary sharesADSs have been held for more than one year. Capital gains of individuals derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. Any gain or loss you recognize on the sale, exchange or other disposition of our common shares or American depositary sharesADSs will generally be treated as U.S.United States source gain or loss. Consequently, you may not be able to use the foreign tax credit arising from any Korean tax imposed on the disposition of our common shares or American depositary sharesADSs unless such credit can be applied (subject to applicable limitations) against tax due on other income treated as derived from foreign sources.
You should note that any Korean securities transaction tax generally will not be treated as a creditable foreign tax for U.S. federal income tax purposes, although you may be entitled to deduct such taxes, subject to applicable limitations under the Code.
Passive Foreign Investment Company Rules
Based onupon the past and projected composition of our income and valuation of our assets, including goodwill, we do not believe that we will bewere a passive foreign investment company (a “PFIC”) for the current taxable year2009, and we do not expect to be a PFIC in 2010 or to become one in the foreseeable future, although there can be no assurance in this regard. However, passive foreign investment companyPFIC status is a factual determination that is made annually. Accordingly, it is possible that we may become a passive foreign investment companyPFIC in the current or any future taxable year due to changes in valuation or composition of our income or assets.
In general, we will be considered a passive foreign investment companyPFIC for any taxable year if either:
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| | • | at least 75% of our gross income is passive income; or |
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| | • | at least 50% of the value of our assets is attributable to assets that produce or are held for the production of passive income. |
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The 50% of value test is based on the average of the value of our assets for each quarter during the taxable year. For this purpose, passive income generally includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or business and not derived from a related person). SpecialCertain proposed U.S. Treasury regulations and other administrative pronouncements from the Internal Revenue Service provide special rules for determining the character of income and assets derived in the active conduct of a banking business for purposes of the PFIC rules. Specifically, these rules treat interestcertain income earned by anon-U.S. corporation engaged in the active conduct of a banking business as non-passive income. Although we believe we have adopted a reasonable interpretation of the proposed U.S. Treasury regulations and administrative pronouncements, there can be no assurance that the Internal Revenue Service will follow the same interpretation. You should consult your own tax advisor regarding the application of these rules.
If we own at least 25% by value of another company’s stock, we will be treated, for purposes of the passive foreign investmentPFIC rules, as owning our proportionate share of the assets and receiving our proportionate share of the income of that company.
If we are a passive foreign investment companyPFIC for any taxable year during which you hold our common shares or American depositary shares,ADSs, you will be subject to special tax rules with respect to any “excess distribution” that you receive and any gain you realize from the sale or other disposition (including a pledge) of our common shares or American depositary shares.ADSs. These special tax rules generally will apply even if we cease to be a passive foreign investment companyPFIC in future years. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or
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your holding period for our common shares or American depositary sharesADSs will be treated as excess distributions. Under these special tax rules:
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| | • | the excess distribution or gain will be allocated ratably over your holding period for our common shares or American depositary shares;ADSs; |
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| | • | the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we are a passive foreign investment company,PFIC, will be treated as ordinary income; and |
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| | • | the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year, and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year. |
In certain circumstances, you could make amark-to-market election, under which in lieu of being subject to the excess distributionspecial rules discussed above, you will include gain on our common shares or American depositary sharesADSs on amark-to-market basis as ordinary income, provided that our common shares or American depositary sharesADSs are regularly traded on a qualified exchange or other market. Our common shares are listed on the Korea Exchange, which must meet certain trading, listing, financial disclosure and other requirements to be treated as a qualified exchange under applicable U.S. Treasury regulations for purposes of themark-to-market election, and no assurance can be given that the common shares are or will continue to be “regularly traded” for purposes of themark-to-market election. Our American depositary sharesADSs are currently listed on the New York Stock Exchange, which constitutes a qualified exchange, although there can be no assurance that the American depositary sharesADSs are or will be “regularly traded.” If you make a validmark-to-market election, you will include in each year as ordinary income the excess of the fair market value of your common shares or American depositary sharesADSs at the end of the year over your adjusted tax basis in the common shares or American depositary shares.ADSs. You will be entitled to deduct as an ordinary loss each year the excess of your adjusted tax basis in the common shares or American depositary sharesADSs over their fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result of themark-to-market election. If you make an effectivemark-to-market election, any gain you recognize upon the sale or other disposition of your common shares or American depositary sharesADSs will be treated as ordinary income, and any loss will be treated as ordinary loss, but only to the extent of the net amount previously included in income as a result of themark-to-market election.
A U.S. holder’s adjusted tax basis in common shares or American depositary sharesADSs will be increased by the amount of any income inclusion and decreased by the amount of any deductions under themark-to-market rules. If a U.S. holder makes amark-to-market election, it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the common shares or American depositary sharesADSs are no longer regularly traded on a qualified exchange or the Internal Revenue Service consents to the revocation of the election. You should consult your tax advisor about the availability of themark-to-market election, and whether making the election would be advisable with respect to your particular circumstances.
In addition, a holder of common shares or ADSs in a passive foreign investment companyPFIC can sometimes avoid the rules described above by electing to treat the company as a “qualified electing fund” under Section 1295 of the Code. This
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option is not available to you because we do not intend to comply with the requirements necessary to permit holders to make this election.
If you hold our common shares or American depositary sharesADSs in any year in which we are classified as a passive foreign investment company,PFIC, you would be required to file Internal Revenue Service Form 8621.
Non-corporate U.S. holders will not be eligible for reduced rates of taxation on any dividends received from us in taxable years beginning prior to January 1, 2011, if we are a passive foreign investment companyPFIC in the taxable year in which such dividends are paid or were a PFIC in the preceding taxable year. You should consult your tax advisor concerning the determination of our passive foreign investment companyPFIC status and the U.S. federal income tax consequences of holding our common shares or American depositary sharesADSs if we are considered a passive foreign investment companyPFIC in any taxable year.
Estate and Gift Taxation
Korea may impose an inheritance tax on your heir who receives our shares (and possibly American depositary shares), even if the decedent was not a citizen or resident of Korea. See “— Korean Taxation — Inheritance Tax and Gift Tax.” The amount of any inheritance tax paid to Korea may be eligible for credit against the amount of U.S. federal estate tax imposed on the estate (or heirs) of a U.S. holder. Korea may also impose a gift tax. The Korean gift tax generally will not be treated as a creditable foreign tax for U.S. tax purposes. You should consult your tax advisor regarding the consequences of the imposition of the Korean inheritance or gift tax.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to certain distributions ondividends in respect of our common shares or American depositary sharesADSs and to the proceeds offrom the sale, exchange or redemption of our common shares or American depositary sharesADSs that are paid to you within the United States (and in certain cases, outside the United States), unless you are an exempt recipient (such as a corporation).recipient. A backup
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withholding tax may apply to such payments if you fail to provide a correct taxpayer identification number or certification of foreign or other exempt status or fail to report in full dividend and interest income.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability provided you furnish the required information is timely furnished to the Internal Revenue Service.
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| ITEM 10.F. | Dividends and Paying Agents |
DOCUMENTS ON DISPLAYNot applicable.
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| ITEM 10.G. | Statements by Experts |
Not applicable.
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| ITEM 10.H. | Documents on Display |
We are subject to the information requirements of the U.S. Securities Exchange Act of 1934, as amended, and, in accordance therewith, are required to file reports, including annual reports onForm 20-F, and other information with the U.S. Securities and Exchange Commission. You may inspect and copy these materials, including this annual report onForm 20-Fand the exhibits thereto, at SEC’s Public Reference Room 100 Fifth Street, N.E., Washington, D.C. 20549. Please call the Commission at1-800-SEC-0330 for further information on the public reference rooms. As a foreign private issuer, we are also required to make filings with the Commission by electronic means. Any filings we make electronically will be available to the public over the Internet at the Commission’s web site athttp://www.sec.gov.
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| ITEM 10.I. | Subsidiary Information |
Not applicable.
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| ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
See “Item 4. Information on the Company — Description of Assets and Liabilities4.B. Business Overview — Risk Management” for quantitative and qualitative disclosures about market risk.
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| ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
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| ITEM 12.A. | Debt Securities |
Not applicable.
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| ITEM 12.B. | Warrants and Rights |
Not applicable.
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| ITEM 12.C. | Other Securities |
Not applicable.
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| ITEM 12.D. | Depositary Fees and Charges |
Depositary Fees and Charges
Under the terms of the Deposit Agreement in respect of our American depositary shares (“ADSs”), the holder of ADSs may be required to pay the following fees and charges to Citibank, N.A., acting as depositary for our ADSs:
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| Item | | | Services | | Fees | | Paid by |
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| 1 | | | Issuance of ADSs upon deposit of common shares (excluding issuances contemplated by items 3(b) and 5 below | | Up to US$5.00 per 100 ADSs (or fraction thereof) issued | | Person depositing common shares or person receiving ADSs |
| 2 | | | Delivery of deposited securities against surrender of ADSs | | Up to US$5.00 per 100 ADSs (or fraction thereof) surrendered | | Person surrendering ADSs for purpose of withdrawal of deposited securities or person to whom deposited securities are delivered |
| 3 | | | Distribution of (a) cash dividends or (b) ADSs pursuant to stock dividends | | No fee, to the extent prohibited by the exchange on which the ADSs are listed. If the charging of such fee is not prohibited, the fees specified in item 4 below shall be payable | | Person to whom distribution is made |
| 4 | | | Distribution of (a) cash proceeds (i.e., upon sale of rights and other entitlements) or (b) free shares in the form of ADSs (not constituting a stock dividend) | | Up to US$2.00 per 100 ADSs (or fraction thereof) held | | Person to whom distribution is made |
| 5 | | | Distribution of securities other than ADSs or rights to purchase additional ADSs (i.e., spinoff shares) | | Up to US$5.00 per 100 ADSs (or fraction thereof) distributed | | Person to whom distribution is made |
| 6 | | | Depositary Services | | Unless prohibited by the exchange on which the ADSs are listed, up to US$2.00 per 100 ADSs (or fraction thereof) held as of the last day of each calendar year, except to the extent of any cash dividend fee(s) charged under paragraph (3)(a) above during the applicable calendar year | | Person holding ADSs on last day of calendar year |
| 7 | | | Distribution of ADSs pursuant to exercise of rights to purchase additional ADSs | | Up to US$2.00 per 100 ADSs (or fraction thereof) held | | Person who exercises such rights |
Holders and beneficial owners of ADSs, persons depositing common shares for deposit and persons surrendering ADSs for cancellation and for the purpose of withdrawing deposited securities shall be responsible for the following charges:
(i) taxes (including applicable interest and penalties) and other governmental charges;
(ii) such registration fees as may from time to time be in effect for the registration of common shares or other deposited securities on the share register and applicable to transfers of common shares or other deposited securities to or from the name of the custodian, the depositary or any nominees upon the making of deposits and withdrawals, respectively;
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(iii) such cable, telex and facsimile transmission and delivery expenses as are expressly provided in the Deposit Agreement to be at the expense of the person depositing or withdrawing common shares or holders and beneficial owners of ADSs;
(iv) the expenses and charges incurred by the depositary in the conversion of foreign currency;
(v) such fees and expenses as are incurred by the depositary in connection with compliance with exchange control regulations and other regulatory requirements applicable to common shares, deposited securities, ADSs and ADRs; and
(vi) the fees and expenses incurred by the depositary, the custodian or any nominee in connection with the servicing or delivery of deposited securities.
Depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary by the brokers (on behalf of their clients) receiving the newly-issued ADSs from the depositary and by the brokers (on behalf of their clients) delivering the ADSs to the depositary for cancellation. The brokers in turn charge these transaction fees to their clients.
Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary to the holders of record of ADSs as of the applicable ADS record date. The depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash (i.e., stock dividends, rights offerings), the depositary charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or un-certificated in direct registration), the depositary sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts via the central clearing and settlement system, The Depository Trust Company (DTC), the depositary generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary.
In the event of refusal to pay the depositary fees, the depositary may, under the terms of the Deposit Agreement, refuse the requested service until payment is received or may set- off the amount of the depositary fees from any distribution to be made to the ADS holder.
The fees and charges the ADS holders may be required to pay may vary over time and may be changed by us and by the depositary. The ADS holders will receive prior notice of such changes.
Depositary Payments for the Fiscal Year 2009
In 2009, we received the following payments from Citibank, N.A., acting as depositary for our ADSs:
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| Reimbursement of settlement infrastructure fees (including DTC fees) | | US$ | 27,531.50 | |
| Reimbursement of proxy process expenses (printing, postage and distribution) | | US$ | 32,656.46 | |
| Reimbursement of legal fees | | US$ | 266,895.36 | |
| Contributions towards our investor relations efforts (i.e. non-deal roadshows, investor conferences and IR agency fees) | | US$ | 30,305.55 | |
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| Total: | | US$ | 357,388.87 | |
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| ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
Not applicable.
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| ITEM 14. | MATERIAL MODIFICATION TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
Not applicable.
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| ITEM 15. | CONTROLS AND PROCEDURES |
Disclosure Control
An evaluation was carried out underUnder the supervision and with the participation of our management, including our Chief Executive Officerchief executive officer and Chief Financial Officer, ofchief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined inRule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of December 31, 2007.
A control2009. There are inherent limitations to the effectiveness of any system no matter how well conceivedof disclosure controls and operated,procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable not absolute, assurance that the objectives of theachieving their control system are met. As such, disclosure controls and procedures or systems for internal control over financial reporting may not prevent all errors and all fraud. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
objectives. Based upon theour evaluation, referred to above, our Executive Officerchief executive officer and Chief Financial Officerchief financial officer concluded that the design and operation of our disclosure controls and procedures as of December 31, 20072009 were effective to provide reasonable assurance that information required to be disclosed by us in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as and when required.appropriate to allow timely decision regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined inRuleRules 13a-15(f) and15d-15(f) under the Securities Exchange Act, of 1934, as amended, for our company. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of our internal control over financial reporting as of December 31, 2009 based on the framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with generally accepted accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company’s assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that a company’s receipts and expenditures are being made only in accordance with authorizations of a company’s management and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of a company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to consolidated financial statement preparation and presentation and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules as promulgated by the Securities and Exchange Commission, management assessed the effectiveness of the our internal control over
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financial reporting as of December 31, 2007. The assessment was made using criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment,evaluation, our management concluded that the our internal control over financial reporting was effective as of December 31, 2007 based on the criteria established in Internal Control-Integrated Framework issued by the Committee2009. The effectiveness of Sponsoring Organizations of the Treadway Commission.
Our management’s assessment, as well as the effectiveness ofour internal control over financial reporting has been audited by KPMG Samjong, an independent registered public accounting firm, who has also audited our consolidated financial statements for the year ended December 31, 2007.2009. KPMG Samjong has issued an attestation report on management’s assessment of the effectiveness of our internal control over financial reporting under Auditing Standard No. 25 of the Public Company Accounting Oversight Board.Board, which is included herein.
Attestation Report of the Independent Registered Public Accounting Firm
KPMG Samjong’s attestation report on management’s assessment of, and the effectiveness of internal control over financial reporting can be found onpage F-3 of this annual report.
Changes in Internal Controls
There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 20072009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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| ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT |
Our board of directors has determined that Ms. Sung Bin Chun, our outside director, and Mr. Yun Ke Sup, our outside director and the chairman of our Audit Committee, is anare “audit committee financial expert,experts,” as such term is defined by the regulations of the Securities and Exchange Commission issued pursuant to Section 407 of the Sarbanes-Oxley Act of 2002. Ms. Chun is anand Mr. Yun are independent director as such term is defined underin Section 301303A.02 of the Sarbanes-OxleyNYSE Listed Company Manual,Rule 10A-3 under the Exchange Act of 2002.and the Korea Stock Exchange listing standards.
Section 406 of the Sarbanes-Oxley Act of 2002 requires us either to adoptWe have adopted a code of ethics that applies tofor our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions or, if no such codeas required under Section 406 of ethics has been adopted, to disclose the reason for not adopting such a code. In May 2005, our boardSarbanes-Oxley Act of directors approved a code of ethics for such officers and we have implemented the code as of July 1, 2005,2002, together with an insider reporting system in compliance with Section 301 of the Sarbanes-Oxley Act. The code of ethics is available on our websitewww.shinhangroup.com. We have not granted any waiver, including an implicit waiver, from a provision of the code of ethics to any of the above-mentioned officers during our most recently completed fiscal year.
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| ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The following table sets forth the aggregate fees billed for professional services rendered by KPMG Samjong Accounting Corp. for the years ended December 31, 2005, 20062007, 2008 and 2007,2009, our principal accountants for the respective period, depending on the various types of services and a brief description of the nature of such services.
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| | | | Aggregate Fees
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| | | | Billed During
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| | | | | | | | | | | | | | | | | the Year Ended
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| | | Aggregate Fees Billed During the Year Ended December 31, | | | | December 31, | | |
Type of Services | | 2005 | | 2006 | | 2007 | | Nature of Services | | 2008 | | 2009 | | Nature of Services |
| | | (In millions of Won) | | | | (In millions of Won) | | |
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| Audit fees | | W | 4,529 | | | W | 6,071 | | | W | 7,072 | | | Audit service for Shinhan Financial Group and its subsidiaries. | | W | 6,381 | | | W | 7,214 | | | Audit service for Shinhan Financial Group and its subsidiaries. |
| Tax fees | | | 207 | | | | 191 | | | | 285 | | | Tax return and consulting advisory service. | | | 259 | | | | 287 | | | Tax return and consulting advisory service. |
| All other fees | | | — | | | | 8 | | | | 369 | | | All other services which do not meet the three categories above. | | | 443 | | | | 15 | | | All other services which do not meet the three categories above. |
| | | | | | | | | | | | | |
| Total | | W | 4,736 | | | W | 6,270 | | | W | 7,726 | | | | | W | 7,083 | | | W | 7,516 | | | |
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United States law and regulations in effect since May 6, 2003, and our own policies,Our audit committee generally requirepre-approves all engagements of our principal accountants be pre-approved by our Audit Committee or pursuant to policies and procedures adopted by it. Our Audit Committeeaudit committee has adopted the following policies and procedures for consideration and approval of requests to engage our principal accountants to perform audit and non-audit services. Engagement requests must in the first instance be submitted as follows: (i) in the case of audit and non-audit services for our holding company, to our Planning & Financial Management subject to reporting to our Chief Financial Officer; and (ii) in the case of audit and non-audit services for our subsidiaries, to our Audit and Compliance Team subject to reporting to the Senior Executive Vice President of Audit & Compliance Team. If the request relates to services that would impair the independence of our principal accountants, the request must be rejected. If the engagement request relates to audit and permitted non-audit services, it must be forwarded to the Audit Committee for consideration. To facilitate the consideration of engagement requests between its meetings, the Audit Committee has delegated approval authority of the following: (i) permitted non-audit services to our holding company, (ii) audit services to our subsidiaries and (iii) permitted non-audit services to our subsidiaries, to one of its members who is “independent” as defined by the Securities and Exchange Commission and the New York Stock Exchange. Such member in our case is Ms. Sung Bin Chun,Mr. Ke Sup Yun, the chairman of our Audit Committee, and shehe is required to report any approvals made by them to the Audit Committee at its next meeting. Our Audit Committee meets regularly once every quarter.
Additionally, United States law and regulations in effect since May 6, 2003 permitAny other audit or permitted non-audit service must be pre-approved by the pre-approval requirement to be waived with respect to engagements foraudit committee on acase-by-case basis. Our audit committee did not pre-approve any non-audit services aggregating no more than five percentunder the de minimis exception of Rule 2.01(c)(7)(i)(C) ofRegulation S-X as promulgated by the total amount of revenues we paid to our principal accountants, if such engagements were not recognized by us at the time of engagementSecurities and were promptly brought to the attention of our Audit Committee or a designated member thereof and approved prior to the completion of the audit. In 2007, the percentage of the total amount of revenue we paid to our principal accountants represented by non-audit services in each category that were subject to such a waiver was less than 5%.Exchange Commission.
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| ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
Not applicable.
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| ITEM 16E. | PURCHASE OF EQUITY SECURITIES BY SHINHAN CARDTHE ISSUER AND AFFILIATED PURCHASERS |
Neither we nor any “affiliated purchaser,” as defined inRule 10b-18(a)(3) of the Exchange Act, purchased any of our equity securities during the period covered by this annual report.
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| ITEM 16F. | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT |
Not applicable.
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| ITEM 16G. | CORPORATE GOVERNANCE |
We are committed to high standards of corporate governance. We are in compliance with the corporate governance provisions of the Korean Commercial Code, the Financial Holding Companies Act of Korea, the Financial Investment Services and Capital Markets Act and the Listing Rules of the Korea Exchange. We, like all other companies in Korea, must comply with the corporate governance provisions of the Korean Commercial Code. In addition, as a financial holding company, we are also subject to the Financial Holding Companies Act. Also, our subsidiaries that are financial institutions must comply with the respective corporate governance provisions under the relevant laws under which they were established.
We are a “foreign private issuer” (as such term is defined inRule 3b-4 under the Exchange Act), and our ADSs are listed on the New York Stock Exchange, or NYSE. Under Section 303A of the NYSE Listed Company Manual, NYSE-listed companies that are foreign private issuers are permitted to follow home country practice in lieu of the corporate governance provisions specified by the NYSE with limited exceptions. Under the NYSE Listed Company Manual, we as foreign private issuers are required to disclose significant differences between NYSE“s corporate governance standards and those we follow under Korean law. The following summarizes some significant ways in which our corporate governance practices differ from those followed by U.S. companies listed on the NYSE under the listing rules of the NYSE:
Majority of Independent Directors on the Board
Under the NYSE listing rules, U.S. companies listed on the NYSE must have a board the majority of which is comprised of independent director satisfying the requirements of “independence” as set forth inRule 10A-3 under the Exchange Act. While as a foreign private issuer, we are exempt from this requirement, but our board of directors is in compliance with this requirement as it currently consists of 12 directors, of which eight directors satisfy the requirements of “independence” as set forth inRule 10A-3 under the Exchange Act. Eight of our directors are also “outside directors” as defined in the Financial Holding Companies Act of Korea. An “outside director” for purposes of the Financial Holding Companies Act and the Korean Commercial Code means a director who does not engage in the regular affairs of the financial holding company, and who is elected at a shareholders meeting, after having been nominated by the outside director nominating committee, and none of the largest shareholder, those persons “specially related” to the largest shareholder of such company, persons who during the past two years have served as an officer or employee of such company, the spouses and immediate family members of an officer of such company, and certain other persons specified by law may qualify as an outside director of such company. Under the Korea Exchange listing rules and the Korean Commercial Code, at least one-fourth of a listed company’s directors must be outside directors provided that there must be at least three outside directors. In the case of “large listed companies” as defined under the Korean Commercial Code, like us, a majority of the directors must be outside directors.
Executive Session
Under the NYSE listing rules, non-management directors of U.S. companies listed on the NYSE are required to meet on a regular basis without management present and independent directors must meet separately at least once per year. While no such requirement currently exists under applicable Korean law or listing standards, pursuant to
231
the bylaws governing our board of directors, outside directors are required to hold two exclusive sessions each year in order to promote the exchange of diverse opinions by outside directors.
Audit Committee
Under the NYSE listing rules, listed companies must have an audit committee that has a minimum of three members, and all audit committee members must satisfy the requirements of independence set forth in Section 303A.02 of the NYSE Listed Company Manual andRule 10A-3 under the Exchange Act. We are in compliance with this requirement as our audit committee comprises of three outside directors meeting the requirements of independence set forth in Section 303A.02 of the NYSE Listed Company Manual andRule 10A-3 under the Exchange Act. Under the Korea Exchange listing rules and the Korean Commercial Code, a large listed company must also establish an audit committee of which at least two-thirds of its members must be outside directors and whose chairman must be an outside director. In addition, at least one member of the audit committee who is an outside director must also be an accounting or financial expert. We are also in compliance with the foregoing requirements.
Nomination/Corporate Governance Committee
Under the NYSE listing rules, U.S. companies listed on the NYSE must have a nomination/corporate governance committee composed entirely independent directors. In addition to identifying individuals qualified to become board members, this committee must develop and recommend to the board a set of corporate governance principles. Under the Korean Commercial Code and other applicable laws, large listed companies, financial holding companies, commercial banks, and certain other financial institutions are required to have an outside director nominating committee of which at least one-half of its members are required to be outside directors. However, there is no requirement to establish a corporate governance committee under applicable Korean law. We currently have an outside director recommendation committee and a board steering committee which manage corporate governance practices applicable to us. The outside director recommendation committee currently consists of five directors, including four outside directors. The chairman of the committee must be an outside director pursuant to our outside director recommendation committee regulations. The board steering committee consists of five directors, including four outside directors.
Compensation Committee
Under the NYSE listing rules, U.S. companies listed on the NYSE are required to have a compensation committee which is composed entirely of independent directors. While no such requirement currently exists under applicable Korean law or listing standards, we currently have a compensation committee composed of three outside directors. Two member of the compensation committee satisfies the independent director requirements as set forth inRule 10A-3 under the Exchange Act.
Corporate Governance Guidelines and Code of Business Conduct and Ethics
Under the NYSE listing rules, U.S. companies listed on the NYSE are required to establish corporate governance guidelines and to adopt a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. As a foreign private issuer, we are exempt from this requirement. While we have not adopted official corporate governance guidelines, our board of directors, outside director recommendation committee and the board steering committee review and determine corporate policies as needed to ensure efficient and transparent corporate governance practices. Pursuant to the requirements of the Sarbanes-Oxley Act, we have adopted a code of ethics applicable to our Chairman & Chief Executive Officer and all other directors and executive officers including the Chief Financial Officer and the Chief Accounting Officer, as well as all financial, accounting and other officers of Shinhan Financial Group and its subsidiaries that are involved in the preparation and disclosure of Shinhan Financial Group’s consolidated financial statements and internal control of financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We have also adopted an insider reporting system in compliance with Section 301 of the Sarbanes-Oxley Act. The code of ethics applicable to our executive officers as well as the financial officers of the holding company and its subsidiaries are available on our websitewww.shinhangroup.com. Several of our subsidiaries, including Shinhan
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Bank, Shinhan Investment and Shinhan Life Insurance, currently also have their own codes of business conduct and ethics.
Shareholder Approval of Equity Compensation Plans
Under the NYSE listing rules, shareholders of U.S. companies listed on the NYSE are required to approve all equity compensation plans. We currently have two equity compensation plans, consisting of a stock option plan for directors and key employees and an employee stock ownership plan for all employees. Stock options may be granted up to 20% of the total number of outstanding shares in accordance with the relevant rules set forth in our articles of incorporation. Under applicable Korean laws and our articles of incorporation, granting of stock options requires a special resolution at a shareholders’ meeting, which requires the approval of the holders of the shares representing at least two-thirds of those shares present or represented at such meeting and also representing at least one-third of the total issued and outstanding shares. Under applicable Korean laws and our articles of incorporation, stock options may be granted up to 1% of the total number of outstanding shares by a board of director, subject to the approval at the next shareholders’ meeting. Under the Framework Act on Workers’ Welfare and the Enforcement Decree thereunder, a Korean company may issue stock options up to 20% of its issued and outstanding shares by a resolution at the shareholders’ meeting with an individual limit of W6 million for any given year per each member of the employee stock ownership association, if permitted by the articles of incorporation. In addition, if a company is issuing stock options by a 10% of its issued and outstanding shares, only a board of director resolution is required for such issuance if permitted by the Articles of Incorporation. However, we have not adopted such provision in our articles of incorporation.
Annual Certification of Compliance
Under the NYSE listing rules, a chief executive officer of a U.S. company listed on the NYSE must annually certify that he or she is not aware of any violation by the company of NYSE corporate governance standards. As a foreign private issuer, we are not subject to this requirement. However, in accordance with rules applicable to both U.S. companies and foreign private issuers, we are required to promptly notify the NYSE in writing if any executive officer becomes aware of any material noncompliance with the NYSE corporate governance standards applicable to us. In addition, foreign private issuers, including us, are required to submit to the NYSE an annual written affirmation relating to compliance with Sections 303A.06 and 303A.11 of the NYSE listed company manual, which are the NYSE corporate governance standards applicable to foreign private issuers. All written affirmations must be executed in the form provided by the NYSE, without modification. An annual written affirmation is required to be submitted to the NYSE within 30 days of filing with the SEC our annual report onForm 20-F. We have been in compliance with this requirement in all material respects and plan to submit such affirmation within the prescribed time line.
| |
| ITEM 17. | FINANCIAL STATEMENTS |
We have responded to Item 18 in lieu of responding to this item.
253
| |
| ITEM 18. | FINANCIAL STATEMENTS |
Reference is made to Item 19(a) for a list of all financial statements filed as part of this annual report.
(a) Financial Statements filed as part of this Annual Report:
See Index to Financial Statements onpage F-1 of this annual report.
(b) Exhibits filed as part of this Annual Report:
See Exhibit Index beginning onpage E-1 of this annual report.
254233
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Date: June 30, 2008
Shinhan Financial Group Co, Ltd.
| | |
| | By: | /s/ In Ho LeeSang Hoon Shin |
Name: In Ho LeeSang Hoon Shin
| | |
| | Title: | President &and Chief Executive Officer |
Date: June 28, 2010
255234
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | |
| | | Page |
| |
| | | F-1 | |
| | | F-2 | |
| | | F-3 | |
| | | F-4 | |
| | | F-5 | |
| | | F-7 | |
| | | F-9F-10 | |
| | | F-11F-13 | |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM —
CONSOLIDATED FINANCIAL STATEMENTS
The Board of Directors and Stockholders
Shinhan Financial Group Co., Ltd.:
We have audited the accompanying consolidated balance sheets of Shinhan Financial Group Co., Ltd. and its subsidiaries (the Group) as of December 31, 20072009 and 2006,2008, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2007.2009. These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Shinhan Financial Group Co., Ltd. and its subsidiaries as of December 31, 20072009 and 2006,2008, the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007,2009, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 and 2 to the consolidated financial statements, in 2009, the Group adopted the provisionschanged its method of FASB Interpretation No. 48,Accountingaccounting for Uncertaintyother-than temporary impairments on debt securities, business combinations and noncontrolling interests in Income Taxes, an interpretationsubsidiaries. The Group also changed its method of FASB Statement No,109accounting for fair value measurements in 2008 and SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, as of January 1,uncertainty in income taxes and certain hybrid financial instruments in 2007.
The accompanying consolidated financial statements as of and for the year ended December 31, 20072009 have been translated into United States dollars solely for the convenience of the reader. We have audited the translation and, in our opinion, the consolidated financial statements expressed in Korean Won have been translated into dollars on the basis set forth in Note 1 to the consolidated financial statements.
We also have also audited, in accordance with the standards of Public Company Accounting Oversight Board (United States), Shinhan Financial Group, Co., Ltd. and its subsidiaries’the Group’s internal control over financial reporting as of December 31, 2007,2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated June 19, 200828, 2010 expressed an unqualified opinion on the effectiveness of the Group’s internal control over financial reporting.
/s/ KPMG Samjong Accounting Corp.
Seoul, Korea
June 19, 200828, 2010
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM —
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders
Shinhan Financial Group Co., Ltd.:
We have audited Shinhan Financial Group Co., Ltd. and its subsidiaries’ (the Group) internal control over financial reporting as of December 31, 2007,2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Group’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying management’s annual report on internal control over financial reporting. Our responsibility is to express an opinion on the Group’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007,2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Shinhan Financial Group, Co., Ltd. and its subsidiaries as of December 31, 20072009 and 2006,2008, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2007,2009, and our report dated June 19, 200828, 2010 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG Samjong Accounting Corp.
Seoul, Korea
June 19, 200828, 2010
F-3
Shinhan Financial Group Co., Ltd. and Subsidiaries
As of December 31, 20062008 and 20072009
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | 2007 | | | 2008 | | 2009 | | 2009 | |
| | | (In millions of
| | (See Note 1)
| | | (In millions of Korean Won, except share data) | | (See Note 1)
| |
| | | Korean won, except
| | (In thousands
| | | | | (In thousands
| |
| | | share data) | | of US$, except
| | | | | of US$, except
| |
| | | | | share data) | | | | | share data) | |
| |
ASSETS | ASSETS | ASSETS |
| Cash and cash equivalents | | W | 1,691,303 | | | W | 3,579,806 | | | $ | 3,825,396 | | | W | 1,364,777 | | | W | 4,363,125 | | | $ | 3,749,517 | |
| Restricted cash (Note 4) | | | 6,758,043 | | | | 4,744,801 | | | | 5,070,315 | | | | 7,049,312 | | | | 7,973,917 | | | | 6,852,504 | |
| Interest-bearing deposits | | | 725,191 | | | | 1,093,830 | | | | 1,168,872 | | | | 1,626,880 | | | | 2,164,004 | | | | 1,859,669 | |
| Call loans and securities purchased under resale agreements (Note 5) | | | 1,243,059 | | | | 802,544 | | | | 857,602 | | | | 3,065,870 | | | | 1,346,244 | | | | 1,156,915 | |
| Trading assets (Note 6) | | | 4,836,892 | | | | 10,182,525 | | | | 10,881,091 | | | | 18,700,942 | | | | 11,297,076 | | | | 9,708,311 | |
| Securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale securities (Note 7) | | | 16,939,463 | | | | 22,848,619 | | | | 24,416,135 | | | | 29,016,011 | | | | 27,611,895 | | | | 23,728,694 | |
| Held-to-maturity securities (Note 7) | | | 7,581,093 | | | | 8,224,279 | | | | 8,788,500 | | | | 8,696,144 | | | | 12,793,618 | | | | 10,994,386 | |
Loans (net of allowance for loan losses of W1,575,013 in 2006 and W2,099,122 in 2007) (Note 8) | | | 120,989,101 | | | | 149,722,605 | | | | 159,994,234 | | |
Loans (net of allowance for loan losses of W3,200,633 in 2008 and W3,637,994 in 2009) (Note 8) | | | | 167,308,055 | | | | 165,593,546 | | | | 142,305,286 | |
| Customers’ liability on acceptances | | | 1,417,385 | | | | 1,700,637 | | | | 1,817,309 | | | | 2,433,097 | | | | 2,780,290 | | | | 2,389,284 | |
| Premises and equipment, net (Note 9) | | | 2,097,106 | | | | 2,454,970 | | | | 2,623,392 | | | | 2,412,464 | | | | 2,437,014 | | | | 2,094,284 | |
| Intangible assets (Note 10) | | | 1,590,239 | | | | 2,181,588 | | | | 2,331,254 | | | | 1,678,278 | | | | 1,266,604 | | | | 1,088,475 | |
| Goodwill (Note 10) | | | 993,320 | | | | 3,978,094 | | | | 4,251,009 | | | | 3,892,393 | | | | 3,805,422 | | | | 3,270,246 | |
| Security deposits | | | 1,107,603 | | | | 1,294,222 | | | | 1,383,011 | | | | 1,333,783 | | | | 1,323,666 | | | | 1,137,513 | |
| Other assets (Notes 11 and 24) | | | 7,117,640 | | | | 8,813,384 | | | | 9,418,022 | | | | 12,395,127 | | | | 10,153,495 | | | | 8,725,557 | |
| | | | | | | | | | | | | | | |
| Total Assets | | W | 175,087,438 | | | W | 221,621,904 | | | $ | 236,826,142 | | | W | 260,973,133 | | | W | 254,909,916 | | | $ | 219,060,641 | |
| | | | | | | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |
LIABILITIES AND EQUITY | | LIABILITIES AND EQUITY |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing (Note 12) | | W | 91,578,301 | | | W | 103,241,337 | | | $ | 110,324,147 | | | W | 119,762,461 | | | W | 140,808,902 | | | $ | 121,006,232 | |
| Non-interest-bearing (Note 12) | | | 3,918,153 | | | | 3,162,310 | | | | 3,379,258 | | | | 2,942,034 | | | | 2,889,587 | | | | 2,483,210 | |
| Trading liabilities (Note 6) | | | 1,610,840 | | | | 2,508,643 | | | | 2,680,747 | | | | 11,830,665 | | | | 4,565,034 | | | | 3,923,030 | |
| Acceptances outstanding | | | 1,417,385 | | | | 1,700,637 | | | | 1,817,309 | | | | 2,433,097 | | | | 2,780,290 | | | | 2,389,284 | |
| Short-term borrowings (Note 13) | | | 10,995,026 | | | | 15,801,426 | | | | 16,885,474 | | | | 23,224,991 | | | | 9,714,857 | | | | 8,348,607 | |
| Secured borrowings (Note 14) | | | 8,102,714 | | | | 11,451,665 | | | | 12,237,299 | | | | 10,225,777 | | | | 7,944,390 | | | | 6,827,130 | |
| Long-term debt (Notes 15 and 22) | | | 32,574,138 | | | | 46,496,307 | | | | 49,686,157 | | |
| Long-term debt (Notes 15 and 21) | | | | 49,651,706 | | | | 44,794,981 | | | | 38,495,235 | |
| Future policy benefits (Note 16) | | | 5,682,834 | | | | 6,769,022 | | | | 7,233,407 | | | | 7,260,333 | | | | 8,310,238 | | | | 7,141,527 | |
| Accrued expenses and other liabilities (Notes 17 and 24) | | | 9,243,766 | | | | 13,369,015 | | | | 14,286,187 | | | | 15,677,926 | | | | 12,552,247 | | | | 10,786,961 | |
| | | | | | | | | | | | | | | |
| Total Liabilities | | W | 165,123,157 | | | W | 204,500,362 | | | $ | 218,529,985 | | | W | 243,008,990 | | | W | 234,360,526 | | | $ | 201,401,216 | |
| | | | | | | | | | | | | | | |
| Commitments and contingencies (Note 30) | | | | | | | | | | | | | |
| Minority interest | | | 161,935 | | | | 211,450 | | | | 225,956 | | |
Stockholders’ equity | | | | | | | | | | | | | |
Common stock, W5,000 par value; 1 billion shares authorized; 381,567,614 shares issued and 374,437,647 shares outstanding in 2006; 396,199,587 shares issued and 396,199,058 shares outstanding in 2007 (Note 20) | | W | 1,907,838 | | | W | 1,980,998 | | | $ | 2,116,903 | | |
Redeemable convertible preferred stock, W5,000 par value;
44,720,603 shares authorized; 0 shares issued and outstanding in 2006; 14,721,000 shares issued and outstanding in 2007 (Note 21) | | | — | | | | 73,605 | | | | 78,655 | | |
Redeemable preferred stock, W5,000 par value;
44,720,603 shares authorized; 0 shares issued and outstanding in 2006; 28,990,000 shares issued and outstanding in 2007 (Note 21) | | | — | | | | 144,950 | | | | 154,894 | | |
| Commitments and contingencies (Note 31) | | | | — | | | | — | | | | — | |
Equity: | | | | | | | | | | | | | |
Common stock, W5,000 par value; 1 billion shares authorized; 396,199,587 shares issued and 396,199,058 shares outstanding in 2008 and 474,199,587 shares issued and outstanding in 2009 (Note 20) | | | W | 1,980,998 | | | W | 2,370,998 | | | $ | 2,037,552 | |
Redeemable convertible preferred stock, W5,000 par value; 14,721,000 shares issued and outstanding in 2008 and 2009 (Note 21) | | | | 73,605 | | | | 73,605 | | | | 63,254 | |
Redeemable preferred stock, W5,000 par value; 28,990,000 shares issued and outstanding in 2008 and 2009 (Note 21) | | | | 144,950 | | | | 144,950 | | | | 124,565 | |
| Additional paid-in capital | | | 2,710,093 | | | | 7,147,165 | | | | 7,637,492 | | | | 7,147,165 | | | | 8,037,718 | | | | 6,907,333 | |
| Retained earnings (Note 22) | | | 5,205,043 | | | | 6,801,202 | | | | 7,267,796 | | | | 7,709,897 | | | | 8,621,915 | | | | 7,409,372 | |
| Accumulated other comprehensive income, net of taxes (Note 36) | | | 140,883 | | | | 762,200 | | | | 814,491 | | |
| Less: treasury stock, at cost, 7,129,967 shares in 2006 and 529 shares in 2007 (Note 20) | | | (161,511 | ) | | | (28 | ) | | | (30 | ) | |
| Accumulated other comprehensive income, net of taxes (Note 37) | | | | 595,481 | | | | 969,013 | | | | 832,735 | |
| Less: Treasury stock, at cost, 529 shares in 2008 (Note 20) | | | | (28 | ) | | | — | | | | — | |
| Total the Group stockholders’ equity | | | W | 17,652,068 | | | W | 20,218,199 | | | $ | 17,374,811 | |
| | | | | | | | | | | | | | | |
| Total stockholders’ equity | | W | 9,802,346 | | | W | 16,910,092 | | | $ | 18,070,201 | | |
| Noncontrolling interest | | | | 312,075 | | | | 331,191 | | | | 284,614 | |
| | | | | | | | | | | | | | | |
| Total liabilities, minority interest, and stockholders’ equity | | W | 175,087,438 | | | W | 221,621,904 | | | $ | 236,826,142 | | |
| Total equity | | | | 17,964,143 | | | | 20,549,390 | | | | 17,659,425 | |
| | | | | | | | | | | | | | | |
Total liabilities and equity | | | W | 260,973,133 | | | W | 254,909,916 | | | $ | 219,060,641 | |
| | | | | | | | | |
See accompanying notes to consolidated financial statements.
F-4
Shinhan Financial Group Co., Ltd. and Subsidiaries
Years endedEnded December 31, 2005, 20062007, 2008 and 20072009
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2006 | | 2007 | | 2007 | | | 2007 | | 2008 | | 2009 | | 2009 | |
| | | (In millions of Korean won, except per share data) | | (See Note 1)
| | | (In millions of Korean Won,
| | (See Note 1)
| |
| | | | | (In thousands
| | | except per share data) | | (In thousands
| |
| | | | | of US$, except
| | | | | of US$, except
| |
| | | | | per share data) | | | | | per share data) | |
| |
Interest and dividend income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest and fees on loans | | W | 6,295,473 | | | W | 7,380,474 | | | W | 10,185,349 | | | $ | 10,884,109 | | | W | 10,185,349 | | | W | 12,109,332 | | | W | 10,224,880 | | | $ | 8,786,903 | |
| Interest and dividends on securities (Note 7) | | | 932,395 | | | | 1,199,137 | | | | 1,402,712 | | | | 1,498,945 | | | | 1,402,712 | | | | 1,775,081 | | | | 1,852,178 | | | | 1,591,697 | |
| Interest and dividends on trading assets | | | 111,070 | | | | 146,747 | | | | 299,759 | | | | 320,324 | | | | 299,759 | | | | 468,656 | | | | 226,732 | | | | 194,845 | |
| Other interest income | | | 148,603 | | | | 166,281 | | | | 261,432 | | | | 279,367 | | | | 261,432 | | | | 380,871 | | | | 293,567 | | | | 252,282 | |
| | | | | | | | | | | | | | | | | | | |
| Total interest income | | | 7,487,541 | | | | 8,892,639 | | | | 12,149,252 | | | | 12,982,745 | | | | 12,149,252 | | | | 14,733,940 | | | | 12,597,357 | | | | 10,825,727 | |
Interest expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest on deposits | | | 2,234,689 | | | | 2,648,257 | | | | 3,510,653 | | | | 3,751,499 | | | | 3,510,653 | | | | 4,714,252 | | | | 4,188,204 | | | | 3,599,195 | |
| Interest on short-term borrowings (Note 13) | | | 339,855 | | | | 524,776 | | | | 659,836 | | | | 705,104 | | | | 659,836 | | | | 865,695 | | | | 555,026 | | | | 476,970 | |
| Interest on secured borrowings | | | 239,663 | | | | 333,516 | | | | 510,470 | | | | 545,490 | | | | 510,470 | | | | 562,735 | | | | 330,624 | | | | 284,126 | |
| Interest on long-term debt | | | 1,182,132 | | | | 1,393,701 | | | | 2,256,293 | | | | 2,411,085 | | | | 2,256,293 | | | | 2,761,858 | | | | 2,277,419 | | | | 1,957,134 | |
| Other interest expense | | | 17,564 | | | | 11,591 | | | | 41,644 | | | | 44,501 | | | | 41,644 | | | | 50,028 | | | | 24,755 | | | | 21,275 | |
| | | | | | | | | | | | | | | | | | | |
| Total interest expense | | | 4,013,903 | | | | 4,911,841 | | | | 6,978,896 | | | | 7,457,679 | | | | 6,978,896 | | | | 8,954,568 | | | | 7,376,028 | | | | 6,338,700 | |
| | | | | | | | | | | | | | | | | | | |
Net interest income | | | 3,473,638 | | | | 3,980,798 | | | | 5,170,356 | | | | 5,525,066 | | | | 5,170,356 | | | | 5,779,372 | | | | 5,221,329 | | | | 4,487,027 | |
| Provision (reversal) for credit losses (Note 8) | | | (183,488 | ) | | | 225,846 | | | | 80,559 | | | | 86,086 | | |
| Provision for credit losses (Note 8) | | | | 80,559 | | | | 1,436,598 | | | | 2,201,164 | | | | 1,891,603 | |
| | | | | | | | | | | | | | | | | | | |
Net interest income after provision (reversal) for credit losses | | | 3,657,126 | | | | 3,754,952 | | | | 5,089,797 | | | | 5,438,980 | | |
Net interest income after provision for credit losses | | | | 5,089,797 | | | | 4,342,774 | | | | 3,020,165 | | | | 2,595,424 | |
Non-interest income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commissions and fees (Note 18) | | | 1,505,703 | | | | 1,511,384 | | | | 2,611,641 | | | | 2,790,811 | | | | 2,611,641 | | | | 2,595,215 | | | | 2,700,414 | | | | 2,320,641 | |
| Net trust management fees | | | 100,216 | | | | 105,605 | | | | 72,772 | | | | 77,765 | | | | 72,772 | | | | 69,163 | | | | 69,420 | | | | 59,657 | |
| Net trading profits (losses) (Note 6) | | | 116,279 | | | | 141,046 | | | | (209,721 | ) | | | (224,109 | ) | | | (209,721 | ) | | | 584,330 | | | | (516,962 | ) | | | (444,259 | ) |
| Net gains on securities (Note 7) | | | 96,227 | | | | 30,548 | | | | 169,322 | | | | 180,938 | | | | 213,063 | | | | 13,092 | | | | 321,405 | | | | 276,204 | |
| Gain on other investment | | | 531,984 | | | | 324,457 | | | | 180,880 | | | | 193,290 | | |
| Net gain on foreign exchange | | | 93,771 | | | | 229,448 | | | | 146,351 | | | | 156,392 | | |
| Impairment loss on debt securities: | | | | | | | | | | | | | | | | | |
| Gross Impairment losses on debt securities | | | | (43,741 | ) | | | (148,894 | ) | | | (14,262 | ) | | | (12,256 | ) |
| Less: Impairment recognized in OCI | | | | — | | | | — | | | | 957 | | | | 822 | |
| | | | | | | | | | | |
| Net impairment losses on debt securities | | | | (43,741 | ) | | | (148,894 | ) | | | (13,305 | ) | | | (11,434 | ) |
| Income from other investment | | | | 180,880 | | | | 317,211 | | | | 267,546 | | | | 229,920 | |
| Net gains (losses) on foreign exchange | | | | 146,351 | | | | (566,751 | ) | | | 956,238 | | | | 821,758 | |
| Insurance income | | | 167,001 | | | | 1,108,918 | | | | 1,119,388 | | | | 1,196,183 | | | | 1,119,388 | | | | 1,329,274 | | | | 1,229,057 | | | | 1,056,209 | |
| Other (Note 19) | | | 333,897 | | | | 335,247 | | | | 647,573 | | | | 691,999 | | | | 647,573 | | | | 378,777 | | | | 670,928 | | | | 576,571 | |
| | | | | | | | | | | | | | | | | | | |
| Total non-interest income | | | 2,945,078 | | | | 3,786,653 | | | | 4,738,206 | | | | 5,063,269 | | | | 4,738,206 | | | | 4,571,417 | | | | 5,684,741 | | | | 4,885,267 | |
Non-interest expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Employee compensation and other benefits (Note 27) | | | 1,480,293 | | | | 1,788,758 | | | | 2,056,348 | | | | 2,197,423 | | | | 2,056,348 | | | | 1,817,473 | | | | 2,000,396 | | | | 1,719,070 | |
Depreciation and amortization
(Note 9 and 10) | | | 377,350 | | | | 470,807 | | | | 812,345 | | | | 868,076 | | |
| Depreciation and amortization (Notes 9 and 10) | | | | 812,345 | | | | 871,416 | | | | 713,521 | | | | 613,175 | |
| General and administrative expenses | | | 515,882 | | | | 666,439 | | | | 877,860 | | | | 938,085 | | | | 877,860 | | | | 882,135 | | | | 868,317 | | | | 746,201 | |
| Credit card fees | | | 134,489 | | | | 204,594 | | | | 665,908 | | | | 711,592 | | | | 665,908 | | | | 700,403 | | | | 741,744 | | | | 637,429 | |
| Provision (reversal) for other losses | | | 112,944 | | | | (16,217 | ) | | | 72,371 | | | | 77,338 | | | | 72,371 | | | | (18,467 | ) | | | 166,238 | | | | 142,859 | |
| Insurance fees on deposits | | | 124,826 | | | | 127,518 | | | | 130,560 | | | | 139,517 | | | | 130,560 | | | | 132,705 | | | | 161,586 | | | | 138,862 | |
| Other fees and commission expense | | | 291,819 | | | | 357,882 | | | | 445,711 | | | | 476,288 | | | | 445,711 | | | | 422,146 | | | | 454,077 | | | | 390,217 | |
| Taxes (except income taxes) | | | 109,918 | | | | 95,868 | | | | 128,172 | | | | 136,965 | | | | 128,172 | | | | 179,009 | | | | 143,354 | | | | 123,193 | |
| Insurance operating expense | | | 178,247 | | | | 1,147,450 | | | | 1,350,468 | | | | 1,443,116 | | | | 1,350,468 | | | | 1,037,797 | | | | 1,456,306 | | | | 1,251,498 | |
| Minority interest | | | 16,079 | | | | 17,860 | | | | 94,956 | | | | 101,470 | | |
| Other (Note 19) | | | 315,637 | | | | 465,172 | | | | 205,248 | | | | 219,329 | | | | 205,248 | | | | 702,243 | | | | 431,816 | | | | 371,088 | |
| | | | | | | | | | | | | | | | | | | |
| Total non-interest expense | | | 3,657,484 | | | | 5,326,131 | | | | 6,839,947 | | | | 7,309,199 | | | | 6,744,991 | | | | 6,726,860 | | | | 7,137,355 | | | | 6,133,592 | |
| | | | | | | | | | | | | | | | | | | |
Income before income tax expense | | | | 3,083,012 | | | | 2,187,331 | | | | 1,567,551 | | | | 1,347,099 | |
Income tax expense(Note 24) | | | | 1,058,444 | | | | 694,931 | | | | 424,026 | | | | 364,393 | |
| | | | | | | | | | | |
Net income | | | | 2,024,568 | | | | 1,492,400 | | | | 1,143,525 | | | | 982,706 | |
| | | | | | | | | | | |
| Net income attributable to noncontrolling interests | | | | 94,956 | | | | 11,701 | | | | 9,673 | | | | 8,313 | |
| | | | | | | | | | | |
Net income attributable to the Group | | | W | 1,929,612 | | | W | 1,480,699 | | | W | 1,133,852 | | | $ | 974,393 | |
| | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
F-5
Shinhan Financial Group Co., Ltd. and Subsidiaries
Consolidated Statements of Income — (Continued)
| | | | | | | | | | | | | | | | | |
| | | 2005 | | | 2006 | | | 2007 | | | 2007 | |
| | | (In millions of Korean won, except per share data) | | | (See Note 1)
| |
| | | | | | (In thousands
| |
| | | | | | of US$, except
| |
| | | | | | per share data) | |
| |
Income before income tax expense and cumulative effect of change in accounting principle | | | 2,944,720 | | | | 2,215,474 | | | | 2,988,056 | | | | 3,193,050 | |
| Income tax expense (Note 24) | | | 1,014,867 | | | | 649,806 | | | | 1,058,444 | | | | 1,131,058 | |
| | | | | | | | | | | | | | | | | |
Income before and cumulative effect of change in accounting principle | | | 1,929,853 | | | | 1,565,668 | | | | 1,929,612 | | | | 2,061,992 | |
| Cumulative effect of change in accounting principle, net of taxes (Notes 2 and 27) | | | — | | | | (10,184 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
Net income | | W | 1,929,853 | | | W | 1,555,484 | | | W | 1,929,612 | | | $ | 2,061,992 | |
| | | | | | | | | | | | | | | | | |
Net income per share of common stock(Note 25) | | | | | | | | | | | | | | | | |
| Basic | | | | | | | | | | | | | | | | |
| Income before cumulative effect of change in accounting principle | | W | 5,763 | | | W | 4,207 | | | W | 4,480 | | | $ | 4.79 | |
| Cumulative effect of change in accounting principle, net of taxes | | | — | | | | (27 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
| Net income per share | | W | 5,763 | | | W | 4,180 | | | W | 4,480 | | | $ | 4.79 | |
| | | | | | | | | | | | | | | | | |
| Diluted | | | | | | | | | | | | | | | | |
| Income before cumulative effect of change in accounting principle | | W | 5,419 | | | W | 4,207 | | | W | 4,390 | | | $ | 4.69 | |
| Cumulative effect of change in accounting principle, net of taxes | | | — | | | | (27 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
| Net income per share | | W | 5,419 | | | W | 4,180 | | | W | 4,390 | | | $ | 4.69 | |
| | | | | | | | | | | | | | | | | |
| Average common shares issued and outstanding | | | 333,424,397 | | | | 372,172,814 | | | | 382,730,606 | | | | | |
| Average diluted common shares issued and outstanding | | | 356,140,320 | | | | 372,172,814 | | | | 396,483,650 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | 2007 | | | 2008 | | | 2009 | | | 2009 | |
| | | (In millions of Korean Won, except per share data) | | | (See Note 1)
| |
| | | | | | (In thousands
| |
| | | | | | of US$, except
| |
| | | | | | per share data) | |
| |
Net income per share of common stock(Note 25) | | | | | | | | | | | | | | | | |
| Basic | | | | | | | | | | | | | | | | |
| Net income per share | | W | 4,250 | | | W | 2,993 | | | W | 1,957 | | | $ | 1.68 | |
| | | | | | | | | | | | | | | | | |
| Diluted | | | | | | | | | | | | | | | | |
| Net income per share | | W | 4,172 | | | W | 2,955 | | | W | 1,955 | | | $ | 1.67 | |
| | | | | | | | | | | | | | | | | |
| Average common shares issued and outstanding | | | 403,474,783 | | | | 417,673,260 | | | | 461,500,172 | | | | | |
| Average diluted common shares issued and outstanding | | | 417,227,827 | | | | 432,394,260 | | | | 476,221,172 | | | | | |
See accompanying notes to consolidated financial statements.
F-6
Shinhan Financial Group Co., Ltd. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2005, 2006 and 2007
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Accumulated
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Other
| | | | | | | |
| | | | | | | | | | | | | | | Additional
| | | | | | Comprehensive
| | | | | | Total
| |
| | | Common Stock | | | Preferred Stock | | | Paid-in
| | | Retained
| | | Income (loss),
| | | Treasury
| | | Stockholders’
| |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Earnings | | | Net of Taxes | | | Stock | | | Equity | |
| | | (In millions of Korea won and in thousands of US $, except share and per share data) | |
| |
Balance at January 1, 2005 | | | 319,319,011 | | | W | 1,596,595 | | | | — | | | W | — | | | W | 1,658,189 | | | W | 2,238,702 | | | W | 157,873 | | | W | (203,831 | ) | | W | 5,447,528 | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,929,853 | | | | — | | | | — | | | | 1,929,853 | |
| Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (12,024 | ) | | | — | | | | (12,024 | ) |
| Net unrealized gains (losses) on available-for-sale securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (246,046 | ) | | | — | | | | (246,046 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,929,853 | | | | (258,070 | ) | | | — | | | | 1,671,783 | |
| Issuance of common stock | | | 17,528,000 | | | | 87,640 | | | | — | | | | — | | | | 485,775 | | | | — | | | | — | | | | — | | | | 573,415 | |
| Conversion of redeemable convertible preferred stock into common stock | | | 22,360,302 | | | | 111,802 | | | | — | | | | — | | | | 256,070 | | | | — | | | | — | | | | — | | | | 367,872 | |
Cash dividends declared (W750 per share) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (232,749 | ) | | | — | | | | — | | | | (232,749 | ) |
| Dividends on redeemable convertible preferred stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | (8,170 | ) | | | — | | | | — | | | | (8,170 | ) |
| Acquisition of treasury stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (42,392 | ) | | | (42,392 | ) |
| Sale of treasury stock | | | — | | | | — | | | | — | | | | — | | | | 80 | | | | — | | | | — | | | | 765 | | | | 845 | |
| Share-based compensation | | | — | | | | — | | | | — | | | | — | | | | 19,791 | | | | — | | | | — | | | | — | | | | 19,791 | |
| Reclassification to accrued expense | | | — | | | | — | | | | — | | | | — | | | | (13,240 | ) | | | — | | | | — | | | | — | | | | (13,240 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2005 | | | 359,207,313 | | | W | 1,796,037 | | | | — | | | W | — | | | W | 2,406,665 | | | W | 3,927,636 | | | W | (100,197 | ) | | W | (245,458 | ) | | W | 7,784,683 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at January 1, 2006 | | | 359,207,313 | | | W | 1,796,037 | | | | — | | | W | — | | | W | 2,406,665 | | | W | 3,927,636 | | | W | (100,197 | ) | | W | (245,458 | ) | | W | 7,784,683 | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,555,484 | | | | — | | | | — | | | | 1,555,484 | |
| Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (13,315 | ) | | | — | | | | (13,315 | ) |
| Net unrealized gains (losses) on available-for-sale securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 254,395 | | | | — | | | | 254,395 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,555,484 | | | | 241,080 | | | | — | | | | 1,796,564 | |
| Conversion of redeemable convertible preferred stock into common stock | | | 22,360,301 | | | | 111,801 | | | | — | | | | — | | | | 256,040 | | | | — | | | | — | | | | — | | | | 367,841 | |
Cash dividends declared (W800 per share) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (278,077 | ) | | | — | | | | — | | | | (278,077 | ) |
| Sale of treasury stock | | | — | | | | — | | | | — | | | | — | | | | 82,773 | | | | — | | | | — | | | | 83,947 | | | | 166,720 | |
| Reclassification to accrued expense | | | — | | | | — | | | | — | | | | — | | | | (35,385 | ) | | | — | | | | — | | | | — | | | | (35,385 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2006 | | | 381,567,614 | | | W | 1,907,838 | | | | — | | | W | — | | | W | 2,710,093 | | | W | 5,205,043 | | | W | 140,883 | | | W | (161,511 | ) | | W | 9,802,346 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shinhan Financial Group Co., Ltd. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Accumulated
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Other
| | | | | | | |
| | | | | | | | | | | | | | | Additional
| | | | | | Comprehensive
| | | | | | Total
| |
| | | Common Stock | | | Preferred Stock | | | Paid-in
| | | Retained
| | | Income (loss),
| | | Treasury
| | | Stockholders’
| |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Earnings | | | Net of Taxes | | | Stock | | | Equity | |
| | | (In millions of Korea won and in thousands of US $, except share and per share data) | |
| |
Cumulative effect of change — adoption of SFAS 155 | | | — | | | W | — | | | | — | | | W | — | | | W | — | | | W | (274 | ) | | W | 274 | | | W | — | | | W | — | |
Cumulative effect of change — adoption of FIN 48 | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3,815 | | | | — | | | | — | | | | 3,815 | |
Adjusted balance at January 1, 2007 | | | 381,567,614 | | | | 1,907,838 | | | | — | | | | — | | | | 2,710,093 | | | | 5,208,584 | | | | 141,157 | | | | (161,511 | ) | | | 9,806,161 | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,929,612 | | | | — | | | | — | | | | 1,929,612 | |
| Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 7,958 | | | | — | | | | 7,958 | |
| Net unrealized gains (losses) on available-for-sale securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 613,085 | | | | — | | | | 613,085 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,929,612 | | | | 621,043 | | | | — | | | | 2,550,655 | |
| Issuance of common stock | | | 14,631,973 | | | | 73,160 | | | | — | | | | — | | | | 741,817 | | | | — | | | | — | | | | — | | | | 814,977 | |
| Issuance of redeemable convertible preferred stock | | | — | | | | — | | | | 14,721,000 | | | | 73,605 | | | | 777,357 | | | | — | | | | — | | | | — | | | | 850,962 | |
| Issuance of redeemable preferred stock | | | — | | | | — | | | | 28,990,000 | | | | 144,950 | | | | 2,740,326 | | | | — | | | | — | | | | — | | | | 2,885,276 | |
Cash dividends declared (W900 per share) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (336,994 | ) | | | — | | | | — | | | | (336,994 | ) |
| Acquisition of treasury stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (372 | ) | | | (372 | ) |
| Sale of treasury stock | | | — | | | | — | | | | — | | | | — | | | | 177,572 | | | | — | | | | — | | | | 161,855 | | | | 339,427 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2007 | | | 396,199,587 | | | W | 1,980,998 | | | | 43,711,000 | | | W | 218,555 | | | W | 7,147,165 | | | W | 6,801,202 | | | W | 762,200 | | | W | (28 | ) | | W | 16,910,092 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative effect of change — adoption of SFAS 155 | | | — | | | $ | — | | | | — | | | $ | — | | | $ | — | | | $ | (293 | ) | | $ | 293 | | | $ | — | | | $ | — | |
Cumulative effect of change — adoption of FIN 48 | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4,077 | | | | — | | | | — | | | | 4,077 | |
Adjusted balance at January 1, 2007 | | | 381,567,614 | | | | 2,038,724 | | | | — | | | | — | | | | 2,896,017 | | | | 5,565,916 | | | | 150,841 | | | | (172,591 | ) | | | 10,478,907 | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,061,992 | | | | — | | | | — | | | | 2,061,992 | |
| Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 8,504 | | | | — | | | | 8,504 | |
| Net unrealized gains (losses) on available-for-sale securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 655,146 | | | | — | | | | 655,146 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,061,992 | | | | 663,650 | | | | — | | | | 2,725,642 | |
| Issuance of common stock | | | 14,631,973 | | | | 78,179 | | | | — | | | | — | | | | 792,709 | | | | — | | | | — | | | | — | | | | 870,888 | |
| Issuance of redeemable convertible preferred stock | | | — | | | | — | | | | 14,721,000 | | | | 78,655 | | | | 830,687 | | | | — | | | | — | | | | — | | | | 909,342 | |
| Issuance of redeemable preferred stock | | | — | | | | — | | | | 28,990,000 | | | | 154,894 | | | | 2,928,324 | | | | — | | | | — | | | | — | | | | 3,083,218 | |
Cash dividends declared (W900 per share) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (360,112 | ) | | | — | | | | — | | | | (360,112 | ) |
| Acquisition of treasury stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (398 | ) | | | (398 | ) |
| Sale of treasury stock | | | — | | | | — | | | | — | | | | — | | | | 189,755 | | | | — | | | | — | | | | 172,959 | | | | 362,714 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2007 | | | 396,199,587 | | | $ | 2,116,903 | | | | 43,711,000 | | | $ | 233,549 | | | $ | 7,637,492 | | | $ | 7,267,796 | | | $ | 814,491 | | | $ | (30 | ) | | $ | 18,070,201 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
F-8
Shinhan Financial Group Co., Ltd. and Subsidiaries
Years Ended December 31, 2005, 20062007, 2008 and 20072009
| | | | | | | | | | | | | | | | | |
| | | 2005 | | | 2006 | | | 2007 | | | 2007 | |
| | | (In millions of Korean won) | | | (See Note 1)
| |
| | | | | | (In thousands
| |
| | | | | | of US$) | |
| |
Cash flows from operating activities | | | | | | | | | | | | | | | | |
| Net income | | W | 1,929,853 | | | W | 1,555,484 | | | W | 1,929,612 | | | $ | 2,061,992 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | |
| Provision (reversal) for credit losses | | | (183,488 | ) | | | 225,846 | | | | 80,559 | | | | 86,086 | |
| Provision for future policy benefit | | | 58,284 | | | | 457,761 | | | | 618,977 | | | | 661,300 | |
| Depreciation and amortization | | | 377,350 | | | | 470,807 | | | | 812,345 | | | | 868,076 | |
| Accretion of discounts on long-term debt | | | 181,038 | | | | 100,719 | | | | 148,826 | | | | 159,002 | |
| Amortization on deferred loan origination fees and costs | | | 47,071 | | | | 36,332 | | | | 234,059 | | | | 250,063 | |
| Amortization on investment debt securities | | | 30,863 | | | | 33,680 | | | | 4,347 | | | | 4,644 | |
| Net gain on equity investments | | | (294,760 | ) | | | (193,811 | ) | | | (79,863 | ) | | | (85,324 | ) |
| Net trading (profits) losses | | | (116,279 | ) | | | (141,046 | ) | | | 209,721 | | | | 224,109 | |
| Net gain on sale of available-for-sale securities | | | (101,553 | ) | | | (106,904 | ) | | | (246,102 | ) | | | (262,929 | ) |
| Impairment loss on securities | | | 5,326 | | | | 76,357 | | | | 76,780 | | | | 82,030 | |
| Net (gain) loss on sale of premises and equipment | | | (20,318 | ) | | | 2,331 | | | | (7,131 | ) | | | (7,619 | ) |
| Provision (reversal) for other losses | | | 112,944 | | | | (16,217 | ) | | | 72,371 | | | | 77,338 | |
| Net gain on sales of other assets | | | (197,056 | ) | | | (85,273 | ) | | | (61,220 | ) | | | (65,406 | ) |
| Net unrealized foreign exchange (gain) loss | | | 55,868 | | | | (4,977 | ) | | | 14,267 | | | | 15,243 | |
| Minority interest in net income of subsidiaries | | | 16,079 | | | | 17,860 | | | | 94,956 | | | | 101,470 | |
| Expense on stock option | | | 45,459 | | | | 46,233 | | | | 104,042 | | | | 111,156 | |
| Impairment loss on goodwill | | | — | | | | 129,285 | | | | — | | | | — | |
| Impairment loss on other investments | | | 5,757 | | | | 31,351 | | | | 11,741 | | | | 12,544 | |
| Cumulative effect of change in accounting principle | | | — | | | | 10,184 | | | | — | | | | — | |
| Net (gain) loss on sale of loans | | | (94,411 | ) | | | 5,018 | | | | (5,301 | ) | | | (5,663 | ) |
| Net changes in: | | | | | | | | | | | | | | | | |
| Restricted cash | | | (338,795 | ) | | | (3,114,207 | ) | | | 2,120,453 | | | | 2,265,451 | |
| Trading assets | | | 2,229,181 | | | | (202,813 | ) | | | (5,535,274 | ) | | | (5,913,744 | ) |
| Other assets (excluding assets for pending LG Card acquisition) | | | 3,035,963 | | | | (2,061,943 | ) | | | (1,496,233 | ) | | | (1,598,520 | ) |
| Trading liabilities | | | (713,088 | ) | | | 569,311 | | | | 895,288 | | | | 956,509 | |
| Accrued expenses and other liabilities | | | (3,082,875 | ) | | | 2,744,668 | | | | 2,770,178 | | | | 2,959,612 | |
| | | | | | | | | | | | | | | | | |
| Net cash provided by operating activities | | | 2,988,413 | | | | 586,036 | | | | 2,767,398 | | | | 2,957,420 | |
| | | | | | | | | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | | | | | | | |
| Net change in interest-bearing deposit assets | | W | (13,563 | ) | | W | (98,420 | ) | | W | (365,226 | ) | | $ | (390,199 | ) |
| Net change in call loans and securities purchased under resale agreements | | | 66,636 | | | | 239,270 | | | | 1,063,677 | | | | 1,136,407 | |
| Proceeds from sales of available-for-sale securities | | | 3,190,313 | | | | 9,284,185 | | | | 4,330,853 | | | | 4,626,980 | |
| Proceeds from maturities of available-for-sale securities | | | 10,105,078 | | | | 7,407,115 | | | | 7,269,091 | | | | 7,766,123 | |
| Purchases of available-for-sale securities | | | (16,156,100 | ) | | | (10,514,671 | ) | | | (16,405,652 | ) | | | (17,527,406 | ) |
| Proceeds from maturities, prepayments and calls of held-to-maturity securities | | | 1,307,473 | | | | 2,588,671 | | | | 1,953,059 | | | | 2,086,601 | |
| Purchases of held-to-maturity securities | | | (1,178,122 | ) | | | (7,216,116 | ) | | | (2,547,434 | ) | | | (2,721,618 | ) |
| Loan originations and principal collections, net | | | (8,318,374 | ) | | | (17,547,650 | ) | | | (17,620,125 | ) | | | (18,824,920 | ) |
| Proceeds from sales of premises and equipment | | | 95,971 | | | | 145,324 | | | | 11,263 | | | | 12,033 | |
| Purchases of premises and equipment | | | (282,909 | ) | | | (594,429 | ) | | | (453,706 | ) | | | (484,729 | ) |
| Net change in security deposits | | | (57,195 | ) | | | (29,945 | ) | | | (141,982 | ) | | | (151,690 | ) |
| Acquisition of subsidiaries, net of cash acquired | | | 27,225 | | | | — | | | | (5,960,417 | ) | | | (6,367,966 | ) |
| Proceeds from sales of equity method investments | | | 73,489 | | | | 42,041 | | | | 12,291 | | | | 13,131 | |
| Acquisition of equity method investments | | | (42,568 | ) | | | (26,050 | ) | | | (58,196 | ) | | | (62,175 | ) |
| Increase in other assets (relating to pending LG Card acquisition) | | | — | | | | (519,318 | ) | | | — | | | | — | |
| Net change in other investments | | | (201,062 | ) | | | 438,015 | | | | (302,403 | ) | | | (323,061 | ) |
| | | | | | | | | | | | | | | | | |
| Net cash used in investing activities | | | (11,383,708 | ) | | | (16,401,978 | ) | | | (29,214,907 | ) | | | (31,212,489 | ) |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Accumulated
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Other
| | | | | | Total
| | | | | | | |
| | | | | | | | | | | | | | | Additional
| | | | | | Comprehensive
| | | | | | Group
| | | Non
| | | | |
| | | Common Stock | | | Preferred Stock | | | Paid-in
| | | Retained
| | | Income (Loss),
| | | Treasury
| | | Stockholders’
| | | Controlling
| | | Total
| |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Earnings | | | Net of Taxes | | | Stock | | | Equity | | | Interest | | | Equity | |
| | | (In millions of Korean Won and in thousands of US $, except share and per share data) | |
| |
Balance at January 1, 2007 | | | 381,567,614 | | | W | 1,907,838 | | | | — | | | W | — | | | W | 2,710,093 | | | W | 5,205,043 | | | W | 140,883 | | | W | (161,511 | ) | | W | 9,802,346 | | | W | 161,935 | | | W | 9,964,281 | |
| Cumulative effect of change — adoption of SFAS 155 | | | — | | | | — | | | | — | | | | — | | | | — | | | | (274 | ) | | | 274 | | | | — | | | | — | | | | — | | | | — | |
| Cumulative effect of change — adoption of FIN 48 | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3,815 | | | | — | | | | — | | | | 3,815 | | | | — | | | | 3,815 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted balance at January 1, 2007 | | | 381,567,614 | | | | 1,907,838 | | | | — | | | | — | | | | 2,710,093 | | | | 5,208,584 | | | | 141,157 | | | | (161,511 | ) | | | 9,806,161 | | | | 161,935 | | | | 9,968,096 | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,929,612 | | | | — | | | | — | | | | 1,929,612 | | | | 94,956 | | | | 2,024,568 | |
| Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 7,958 | | | | — | | | | 7,958 | | | | — | | | | 7,958 | |
Net unrealized gains (losses) onavailable-for-sale securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 613,085 | | | | — | | | | 613,085 | | | | (4,985 | ) | | | 608,100 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,929,612 | | | | 621,043 | | | | — | | | | 2,550,655 | | | | 89,971 | | | | 2,640,626 | |
| Issuance of common stock | | | 14,631,973 | | | | 73,160 | | | | — | | | | — | | | | 741,817 | | | | — | | | | — | | | | — | | | | 814,977 | | | | — | | | | 814,977 | |
| Issuance of redeemable convertible preferred stock | | | — | | | | — | | | | 14,721,000 | | | | 73,605 | | | | 777,357 | | | | — | | | | — | | | | — | | | | 850,962 | | | | — | | | | 850,962 | |
| Issuance of redeemable preferred stock | | | — | | | | — | | | | 28,990,000 | | | | 144,950 | | | | 2,740,326 | | | | — | | | | — | | | | — | | | | 2,885,276 | | | | — | | | | 2,885,276 | |
Cash dividends (W900 per share) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (336,994 | ) | | | — | | | | — | | | | (336,994 | ) | | | — | | | | (336,994 | ) |
| Acquisition of treasury stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (372 | ) | | | (372 | ) | | | — | | | | (372 | ) |
| Sale of treasury stock | | | — | | | | — | | | | — | | | | — | | | | 177,572 | | | | — | | | | — | | | | 161,855 | | | | 339,427 | | | | — | | | | 339,427 | |
| Other changes in noncontrolling interest | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (40,456 | ) | | | (40,456 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2007 | | | 396,199,587 | | | W | 1,980,998 | | | | 43,711,000 | | | W | 218,555 | | | W | 7,147,165 | | | W | 6,801,202 | | | W | 762,200 | | | W | (28 | ) | | W | 16,910,092 | | | W | 211,450 | | | W | 17,121,542 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at January 1, 2008 | | | 396,199,587 | | | W | 1,980,998 | | | | 43,711,000 | | | W | 218,555 | | | W | 7,147,165 | | | W | 6,801,202 | | | W | 762,200 | | | W | (28 | ) | | W | 16,910,092 | | | W | 211,450 | | | W | 17,121,542 | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,480,699 | | | | — | | | | — | | | | 1,480,699 | | | | 11,701 | | | | 1,492,400 | |
| Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 142,257 | | | | — | | | | 142,257 | | | | — | | | | 142,257 | |
Net unrealized gains (losses) onavailable-for-sale securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (308,976 | ) | | | — | | | | (308,976 | ) | | | 2,855 | | | | (306,121 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,480,699 | | | | (166,719 | ) | | | — | | | | 1,313,980 | | | | 14,556 | | | | 1,328,536 | |
Cash dividends (W900 per share) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (572,004 | ) | | | — | | | | — | | | | (572,004 | ) | | | — | | | | (572,004 | ) |
| Other changes in noncontrolling interest | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 86,069 | | | | 86,069 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2008 | | | 396,199,587 | | | W | 1,980,998 | | | | 43,711,000 | | | W | 218,555 | | | W | 7,147,165 | | | W | 7,709,897 | | | W | 595,481 | | | W | (28 | ) | | W | 17,652,068 | | | W | 312,075 | | | W | 17,964,143 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-9F-7
Shinhan Financial Group Co., Ltd. and Subsidiaries
Consolidated Statements of Changes in Equity — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Accumulated
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Other
| | | | | | Total
| | | | | | | |
| | | | | | | | | | | | | | | Additional
| | | | | | Comprehensive
| | | | | | Group
| | | Non
| | | | |
| | | Common Stock | | | Preferred Stock | | | Paid-in
| | | Retained
| | | Income (Loss),
| | | Treasury
| | | Stockholders’
| | | Controlling
| | | Total
| |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Earnings | | | Net of Taxes | | | Stock | | | Equity | | | Interest | | | Equity | |
| | | (In millions of Korean Won and in thousands of US $, except share and per share data) | |
| |
Balance at January 1, 2009 | | | 396,199,587 | | | W | 1,980,998 | | | | 43,711,000 | | | W | 218,555 | | | W | 7,147,165 | | | W | 7,709,897 | | | W | 595,481 | | | W | (28 | ) | | W | 17,652,068 | | | W | 312,075 | | | W | 17,964,143 | |
Cumulative effect of change — adoption ofFAS 115-2 | | | — | | | | — | | | | — | | | | — | | | | — | | | | 8,752 | | | | (8,752 | ) | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted balance at January 1, 2009 | | | 396,199,587 | | | W | 1,980,998 | | | | 43,711,000 | | | W | 218,555 | | | W | 7,147,165 | | | W | 7,718,649 | | | W | 586,729 | | | W | (28 | ) | | W | 17,652,068 | | | W | 312,075 | | | W | 17,964,143 | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,133,852 | | | | — | | | | — | | | | 1,133,852 | | | | 9,673 | | | | 1,143,525 | |
| Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (67,906 | ) | | | — | | | | (67,906 | ) | | | (311 | ) | | | (68,217 | ) |
Net unrealized gains (losses) onavailable-for-sale securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 449,990 | | | | — | | | | 449,990 | | | | (1,458 | ) | | | 448,532 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,133,852 | | | | 382,084 | | | | — | | | | 1,515,936 | | | | 7,904 | | | | 1,523,840 | |
| Issuance of common stock | | | 78,000,000 | | | | 390,000 | | | | — | | | | — | | | | 885,260 | | | | — | | | | — | | | | — | | | | 1,275,260 | | | | — | | | | 1,275,260 | |
Cash dividends (W900 per share) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (230,586 | ) | | | — | | | | — | | | | (230,586 | ) | | | — | | | | (230,586 | ) |
| Sale of treasury stock | | | — | | | | — | | | | — | | | | — | | | | (3 | ) | | | — | | | | — | | | | 28 | | | | 25 | | | | — | | | | 25 | |
| Changes in the Group’s ownership interest in subsidiary | | | — | | | | — | | | | — | | | | — | | | | 5,296 | | | | — | | | | 200 | | | | — | | | | 5,496 | | | | (5,496 | ) | | | — | |
| Other changes in noncontrolling interest | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 16,708 | | | | 16,708 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2009 | | | 474,199,587 | | | W | 2,370,998 | | | | 43,711,000 | | | W | 218,555 | | | W | 8,037,718 | | | W | 8,621,915 | | | W | 969,013 | | | W | — | | | W | 20,218,199 | | | W | 331,191 | | | W | 20,549,390 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-8
Shinhan Financial Group Co., Ltd. and Subsidiaries
Consolidated Statements of Changes in Equity — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Accumulated
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Other
| | | | | | Total
| | | | | | | |
| | | | | | | | | | | | | | | Additional
| | | | | | Comprehensive
| | | | | | Group
| | | Non
| | | | |
| | | Common Stock | | | Preferred Stock | | | Paid-in
| | | Retained
| | | Income (Loss),
| | | Treasury
| | | Stockholders’
| | | Controlling
| | | Total
| |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Earnings | | | Net of Taxes | | | Stock | | | Equity | | | Interest | | | Equity | |
| | | (In millions of Korean Won and in thousands of US $, except share and per share data) | |
| |
Balance at January 1, 2009 | | | 396,199,587 | | | $ | 1,702,400 | | | | 43,711,000 | | | $ | 187,819 | | | $ | 6,142,024 | | | $ | 6,625,615 | | | $ | 511,736 | | | $ | (24 | ) | | $ | 15,169,570 | | | $ | 268,185 | | | $ | 15,437,755 | |
Cumulative effect of change — adoption ofFAS 115-2 | | | — | | | | — | | | | — | | | | — | | | | — | | | | 7,521 | | | | (7,521 | ) | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted balance at January 1, 2009 | | | 396,199,587 | | | $ | 1,702,400 | | | | 43,711,000 | | | $ | 187,819 | | | $ | 6,142,024 | | | $ | 6,633,136 | | | $ | 504,215 | | | $ | (24 | ) | | $ | 15,169,570 | | | $ | 268,185 | | | $ | 15,437,755 | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 974,393 | | | | — | | | | — | | | | 974,393 | | | | 8,313 | | | | 982,706 | |
| Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (58,356 | ) | | | — | | | | (58,356 | ) | | | (267 | ) | | | (58,623 | ) |
Net unrealized gains (losses) onavailable-for-sale securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 386,706 | | | | — | | | | 386,706 | | | | (1,253 | ) | | | 385,453 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 974,393 | | | | 328,350 | | | | — | | | | 1,302,743 | | | | 6,793 | | | | 1,309,536 | |
| Issuance of common stock | | | 78,000,000 | | | | 335,152 | | | | — | | | | — | | | | 760,762 | | | | — | | | | — | | | | — | | | | 1,095,914 | | | | — | | | | 1,095,914 | |
Cash dividends (W900 per share) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (198,157 | ) | | | — | | | | — | | | | (198,157 | ) | | | — | | | | (198,157 | ) |
| Sale of treasury stock | | | — | | | | — | | | | — | | | | — | | | | (3 | ) | | | — | | | | — | | | | 24 | | | | 21 | | | | — | | | | 21 | |
| Changes in the Group’s ownership interest in subsidiary | | | — | | | | — | | | | — | | | | — | | | | 4,550 | | | | — | | | | 170 | | | | — | | | | 4,720 | | | | (4,720 | ) | | | — | |
| Other changes in noncontrolling interest | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 14,356 | | | | 14,356 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2009 | | | 474,199,587 | | | $ | 2,037,552 | | | | 43,711,000 | | | $ | 187,819 | | | $ | 6,907,333 | | | $ | 7,409,372 | | | $ | 832,735 | | | $ | — | | | $ | 17,374,811 | | | $ | 284,614 | | | $ | 17,659,425 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
F-9
Shinhan Financial Group Co., Ltd. and Subsidiaries
Years Ended December 31, 2007, 2008 and 2009
| | | | | | | | | | | | | | | | | |
| | | 2007 | | | 2008 | | | 2009 | | | 2009 | |
| | | (In millions of Korean Won) | | | (See Note 1)
| |
| | | | | | (In thousands
| |
| | | | | | of US$) | |
| |
Cash flows from operating activities | | | | | | | | | | | | | | | | |
| Net income | | W | 2,024,568 | | | W | 1,492,400 | | | W | 1,143,525 | | | $ | 982,706 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | |
| Provision for credit losses | | | 80,559 | | | | 1,436,598 | | | | 2,201,164 | | | | 1,891,603 | |
| Provision for future policy benefit | | | 618,977 | | | | (71,059 | ) | | | 526,463 | | | | 452,424 | |
| Depreciation and amortization | | | 812,345 | | | | 871,416 | | | | 713,521 | | | | 613,175 | |
| Accretion of discounts on long-term debt | | | 148,826 | | | | 140,635 | | | | 50,148 | | | | 43,096 | |
| Amortization on deferred loan origination fees and costs | | | 234,059 | | | | 151,073 | | | | 94,411 | | | | 81,134 | |
| Amortization on investment debt securities | | | 4,347 | | | | (32,279 | ) | | | (18,746 | ) | | | (16,110 | ) |
| Net gain on equity investments | | | (79,863 | ) | | | (53,067 | ) | | | (61,362 | ) | | | (52,732 | ) |
| Net trading (profits) losses | | | 209,721 | | | | (584,330 | ) | | | 516,962 | | | | 444,259 | |
Net gain on sale ofavailable-for-sale securities | | | (246,102 | ) | | | (110,463 | ) | | | (416,196 | ) | | | (357,664 | ) |
| Impairment loss on securities | | | 76,780 | | | | 246,265 | | | | 108,096 | | | | 92,894 | |
| Net (gain) loss on sale of premises and equipment | | | (7,131 | ) | | | (1,604 | ) | | | (14,140 | ) | | | (12,152 | ) |
| Provision (reversal) for other losses | | | 72,371 | | | | (18,467 | ) | | | 166,238 | | | | 142,859 | |
| Net gain on sales of other assets | | | (61,220 | ) | | | (99,821 | ) | | | (87,340 | ) | | | (75,058 | ) |
| Gain on deconsolidation | | | — | | | | — | | | | (31,933 | ) | | | (27,442 | ) |
| Net unrealized foreign exchange (gains) losses | | | 14,267 | | | | 805,429 | | | | (1,093,482 | ) | | | (939,700 | ) |
| Expense (reversal) on stock option | | | 104,042 | | | | (114,058 | ) | | | 52,077 | | | | 44,753 | |
| Impairment loss on goodwill | | | — | | | | 128,394 | | | | 59,517 | | | | 51,147 | |
| Impairment loss on other investments | | | 11,741 | | | | 33,206 | | | | 14,802 | | | | 12,721 | |
| Net gain on sale of loans | | | (5,301 | ) | | | (1,196 | ) | | | (26,189 | ) | | | (22,506 | ) |
| Net changes in: | | | | | | | | | | | | | | | | |
| Restricted cash | | | 2,120,453 | | | | (2,304,511 | ) | | | (939,905 | ) | | | (807,722 | ) |
| Trading assets | | | (5,535,274 | ) | | | (7,934,088 | ) | | | 6,881,682 | | | | 5,913,876 | |
| Other assets | | | (1,496,233 | ) | | | (1,714,095 | ) | | | 1,756,950 | | | | 1,509,861 | |
| Trading liabilities | | | 895,288 | | | | 9,322,022 | | | | (7,265,631 | ) | | | (6,243,828 | ) |
| Accrued expenses and other liabilities | | | 2,770,178 | | | | 2,315,268 | | | | (2,616,515 | ) | | | (2,248,542 | ) |
| | | | | | | | | | | | | | | | | |
| Net cash provided by operating activities | | | 2,767,398 | | | | 3,903,668 | | | | 1,714,117 | | | | 1,473,052 | |
| | | | | | | | | | | | | | | | | |
F-10
Shinhan Financial Group Co., Ltd. and Subsidiaries
Consolidated Statements of Cash Flows — (Continued)
| | | | | | | | | | | | | | | | | |
| | | 2005 | | | 2006 | | | 2007 | | | 2007 | |
| | | (In millions of Korean won) | | | (See Note 1)
| |
| | | | | | (In thousands
| |
| | | | | | of US$) | |
| |
Cash flows from financing activities | | | | | | | | | | | | | | | | |
| Net increase in interest-bearing deposits | | | 3,447,855 | | | | 8,535,560 | | | | 11,286,195 | | | | 12,057,901 | |
| Net increase (decrease) in non-interest-bearing deposits | | | 397,246 | | | | 774,983 | | | | (755,843 | ) | | | (807,525 | ) |
| Net increase (decrease) in short-term borrowings | | | 1,059,981 | | | | (938,879 | ) | | | 4,345,085 | | | | 4,642,185 | |
| Proceeds from issuance of secured borrowings | | | 1,864,737 | | | | 1,237,050 | | | | 5,356,410 | | | | 5,722,660 | |
| Repayment of secured borrowings | | | (671,123 | ) | | | (1,213,438 | ) | | | (4,769,939 | ) | | | (5,096,089 | ) |
| Proceeds from issuance of long-term debt | | | 26,507,592 | | | | 44,616,738 | | | | 20,165,044 | | | | 21,543,850 | |
| Repayment of long-term debt | | | (23,942,920 | ) | | | (37,877,713 | ) | | | (11,225,192 | ) | | | (11,992,726 | ) |
| Issuance of redeemable convertible preferred stock | | | — | | | | — | | | | 850,962 | | | | 909,147 | |
| Issuance of redeemable preferred stock | | | — | | | | — | | | | 2,885,276 | | | | 3,082,560 | |
| Purchases of treasury stock | | | (479 | ) | | | (315 | ) | | | (372 | ) | | | (397 | ) |
| Sale of treasury stock | | | 845 | | | | 198,430 | | | | 406,795 | | | | 434,610 | |
| Cash dividends paid by parent company | | | (240,919 | ) | | | (278,077 | ) | | | (336,994 | ) | | | (360,036 | ) |
| Increase (decrease) of minority interest | | | (11,688 | ) | | | 63,597 | | | | 54,981 | | | | 58,740 | |
| | | | | | | | | | | | | | | | | |
| Net cash provided by financing activities | | | 8,411,127 | | | | 15,117,936 | | | | 28,262,408 | | | | 30,194,880 | |
| | | | | | | | | | | | | | | | | |
| Effect of exchange rate changes on cash | | | (25,350 | ) | | | (45,073 | ) | | | 73,604 | | | | 78,637 | |
| | | | | | | | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | (9,518 | ) | | | (743,079 | ) | | | 1,888,503 | | | | 2,018,448 | |
Cash and cash equivalents | | | | | | | | | | | | | | | | |
| Beginning of year | | | 2,443,900 | | | | 2,434,382 | | | | 1,691,303 | | | | 1,806,948 | |
| | | | | | | | | | | | | | | | | |
| End of year | | W | 2,434,382 | | | W | 1,691,303 | | | W | 3,579,806 | | | $ | 3,825,396 | |
| | | | | | | | | | | | | | | | | |
Supplemental disclosure of cash flow information | | | | | | | | | | | | | | | | |
| Cash paid for interest | | W | 3,880,792 | | | W | 4,746,165 | | | W | 6,514,034 | | | $ | 6,959,438 | |
| Cash paid for income taxes | | | 455,480 | | | | 563,980 | | | | 676,764 | | | | 723,038 | |
Supplemental disclosure of non-cash investing and financing activities | | | | | | | | | | | | | | | | |
| Acquisitions: | | | | | | | | | | | | | | | | |
| Fair value of net assets acquired | | | 243,067 | | | | — | | | | 765,123 | | | | 817,439 | |
| Goodwill | | | 289,800 | | | | — | | | | 81,153 | | | | 86,702 | |
| Consideration other than cash | | | 531,462 | | | | — | | | | 814,971 | | | | 870,696 | |
| Conversion of redeemable convertible preferred stock into common stock: | | | | | | | | | | | | | | | | |
| Common stock | | | 111,802 | | | | 111,801 | | | | — | | | | — | |
Additionalpaid-in-capital | | | 256,070 | | | | 256,040 | | | | — | | | | — | |
| Securities and other investments received in connection with loan restructuring | | | 27,328 | | | | 32,384 | | | | 2,783 | | | | 2,973 | |
| Increase(decrease) in cumulative translation adjustments, net of taxes | | | (12,024 | ) | | | (13,315 | ) | | | 7,958 | | | | 8,504 | |
| Increase (decrease) in unrealized gains (losses) on available-for-sale securities, net of taxes | | | (246,046 | ) | | | 254,395 | | | | 613,359 | | | | 655,439 | |
| Account payable for contingent consideration | | | 20,461 | | | | — | | | | — | | | | — | |
| Increase in premises and equipment transferred from other receivables | | | — | | | | — | | | | 107,466 | | | | 114,814 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | 2007 | | | 2008 | | | 2009 | | | 2009 | |
| | | (In millions of Korean Won) | | | (See Note 1)
| |
| | | | | | (In thousands
| |
| | | | | | of US$) | |
| |
Cash flows from investing activities | | | | | | | | | | | | | | | | |
| Net change in interest-bearing deposit assets | | W | (365,226 | ) | | W | (533,050 | ) | | W | (562,124 | ) | | $ | (483,070 | ) |
| Net change in call loans and securities purchased under resale agreements | | | 1,063,677 | | | | (2,158,154 | ) | | | 1,483,791 | | | | 1,275,118 | |
Proceeds from sales ofavailable-for-sale securities | | | 4,330,853 | | | | 2,473,684 | | | | 1,561,005 | | | | 1,341,473 | |
Proceeds from maturities ofavailable-for-sale securities | | | 7,269,091 | | | | 7,274,598 | | | | 12,351,877 | | | | 10,614,770 | |
Purchases ofavailable-for-sale securities | | | (16,227,787 | ) | | | (16,325,479 | ) | | | (11,668,839 | ) | | | (10,027,790 | ) |
Proceeds from maturities ofheld-to-maturity securities | | | 1,953,059 | | | | 6,237,970 | | | | 2,224,973 | | | | 1,912,063 | |
Purchases ofheld-to-maturity securities | | | (2,547,434 | ) | | | (6,680,646 | ) | | | (6,345,609 | ) | | | (5,453,194 | ) |
| Loan originations and principal collections, net | | | (17,620,125 | ) | | | (16,141,642 | ) | | | (5,477,713 | ) | | | (4,707,354 | ) |
| Proceeds from sales of premises and equipment | | | 11,263 | | | | 92,158 | | | | 69,583 | | | | 59,797 | |
| Purchases of premises and equipment | | | (453,706 | ) | | | (411,017 | ) | | | (382,246 | ) | | | (328,489 | ) |
| Net change in security deposits | | | (141,982 | ) | | | (38,904 | ) | | | 6,185 | | | | 5,315 | |
| Increase in goodwill | | | — | | | | — | | | | (3,303 | ) | | | (2,838 | ) |
| Acquisition of subsidiaries, net of cash acquired | | | (5,960,417 | ) | | | (46,278 | ) | | | — | | | | — | |
| Deconsolidation of subsidiaries | | | — | | | | — | | | | (1,409 | ) | | | (1,211 | ) |
| Proceeds from sales of equity method investments | | | 12,291 | | | | 8,613 | | | | 121,902 | | | | 104,758 | |
| Acquisition of equity method investments | | | (58,196 | ) | | | (264,136 | ) | | | (114,535 | ) | | | (98,427 | ) |
| Net change in other investments | | | (480,268 | ) | | | (395,972 | ) | | | (749,297 | ) | | | (643,919 | ) |
| | | | | | | | | | | | | | | | | |
| Net cash used in investing activities | | | (29,214,907 | ) | | | (26,908,255 | ) | | | (7,485,759 | ) | | | (6,432,998 | ) |
| | | | | | | | | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | | | | | | | |
| Net increase in interest-bearing deposit liabilities | | | 11,286,195 | | | | 14,955,203 | | | | 25,310,495 | | | | 21,750,952 | |
| Net increase (decrease) in non-interest-bearing deposits | | | (755,843 | ) | | | (220,276 | ) | | | (52,447 | ) | | | (45,071 | ) |
| Net increase (decrease) in short-term borrowings | | | 4,345,085 | | | | 7,079,775 | | | | (13,220,611 | ) | | | (11,361,330 | ) |
| Proceeds from issuance of secured borrowings | | | 5,356,410 | | | | 4,503,126 | | | | 2,434,546 | | | | 2,092,163 | |
| Repayment of secured borrowings | | | (4,769,939 | ) | | | (5,826,397 | ) | | | (4,685,501 | ) | | | (4,026,555 | ) |
| Proceeds from issuance of long-term debt | | | 20,165,044 | | | | 13,097,327 | | | | 16,136,245 | | | | 13,866,923 | |
| Repayment of long-term debt | | | (11,225,192 | ) | | | (12,673,038 | ) | | | (17,171,152 | ) | | | (14,756,286 | ) |
| Proceed from the issuance of common stock | | | — | | | | — | | | | 1,275,260 | | | | 1,095,914 | |
| Issuance of redeemable convertible preferred stock | | | 850,962 | | | | — | | | | — | | | | — | |
| Issuance of redeemable preferred stock | | | 2,885,276 | | | | — | | | | — | | | | — | |
| Purchases of treasury stock | | | (372 | ) | | | — | | | | — | | | | — | |
| Sale of treasury stock | | | 406,795 | | | | — | | | | 25 | | | | 21 | |
| Cash dividends paid | | | (336,994 | ) | | | (572,004 | ) | | | (230,586 | ) | | | (198,157 | ) |
| Increase of noncontrolling interest | | | 54,981 | | | | 2,328 | | | | 16,690 | | | | 14,343 | |
| | | | | | | | | | | | | | | | | |
| Net cash provided by financing activities | | | 28,262,408 | | | | 20,346,044 | | | | 9,812,964 | | | | 8,432,917 | |
| | | | | | | | | | | | | | | | | |
| Effect of exchange rate changes on cash | | | 73,604 | | | | 443,514 | | | | (1,042,974 | ) | | | (896,295 | ) |
| | | | | | | | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | 1,888,503 | | | | (2,215,029 | ) | | | 2,998,348 | | | | 2,576,676 | |
Cash and cash equivalents | | | | | | | | | | | | | | | | |
| Beginning of year | | | 1,691,303 | | | | 3,579,806 | | | | 1,364,777 | | | | 1,172,841 | |
| | | | | | | | | | | | | | | | | |
| End of year | | W | 3,579,806 | | | W | 1,364,777 | | | W | 4,363,125 | | | $ | 3,749,517 | |
| | | | | | | | | | | | | | | | | |
F-11
Shinhan Financial Group Co., Ltd. and Subsidiaries
Consolidated Statements of Cash Flows — (Continued)
| | | | | | | | | | | | | | | | | |
| | | 2007 | | | 2008 | | | 2009 | | | 2009 | |
| | | (In millions of Korean Won) | | | (See Note 1)
| |
| | | | | | (In thousands
| |
| | | | | | of US$) | |
| |
Supplemental disclosure of cash flow information | | | | | | | | | | | | | | | | |
| Cash paid for interest | | W | 6,514,034 | | | W | 8,297,836 | | | W | 8,085,712 | | | $ | 6,948,577 | |
| Cash paid for income taxes | | | 676,764 | | | | 985,904 | | | | 700,844 | | | | 602,281 | |
Supplemental disclosure of non-cash investing and financing activities | | | | | | | | | | | | | | | | |
| Acquisitions: | | | | | | | | | | | | | | | | |
| Fair value of net assets acquired | | | 765,123 | | | | — | | | | — | | | | — | |
| Goodwill | | | 81,153 | | | | — | | | | — | | | | — | |
| Consideration other than cash | | | 814,971 | | | | — | | | | — | | | | — | |
| Securities and other investments received in connection with loan restructuring | | | 2,783 | | | | — | | | | 40,072 | | | | 34,436 | |
| Increase in cumulative translation adjustments, net of taxes | | | 7,958 | | | | 142,257 | | | | (67,906 | ) | | | (58,356 | ) |
Increase (decrease) in unrealized gains (losses) onavailable-for-sale securities, net of taxes | | | 613,359 | | | | (308,976 | ) | | | 441,438 | | | | 379,355 | |
| Increase in premises and equipment transferred from other receivables | | | 107,466 | | | | — | | | | — | | | | — | |
| Increase in equity method investment due to deconsolidation | | | — | | | | — | | | | 126,795 | | | | 108,963 | |
See accompanying notes to consolidated financial statements.
F-10F-12
Shinhan Financial Group Co., Ltd. and Subsidiaries
December 31, 2005, 20062007, 2008 and 20072009
| |
| 1. | General Information and Summary of Significant Accounting Policies |
Business
Shinhan Financial Group Co., Ltd. is a financial holding company incorporated in the Republic of Korea (Korea) under the Financial Holding Company Act of Korea. Shinhan Financial Group Co., Ltd. and its subsidiaries (collectively, the Group) engage in banking and a variety of related businesses to provide a wide range of financial services to corporations, governments, institutions and individuals.
The principal subsidiaries of the Group at December 31 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Country of
| | Percentage of Ownership(1) | | | Country of
| | Percentage of Ownership(1) | |
| | | Incorporation | | 2005 | | 2006 | | 2007 | | | Incorporation | | 2007 | | 2008 | | 2009 | |
| |
Shinhan Bank(2) | | | Korea | | | | 100 | % | | | 100 | % | | | 100 | % | | Korea | | | 100 | % | | | 100 | % | | | 100 | % |
| Chohung Bank(2) | | | Korea | | | | 100 | % | | | 0 | % | | | 0 | % | |
| Good Morning Shinhan Securities Co., Ltd. | | | Korea | | | | 100 | % | | | 100 | % | | | 100 | % | |
| Shinhan Investment Corp. (Formerly Good Morning Shinhan Securities Co., Ltd.)(2) | | | Korea | | | 100 | % | | | 100 | % | | | 100 | % |
| Shinhan Card Co., Ltd. (Formerly LG Card Co., Ltd.)(3) | | | Korea | | | | 7.15 | % | | | 7.15 | % | | | 100 | % | | Korea | | | 100 | % | | | 100 | % | | | 100 | % |
| Shinhan Capital Co., Ltd. | | | Korea | | | | 100 | % | | | 100 | % | | | 100 | % | | Korea | | | 100 | % | | | 100 | % | | | 100 | % |
| Jeju Bank | | | Korea | | | | 62.42 | % | | | 62.42 | % | | | 62.42 | % | | Korea | | | 62.42 | % | | | 62.42 | % | | | 68.88 | % |
| Shinhan Credit Information Co., Ltd. | | | Korea | | | | 100 | % | | | 100 | % | | | 100 | % | | Korea | | | 100 | % | | | 100 | % | | | 100 | % |
| Shinhan Private Equity Inc. | | | Korea | | | | 100 | % | | | 100 | % | | | 100 | % | | Korea | | | 100 | % | | | 100 | % | | | 100 | % |
| Shinhan Life Insurance Co., Ltd. | | | Korea | | | | 12.90 | % | | | 100 | % | | | 100 | % | | Korea | | | 100 | % | | | 100 | % | | | 100 | % |
| SHC Management Co., Ltd. (Formerly Shinhan Card Co., Ltd.)(4) | | | Korea | | | | 100 | % | | | 100 | % | | | 100 | % | | Korea | | | 100 | % | | | 100 | % | | | 100 | % |
Note:
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| (1) | | Direct and indirect ownership are combined. All holdings are in common stock of the respective subsidiaries. |
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| (2) | | On April 3, 2006,The former Good Morning Shinhan Bank was merged into Chohung Bank with Chohung Bank being the surviving legal entity and Chohung BankSecurities Co., Ltd. changed its name to Shinhan Bank. In addition, Chohung Bank’s credit card business was spun off and merged into Shinhan Card Co., Ltd.“Shinhan Investment Corp.”. |
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| (3) | | On March 23, 2007, the Group acquired 78.58% of the issued and outstanding common stock of LG Card Co., Ltd. (“LG Card”)(LG Card) where the Group had owned 7.15% interest through a tender offer. On September 21, 2007, the Group completed the acquisition of the remaining LG Card shares through a tender offer and share exchange, and the Group’s ownership increased to 100%. |
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| (4) | | On October 1, 2007, LG Card acquired and assumed all assets, liabilities and contracts of the former Shinhan Card and changed its name to “Shinhan Card”. Also, the former Shinhan Card changed its name to “SHC Management Co., Ltd.”. |
The Group is subject to the provisions of the Financial Holding Company Act of Korea. Shinhan Bank and Jeju Bank conduct operations in accordance with the provisions of the Bank Act of Korea, including their activities in the commercial banking business. Shinhan Bank and Jeju Bank also engage in the trust business subject to the Korean Trust BusinessFinancial Investment Services and Capital Market Act (“FSCMA”) and other relevant laws.
Principles of Consolidation
The consolidated financial statements, presented in accordance with U.S. generally accepted accounting principles (US GAAP), include the accounts of Shinhan Financial Group Co., Ltd. and its majority-owned subsidiaries. The Group consolidates subsidiaries in which it holds, directly or indirectly, more than 50% of the voting rights or where it exercises control. All significant intercompany transactions and balances have been
F-11
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
eliminated in consolidation. Operating results of companies purchased are included from the dates of the acquisition. Assets held in an agency or trust management capacities are not included in the consolidated financial
F-13
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
statements. The Group accounts for investments in companies in which it owns voting or economic interest of 20% to 50% and for which it has significant influence over operating and financing decisions using the equity method of accounting and the pro rata share of their income (loss) is included in other noninterest income (expense). Investments in joint ventures, where the Group does not have unilateral control, are also accounted for using the equity method of accounting. Investments in companies where the Group owns less than 20% and does not have the ability to exercise significant influence over operating and financing decisions are accounted for using the cost method of accounting. Income from these investments is recognized when dividends are received. As discussed below, the Group consolidates entities deemed to be variable interest entities (VIEs) when the Group is determined to be the primary beneficiary of the VIEs.
Variable Interest Entities
An entity is referred to as a variable interest entity (VIE) if it meets the criteria outlined in Financial Accounting Standards Board (FASB)ASC 810,Consolidation(formerly FASB Interpretation No. 46R,46(R),Consolidation of Variable Interest Entities (revised(revised December 2003) (FIN 46R)46(R)), which are: (1) the entity has equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) the entity has equity investors that cannot make significant decisions about the entity’s operations or that do not absorb the expected losses or receive the expected residual returns of the entity.
In addition, as specified in FIN 46R, a VIE must be consolidated by the Group if it is deemed to be the primary beneficiary of the VIE, which is the party involved with the VIE that has a majority of the expected losses or a majority of the expected residual returns or both.
Along with the VIEs that are consolidated in accordance with these guidelines, the Group has significant variable interests in other VIEs that are not consolidated because the Group is not the primary beneficiary. These include Special Purpose Entities (SPEs) where the Group provides credit enhancement or liquidity guarantees, and various investment trust funds. All other entities not deemed to be VIEs, with which the Group has involvement, are evaluated for consolidation under ARBother subtopics of ASC 810 (formerly Accounting Research Bulletin (ARB) No. 51,Consolidated Financial Statements, and SFAS No. 94,Consolidation of All Majority-Owned Subsidiaries(SFAS 94)and EITF IssueNo. 04-5,Determining whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity when the Limited Partners Have Certain Rights).
Foreign Currency Translation
Assets, liabilities and operations of foreign branches and subsidiaries are recorded based on the functional currency of each entity. For certain foreign operations, the functional currency is the local currency or the US dollar, in which case assets and liabilities are translated, for consolidation purposes, at the current exchange rates from the local currency to the reporting currency, the Korean Won. Income and expenses are translated at the weighted-average exchange rate for the reporting period. The resulting translation adjustments are reported as a component of accumulated other comprehensive income within stockholders’ equity on an after-tax basis.
Foreign currency transactions executed by domestic Korean entities are accounted for at the exchange rates prevailing on the related transaction dates. Assets and liabilities denominated in foreign currencies are translated to the Korean Won using period-end exchange rates. Gains and losses resulting from the settlement of foreign currency transactions and from the translation of assets and liabilities denominated in foreign currencies are recognized in the consolidated statements of income except for gains and losses arising from the translation ofavailable-for-sale securities which are recorded as a component of accumulated other comprehensive income within stockholders’ equity on an after-tax basis.
F-12F-14
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Use of Estimates
The preparation of the consolidated financial statements requires management of the Group to make a number ofcertain estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include financial instruments with no quoted market prices, intangibles and goodwill, valuation allowances for loan losses and unfunded lending commitments, deferred income taxoff-balance sheet credit instruments, impairment of goodwill and intangible assets, fair value measurements, consolidation decision for special purpose entities,contingent liabilities, future policy benefits, deferred policy acquisition costs, , valuation allowance for deferred tax assets, valuation of businesses acquired, useful lives of property and equipment and definite lived intangible assets, share-based compensation, valuation of derivative instruments and other than temporary impairment for securities. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposesthe purpose of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, cash items in the process of collection, amounts due from banks and other financial institutions, all of which have original maturities within 90 days.
Securities Purchased under Resale Agreements and Securities Sold under Repurchase Agreements
Securities purchased under resale agreements and securities sold under repurchase agreements are treated as collateralized financing transactions and are carried inon the consolidated balance sheets at the amount at which the securities will be subsequently resold or repurchased, including accrued interest, as specified in the respective agreements. Interest earned on resale agreements and interests incurred on repurchase agreements are reported as interest income and interest expense, respectively. The Group’s policy is to take possession of securities purchased under agreements to resell. The market value of securities to be repurchased and resold is monitored, and additional collateral is obtained where appropriate to protect the Group against credit exposure.
Trading Assets and Liabilities, including Derivatives
Trading assets include securities that are bought and held principally for the purpose of selling them in the near term. Trading positions are carried at fair value and recorded on a trade date basis. The Group recognizes changes in the fair value of trading positions as they occur in net trading profits (losses). Interest and dividends are recognized when earned and included in interest and dividends on trading assets.
Fair value of trading positions is generally based on quoted market prices or quoted market prices for similar assets and liabilities. If these market prices are not available, fair values are estimated based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may require significant management judgment or estimation.
Trading assets and liabilities also include derivatives used for trading purposes and for non-trading purposes that do not qualify for hedge accounting and foreign exchange contracts which are recognized on the consolidated financial statements at fair value. Trading and non-trading derivatives include interest rate and foreign currency swaps, equity conversion options, credit indexed contracts, puts and calls, caps and floors, warrants, futures and forwards. The Group recognizes changes in the fair value of trading and non-trading derivatives that do not qualify for hedge accounting and foreign exchange contracts as they occur in net trading profits (losses).
The fair value of trading securities, derivative financial instruments and foreign exchangeFor exchange-traded contracts, is determined using quoted market prices, including quotes from dealers trading those securities or instruments, when available. If quoted market prices are not available, the fair value is determined based on quoted market prices. For non-exchange traded contracts, fair value is based on dealer quotes, pricing models, quoted prices of instruments with similar characteristics, discounted cash flowsflow methodologies, or similar techniques for which the net assetdetermination of fair value may require significant management judgment or estimation. Valuations of derivative assets and liabilities reflect the value of the investee,instruments including adjustments associated with counterparty quotes or external valuations performed by qualified independent evaluators.credit risk and the Group’s nonperformance risk, respectively.
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Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Derivatives and Hedging Activities
As part of its asset and liability management process, the Group uses various derivative instruments including interest rate and foreign currency swaps to manage various interest rate and foreign exchange exposures or modify interest rate characteristics of various balance sheet accounts. Certain derivative contracts such as interest rate
F-13
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
swaps and cross currency swaps are entered into for non-trading purposes and intended to serve as economic hedges of risk but do not qualify for hedge accounting.
The Group accounts for derivative and hedging activities in accordance with the FASB StatementASC 815-10 (formerly SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended (SFAS 133)), which requires that all derivative instruments be recorded on the balance sheet at their respective fair values. On the date a non-trading derivative contract is entered into, the Group designates the derivative as either a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge), a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge), a foreign-currency fair-value or cash-flow hedge (foreign currency hedge), or a hedge of a net investment in a foreign operation. For all hedging relationships the Group formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged item, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method of measuring ineffectiveness. This process includes linking all derivatives that are designated as fair-value, cash-flow, or foreign-currency hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Group also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.
Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a fair-value hedge, along with the loss or gain on the hedged asset or liability or unrecognized firm commitment of the hedged item that is attributable to the hedged risk, are recorded in earnings. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash-flow hedge are recorded in other comprehensive income to the extent that the derivative is effective as a hedge, until earnings are affected by the variability in cash flows of the designated hedged item. Changes in the fair value of derivatives that are highly effective as hedges and that are designated and qualify as foreign-currency hedges are recorded in either earnings or other comprehensive income, depending on whether the hedge transaction is a fair-value hedge or a cash-flow hedge. However, if a derivative is used as a hedge of a net investment in a foreign operation, its changes in fair value, to the extent effective as a hedge, are recorded in the cumulative translation adjustments account within other comprehensive income. The ineffective portion of the change in fair value of a derivative instrument that qualifies as a cash-flow hedge is reported in earnings. Changes in the fair value of derivative trading instruments are reported in current period earnings.
The Group discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative expires or is sold, terminated, or exercised, the derivative is no longer designated as a hedging instrument because it is unlikely that a forecasted transaction will occur, a hedged firm commitment no longer meets the definition of a firm commitment, or management determines that designation of the derivative as a hedging instrument is no longer appropriate.
In all situations in which hedge accounting is discontinued and the derivative is retained, the Group continues to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in its fair value in earnings. When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair-value hedge, the Group no longer adjusts the hedged asset or liability for changes in fair value. The adjustment of the carrying amount of the hedged asset or liability is accounted for in the same manner as other components of the carrying amount of that asset or liability. When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the Group removes any asset or liability that was recorded pursuant to recognition of the firm commitment from the balance sheet, and recognizes any gain or loss in
F-16
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
earnings. When it is probable that a forecasted transaction will not occur, the Group discontinues hedge accounting if not already done and recognizes immediately in earnings gains and losses that were accumulated in other comprehensive income.
F-14
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The short-cut method of hedge accounting assumes no ineffectiveness in a hedging relationship involving an interest rate swap and an interest-bearing asset or liability. The changes in the fair value or cash flows that are attributable to the risk being hedged will be completely offset at the hedge’s inception and on an on-going basis. Under the short-cut method, among other requirements, the critical terms of the derivative instrument and the hedged item should be initially the same and subsequently stay the same throughout the hedge’s life to support the ongoing application of hedge accounting.
Certain Hybrid Financial Instruments
On January 1, 2007, the Group elected to adoptIn accordance withASC 851-15 (formerly SFAS No. 155,Accounting for Certain Hybrid Financial Instruments(SFAS 155). In accordance with this standard,), hybrid financial instruments — such as structured notes containing embedded derivatives that otherwise would require bifurcation, as well as certain interest-only instruments — may be accounted for at fair value if the Group makes an irrevocable election to do so on aninstrument-by-instrument basis. The changes in fair value are recorded in current earnings. The cumulative effect atOn January 1, 2007, the Group adopted fair value election on certain hybrid financial instruments and as a result, the opening balance of adopting this standard was a gainretained earnings as of January 1, 2007 has been decreased by W15 million (W11 million after tax) and a loss of W393 million (W285 million after tax).274 million.
Securities
Securities primarily consist of asset-backed securities and debt securities issued by Korean Treasury, financial institutions mortgage-backed, corporate debt, and corporations as well as marketable equity securities with readily determinable fair values.securities. The Group classifies its debt securities in one of three categories: trading,available-for-sale, orheld-to-maturity and its equity securities into trading oravailable-for-sale. Trading securities are bought and held principally for the purpose of selling them in the near term.Held-to-maturity debt securities are those securities in which the Group has the positive intent and ability to hold the security until maturity. All securities not included in trading orheld-to-maturity are classified asavailable-for-sale.
Available-for-sale securities are recorded at fair value.Held-to-maturity debt securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses, net of the related tax effect, onavailable-for-sale securities are excluded from earnings and are reported as a separate component of other comprehensive income until realized. Realized gains and losses from the sale ofavailable-for-sale securities are determined using the moving average method for equity securities or specific identification method for debt securities.
A declineAs of January 1, 2009, the Group adopted FSPFAS 115-2 andFAS 124-2 (nowASC 320-10,Investments-Debt and Equity Securities: Recognition of anOther-than-temporary impairment, “OTTI”) (formerly FSPFAS 115-2 andFAS 124-2). OTTI must be recognized if an investor has the intent to sell the debt security or if it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. In addition, the guidance changes the amount of impairment to be recognized in current-period earnings when an investor does not have the intent to sell, or if it is more likely than not that it will not be required to sell the debt security, as in these cases only the amount of the impairment associated with credit losses is recognized in income, while the rest of the fair value loss is recognized in other comprehensive income. But declines in the fair value ofavailable-for-sale equity securities below their cost that are deemed to beother-than-temporary are recorded in earnings. When the Group does not intend to sellavailable-for-sale equity or debt securities in an unrealized loss position, potential OTTI is considered using a variety of factors, including the length of time and extent to which the market value has been less than cost; adverse conditions specifically related to the industry, geographic area or financial condition of any available-for-salethe issuer or held-to-maturity security below cost that is deemedunderlying collateral of a security; payment structure of the security; changes to be other-than-temporary resultsthe rating of the security’s issuer; the volatility of the fair value changes; and changes in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis forvalue of the security is established. To determine whether an impairment is other-than-temporary,after the balance
F-17
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
sheet date. For equity securities, the Group considers whether it has the above factors, as well as the Group’s intent and ability and intent to hold theretain its investment untilfor a period of time sufficient to allow for any anticipated recovery in market price recoveryvalue, and considers whether evidence indicatingexists to support a realizable value equal to or greater than the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year-end, and forecasted performance of the investee.carrying value.
Premiums and discounts are amortized or accreted over the life of the relatedheld-to-maturity oravailable-for-sale security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned.
Certain equity securities that do not have readily determinable fair values or have sales restrictions exceeding one year are recorded using the cost method. The cost method is used for thoseclassified as other investments under other assets. For investments in which the Group does not havehas significant influence over the investees, the equity method is applied. Certain alternative investments which meet both of the criteria underASC 820-10-15-4 are measured at fair value determined by net asset value per share and the resulting valuation gain or loss is recognized through profit or loss which is recorded in non-interest income. All the other equity securities included in the category of other investments are recorded using the cost method under this method,which there is no change to the cost basis unless there is other than temporaryother-than-temporary decline in value. If the decline is determined to be other than temporary,other-than-temporary, the groupGroup writes down the cost basis of the investment to a new cost basis that represents realizableits fair value. Those equity securities are recorded as other investments under other assets and theThe amount of write-down is included in earnings under non-interest expense and dividend income earned on these securities is recorded in non-interest income.
F-15
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Shinhan National Pension Service PEF 1st one ofand Shinhan PEF 2nd, the group’sGroup’s subsidiaries, engagesengage exclusively in venture capital activities. Venture capital investments are not within the scope ofASC 320-10 (formerly SFAS No. 115-115,Accounting for Certain Investments in Debt and Equity Securities(SFAS No. 115)), and are subject to specialized industry accounting principles for investment companies. Venture capital investments are recorded as trading assets and are carried at fair value with net changes in fair value recognized in net trading profits(losses)profits (losses). The fair values of publicly-traded securities held by this subsidiarythese subsidiaries are generally based on quoted market prices. Securities that are held by this subsidiarythese subsidiaries that are not publicly traded are initially recorded at cost, which is deemed to approximate the fair value as of the acquisition date. Subsequent to acquisition, management estimates the fair value based on investee transactions with unaffiliated parties, management’s review of the investee’s financial results and condition or the latest obtainable net asset value of the investees.
Loans
Loans are reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans, and premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are deferred and recognized as adjustments to income over the lives of the related loans. Unearned income, discounts and premiums are amortized using methods that approximate the effective interest method.
The Group generally ceases the accrual of interest when principal or interest payments become one day past due. Any unpaid interest previously accrued on such loans is reversed from income, and thereafter interest is recognized only to the extent payments are received. In applying payments on delinquent loans, payments are applied first to delinquent interest and normal interest, and then to the loan balanceprincipal until it is paid in full. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current. Interest accruals are continued for past-due loans collateralized by customer deposits.
Securities received by the Group involving loans that are restructured or settled are recorded at the fair value of the security at the date of restructuring or settlement. Any difference between the security’s fair value and the net carrying amount of the loan is recorded as a charge-off or recovery, as appropriate, on the loan through the allowance for loan losses.appropriate.
Transfers of loans to third parties are accounted for as sales when control is surrendered to the transferee. The Group derecognizes thesuch loans from the balance sheet including any related allowance and deferred loan origination costs, and recognizes all assets obtained, and liabilities incurred, including any recourse obligations to the transferee, at fair value. Any resulting gain or loss on the sales is recognized in earnings. Conversely, the
F-18
Shinhan Financial Group onlyCo., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Group recognizes loans transferred from third parties on the balance sheet when the Group obtains control of the loans.loans or participates in a loan originated by another financial institution.
The Group provides equipment financing to its customers through a variety of lease arrangements. Direct financing leases are carried at the sum of the aggregate of minimum lease payments receivable, estimated unguaranteed residual value of the lease property and unamortized initial direct costs, less unearned income. Unearned income and initial direct costs are amortized to income using the effective interest method.
The Group purchases loans with and without evidence of credit quality deterioration since origination [The Group acquires loans in a purchase business combination with and without evidence of credit quality deterioration since origination].origination. Those loans with evidence of credit quality deterioration for which it is probable, at the time of acquisition, that all amounts due according to the contractual terms of the loan agreement will not be collected are accounted for underASC 310-30 (formerly AICPA Statement of Position (SOP)03-3,Accounting for Certain Loans or Debt Securities Acquired in a Transfer(SOP 03-3).SOP 03-3). addresses accountingThe Group analyzes for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans acquired in a transfer and if those differences are attributable, at least in part, to credit quality. SOP03-3 requires impairedquality, such loans beare recorded at fair value and prohibits “carrying over” or the creation of valuation allowances in the initial accounting of loans acquired in a transfer that are within the scope of this SOP.is prohibited. The prohibition of the valuation allowance carryover
F-16
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination. UnderSOP 03-3, theThe excess of cash flows expected at purchase over the purchase price is recorded as interest income over the life of the loan. For those loans not within the scope ofSOP 03-3,ASC 310-30, any difference between the purchase price and the par value of the loan is reflected in interest income over the life of the loan.
Allowance for Loan Losses
The Group’s allowance for loan losses is based upon management’s continuing review and evaluation of the loan portfolio and is management’s best estimate of probable losses that have been incurred as of the balance sheet date. The determination of the allowance for loan losses hinges upon various judgments and assumptions, including but not limited to, management’s assessment of probable losses on individual loans, domestic and international economic conditions, loan portfolio composition, transfer risks and prior loan loss experience. The allowance for loan losses is increased by the provision for loan losses, which is charged against current period operating results and decreased by the amount of charge-offs, net of recoveries.
The Group’s allowance for loan losses consists of (a) specific allowances for specifically identified impaired borrowers, and (b) general allowances for homogeneous pools of commercial and consumer loans, and other loans which are not specifically identified as impaired.
A commercial loan is considered impaired when, after consideration of current information and events, it is probable that the Group will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement. The Group considers the following types of loans to be impaired:
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| | • | Loans classified as “substandard” or below according to asset classification guidelines of the Financial Services Commission (FSC) of the Republic of Korea. |
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| | • | Loans that are more than 90 days past due; and |
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| | • | Loans which are “troubled debt restructurings” under US GAAP |
Once a loan has been identified as individually impaired, impairment is measured in accordance withASC 310-10 (formerly SFAS No. 114,Accounting by Creditors for Impairment of a Loan, as amended by SFAS 118.118 (SFAS 114)). The Group’s measurement of the impairment of a loan, with the exception of large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, is based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, on the loan’s observable market price or on the fair value of the collateral if the loan is collateral dependent. If the resulting value is less than the book value of the loan, a specific allowance is established for an amount equal to the difference. Any
F-19
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
amounts deemed uncollectible are charged against the allowance for loan losses. Recoveries of previously charged-off amounts are credited to the allowance for loan losses. Impairment criteria are applied to the entire loan portfolio, exclusive of leases and smaller-balance homogeneous loans such as residential mortgage, consumer loans and credit cards, which are evaluated collectively for impairment. Smaller-balance commercial loans, managed on a portfolio basis, are also evaluated collectively for impairment.
The allowance for non-impaired corporate loans, consumer loans and credit card loans is determined using several modeling tools, including a delinquency roll-rate model for credit cards, as well as a risk rating migration model for homogeneous pools of consumer and commercial loans. The loss factors developed through the use of such models are based on the Group’s historical loss experiences and may be adjusted for significant factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date.
The Group charges off unsecured consumer and credit card loan amounts past due greater than 180 days and the amount deemed uncollectible on financing leases is charged off when past due greater than one year.
F-17
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Allowance for Off-Balance Sheet Credit Instruments
The Group maintains an allowance for credit losses on off-balance sheet credit instruments, such as commitments to extend credit, guarantees, acceptances, standby and commercial letters of credit and other financial instruments to absorb estimated probable losses related to these unfunded credit facilities. The allowance is estimated based on the assessment of the probability of commitment usage and credit risk factors for loans outstanding to these same customers. The allowance for credit losses for off-balance sheet credit instruments is included in other liabilities.
Following the implementation of a policy by the Korea Fair Trade Commission effective April 2008 that prohibited a unilateral lowering by the credit card company of the credit card limit of a cardholder except in the case of an impairment in the cardholder’s ability to repay, the Group established additional allowance for unfunded credit card commitments with respect to the unused credit card limit as the Group no longer control the unfunded credit card commitments.
The Group also began to apply, with respect to the off-balance sheet unused credit card limits, the same methodology used in calculating probabilities of default (“PDs”) with respect to credit card receivables, considering the current unstable financial market conditions as well as increased gross charge offs in the fiscal year 2009 compared to the fiscal year 2008. Previously, the Group applied a lower set of PDs to off-balance sheet unsued credit limits than to credit card receivables.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosures are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, the assets are carried at the lower of their carrying amounts or fair values, less cost to sell, based on periodic valuation reviews performed by management. Revenues and expenses from operations and changes in the valuation allowance are included in other non-interest expense.
Securitizations
The Group primarily securitizes corporate loans, credit card receivables, mortgages and student loans.
There are two key accounting determinations that must be made relating to securitizations. First, in the case where the Group originated or owned the financial assets transferred to the securitization entity, a decision must be made as to whether that transfer is considered a sale under generally accepted accounting principles. If it is a sale, the transferred assets are removed from the Group’s consolidated balance sheetsheets with a gain or loss recognized.
F-20
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Alternatively, when the transfer is not considered as a sale but rather a financing, the assets will remain on the Group’s consolidated balance sheetsheets with an offsetting liability recognized in the amount of proceeds received.
Second, determination must be made as to whether the securitization entity is sufficiently independent. If so, the entity would not be included in the Group’s consolidated financial statements. For each securitization entity with which it is involved, the Group makes a determination of whether the entity should be considered a subsidiary of the Group and be included in its consolidated financial statements or whether the entity is sufficiently independent that it does not need to be consolidated.require consolidation. If the securitization entity’s activities are sufficiently restricted to meet accounting requirements to be a Qualifying Special Purpose Entities (QSPE), the securitization entity is not consolidated by the seller of transferred assets. If the securitization entity is determined to be a VIE, the Group consolidates the VIE, if it is the primary beneficiary.
Interest in the securitized and sold loans may be retained in the form of subordinated debts. Retained interests are primarily recorded asavailable-for-sale investments. Gains or losses on securitization and sale depend in part on the previous carrying amount of the loans involved in the transfer and proceeds are allocated between the loans sold and the retained interests based on their relative fair values at the date of sale. Gains are recognized at the time of securitization and are reported in non-interest income or expense.
The Group values its securitized retained interest at fair value using either financial models, quoted market prices, or sales of similar assets. Where quoted market prices are not available, the Group estimates the fair value of these retained interests by determining the present value of expected future cash flows using modeling techniques that incorporate management’s best estimates of key assumptions, including prepayment speeds, credit losses, and discount rates.
Transfers of Financial Assets
For a transfer of financial assets to be considered a sale, the assets must have been isolated from the Group, even in bankruptcy or other receivership; the purchaser must have the right to sell or pledge the assets transferred, or
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Notes to Consolidated Financial Statements — (Continued)
the purchaser must be a QSPEqualifying special purpose entity (QSPE) and the Group does not maintain effective control. If these sale requirements are met, the assets are removed from the Group’s consolidated balance sheet. If the conditions for sale are not met, the transfer is considered to be a secured borrowing, and the assets remain on the consolidated balance sheet. The sale proceeds are recognized as the Group’s liability. A legal opinion on a sale is generally obtained for complex transactions or where the Group has continuing involvement with assets transferred or with the securitization entity. Those opinions must state that the asset transfer is considered a sale and that the assets transferred would not be consolidated with other assets in the event of the Group’s insolvency.
Premises and Equipment
Buildings, equipment and furniture, leasehold improvements and operating lease assets are stated at cost less accumulated depreciation and amortization. Equipment under capital leases are stated at the present value of minimum lease payments less unguaranteed residual value. Depreciation of buildings and operating lease assets is calculated on the straight-line method over the estimated useful lives of the assets. Depreciation of equipment and furniture is calculated on a declining balance method over the estimated useful lives of the assets. Equipment under capital leases and leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful lives of the assets. Gains or losses on sale of premises and equipment are determined by reference to their carrying amounts. Maintenance and repairs are charged to expense as incurred.
The Group capitalizes certain direct costs related to developing software for internal use, and amortizes such costs on a straight-line basis once the software is available for use in accordance with the Statements ofPositionASC 350-40 (formerlySOP 98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal UseUse).
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Notes to Consolidated Financial Statements — (Continued)
The estimated useful lives of premises and equipment are as follows:
| | | | | |
| Buildings | | | 40 years | |
| Equipment and furniture | | | 4~5 years | |
| Leasehold improvements | | | 5 years | |
| Operating lease assets | | | 3~5 years | |
| Capitalized software costs | | | 4~5 years | |
Goodwill and Other Intangible Assets
Goodwill represents the cost of an acquired business in excess of the fair value of the net assets acquired. Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights, or because the asset is capable of being sold or exchanged either on its own or in connection with a related contract, asset, or liability. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions ofASC 350-10 (formerly SFAS No. 142,Goodwill and Other Intangible Assets(SFAS 142)). Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance withASC 360-10 (formerly SFAS No. 144,Accounting for Impairment or Disposal of Long-Lived Assets(SFAS 144)).
The Group’s finite-lived intangible assets are comprised of core deposit, credit card relationship, brokerage customer relationship and Korea Securities Finance Corporation (KSFC) deposit and valuation of business acquired (“VOBA”)(VOBA) intangibles. Core deposit intangibles represent the value of the funding provided by a base of acquired demand and savings accounts, which the Group can expect to maintain for an extended period of time because of generally stable customer relationships. Credit card relationship and brokerage customer relationship intangibles reflect the value of revenues to be derived from a base of acquired customer credit card and brokerage accounts’ activities, which the Group can expect to maintain for an extended period of time. KSFC deposit intangibles represent the positive spread realized on the differences between the interest rate paid to the customers and the interest rate earnedpaid on the deposit with KSFC, which the Group can expect to maintain for an extended period of
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Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
time. VOBA intangible represents the present value of future profits embedded in the acquired business, which is determined by estimating the net present value of future cash flows from the contracts in force at the date of acquisition. The Group has established VOBA primarily for its acquired traditional, interest-sensitive and variable businesses. Each of the traditional and interest-sensitive businesses is composed of life insurance and annuity contacts.
The finite-lived intangibles except VOBA are amortized usingsum-of-the-years’-digit method over their estimated useful lives, which range from 1 to 18 years. The estimated weighted-average life of brokerage customer relationship intangibles, KSFC deposit intangibles and Shinhan Bank’s core deposit intangibles and credit card relationship intangibles are approximately 3, 3, 109 and 56 years, respectively, reflecting the run-off of economic value. VOBA is amortized over the effective lives of the acquired contracts. For acquired traditional business, VOBA is amortized in proportion to gross premiums of insurance in force, as applicable. For acquired interest-sensitive and variable businesses, VOBA is amortized in proportion to gross profits arising from the contracts and anticipated future experience, which is evaluated regularly.
The Group’s indefinite-lived intangible assets are composed of court deposits of ChohungShinhan Bank and KSFC borrowings. Court deposit intangible asset representrepresents the value of the funding provided by a base of acquired court deposit accounts acquired in a business combination which the Group can expect to maintain for an indefinite period because that court deposit will be maintained indefinitely once appointed by courts. KSFC borrowing represents the value of the low cost funding from KSFC compared to the next available funding source in the market, and the
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Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Group expects to benefit from the borrowing agreement indefinitely because that borrowing agreement lasts indefinitely in accordance with the Securities and Exchange Law inAct of Korea.
Deferred Policy Acquisition Costs (DAC)
Deferred Policy Acquisition Costs (DAC), included in other assets, represent the costs of acquiring new business, principally commissions, certain underwriting and agency expenses directly attributable to the policies written, and the cost of issuing policies.
For traditional business, DAC is amortized over the premium-paying periods of the related policies, in proportion to the ratio of the annual premium revenue to the total anticipated premium revenue in accordance withASC 944-20 (formerly SFAS No. 60,Accounting and Reporting by Insurance Enterprises(SFAS 60)). Assumptions as to the anticipated premiums are made at the date of policy issuance or acquisition and are consistently applied over the life of the policy.
For interest-sensitive and variable businesses, DAC is amortized at a constant rate based upon the present value of estimated gross profits expected to be realized in accordance withASC 944-20 (formerly SFAS No. 97,Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from Sale of Investments(SFAS 97)). The effect of changes in estimated gross profits on unamortized deferred acquisition costs is reflected in the period such estimated gross profits are revised.
Deferred policy acquisition costs are reviewed to determine if they are recoverable from future income, including investment income, and, if not recoverable, are charged to expense. All other acquisition expenses are charged to operations as incurred.
Future Policy Benefits
The Group’s liability for future policy benefits is primarily comprised of the present value of estimated future payments to or on behalf of policyholders, where the timing and amount of payment depends on policyholder mortality or morbidity, less the present value of future net premiums. Major assumptions used for future policy benefits are mortality and interest rate. Expected mortality is generally based on the Group’s historical experience and the standard industry table including a provision for the risk of adverse deviation. Interest rate assumptions are based on factors such as market conditions and expected investment returns. Although mortality and interest rate assumptions are “locked-in” upon the issuance of new insurance or annuity business with fixed and guaranteed
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Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
terms, significant changes in experience or assumptions may require the Group to provide for expected future losses on a product by establishing premium deficiency reserves. Premium deficiency reserves, if required, are determined based on assumptions at the time the premium deficiency reserve is established and do not include a provision for the risk of adverse deviation.
The Group’s liability for future policy benefits also includes a liability for unpaid claims and claim adjustment expenses. The Group does not establish loss reserves until a loss has occurred. However, unpaid claims and claim adjustment expenses include estimates of claims that the Group believes have been incurred but have not yet been reported as of the balance sheet date. The Group’s liability for future policy benefits also includes liabilities for guarantee benefits related to certain nontraditional long-duration life and annuity contracts and unearned revenue.
Separate Account Assets and Liabilities
Separate account assets and liabilities are reported at fair value and represent segregated funds that are invested for certain policyholders. The assets consist of equity securities, fixed maturities, policy loans and cash equivalents. The assets of each account are legally segregated and are generally not subject to claims that arise out of any other business of the Group. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Group with respect to certain accounts. The investment income and gains or losses for separate accounts generally accrue to the policyholders and are not included in the consolidated
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Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
statements of income. Separate account assets and liabilities amounts are included in “Other assets”other assets and “Accruedaccrued expenses and other liabilities”,liabilities, respectively, and amountamounted to W716,737 million and W1,090,887 million as of each account is W560,163 million.December 31, 2008 and 2009, respectively.
Insurance Premium
Insurance Premiums from long-duration contracts, other than interest-sensitive life contracts, are earned when due as determined by the respective contract and estimates for premiums due but not yet collected are accrued. Premium collected for interest-sensitive contracts are not reported as revenue in the consolidated statements of income. Premiums from short-duration insurance contracts, principally accident and health policies, are earned over the related contract period.
Impairment
In accordance withASC 360-10 (formerly SFAS 144,144), long-lived assets, such as premises, and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison ofcomparing the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows or quoted market prices in active markets if available, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet.
Goodwill and intangible assets that have indefinite useful lives are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. For goodwill, the impairment determination is made at the reporting unit level and consists of two steps. First, the Group determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in
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Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
accordance withASC 805-10 (formerly SFAS No. 141,Business Combinations(SFAS 141)). The residual fair value after this allocation is the implied fair value of the reporting unitunit’s goodwill.
Share-Based Compensation
The Group uses a fair value method of accounting for share-based compensation provided to its employees and key executives. The Group values stock options issued based upon an option-pricing model and recognizes this value as an expense, adjusted for forfeitures, over the period in which the options vest. On January 1, 2006, the Group adopted SFAS No. 123(revised 2004),Share-Based Payment. The revised standard replaced the existing SFAS 123, which allowed use of the intrinsic value method under APB 25.are vested.
Commissions and Fees
Commissions and fees primarily consist of brokerage fees and commissions, credit card fees, fees on guarantees and import / import/export letters of credit, and commissions received on remittance, cash dispenser service, cash management services and others. These fees are recognized over the period during which the related services are rendered.
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Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Net Trust Management Fees
The Group manages funds on behalf of its customers through operations of various trust accounts. The Group receivesrecognized such management fees for managing those funds which are recognized when earned. The Group is also entitled to receive performance-based fees for certain trust accounts. These fees, if earned, are recognized at the end of the performance period. In addition, the Group is liable to compensate trust account holders for losses incurred in certain trust accounts, subject to minimum return and principal guarantees. Such losses arising from the trusts underperforming the guaranteed level are accrued at the end of each applicable year when they are considered probable and reasonably estimable, and are included in net trust management fees.
Co-Branding Credit Card Arrangements
The Group has co-brand arrangements with certain vendors that entitle a cardholder to receive benefits, such as airline frequent-flyer points, based on purchases made with the credit card. These arrangements have remaining terms not exceeding five years. The Group makes monthly payments to the certain co-brand partners based on the volume of cardholders’ purchases and on the number of points awarded to cardholders, and to the other co-brand partners, based on the numbers of points used when cardholders useredeemed by the points awarded.cardholders. The probable amount of payments to the co-brand partners is estimated consideringbased on historical payment experience and is recorded in accrued expenses and other liability.liabilities.
Dormant Accounts
Customers’ deposits with a positive balance but no earnings for an extended period of time are considered dormant accounts. BeforePrior to 2007, with respect to the dormant accounts after the legal discharge, and pursuant to the Korean Commercial Code, the Group estimated a redemption ratio based on past experience and recognized gain on dormant accounts excluding expected redemption amounts as other non-interest income. However, regulations on dormant accounts that were newly enacted in 2007 requirerecommend balances on dormant accounts to be transferred to dormant account foundation.foundation and the Group elected to transfer only the dormant accounts of consumer deposits. Consequently, the Group has accounted for such amounts as other liabilities in 2007.since 2007 and continuously recognized gain on dormant accounts of corporate deposits excluding expected redemption amounts as other non-interest income.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
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Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Deferred tax assets, including the tax effect on the carryforward tax losses,loss carryforwards, are recognized to the extent it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible. To the extent the deferred tax assets are not more likely than not realizable, a valuation allowance is recognized.
In June 2006, the FASB issued FIN 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, amended by FASB Staff PositionNo. FIN 48-1,Definition of Settlement in FASB Interpretation No. 48(FIN 48). FIN 48, currently coded asASC 740-10.ASC 740-10 addresses the accounting for uncertainty in income tax positions by prescribing a consistent recognition threshold and measurement attribute for income tax positions taken or expected to be taken in an income tax return. FIN 48ASC 740-10 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48
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Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
ASC 740-10 requires a two-step process in evaluating income tax positions. In the first step, an enterprise determines whether it is more likely than not that an income tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Income tax positions meeting the more-likely-than-not recognition threshold are then measured to determine the amount of benefit eligible for recognition in the financial statements. Each income tax position is measured at the largest amount of benefit that is more likely than not to be realized upon settlement.
The Group adopted the provisions of FIN 48ASC 740-10 on January 1, 2007, resulting in a cumulative effect of W3,815 million cumulative effect increase to beginning retained earnings. Additionally, the Group elected to classify interest and penalties related to unrecognized tax benefits as a component of income tax expense. See Note 24 in the consolidated financial statements for further details regarding additional disclosures on FIN 48.ASC 740-10.
Earnings Per Share
Earnings per share is computed after recognition of preferred stock dividend requirements. Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised. It is computed after giving consideration to the weighted average dilutive effect of the Group’s stock option, bonds with stock purchase warrants and redeemable convertible preferred stock. Dilutive potential common shares are calculated using the treasury stock method and if-converted method.
Comprehensive Income
The Group records unrealized gains and losses onavailable-for-sale securities and foreign currency translation adjustments in accumulated other comprehensive income (AOCI), net of taxes. Unrealized gains and losses onavailable-for-sale securities are reclassified to net income as the gains or losses are realized upon sale of the securities.Other-than-temporary impairment charges are reclassified to net income at the time of the charge.recognition. Translation gains or losses on foreign currency translation adjustments are reclassified to net income upon sale or liquidation of investments in foreign operations.
Convenience Translation
The Group operates primarily in Korea and its official accounting records are maintained in Korean Won. The US dollar amounts are provided herein as supplementary information solely for the convenience of the reader. Korean Won amounts are expressed in US dollars at the rate of W935.80 :1,163.65: US$1, the United States Federal Reserve
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Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Bank of New York noon buying exchange rate in effect on December 31, 2007.2009. Such convenience translation into US dollar should not be construed as representations that the Korean Won amounts have been, could have been, or could in the future be converted into US dollars at this or any other rate of exchange.
Reclassification
Certain reclassifications have been made in the prior years’ consolidated financial statements to conform to the current year presentation for comparative purposes.
| |
| 2. | Accounting Changes and Future Application of Accounting Standards |
Fair Value MeasurementsThe FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (ASC 105)
In September 2006,June 2009, the FASB approved the FASB Accounting Standards Codification (the Codification or ASC) to be the single source of authoritative non-governmental US GAAP and issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB
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Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Statement No. 162 (SFAS No. 168). The Codification is not meant to change US GAAP, but is intended to improve the ease of researching US GAAP issues. The Codification reorganizes existing US GAAP pronouncements, relevant portions of authoritative content issued by the US Securities and Exchange Commission (SEC), and SEC staff interpretations and administrative guidance, into approximately 90 accounting topics. Once the Codification was launched on July 1, 2009, it became the single source of authoritative US GAAP. On the effective date of SFAS No. 168, the Codification supersedes all then-existing non- SEC accounting and reporting standards to become the single source of authoritative non-governmental US GAAP. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. SFAS No. 168 represents the final standard that the FASB will issue in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. All subsequent standards will be issued as Accounting Standard Updates (ASU), which will serve only to update the Codification. The Codification and SFAS No. 168 are effective for financial statements issued for interim and annual periods ending after September 15, 2009.
Fair Value Measurements (ASC 820)
Effective January 1, 2008, the Group adopted SFAS No. 157,Fair Value Measurements (SFAS(SFAS 157), which defines (nowASC 820-10,Fair Value Measurements and Disclosures).ASC 820-10 establishes a three-level fair value establishes a framework for measuringhierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets the lowest priority to unobservable inputs to fair value and expands disclosures about financialmeasurements. The three levels of the fair value hierarchy underASC 820-10 are described below:
| | |
| • | Level 1 — Quoted prices for identical instruments in active markets. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain securities that are highly liquid and are actively traded inover-the-counter markets. |
|
| • | Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations in which all significant inputs and significant value drivers are observable in active markets. |
|
| • | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value measurements. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques based on significant unobservable inputs, as well as management judgements or estimates that are significant to valuation. |
This hierarchy requires the Group to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. For some products or in certain market conditions, observable inputs may not always be available.
UnderASC 820-10, the Group is required to take into account its own credit risk when measuring the fair value of derivative liabilities as well as the other liabilities for which fair value accounting has been elected underASC 815-15 (formerly SFAS No. 155,Accounting for Certain Hybrid Financial Instruments). The Group adopted certain provisions ofASC 820-10 related to nonfinancial assets and nonfinancial liabilities that are not measured at fair value.value on a recurring basis since January 1, 2009. The application of these provisions did not have a material impact on the Group’s consolidated financial statements.
Determining Fair Value Financial Assets when the Market for that Asset is Not Active
In October 2008, the FASB issued FASB Staff PositionFAS 157-3, Determining Fair Value of Financial Assets when the Market for that Asset is not Active (FSPFAS 157-3) (nowASC 820-1-035-55A,Fair Value Measurements and Disclosures: Financial Assets in a market That is not Active), which clarifies the application of SFAS 157 (nowASC 820-10-35-55A,Fair Value Measurements and disclosures: Financial Assets in a Market That is Not Active), in a market that is not active and provides a consistent definition ofan example to illustrate key considerations in determining the fair value of
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Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
a financial instrument when the market for that financial asset is not active. This FSP is effective upon issuance, including prior periods for which focusesfinancial statements have not been issued. The application of this FSP did not have a material impact on exit pricethe Group’s consolidated financial statements.
Determining Fair Value When the Volume and prioritizes, within a measurementLevel of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (ASC 820)
In April 2009, the FASB issued FASB Staff PositionNo. FAS 157-4,Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly(FSPFAS 157-4) (nowASC 820-10-35-51A,Fair Value Measurements and Disclosures: Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased). The FSP provides additional guidance for estimating fair value in accordance withASC 820-10, when the usevolume and level of market-based inputs over entity-specific inputs. The standard also establishes a three-level hierarchyactivity for fair value measurements based on the transparency of inputs to the valuation of a financial asset or liability as of the measurement date. SFAS 157have significantly decreased. The FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. The guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted. The adoption of the FSP had no impact on the Group’s fiscal year beginning January 1, 2008 and requires that cumulative effect of the adoption be reflected as an adjustment to the beginning balance of retained earnings in the year of adoption. The Group is currently evaluating the impact of adopting SFAS 157 on its consolidated financial statements.condition, results of operations or cash flows.
The Fair Value Option for Financial Assets and Financial Liabilities (ASC 820)
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(SFAS 159). SFAS 159 (nowASC 825-10,Financial Instruments: Fair Value Option) currently coded asASC 825-10, which provides an option for companies tounder which a company may irrevocably elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments. Under SFAS 159, fair value would be used for both the initial and subsequent measurement of the designatedattribute for certain financial assets liabilities and commitments,financial liabilities. This fair value option is available on acontract-by-contract basis with the changes in fair value recognized in earnings.earnings as those changes occur. The standard isGroup adopted SFAS 159 effective for the Group’s fiscal year beginning January 1, 2008, and requires that cumulative effect of the adoption be reflected as an adjustmenthowever, there was no impact to the beginning balance of retained earnings inGroup’s consolidated financial statements as the Group did not elect the fair value option for any qualified assets or liabilities during the year of adoption. The Group does not believe the impact of adopting SFAS 159 will have a significant impact on our consolidated financial condition and results of operations.ended December 31, 2008.
Derivatives NettingASUNo. 2009-05, FV Measurements and Disclosures — Amendment of FASB Interpretation No. 39Measuring Liabilities at FV (ASC 820)
In April 2007,August 2009, the FASB issued accounting standard updates to clarify how the fair value measurement principles should be applied to measuring liabilities carried at fair value. The update explains how to prioritize market inputs appropriate for debt obligations that are restricted from being transferred to another obligor. The update is effective for the first reporting period (including interim period) beginning after issuance and is not expected to have a material impact.
Disclosures about Credit Derivatives and Certain Guarantees (ASC 815 and ASC 460)
In September 2008, the FASB issued FASB Staff PositionNo. FAS 133-1 andFIN 39-1,45-4,Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 3945, and Clarification of the Effective Date of FASB Statement No. 161(FSP (FSPFAS 133-1 andFIN 39-1)45-4), which permits offsetting(nowASC 815-10-50-4K,Derivatives and Hedging: Credit Derivatives, respectively). FSPFAS 133-1 andFIN 45-4 requires enhanced disclosures about credit derivatives and guarantees and amends FIN 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of cash collateral receivables or payables with netIndebtedness of Others(FIN 45) to exclude credit derivative positionsinstruments accounted for at fair value under certain circumstances.SFAS 133. This FSPFIN 39-1 is effective for fiscal years beginningfinancial statements issued for reporting periods ending after November 15, 2007, with early application permitted. The Group is currently evaluating the potential impact2008. Since FSPFAS 133-1 andFIN 45-4 only requires additional disclosures concerning credit derivatives and guarantees, adoption of adopting this FSP did not have an effect on itsthe Group’s consolidated financial statements but does not expect that it will have a significant impact on our consolidated financial condition and results of operations.
Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards
In June 2007, the FASB ratified the Emerging Issues Task Force consensus on IssueNo. 06-11,Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards(EITF 06-11), which must be applied prospectively for dividends declared in fiscal years beginning after December 15, 2007.EITF 06-11 requires that realized tax benefits from dividends or dividend equivalents paid on equity-classified share-based payment awards that are charged to retained earnings should be recorded as an increase to additional paid-in capital and included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. Thestatements.
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Notes to Consolidated Financial Statements — (Continued)
GroupDetermining Whether an Instrument Is Indexed to an Entity’s Own Stock (ASC 810)
In June 2008, the FASB issuedEITF 07-5,Determining Whether an Instrument Is Indexed to an Entity’s Own Stock(EITF 07-5) (nowASC 815-40-15-5,Derivatives and Hedging: Evaluating whether an Instrument is currentlyConsidered Indexed to an Entity’s Own Stock), which establishes a two-step process for evaluating whether equity-linked financial instruments and embedded features are indexed to a company’s own stock for purposes of determining whether the potentialderivative scope exception in SFAS 133 should be applied.EITF 07-5 is effective for fiscal years beginning after December 15, 2008. The adoption of this EITF did not have a material impact of adopting this consensus on itsthe Group’s consolidated financial statements.
Investment CompaniesFSPFIN 39-1, which modifies FASB Interpretation (FIN) No. 39, “Offsetting of Amounts Related to Certain Contracts,” (ASC 210)
In June 2007, the AICPA issued Statement of Position07-1,Clarification of the Scope of the Audit and Accounting Guide for Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies(SOP 07-1).SOP 07-1 provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide Investment Companies (Guide), and therefore qualifies to use the Guide’s specialized accounting principles (referred to as “investment company accounting”). Additionally,SOP 07-1 provides guidelines for determining whether investment company accounting should be retained by a parent company in consolidation or by an equity method investor in an investment. In MayDuring April 2007, the FASB issued FSPFIN 39-1,Amendment of FASB Staff PositionInterpretation No. 39(FSPFIN 46R-7,39-1) (now incorporated intoASC 815-10-45,Application of FIN 46R to Investment CompaniesDerivatives and Hedging — Other Presentation Matters(FSP FIN 46R-7)), which amends FIN 46R to permanently exempt entities within the scope of the Guide from applying the modifying certain provisions of FIN 46R39,Offsetting of Amounts Related to their investments. In February 2008,Certain Contracts. This amendment amends FIN 39 to permit a reporting entity to offset fair value amounts recognized for the FASB agreedright to an indefinite delayreclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement that have been offset. The Group has presented derivative assets and liabilities on a gross basis regardless of the effective dateexistence ofSOP 07-1 in order master netting arrangements under FIN 39. According to address implementation issues, which effectively delays FSPFIN 46R-7 as well for those companies, such asits accounting policy, the Group that havedid not adoptedSOP 07-1. The Group is currently evaluatingoffset fair value amounts for the potential impact of adoptingSOP 07-1rights and obligations related to cash collateral and FSPFIN 46R-739-1 on itshad no impact to the Group’s consolidated financial statements.
Written Loan Commitments Recorded at Fair Value Throughthrough Earnings
On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109,Written Loan Commitments Recorded at Fair Value Throughthrough Earnings(SAB 109), which revises and rescinds portions of SAB 105,Application of Accounting Principles to Loan Commitments. SAB 109 states that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. However, the fair value measurement of a written loan commitment still must exclude the expected net cash flows related to internally developed intangible assets (such as customer relationship intangible assets). The provisions of SAB 109 are applicable to written loan commitments issued or modified beginning on January 1, 2008. The Group is currently evaluating the impactadoption of adopting SAB 109 did not have a material impact to the Group’s consolidated financial statements.
Measurement of Impairment for Certain Securities (ASC 325)
In January 2009, the FASB issued FASB Staff PositionEITF 99-20-1 (FSPEITF 99-20-1) (now incorporated intoASC 320-10-35-20,Investments — Debt and Equity Securities: Steps for Identifying and Accounting for Impairment), which amends the impairment guidance inEITF 99-20 to make the investment security impairment model inEITF 99-20 more consistent with the securities impairment model in SFAS 115. FSPEITF 99-20-1 removes the requirement that a holder’s best estimate of cash flows be based exclusively upon those that a market participant would use and allows for reasonable judgement to be applied in considering whether an adverse change in cash flows has occurred based on all available information relevant to the collectability of the security.FSP EITF 99-20-1 is effective for interim and annual periods ending after December 15, 2008, and therefore the Group adopted FSPEITF 99-20-1 from 2008. The adoption of this FSP did not have a material impact on the Group’s consolidated financial statements.
F-29
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Disclosure about Transfers of Financial Assets and Interests in VIEs (ASC 860)
On December 11, 2008, the FASB issued FASB Staff PositionFAS 140-4 and FIN 46(R)-8 (FSP FAS140-4 and FIN 46(R)-8) (nowASC 860-10,Transfers and servicing), which requires additional disclosures relating to transfers of financial assets and interests in securitization entities and other variable interest entities. The purpose of this FSP is to require improved disclosure by public enterprises prior to the effective dates of the proposed amendments to SFAS 140 and FIN 46(R). The effective date for the FSP is for reporting periods (interim and annual) beginning with the first reporting period that ends after December 15, 2008. The disclosures required by this FSP are incorporated in this report. FSPFAS 140-4 and FIN 46(R)-8 only affected the Group’s disclosure of transfers of financial assets and interests in securitization entities and other variable interest entities and not its consolidated financialbalance sheets, consolidated statements but does not expect the impact of adopting SAB 109 to be material.income or consolidated statements of cash Flows.
Business Combinations (ASC 805)
On December 4, 2007, the FASB issued SFAS No. 141 (revised),Business Combination(SFAS 141R)141(R)). SFAS 141R141(R) (nowASC 805-10,Business Combinations) retains the fundamental requirements in SFAS 141 that the purchase method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. This statement also retains the guidance in SFAS 141 for identifying and recognizing intangible assets separately from goodwill. The most significant changes in SFAS 141R141(R) are: (1) acquisition and restructuring costs are now expensed; (2) stock consideration is measured based on the quoted market price as of the acquisition date instead of the date the deal is announced; (3) contingent consideration arising from a contract and noncontractual contingencies that meet the more-likely-than-not recognition threshold are measured and recognized as an asset or liability at fair value at the acquisition date using a probability-weighted discounted cash flow model, with subsequent changes in fair value reflected in earnings. Noncontractual contingencies that do not meet the more-likely-than-not criteria continue to be recognized when they are probable and reasonably estimable; and (4) acquirer records 100%step-up to fair value for all assets and liabilities, including the minoritynoncontrolling interest portion and goodwill is recorded as if a 100 percent interest was acquired. SFAS 141R is effective for new acquisitions consummatedThe Group adopted the standard on or after January 1, 2009, and early adoptionit is not permitted.applied prospectively.
F-25
Shinhan Financial Group Co., Ltd. and Subsidiaries
Loss- Contingency Disclosures (ASC 450)
In June 2008, the FASB issued an exposure draft proposing expanded disclosures regarding loss contingencies accounted for under SFAS No. 5, Accounting for Contingencies (SFAS 5), and SFAS 141(R) (nowNotesASC 450-10 and805-10, respectively). This proposal increases the number of loss contingencies subject to Consolidated Financial Statements — (Continued)disclosure and requires substantial quantitative and qualitative information to be provided about those loss contingencies. The proposal is expected to have no impact on the Group’s accounting for loss contingencies.
Noncontrolling Interests in Consolidated Financial Statements (ASC 810)
On December 4, 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements (SFAS 160) (nowASC 810-10-45-15,Consolidation — Noncontrolling Interest in a Subsidiary(SFAS 160)), which establishes standards for the accounting and reporting of noncontrolling interests in subsidiaries (that is, minority interests) in consolidated financial statements and for the loss of control of subsidiaries. SFAS 160 requires: (1) the equity interest of noncontrolling shareholders, partners, or other equity holders in subsidiaries to be accounted for and presented in equity, separately from the parent shareholder’s equity, rather than as liabilities or as “mezzanine” items between liabilities and equity; (2) the amount of consolidated net income attributable to the parent and to the noncontrolling interests be clearly identified and presented on the face of the consolidated statement of income; and (3) when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of any noncontrolling equity investment rather than the carrying amount of that retained investment. The Group’s adoption on January 1, 2009 did not have a material impact on the consolidated financial statements.
F-30
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Fair Value Disclosures about Pension Plan Assets (ASC 715)
In December 2008, the FASB issued FASB Staff PositionSFAS 160 is132R-1,Employers’ Disclosures about Postretirement Benefit Plan Assets(FSP SFAS 132(R)-1) (now incorporated intoASC 715-20-50,Compensation and Benefits — Disclosure). This FSP requires that information about plan assets be disclosed, on an annual basis, based on the fair value disclosure requirements of SFAS 157. The disclosures about plan assets required by this FSP are effective for fiscal years ending after December 15, 2009 and as this FSP only relates to disclosures, the Group’s fiscal year beginning January 1, 2009. Earlier adoption is not permitted.has no material impact on the consolidated financial statements.
Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (ASC 860)
In February 2008, the FASB issued FASB Staff PositionFAS 140-3,Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (FSP(FSPFAS 140-3)140-3 (nowASC 860-10-40-42,Transfers and Servicing: Repurchase Financing). FSPFAS 140-3 provides guidance for determining whether an initial transfer of a financial asset and a repurchase financing should be considered a linked transaction for the purposes of assessing whether sale accounting is appropriate under SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities(SFAS 140). For transactions within its scope, FSPFAS 140-3 presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement, as a linked transaction. However, if certain criteria are met, the initial transfer and repurchase financing should not be evaluated as a linked transaction and should be evaluated separately under SFAS 140. FSPFAS 140-3 will beis effective for the Group’s fiscal year beginning January 1, 2009, and will beis applied to new transactions entered into after the date of adoption. EarlyThe adoption is prohibited. The Group is currently evaluating the potential impact of adopting this FSP has no material impact on itsthe Group’s consolidated financial statements.
Disclosures about Derivative Instruments and Hedging Activities
On March 19, 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities (SFAS 161) (now incorporated intoASC 815-10-50,Derivative and Hedging — Disclosure(SFAS 161)), which amends the disclosure requirements of SFAS 133,Accounting for Derivative Instruments and Hedging Activities(SFAS 133, now ASC 815). SFAS 161This Statement requires increasedenhanced disclosures about derivative instruments and hedging activities and their effects on an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years beginning after November 15, 2008, with early adoption permitted. This statement will only affectaffected the Group’s disclosures of derivative instruments and related hedging activities, not its consolidated financial position, financial performance or cash flows.
Determination of the Useful Life of Intangible Assets — Amendment of SFAS 142 (ASC 350)
On April 25, 2008, the FASB issued FASB Staff PositionNo. FAS 142-3,Determination of the Useful Life of Intangible Assets(FSPFAS 142-3), (nowASC 350-30,General Intangibles Other Than Goodwill),which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. This FSP is intended to improve the consistency between the useful life of an intangible asset determined under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R,141(R), and other US GAAP. FSPFAS 142-3 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. TheThis FSP is effective for the Group is currently evaluatingon January 1, 2009, and had no material impact.
Equity Method Investment Accounting Considerations
In November 2008, the potential impactFASB issuedEITF 08-6,Equity Method Investment Accounting Considerations(EITF 08-6 (nowASC 323-10,Investments — Equity Method and Joint Ventures). UnderEITF 08-6, an entity shall measure its equity method investment initially at cost in accordance with SFAS 141(R). Anyother-than-temporary impairment of adopting this FSP on its consolidated financial statements.an equity method investment should be recognized in accordance with Opinion 18. An equity method investor shall not separately test an investee’s underlying assets for impairment. Share issuance by an
F-26F-31
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| |
3. | Business Changes and Developments |
investee shall be accounted for as if the equity method investor had sold a proportionate share of its investment, with gain or loss recognized in earnings.EITF 08-6 is effective for the Group on January 1, 2009, and had no material impact.
Acquisition of Shinhan Life Insurance Co., Ltd.Accounting for Defensive Intangible Assets (ASC 350)
Shinhan Life Insurance Co.In November 2008, the FASB issuedEITF 08-7,Accounting for Defensive Intangible Assets(EITF 08-7) (nowASC 350-30-25-5,Intangibles — Goodwill and Other: Defensive Intangible Assets). According toEITF 08-7, an acquired defensive asset should be accounted for as a separate unit of accounting (i.e., Ltd. (Shinhan Life Insurance) was incorporated in January 1990 under the lawsan asset separate from other assets of the Republic of Koreaacquirer). The useful life assigned to engagean acquired defensive asset shall be based on the period during which the asset would diminish in life insurance and related businesses. On December 13, 2005,value.EITF 08-7 states that it would be rare for a defensive intangible to have an indefinite life.EITF 08-7 is effective for the Group acquiredon January 1, 2009, and had no material impact.
Accounting for Transfers of Financial Assets and Consolidation of Variable Interest Entities (ASC 860)
In June 2009, the remaining 34,010,428 sharesFASB issued SFAS 166,Accounting for Transfers of Financial Assets, an amendment of SFAS 140 that will eliminate Qualifying Special Purpose Entities (QSPEs).
Simultaneously, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (now ASC860-10,Transfers and Servicing) which details three key changes to the consolidation model. First, former QSPEs will now be included in the scope of SFAS 167. In addition, the FASB has changed the method of analyzing which party to a variable interest entity (VIE) should consolidate the VIE (known as the primary beneficiary) to a qualitative determination of which party to the VIE has “power” combined with potentially significant benefits or 85.03%losses, instead of the issuedcurrent quantitative risks and outstanding common stockrewards model. The entity that has power has the ability to direct the activities of Shinhan Life Insurance wherethe VIE that most significantly impact the VIE’s economic performance. Finally, the new standard requires that the primary beneficiary analysis be re-evaluated whenever circumstances change. The current rules require reconsideration of the primary beneficiary only when specified reconsideration events occur.
These new standards are effective for fiscal years that begin after November 15, 2009 and as a result of implementing these new accounting standards, the Group had owned 14.97% interest in exchange of cash and shares of common stockwill consolidate certain of the Group. AsVIEs with which it currently has involvement. An ongoing evaluation of the application of these new requirements could, with the resolution of certain uncertainties, result in the identification of additional VIEs, needing to be consolidated. It is not currently anticipated, however, that any such newly identified VIEs and former QSPEs would have a result,significant impact on the Group’s ownership increasedconsolidated financial statements.
Recognition and Presentation ofOther-Than-Temporary Impairments (ASC 320)
In April 2009, the FASB issued FASB Staff PositionNo. FAS 115-2 andFAS 124-2 (FSPFAS 115-2 andFAS 124-2), nowASC 320-10 and958-320,Investments — Debt and Equity Securities: Recognition of anOther-Than-Temporary Impairment). This FSP amends theother-than-temporary impairment guidance in GAAP for debt securities and the presentation and disclosure requirements ofother-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to 100% and Shinhan Life Insurance became a wholly-owned subsidiaryother-than temporary impairments of equity securities. Under the guidance, another-than-temporary-impairment must be recognized if an investor has the intent to sell the debt security or if it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. In addition, the guidance changes the amount of impairment to be recognized in current-period earnings when an investor does not have the intent to sell, or if it is more likely than not that it will not be required to sell the debt security, as in these cases only the amount of the Group. 5,989,572 shares or 14.97%impairment associated with credit losses is recognized in income, while the rest of common stock of Shinhan Life Insurance acquired before December 13, 2005 and owned by Shinhan Bank and Good Morning Shinhan Securities were also exchanged to common stock of the Group. The Group issued 17,528,000 shares at the exchange ratio 0.4382 share of the Group for each Shinhan Life Insurance share.
The acquisition was accounted for using the purchase method, with the Group being the accounting acquirer. The assets and liabilities of Shinhan Life Insurance were recorded at fair value, with the excess of the purchase consideration over the fair value loss is recognized in other comprehensive income (OCI). The guidance also requires additional disclosures regarding the calculation of the net assets acquired, after allocating to identifiable intangible assets, recordedcredit losses, as goodwill. The consolidated financial statements of the Group for the year ended December 31, 2005 include the operations of Shinhan Life Insurance from December 1, 2005.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
| | | | |
| | (In millions of
| |
| | Korean won) | |
|
Cash and cash equivalents | | W | 5,108 | |
Deposits | | | 389,627 | |
Trading securities | | | 268,980 | |
Available-for-sale securities | | | 1,529,922 | |
Loans, net of allowance for loan losses | | | 1,155,413 | |
Premises and equipment, net | | | 12,446 | |
Other assets | | | 409,067 | |
| | | | |
Total assets | | W | 3,770,563 | |
| | | | |
Future policy benefit | | W | 4,012,622 | |
Borrowings | | | 39,962 | |
Other liabilities | | | 453,444 | |
| | | | |
Total liabilities | | W | 4,506,028 | |
| | | | |
Fair value of net liabilities of Shinhan Life Insurance | | W | (735,465 | ) |
| | | | |
well as factors considered in reaching a conclusion that an investment is notother-than-temporarily impaired.
F-27F-32
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The allocationGroup adopted the Standard on January 1, 2009. The cumulative effect of the purchase consideration is as follows:
| | | | |
| | (In millions of
| |
| | Korean won) | |
|
Cash | | W | 138 | |
Stock exchange | | | 531,394 | |
Direct acquisition costs | | | 1,335 | |
| | | | |
Total purchase price | | W | 532,867 | |
| | | | |
Allocation of purchase price: | | | | |
Fair value of net liabilities of Shinhan Life Insurance | | W | (735,465 | ) |
Value of business acquired | | | 978,532 | |
Goodwill | | | 289,800 | |
| | | | |
Total purchase price | | W | 532,867 | |
| | | | |
Valuechange included an increase in the opening balance of business acquired intangible asset (VOBA) representsRetained earnings at January 1, 2009 of W11,221 million on a pretax basis (W 8,752 million after-tax). See Note 7 to the present value of future profits embedded in acquired business, which is determined by estimatingConsolidated Financial Statements for disclosures related to the net present value of future cash flows from the contracts in force at the date of acquisition. VOBA is amortized over the effective lives of the acquired contracts.Company’s investment securities and OTTI.
The Merger of Shinhan Bank and Chohung BankInvestments in Certain Entities that Calculate Net Asset Value per Share (ASC 820)
On April 3, 2006, Shinhan Bank was merged into Chohung Bank with Chohung Bank beingIn September 2009, the surviving legal entity. In connection withFASB issued ASU2009-12,Fair Value Measurements and Disclosures: Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), now ASC 820, This is an additional guidance about measuring the merger, each sharefair value of common stockcertain investments such as hedge funds, private equity funds, real estate funds and venture capital funds. The guidance allows companies to determine the fair value of Shinhan Bank was exchanged for 3.867799182 sharessuch investments using net asset value (NAV) as a practical expedient and also requires disclosures of common stockthe nature and risks of Chohung Bank. Immediately after the merger, Chohung Bank changed its name to “Shinhan Bank”.investments by major category of alternative investments. The Group’s adoption on December 31, 2009 did not have a material impact on the consolidated financial statements.
Concurrently, there was a split-mergerImproving Disclosures about Fair Value Measurements
In January 2010, the FASB issued ASU2010-06,Improving Disclosures about Fair Value Measurements. The ASU requires disclosing the amounts of significant transfers in which Chohung Bank’s credit card business was spun-off and merged into Shinhan Card. In connection without of Level 1 and 2 fair value measurements and to describe the split-merger, 41,207,856 shares of common stock of Shinhan Card were issued to SFG in exchangereasons for 42,008,463 shares of common stock of Chohung Bank and Shinhan Card assumed assets amounting to W1,967 billion, together with certain liabilities amounting to W1,797 billion relating to the credit card business of Chohung Bank. As a resulttransfers. The disclosures are effective for reporting periods beginning after December 15, 2009. Additionally, disclosures of the split-merger, 42,008,463 shares of common stock of Chohung Bank were retired, resultinggross purchases, sales, issuances and settlements activity in a reduction in its shareholders’ equity of approximately W210 billion.Level 3 fair value measurements will be required for fiscal years beginning after December 15, 2010.
| |
| 3. | Business Changes and Developments |
Acquisition of LG Card
On March 23, 2007, the Group acquired 98,517,316 shares or 78.58% of the issued and outstanding common stockstocks of LG Card where the Group had owned 7.15% interest through a tender offer to the public for approximately W6,684 billion. As a result of this acquisition, the Group’s ownership increased to 85.73%.
LG Card provides several services such as credit card services, factoring, installment financing and leasing, under the Act forSpecialized Credit Financial Companies Specializing in Loan Business. LG Card was listed on the Korea Stock Exchange on April 22, 2002.Business Act. The acquisition allows the Group to achieve greater economies of scale in the Group’s card operations, as well as to enhance its position as a balanced provider of banking and non-banking services with diversified revenue sources and enhanced synergy opportunities, including cross-selling.
F-28
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The Group applied the equity method of accounting for its previous ownership interest of 7.15% in conformity with APB Opinion No. 18,The Equity Method of Accounting for Investments in Common Stock. Accordingly, the investment, results of operations, and retained earnings of the Group were retrospectively adjusted as follows (in millions of Korean Won, except share data):
| | | | | | | | | | | | | |
| | | 2006 | |
| | | | | | Equity Method of
| | | | |
| | | As Previously
| | | Accounting
| | | | |
| | | Reported | | | Adjustments | | | As Adjusted | |
| | | (In millions of Korean won) | |
| |
| Available-for-sale securities | | W | 17,458,399 | | | W | (518,936 | ) | | W | 16,939,463 | |
| Other assets | | | 6,842,830 | | | | 274,810 | | | | 7,117,640 | |
| | | | | | | | | | | | | |
| Assets adjusted | | W | 24,301,229 | | | W | (244,126 | ) | | W | 24,057,103 | |
| | | | | | | | | | | | | |
| Accrued expenses and other liabilities | | W | 9,310,900 | | | W | (67,134 | ) | | W | 9,243,766 | |
| Retained earnings | | | 5,145,966 | | | | 59,077 | | | | 5,205,043 | |
| Accumulated other comprehensive income, net of taxes | | | 376,952 | | | | (236,069 | ) | | | 140,883 | |
| | | | | | | | | | | | | |
| Liabilities and stockholders’ equity adjusted | | W | 14,833,818 | | | W | (244,126 | ) | | W | 14,589,692 | |
| | | | | | | | | | | | | |
| Gain on other investment | | W | 206,963 | | | W | 117,494 | | | W | 324,457 | |
| Income tax expense | | | 617,495 | | | | 32,311 | | | | 649,806 | |
| Net income | | | 1,470,301 | | | | 85,183 | | | | 1,555,484 | |
| Basic net income per share | | | 3,951 | | | | 229 | | | | 4,180 | |
| Diluted net income per share | | | 3,951 | | | | 229 | | | | 4,180 | |
| | | | | | | | | | | | | |
| | | 2005 | |
| | | | | | Equity Method of
| | | | |
| | | As Previously
| | | Accounting
| | | | |
| | | Reported | | | Adjustments | | | As Adjusted | |
| | | (In millions of Korean won) | |
| |
| Gain on other investment | | W | 283,619 | | | W | 248,365 | | | W | 531,984 | |
| Non-interest expense-other | | | 330,838 | | | | (15,201 | ) | | | 315,637 | |
| Income tax expense | | | 942,386 | | | | 72,481 | | | | 1,014,867 | |
| Net income | | | 1,738,768 | | | | 191,085 | | | | 1,929,853 | |
| Basic net income per share | | | 5,190 | | | | 573 | | | | 5,763 | |
| Diluted net income per share | | | 4,882 | | | | 537 | | | | 5,419 | |
On May 28, 2007, the Group decided to acquire the remaining issued and outstanding common stock of LG Card, through a tender offer and share exchange, at the board of directors’ meeting.
On July 6, 2007, the Group acquired 664,213 shares or 0.53% of the issued and outstanding common stock of LG Card through a tender offer to the public for approximately W31 billion.
On September 21, 2007, the Group completed the acquisition of the remaining LG Card shares by issuing 14,631,973 the Group common shares (approximately W815 billion based on the exchange terms) in exchange for those of LG Card shares.Card.
On October 1, 2007, LG Card acquired and assumed all assets, liabilities and contracts of former Shinhan Card and changed its name to “Shinhan Card”.Shinhan Card. Also, the former Shinhan Card changed its name to “SHCSHC Management Co., Ltd.”.
F-29F-33
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The aforementioned acquisition was accounted for under the purchase method of accounting in accordance withASC 805-10 (formerly SFAS 141.141). The purchase price was allocated to the assets acquired and the liabilities assumed based on their estimated fair values as summarized below.
| | | | | |
| | | 2007 | |
| | | (In millions of Korean won)Won) | |
| |
| Cash and cash equivalents | | W | 315,549 | |
| Deposits | | | 256,207 | |
| Call loans | | | 511,670 | |
| Trading assets | | | 1,729 | |
| Securities | | | 43,649 | |
| Loans, net of allowance for loan losses | | | 9,902,214 | |
| Premises and equipment, net | | | 128,637 | |
| Other assets | | | 719,014 | |
| | | | | |
| Total assets | | W | 11,878,669 | |
| | | | | |
| Borrowings and debentures | | W | 6,970,133 | |
| Other liabilities | | | 1,380,991 | |
| | | | | |
| Total liabilities | | W | 8,351,124 | |
| | | | | |
| Fair value of net assets of LG Card | | W | 3,527,545 | |
| | | | | |
The allocation of the purchase consideration is as follows:
| | | | | |
| | | 2007 | |
| | | (In millions of Korean won)Won) | |
| |
| Cash paid | | W | 6,707,361 | |
| Stock exchanged | | | 814,971 | |
| Direct acquisition costs | | | 7,688 | |
| | | | | |
| Total purchase price | | W | 7,530,020 | |
| | | | | |
| Allocation of purchase price: | | | | |
Fair value of net assets of LG Card (excluding effect of CCICCI(1) and deferred taxes) | | W | 3,831,102 | |
| Credit card relationship intangible asset(1) | | | 1,064,046 | |
| Deferred tax on fair value adjustment | | | (303,558 | ) |
| Goodwill | | | 2,938,430 | |
| | | | | |
| Total purchase price | | W | 7,530,020 | |
| | | | | |
Note:
| | |
| (1) | | Credit card relationship intangible reflects the estimated fair value of the credit card relationships acquired from LG Card from which the Group expects to derive future benefits over the estimated life of such relationships. The customer relationship intangible is amortized over its estimated useful life on asum-of-the years’-digits basis. The estimated weighted average life of the customer relationship intangible is approximately 6 years. The fair value of this asset was based principally upon the estimates of (i) the profitability of the acquired accounts and (ii) the projected run-off of the acquired accounts. |
F-30F-34
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following unaudited pro forma consolidated summary of operations presents information of the Group as if the acquisition of LG Card had occurred on January 1, 2006 and 2007:
| | | | | | | | | |
| | | 2006 | | | 2007 | |
| | | (Unaudited) | | | (Unaudited) | |
| | | (In millions of won,
| |
| | | except per share data) | |
| |
| Total interest and dividend income | | W | 9,923,082 | | | W | 12,412,978 | |
| Net income | | | 2,613,270 | | | | 2,088,697 | |
| Basic earnings per share | | | 7,022 | | | | 4,776 | |
| Diluted earnings per share | | | 7,022 | | | | 4,744 | |
| | | | |
| | 2007 |
| | (Unaudited) |
| | (In millions of Won,
|
| | except per share data) |
|
| Total interest and dividend income | | W | 12,412,978 | |
| Net income | | | 2,088,697 | |
| Basic earnings per share | | | 4,776 | |
| Diluted earnings per share | | | 4,744 | |
TheseThis pro forma results areresult is for illustrative purposes. They do not purport to be indicative of the resultsresult of operations which actually would have resulted had the acquisition occurred as of January 1, 2006 and 2007, or the future results of operations of the Group.
Acquisition of noncontrolling interests in SH Asset Management Co., Ltd.
In July 2007, the Group acquired 20.23% of total outstanding shares in SH Asset Management Co., Ltd. (SH Asset Management) from KGI Securities., Ltd. and others for a consideration of W47,055 million. As a result, the Group’s ownership in SH Asset Management Co., Ltd. increased to 100%, and SH Asset Management Co., Ltd. became a wholly-owned subsidiary of the Group.
Incorporation of Good Morning Shinhan Securities Asia Ltd.Investment Corp.
In May 2007, the Group incorporated Shinhan Investment Corp (formerly Good Morning Shinhan Securities Asia Ltd.Securities) as a wholly-owned subsidiary of the Group.
Incorporation of Shinhan Khmer Bank Ltd.
In August 2007, the Group incorporated Shinhan Khmer Bank Ltd. as a wholly-owned subsidiary of Shinhan Bank, a wholly-owned subsidiary of the Group.
Acquisition of North Atlanta National Bank
In November 2007, Shinhan Bank Americathe Group acquired North Atlanta National Bank for a consideration of W27,510 million and recorded W15,588 million of goodwill.
Incorporation of Shinhan Bank Kazakhstan
In March 2008, the Group incorporated Shinhan Bank Kazakhstan as a wholly-owned subsidiary of Shinhan Bank, a wholly-owned subsidiary of the Group.
Incorporation of Shinhan Bank China Ltd.
In April 2008, the Group incorporated Shinhan Bank (China) Ltd. as a wholly-owned subsidiary of Shinhan Bank, a wholly-owned subsidiary of the Group.
Acquisition of AITAS
In May 2008, the Group acquired 56.63% stake in AITAS. As a result of a series of further acquisitions, the Group owns 89.58% as of December 31, 2008. Subsequently, in September 2008, Shinhan Bank sold its fund management business to AITAS for W3,070 million. The Group recognized goodwill of W42,693 million in connection with acquisition of AITAS.
F-35
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Joint Venture with KT Freetel
On June 2, 2008, the Group jointly established Shinhan — KTF Mobile Card with KT Freetel. As a result, the Group owns 50% +1 share of the entity and KT Freetel owns the remainder of the interest in the entity.
Incorporation of Shinhan Private Equity Fund II
In August 2008, the Group incorporated Shinhan Private Equity Fund II.
Incorporation of Shinhan Bank Canada
In September 2008, the Group incorporated Shinhan Bank Canada.
Acquisition and Merger in 2009 of Shinhan BNP Paribas Investment Trust Management Co., Ltd and SH Asset Management Co., Ltd.
In 2008, the Group reached an agreement with BNP Paribas S.A. (“BNP Paribas”) to merge Shinhan BNP Paribas Investment Trust Management Co., Ltd. (“Shinhan BNP Paribas Investment Trust Management”) and SH Asset Management Co., Ltd..(“SH Asset Management”) Shinhan BNP Paribas Investment Trust Management is a joint venture between the Group and BNP Paribas, and SH Asset Management Co., Ltd. is a wholly-owned subsidiary of the Group. The merger was completed on January 1, 2009 with Shinhan BNP Paribas Investment Trust Management being the surviving entity and renamed Shinhan BNP Paribas Asset Management Co., Ltd. (“Shinhan BNP Paribas Asset Management”), while SH Asset Management was discharged as of the date of the merger. All of the shares of SH Asset Management have been exchanged for shares of the merged company at the agreed ratio of 0.7860830 common stock of the merged company for every one share of SH Asset Management Co., Ltd. in accordance with the terms of the Merger Agreement and the Applicable Law. As a result of deconsolidation of SH Asset Management the Group recognized W31,933 million of gain on deconsolidation, which is recorded within other non-interest income for the year ended December 31, 2009. Furthermore, on January 2, 2009, the Group sold 1,276,162 shares of Shinhan BNP Paribas Asset Management (8.5% of total outstanding shares) at W18,023 per share to BNP Paribas to maintain a 65% stake of Shinhan BNP Paribas Asset Management after the merger.
Incorporation of Shinhan Bank Japan
In September 2009, the Group incorporated Shinhan Bank Japan.
Incorporation of Shinhan Bank Vietnam
In November 2009, the Group incorporated Shinhan Bank Vietnam.
The following table summarizes the details of restricted cash at December 31:
| | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | | 2008 | | 2009 | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
| Reserve deposits with the Bank of Korea(“BOK”) | | W | 5,992,231 | | | W | 3,577,490 | | |
| Reserve deposits with the Bank of Korea (BOK) | | | W | 5,662,362 | | | W | 6,729,167 | |
| Cash restricted for investment activities | | | 723,150 | | | | 812,194 | | | | 1,158,978 | | | | 845,155 | |
| Other | | | 42,662 | | | | 355,117 | | | | 227,972 | | | | 399,595 | |
| | | | | | | | | | | |
| | | W | 6,758,043 | | | W | 4,744,801 | | | W | 7,049,312 | | | W | 7,973,917 | |
| | | | | | | | | | | |
Reserve deposits with BOK represent the amounts required under the Bank of Korea Act for payment of certificate of deposits, other time deposits and mutual installment deposits. Cash restricted for investment activities represents the amounts that the Group is contractually restricted for lending purposes and is reserved solely for purposes of performing investment activities for its customers.
F-31F-36
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Reserve deposits with the Bank of Korea (BOK) represent amounts required under the Republic of Korea’s General Banking Act for payment of deposits. Cash restricted for investment activities represent amounts required the Financial Investment Services and Capital Market Act (FSCMA), for repayment of customers’ deposits.
| |
| 5. | Call Loans and Securities Purchased under Resale Agreements |
The following table summarizes call loans and securities purchased under resale agreements, at their respective carrying values, at December 31:
| | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | | 2008 | | 2009 | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
| Call loans | | W | 455,559 | | | W | 655,569 | | | W | 733,238 | | | W | 902,667 | |
| Securities purchased under resale agreements | | | 787,500 | | | | 146,975 | | | | 2,332,632 | | | | 443,577 | |
| | | | | | | | | | | |
| | | W | 1,243,059 | | | W | 802,544 | | | W | 3,065,870 | | | W | 1,346,244 | |
| | | | | | | | | | | |
Call loans are short-term lending facilities among banks and financial institutions, with maturities of 3090 days or less. Typically, call loans have maturities of one day.
Interest income from call loans and securities purchased under resale agreements, as included in other interest income, amounted to W84,572111,197 million, W72,83398,784 million and W111,197101,691 million during the years ended December 31, 2005, 20062007, 2008 and 2007,2009, respectively.
The following table summarizes the details of trading assets, at fair value, at December 31:
| | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | | 2008 | | 2009 | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
| Debt securities: | | | | | | | | | | | | | | | | |
| Korean treasury and governmental agencies | | W | 493,918 | | | W | 406,251 | | | W | 527,778 | | | W | 1,523,695 | |
| Corporations | | | 1,314,681 | | | | 2,130,180 | | | | 1,264,303 | | | | 1,176,562 | |
| Mortgage-backed and asset-backed securities | | | 73,984 | | | | 1,965,831 | | | | 888,867 | | | | 872,987 | |
| Financial institutions | | | 1,022,738 | | | | 3,033,219 | | | | 3,279,613 | | | | 2,104,094 | |
| Equity securities | | | 507,053 | | | | 655,420 | | | | 704,850 | | | | 746,962 | |
| Derivative instruments: | | | | | | | | | | | | | | | | |
| Foreign exchange derivatives | | | 858,970 | | | | 1,134,036 | | | | 9,442,225 | | | | 3,426,615 | |
| Interest rate derivatives | | | 288,268 | | | | 646,547 | | | | 1,944,530 | | | | 898,554 | |
| Equity derivatives | | | 214,963 | | | | 163,257 | | | | 555,322 | | | | 286,919 | |
| Credit derivatives | | | 250 | | | | 3,432 | | | | — | | | | 2,546 | |
| Commodity derivatives | | | 86 | | | | 14,844 | | | | 34,717 | | | | 1,896 | |
| Other trading assets — commodity indexed deposits | | | 61,981 | | | | 29,508 | | | | 58,737 | | | | 256,246 | |
| | | | | | | | | | | |
| | | W | 4,836,892 | | | W | 10,182,525 | | | W | 18,700,942 | | | W | 11,297,076 | |
| | | | | | | | | | | |
F-32F-37
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table summarizes the details of trading liabilities, at fair value, at December 31:
| | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | | 2008 | | 2009 | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
| Derivative instruments: | | | | | | | | | | | | | | | | |
| Foreign exchange derivatives | | W | 837,402 | | | W | 978,470 | | | W | 8,703,168 | | | W | 2,800,680 | |
| Interest rate derivatives | | | 461,031 | | | | 1,215,497 | | | | 2,217,664 | | | | 1,134,514 | |
| Equity derivatives | | | 239,334 | | | | 152,119 | | | | 615,175 | | | | 285,302 | |
| Credit derivatives | | | 342 | | | | 5,703 | | | | 39,077 | | | | 23,076 | |
| Commodity derivatives | | | 86 | | | | 6,611 | | | | 35,565 | | | | 2,493 | |
| Other trading liabilities — commodity indexed deposits | | | 72,645 | | | | 150,243 | | |
| Other trading liabilities ��� commodity indexed deposits | | | | 220,016 | | | | 318,969 | |
| | | | | | | | | | | |
| | | W | 1,610,840 | | | W | 2,508,643 | | | W | 11,830,665 | | | W | 4,565,034 | |
| | | | | | | | | | | |
The following table presents trading profits (losses) for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2006 | | 2007 | | | 2007 | | 2008 | | 2009 | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
| Debt securities | | W | 66,716 | | | W | 1,550 | | | W | (51,844 | ) | | W | (51,844 | ) | | W | 128,385 | | | W | (88,422 | ) |
| Equity securities | | | 116,353 | | | | (11,961 | ) | | | 130,559 | | | | 130,559 | | | | (108,652 | ) | | | 81,052 | |
| Derivative instruments | | | (66,852 | ) | | | 151,314 | | | | (275,297 | ) | | | (275,297 | ) | | | 590,779 | | | | (513,413 | ) |
| Other trading activities — commodity indexed deposits | | | 62 | | | | 143 | | | | (13,139 | ) | | | (13,139 | ) | | | (26,182 | ) | | | 3,821 | |
| | | | | | | | | | | | | | | |
| Net trading profits | | W | 116,279 | | | W | 141,046 | | | W | (209,721 | ) | |
| Net trading profits (losses) | | | W | (209,721 | ) | | W | 584,330 | | | W | (516,962 | ) |
| | | | | | | | | | | | | | | |
For the years ended December 31, 2005, 20062007, 2008 and 2007,2009, net unrealized gains (losses) onchanges in fair value of trading securities of W98,922(13,680) million, W(7,228)163,362 million and W(13,680)(8,710) million, respectively, were included in net trading profits.profits (losses).
F-33F-38
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table summarizes the details of the Group’savailable-for-sale andheld-to-maturity securities at December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | | 2008 | | 2009 | |
| | | | | Gross
| | Gross
| | | | | | Gross
| | Gross
| | | | | | | Gross
| | Gross
| | | | | | Gross
| | Gross
| | | |
| | | Amortized
| | Unrealized
| | Unrealized
| | Fair
| | Amortized
| | Unrealized
| | Unrealized
| | Fair
| | | Amortized
| | Unrealized
| | Unrealized
| | Fair
| | Amortized
| | Unrealized
| | Unrealized
| | Fair
| |
| | | Cost | | Gains | | Losses | | Value | | Cost(1) | | Gains | | Losses | | Value | | | Cost(1) | | Gains | | Losses | | Value | | Cost(1) | | Gains | | Losses | | Value | |
| | | | | | | | | (In millions of won) | | | | | | | | | (In millions of Won) | |
| |
Available-for-sale securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Debt securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Korean treasury and governmental agencies | | W | 4,436,291 | | | W | 4,269 | | | W | 43,234 | | | W | 4,397,326 | | | W | 4,278,903 | | | W | 607 | | | W | 73,336 | | | W | 4,206,174 | | | W | 6,065,193 | | | W | 190,809 | | | W | 1,837 | | | W | 6,254,165 | | | W | 8,696,449 | | | W | 74,727 | | | W | 49,177 | | | W | 8,721,999 | |
| Corporations | | | 1,751,347 | | | | 20,076 | | | | 11,536 | | | | 1,759,887 | | | | 2,156,641 | | | | 17,187 | | | | 28,643 | | | | 2,145,185 | | | | 1,818,262 | | | | 125,761 | | | | 25,623 | | | | 1,918,400 | | | | 2,222,460 | | | | 92,521 | | | | 7,189 | | | | 2,307,792 | |
| Financial institutions | | | 7,260,212 | | | | 3,522 | | | | 20,556 | | | | 7,243,178 | | | | 10,168,503 | | | | 7,351 | | | | 124,714 | | | | 10,051,140 | | | | 15,284,829 | | | | 301,457 | | | | 36,446 | | | | 15,549,840 | | | | 11,005,207 | | | | 185,646 | | | | 26,589 | | | | 11,164,264 | |
| Foreign governments | | | 30,047 | | | | 8 | | | | 955 | | | | 29,100 | | | | 47,096 | | | | 1,487 | | | | 392 | | | | 48,191 | | | | 106,616 | | | | 17,477 | | | | 564 | | | | 123,529 | | | | 169,087 | | | | 2,875 | | | | 1,794 | | | | 170,168 | |
| Mortgage-backed and asset-backed securities | | | 2,270,423 | | | | 2,136 | | | | 3,883 | | | | 2,268,676 | | | | 3,087,022 | | | | 4,549 | | | | 17,178 | | | | 3,074,393 | | | | 3,009,519 | | | | 11,850 | | | | 20,828 | | | | 3,000,541 | | | | 2,280,105 | | | | 15,867 | | | | 11,788 | | | | 2,284,184 | |
| Marketable equity securities | | | 911,500 | | | | 334,615 | | | | 4,819 | | | | 1,241,296 | | | | 1,984,173 | | | | 1,352,638 | | | | 13,275 | | | | 3,323,536 | | | | 2,016,378 | | | | 287,342 | | | | 134,184 | | | | 2,169,536 | | | | 2,084,668 | | | | 924,779 | | | | 45,959 | | | | 2,963,488 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | W | 16,659,820 | | | W | 364,626 | | | W | 84,983 | | | W | 16,939,463 | | | W | 21,722,338 | | | W | 1,383,819 | | | W | 257,538 | | | W | 22,848,619 | | | W | 28,300,797 | | | W | 934,696 | | | W | 219,482 | | | W | 29,016,011 | | | W | 26,457,976 | | | W | 1,296,415 | | | W | 142,496 | | | W | 27,611,895 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Held-to-maturity securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Debt securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Korean treasury and governmental agencies | | W | 2,504,536 | | | W | 53,100 | | | W | 2,158 | | | W | 2,555,478 | | | W | 3,071,118 | | | W | 5,438 | | | W | 40,366 | | | W | 3,036,190 | | | W | 4,008,480 | | | W | 118,984 | | | W | 1,333 | | | W | 4,126,131 | | | W | 8,138,424 | | | W | 65,026 | | | W | 55,677 | | | W | 8,147,773 | |
| Corporations | | | 63,947 | | | | 440 | | | | 329 | | | | 64,058 | | | | 109,706 | | | | — | | | | 4,654 | | | | 105,052 | | | | 244,988 | | | | 3,606 | | | | 1,312 | | | | 247,282 | | | | 363,259 | | | | 10,566 | | | | 1,513 | | | | 372,312 | |
| Financial institutions | | | 4,959,314 | | | | 65,279 | | | | 6,584 | | | | 5,018,009 | | | | 4,858,539 | | | | 2,538 | | | | 48,774 | | | | 4,812,303 | | | | 4,279,235 | | | | 60,889 | | | | 9,252 | | | | 4,330,872 | | | | 4,092,996 | | | | 47,463 | | | | 23,061 | | | | 4,117,398 | |
| Foreign governments | | | 937 | | | | — | | | | 15 | | | | 922 | | | | 941 | | | | — | | | | — | | | | 941 | | | | 9,148 | | | | 84 | | | | 54 | | | | 9,178 | | | | 35,885 | | | | — | | | | 203 | | | | 35,682 | |
| Mortgage-backed and asset-backed securities | | | 52,359 | | | | 174 | | | | 319 | | | | 52,214 | | | | 183,975 | | | | 29,629 | | | | 2,073 | | | | 211,531 | | | | 154,293 | | | | 5,195 | | | | — | | | | 159,488 | | | | 163,054 | | | | 4,690 | | | | 314 | | | | 167,430 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | W | 7,581,093 | | | W | 118,993 | | | W | 9,405 | | | W | 7,690,681 | | | W | 8,224,279 | | | W | 37,605 | | | W | 95,867 | | | W | 8,166,017 | | | W | 8,696,144 | | | W | 188,758 | | | W | 11,951 | | | W | 8,872,951 | | | W | 12,793,618 | | | W | 127,745 | | | W | 80,768 | | | W | 12,840,595 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Note:
| | |
| (1) | | AsOn January 1, 2007, the groupGroup adopted fair value election underASC 851-15 (formerly SFAS No. 155155) on certain hybrid financial instruments, theinstruments. The fair values of those instruments were W32,16642,225 and W18,254 million at December 31, 2008 and 2009, respectively, and related valuation losses (net) amounting to W1,13912,249 and W152 million were recorded in current earningsnet trading losses during 2008 and included in amortized cost of available-for-sale securities.2009, respectively. |
The Group previously included certain of its beneficiary interests in funds not meeting the scope criteria of SFAS 115 within securities and correctly reclassified those investments to other investments under other assets during the current year, which amounted to W730,093 million as of December 31, 2008. The resulting cumulative effect in related other comprehensive income, which amounted to W24,964 million (pre-tax) as of December 31, 2008, was reflected in 2009. Although this adjustment relates to prior periods, the amount of change attributable to any prior year would not have been material to the Group’s financial condition, equity or results of operations as reported for that year.
The Bank of Korea (BOK) is the central bank that establishes monetary policies in Korea. Korea Development Bank (KDB) is owned and controlled by the Korean government. Of the total amounts listed above in the financial institutions category at December 31, 20062008 and 2007,2009, the fair value ofavailable-for-sale debt securities included W4,273,8098,291,551 million and W4,483,8015,107,873 million, respectively, that were issued by BOK and KDB. Of the total amounts listed above in the financial institutions category at December 31, 20062008 and 2007,2009, the amortized cost of held-to-maturity debt securities included W2,665,769 million and W2,138,526 million, respectively, that were related to BOK and KDB.
During 2007, there was a decline in the fair value of the Group’s asset-backed securities portfolio, specifically asset-backed Collateralized Debt Obligations(“CDOs”), as a result of deteriorating conditions in the U.S. subprime/credit market. The Group’s total exposure to asset backed CDOs at December 31, 2007 was W167,210 million. Accordingly, the Group recorded W36,125 million related to asset-backed CDO’s losses to current operations in 2007 as the group considered the losses to be other-than-temporary. The Group expects conditions in credit markets
F-34F-39
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
held-to-maturity debt securities included W2,150,522 million and W2,144,968 million, respectively, that were related to BOK and KDB.
The Group has recognized total impairment losses onavailable-for-sale andheld-to-maturity debt securities other than unrealized portion of impairment losses on debt securities as net impairment losses on debt securities in earnings and impairment losses onavailable-for-sale equity securities in earnings, where decreases in value were deemed to beother-than-temporary during the years ended December 31, as follows;
| | | | | | | | | | | | | |
| | | 2007 | | | 2008 | | | 2009 | |
| | | (In millions of Won) | |
| |
Available-for-sale securities | | | | | | | | | | | | |
| Debt securities | | | | | | | | | | | | |
Totalother-than-temporary impairment losses (unrealized and realized) | | W | 43,741 | | | W | 147,695 | | | W | 11,486 | |
Unrealizedother-than-temporary impairment losses recognized in OCI | | | — | | | | — | | | | 957 | |
| | | | | | | | | | | | | |
| Net impairment losses on debt securities | | | 43,741 | | | | 147,695 | | | | 10,529 | |
| Equity securities | | | 33,039 | | | | 97,371 | | | | 94,791 | |
| | | | | | | | | | | | | |
| | | W | 76,780 | | | W | 245,066 | | | W | 105,320 | |
| | | | | | | | | | | | | |
Held-to-maturity securities | | | | | | | | | | | | |
| Debt securities | | W | — | | | W | 1,199 | | | W | 2,776 | |
| | | | | | | | | | | | | |
Totalother-than-temporary impairment losses | | W | 76,780 | | | W | 246,265 | | | W | 108,096 | |
| | | | | | | | | | | | | |
During 2008, there was a decline in the fair value of the Group’s asset-backed securities portfolio, specifically asset-backed collateralized debt obligations (CDOs), as a result of deteriorating conditions in the U.S. subprime credit market. The Group’s total exposure to asset backed CDOs at December 31, 2008 and 2009 was W100,364 million and W97,202 million, respectively. Accordingly, the Group recorded W61,182 million and W2,955 million, respectively, related to asset-backed CDOs’ losses to net losses on securities in 2008 and 2009 as the Group considered the losses to beother-than-temporary. The Group expects conditions in credit markets in the U.S. to remain uncertain for the foreseeable future. Therefore, continued deterioration in the U.S. credit markets could adversely affect the fair value of the asset-backed securities held by the Group.
The Group hasfollowing table presents a roll-forward of the credit losses component recognized impairment losses on available-for-sale as a charge to net gains (losses) on securities, where decreases in value were deemed to be other-than-temporary during the years ended December 31, as follows;earnings in 2009.
| | | | | | | | | | | | | |
| | | 2005 | | | 2006 | | | 2007 | |
| | | (In millions of won) | |
| |
| Available-for-sale securities | | | | | | | | | | | | |
| Debt securities | | W | 494 | | | W | 68,175 | | | W | 43,741 | |
| Equity securities | | | 4,832 | | | | 8,181 | | | | 33,039 | |
| | | | | | | | | | | | | |
| Total other-than-temporary impairment losses | | W | 5,326 | | | W | 76,356 | | | W | 76,780 | |
| | | | | | | | | | | | | |
The Group has not recognized impairment losses on held-to-maturity securities, because decreases in value were not deemed to be other-than-temporary for the years ended December 31, 2005, 2006 and 2007.
The following table sets forth the current fair value and the associated unrealized losses on investments in available-for-sale debt securities, marketable equity securities and held-to-maturity debt securities with unrealized losses at December 31, 2007, by length of time that individual securities in each category had been in a continuous loss position:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Less than 12 Months | | | 12 Months or Longer | | | Total | |
| | | | | | Gross
| | | | | | Gross
| | | | | | Gross
| |
| | | Fair
| | | Unrealized
| | | Fair
| | | Unrealized
| | | Fair
| | | Unrealized
| |
| | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | |
| | | (In millions of won) | |
| |
Available-for-sale securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Debt securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Korean treasury and governmental agencies | | W | 2,097,843 | | | W | (34,665 | ) | | W | 1,749,665 | | | W | (38,671 | ) | | W | 3,847,508 | | | W | (73,336 | ) |
| Corporations | | | 909,572 | | | | (19,902 | ) | | | 348,953 | | | | (8,741 | ) | | | 1,258,525 | | | | (28,643 | ) |
| Financial institutions | | | 6,816,400 | | | | (116,070 | ) | | | 933,181 | | | | (8,644 | ) | | | 7,749,581 | | | | (124,714 | ) |
| Foreign governments | | | — | | | | — | | | | 8,645 | | | | (392 | ) | | | 8,645 | | | | (392 | ) |
| Mortgage-backed and asset-backed securities | | | 722,011 | | | | (10,687 | ) | | | 208,841 | | | | (6,491 | ) | | | 930,852 | | | | (17,178 | ) |
| Marketable equity securities | | | 283,449 | | | | (13,275 | ) | | | — | | | | — | | | | 283,449 | | | | (13,275 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | W | 10,829,275 | | | W | (194,599 | ) | | W | 3,249,285 | | | W | (62,939 | ) | | W | 14,078,560 | | | W | (257,538 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Held-to-maturity securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Debt securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Korean treasury and governmental agencies | | W | 2,368,996 | | | W | (36,448 | ) | | W | 96,532 | | | W | (3,918 | ) | | W | 2,465,528 | | | W | (40,366 | ) |
| Corporations | | | 92,138 | | | | (4,214 | ) | | | 9,735 | | | | (440 | ) | | | 101,873 | | | | (4,654 | ) |
| Financial institutions | | | 3,877,418 | | | | (45,747 | ) | | | 167,009 | | | | (3,027 | ) | | | 4,044,427 | | | | (48,774 | ) |
| Foreign governments | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Mortgage-backed and asset-backed securities | | | 108,178 | | | | (1,756 | ) | | | 9,683 | | | | (317 | ) | | | 117,861 | | | | (2,073 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | W | 6,446,730 | | | W | (88,165 | ) | | W | 282,959 | | | W | (7,702 | ) | | W | 6,729,689 | | | W | (95,867 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total temporarily impaired securities | | W | 17,276,005 | | | W | (282,764 | ) | | W | 3,532,244 | | | W | (70,641 | ) | | W | 20,808,249 | | | W | (353,405 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | 2009 | |
| | (In millions of Won) | |
|
| Balance, beginning of year | | W | 80,294 | |
| Additions: | | | | |
| Initial credit impairments | | | 2,807 | |
| Subsequent credit impairments | | | 4,838 | |
| Reductions: | | | | |
| For increases in expected cash flows | | | 23 | |
| | | | |
| Balance, end of year | | W | 87,916 | |
| | | | |
F-35F-40
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Included in W 353,405 million of gross unrealized losses on available-for-sale securities and held-to-maturity securities at December 31, 2007 were W 70,641 million of unrealized losses that have existed for a period greater than 12 months. These securities primarily include Korean treasury and government agencies and financial institutions debt securities. The unrealized losses for these securities are due to overall increases in market interest rates subsequent to purchases. The Group has the ability and intent to hold these securities for a period of time sufficient to recover all gross unrealized losses. Accordingly, the Group has not recognized any other-than-temporary impairment for these securities.
Management has determined that the unrealized losses on the Group’s investments in equity and debt securities at December 31, 2007 are temporary in nature. The Group conducts a periodic review to identify and evaluate investments that have indications of possible impairment. An investment in a debt or equity security is impaired if its fair value falls below its cost and the decline is considered other-than-temporary. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been below cost; the financial condition and near-term prospects of the issuer; and the Group’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. The Group’s review for impairment generally entails:
| | |
| • | Identification and evaluation of investments that have indications of possible impairment |
|
| • | Analysis of individual investments that have fair values less than 80% of amortized cost, including consideration of the length of time the investment has been in an unrealized loss position |
|
| • | Discussion of evidential matter, including an evaluation of factors or triggers that would or could cause individual investments to qualify as having other-than-temporary impairments and those that would not support other-than-temporary impairment |
|
| • | Documentation of the results of these analyses as required under business policies |
Any deterioration in Korean economic conditions or specific situations of the issuers of the securities could adversely affect the fair value of securities held by the Group.
The following table sets forth interest and dividends on securities for the years ended December 31:
| | | | | | | | | | | | | |
| | | 2005 | | | 2006 | | | 2007 | |
| | | (In millions of won) | |
| |
| Interest income | | W | 911,417 | | | W | 1,142,329 | | | W | 1,350,528 | |
| Dividends | | | 20,978 | | | | 56,808 | | | | 52,184 | |
| | | | | | | | | | | | | |
| | | W | 932,395 | | | W | 1,199,137 | | | W | 1,402,712 | |
| | | | | | | | | | | | | |
For the years ended December 31, 2005, 2006 and 2007, proceeds from sales of available-for-sale securities amounted to W3,190,313 million, W9,284,185 million and W4,330,853 million, and proceeds from maturities of available-for-sale securities amounted to W10,105,078 million, W7,407,115 million and W7,269,091 million, respectively. Gross realized gains amounted to W158,210 million, W187,108 million and W260,583 million for the years ended December 31, 2005, 2006 and 2007, respectively. Gross realized losses amounted to W56,657 million, W80,204 million and W14,481 million for the years ended December 31, 2005, 2006 and 2007, respectively.
F-36
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table sets forth the current fair value and the associated unrealized losses on investments inavailable-for-sale debt securities, marketable equity securities andheld-to-maturity debt securities with unrealized losses at December 31, 2008 and 2009, by length of time that individual securities in each category had been in a continuous loss position:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | |
| | | Less than 12 Months | | | 12 Months or Longer | | | Total | |
| | | | | | Gross
| | | | | | Gross
| | | | | | Gross
| |
| | | Fair
| | | Unrealized
| | | Fair
| | | Unrealized
| | | Fair
| | | Unrealized
| |
| | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | |
| | | (In millions of Won) | |
| |
Available-for-sale securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Debt securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Korean treasury and governmental agencies | | W | 232,197 | | | W | (1,039 | ) | | W | 141,152 | | | W | (798 | ) | | W | 373,349 | | | W | (1,837 | ) |
| Corporations | | | 280,811 | | | | (8,591 | ) | | | 641,545 | | | | (17,032 | ) | | | 922,356 | | | | (25,623 | ) |
| Financial institutions | | | 1,056,421 | | | | (18,908 | ) | | | 609,060 | | | | (17,538 | ) | | | 1,665,481 | | | | (36,446 | ) |
| Foreign governments | | | 14,001 | | | | (564 | ) | | | — | | | | — | | | | 14,001 | | | | (564 | ) |
| Mortgage-backed and asset-backed securities | | | 925,321 | | | | (18,398 | ) | | | 109,626 | | | | (2,430 | ) | | | 1,034,947 | | | | (20,828 | ) |
| Marketable equity securities | | | 591,718 | | | | (134,062 | ) | | | 8,262 | | | | (122 | ) | | | 599,980 | | | | (134,184 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | W | 3,100,469 | | | W | (181,562 | ) | | W | 1,509,645 | | | W | (37,920 | ) | | W | 4,610,114 | | | W | (219,482 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Held-to-maturity securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Debt securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Korean treasury and governmental agencies | | W | 4,974 | | | W | (26 | ) | | W | 58,750 | | | W | (1,307 | ) | | W | 63,724 | | | W | (1,333 | ) |
| Corporations | | | 12,808 | | | | (404 | ) | | | 80,899 | | | | (908 | ) | | | 93,707 | | | | (1,312 | ) |
| Financial institutions | | | 74,843 | | | | (3,070 | ) | | | 265,548 | | | | (6,182 | ) | | | 340,391 | | | | (9,252 | ) |
| Foreign governments | | | 2,227 | | | | (54 | ) | | | — | | | | — | | | | 2,227 | | | | (54 | ) |
| Mortgage-backed and asset-backed securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | W | 94,852 | | | W | (3,554 | ) | | W | 405,197 | | | W | (8,397 | ) | | W | 500,049 | | | W | (11,951 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total temporarily impaired securities | | W | 3,195,321 | | | W | (185,116 | ) | | W | 1,914,842 | | | W | (46,317 | ) | | W | 5,110,163 | | | W | (231,433 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
F-41
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2009 | |
| | | Less than 12 Months | | | 12 Months or Longer | | | Total | |
| | | | | | Gross
| | | | | | Gross
| | | | | | Gross
| |
| | | Fair
| | | Unrealized
| | | Fair
| | | Unrealized
| | | Fair
| | | Unrealized
| |
| | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | |
| | | (In millions of Won) | |
| |
Available-for-sale securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Debt securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Korean treasury and governmental agencies | | W | 4,020,926 | | | W | (48,676 | ) | | W | 73,013 | | | W | (501 | ) | | W | 4,093,939 | | | W | (49,177 | ) |
| Corporations | | | 557,862 | | | | (5,794 | ) | | | 252,708 | | | | (1,395 | ) | | | 810,570 | | | | (7,189 | ) |
| Financial institutions | | | 4,921,593 | | | | (15,369 | ) | | | 315,941 | | | | (11,220 | ) | | | 5,237,534 | | | | (26,589 | ) |
| Foreign governments | | | 55,949 | | | | (1,794 | ) | | | — | | | | — | | | | 55,949 | | | | (1,794 | ) |
| Mortgage-backed and asset-backed securities | | | 67,085 | | | | (5,633 | ) | | | 230,250 | | | | (6,155 | ) | | | 297,335 | | | | (11,788 | ) |
| Marketable equity securities | | | 394,303 | | | | (39,624 | ) | | | 108,223 | | | | (6,335 | ) | | | 502,526 | | | | (45,959 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | W | 10,017,718 | | | W | (116,890 | ) | | W | 980,135 | | | W | (25,606 | ) | | W | 10,997,853 | | | W | (142,496 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Held-to-maturity securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Debt securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Korean treasury and governmental agencies | | W | 3,542,310 | | | W | (54,868 | ) | | W | 54,216 | | | W | (809 | ) | | W | 3,596,526 | | | W | (55,677 | ) |
| Corporations | | | 89,265 | | | | (1,132 | ) | | | 5,462 | | | | (381 | ) | | | 94,727 | | | | (1,513 | ) |
| Financial institutions | | | 536,707 | | | | (21,058 | ) | | | 123,511 | | | | (2,003 | ) | | | 660,218 | | | | (23,061 | ) |
| Foreign governments | | | 9,206 | | | | (203 | ) | | | — | | | | — | | | | 9,206 | | | | (203 | ) |
| Mortgage-backed and asset-backed securities | | | 49,703 | | | | (314 | ) | | | — | | | | — | | | | 49,703 | | | | (314 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | W | 4,227,191 | | | W | (77,575 | ) | | W | 183,189 | | | W | (3,193 | ) | | W | 4,410,380 | | | W | (80,768 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total temporarily impaired securities | | W | 14,244,909 | | | W | (194,465 | ) | | W | 1,163,324 | | | W | (28,799 | ) | | W | 15,408,233 | | | W | (223,264 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
The Group conducts and documents periodic reviews of all securities with unrealized losses to evaluate whether the impairment is other than temporary. Prior to January 1, 2009, these reviews were conducted pursuant to FASB Staff PositionNo. FAS 115-1,The Meaning ofOther-Than-Temporary Impairment and its Application to Certain Investments(nowASC 320-10,Investments — Debt and Equity Securities — Subsequent Measurement). Any unrealized loss identified as other than temporary was recorded directly in the Consolidated Statement of Income. As of January 1, 2009, the Group adopted FSPFAS 115-2 andFAS 124-2 (nowASC 320-10,Investments — Debt and Equity Securities: Recognition of anOther-Than-Temporary Impairment). This guidance amends the impairment model for debt securities, and the impairment model for equity securities was not affected. Under the new guidance for debt securities,other-than-temporary impairment is recognized in earnings for debt securities which the Group has an intent to sell or it is more-likely-than-not that the Group will be required to sell prior to recovery of the amortized cost basis. For those debt securities which the Group does not intend to sell or expect to be required to sell, credit-related impairment is recognized in earnings, with the non-credit-related impairment recorded in OCI.
An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in OCI for AFS securities, while such losses related to HTM securities are not recorded, as these investments are carried at their amortized cost. Regardless of the classification of the securities as AFS or HTM, the Group has assessed each position for impairment.
F-42
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Factors considered in determining whether a loss is temporary include:
| | |
| • | the length of time and the extent to which fair value has been below cost; |
|
| • | the severity of the impairment; |
|
| • | the cause of the impairment and the financial condition and near-term prospects of the issuer; |
|
| • | the activity in the market of the issuer which may indicate adverse credit conditions; and |
|
| • | the Group’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. |
The Group’s review for impairment generally entails:
| | |
| • | identification and evaluation of investments that have indications of possible impairment; |
|
| • | analysis of individual investments that have fair values less than amortized cost, including consideration of the length of time the investment has been in an unrealized loss position and the expected recovery period; |
|
| • | discussion of evidential matter, including an evaluation of factors or triggers that could cause individual investments to qualify as havingother-than-temporary impairment and those that would not supportother-than-temporary impairment; and |
|
| • | documentation of the results of these analyses, as required under business policies. |
For equity securities, management considers the various factors described above, including its intent and ability to hold the equity security for a period of time sufficient for recovery to amortized cost. Where management lacks that intent or ability, the security’s decline in fair value is deemed to be other than temporary and is recorded in earnings. AFS equity securities deemedother-than-temporarily impaired are written down to fair value, with the full difference between fair value and amortized cost recognized in earnings.
For debt securities that are not deemed to be credit impaired, management assesses whether it intends to sell or whether it is more-likely than-not that it would be required to sell the investment before the expected recovery of the amortized cost basis. In most cases, management has asserted that it has no intent to sell and that it believes it is not likely to be required to sell the investment before recovery of its amortized cost basis. Where such an assertion has not been made, the security’s decline in fair value is deemed to be other than temporary and is recorded in earnings. In addition, non-credit-related impairment related to debt securities the Group does not plan to sell and is not likely to be required to sell is recognized in OCI.
For debt securities, a critical component of the evaluation forother-than-temporary impairments is the identification of credit impaired securities, where management does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the security. For securities purchased and classified as AFS with the expectation of receiving full principal and interest cash flows, this analysis considers the likelihood of receiving all contractual principal and interest. The extent of the Group’s analysis regarding credit quality and the stress on assumptions used in the analysis have been refined for securities where the current fair value or other characteristics of the security warrant.
Any deterioration in Korean economic conditions or specific situations of the issuers of the securities could adversely affect the fair value of securities held by the Group.
F-43
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table sets forth interest and dividends on securities for the years ended December 31:
| | | | | | | | | | | | | |
| | | 2007 | | | 2008 | | | 2009 | |
| | | | | | (In millions of Won) | | | | |
| |
| Interest income | | W | 1,350,528 | | | W | 1,711,604 | | | W | 1,793,399 | |
| Dividends | | | 52,184 | | | | 63,477 | | | | 58,779 | |
| | | | | | | | | | | | | |
| | | W | 1,402,712 | | | W | 1,775,081 | | | W | 1,852,178 | |
| | | | | | | | | | | | | |
For the years ended December 31, 2007, 2008 and 2009, proceeds from sales ofavailable-for-sale securities amounted to W4,330,853 million, W2,473,684 million and W1,561,006 million, respectively, and proceeds from maturities ofavailable-for-sale securities amounted to W7,269,091 million, W7,274,598 million and W12,351,877 million, respectively. Gross realized gains amounted to W260,583 million, W197,800 million and W449,957 million for the years ended December 31, 2007, 2008 and 2009, respectively. Gross realized losses amounted to W14,481 million, W87,337 million and W33,761 million for the years ended December 31, 2007, 2008 and 2009, respectively.
The following table sets forth the amortized cost and estimated fair value of the Group’savailable-for-sale andheld-to-maturity debt securities at December 31, 20072009 by contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Available-for-Sale
| | Held-to-Maturity
| | | Available-for-Sale
| | Held-to-maturity
| |
| | | Debt Securities | | Debt Securities | | | Debt Securities | | Debt Securities | |
| | | Amortized
| | Fair
| | Amortized
| | Fair
| | | Amortized
| | Fair
| | Amortized
| | Fair
| |
| | | Cost | | Value | | Cost | | Value | | | Cost | | Value | | Cost | | Value | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
| Within 1 year | | W | 6,788,533 | | | W | 6,785,830 | | | W | 3,638,771 | | | W | 3,631,294 | | | W | 9,151,315 | | | W | 9,252,349 | | | W | 2,553,796 | | | W | 2,579,094 | |
| Over 1 year through 5 years | | | 11,478,280 | | | | 11,314,588 | | | | 3,882,082 | | | | 3,840,312 | | | | 12,677,393 | | | | 12,785,195 | | | | 7,491,066 | | | | 7,541,735 | |
| Over 5 years through 10 years | | | 894,186 | | | | 867,188 | | | | 399,148 | | | | 390,133 | | | | 2,309,516 | | | | 2,384,614 | | | | 2,253,469 | | | | 2,239,037 | |
| Over 10 years | | | 237,998 | | | | 220,100 | | | | 304,278 | | | | 304,278 | | | | 235,084 | | | | 226,249 | | | | 495,287 | | | | 480,729 | |
| Not due at a single maturity date | | | 339,168 | | | | 337,377 | | | | — | | | | — | | |
| | | | | | | | | | | | | | | | | | | |
| | | W | 19,738,165 | | | W | 19,525,083 | | | W | 8,224,279 | | | W | 8,166,017 | | | W | 24,373,308 | | | W | 24,648,407 | | | W | 12,793,618 | | | W | 12,840,595 | |
| | | | | | | | | | | | | | | | | | | |
F-44
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
8. Loans
The following table summarizes the details of the loan portfolio at December 31:
| | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | | 2008 | | 2009 | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
| Commercial: | | | | | | | | | | | | | | | | |
| Commercial and industrial | | W | 40,062,760 | | | W | 48,485,436 | | | W | 55,466,168 | | | W | 54,479,473 | |
| Other commercial | | | 27,319,293 | | | | 30,311,497 | | | | 37,637,026 | | | | 34,770,389 | |
| Lease financing | | | 584,641 | | | | 1,370,092 | | | | 1,591,437 | | | | 1,559,652 | |
| Consumer: | | | | | | | | | | | | | | | | |
| Mortgage and home equity | | | 30,097,346 | | | | 31,495,258 | | | | 36,182,970 | | | | 40,022,157 | |
| Credit cards | | | 3,924,304 | | | | 14,680,802 | | | | 14,637,084 | | | | 15,116,757 | |
| Other consumer | | | 20,457,918 | | | | 25,474,788 | | | | 25,026,774 | | | | 23,306,609 | |
| | | | | | | | | | | |
| Total loans, gross | | | 122,446,262 | | | | 151,817,873 | | | | 170,541,459 | | | | 169,255,037 | |
| Deferred loan origination costs | | | 117,852 | | | | 3,854 | | |
| Deferred loan origination costs (fees) | | | | (32,771 | ) | | | (23,497 | ) |
| | | | | | | | | | | |
| | | | 122,564,114 | | | | 151,821,727 | | | | 170,508,688 | | | | 169,231,540 | |
| Less: Allowance for loan losses | | | 1,575,013 | | | | 2,099,122 | | | | (3,200,633 | ) | | | (3,637,994 | ) |
| | | | | | | | | | | |
| Total loans, net | | W | 120,989,101 | | | W | 149,722,605 | | | W | 167,308,055 | | | W | 165,593,546 | |
| | | | | | | | | | | |
On January 1, 2007, the Group corrected its amortization period for qualifying deferred credit card origination costs from 5 years to 12 months. The resulting cumulative effect of W71,568 million (pre-tax) was reflected in the current year.2007. Although this adjustment relates to prior periods, the amount of charge attributable to any prior year would not have been material to the Group’s financial condition or results of operations as reported for that year.
As discussed in Note 3 to the consolidated financial statements, the Group acquired certain loans, resulting from the acquisition of LG Card, for which there was, at the time of the acquisition, evidence of deterioration of credit quality since origination and for which it was probable that all contractually required payments would not be collected. These loans were accounted for in accordance withSOP 03-3 (currently coded asASC 310-30)which requires that purchased impaired loans be recorded at fair value as of the acquisition date. The fair value of such loans was approximately
F-37
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
W220,538 million at the acquisition date. The carrying amount of such loans was W178,09974,980 million and W44,859 million at December 31, 2007,2008 and 2009, respectively, and included in the above loan table.
The changesloans acquired during 2007 in the accretable yield for 2007 are as follows:
| | | | |
| | Accretable Yield | |
| | (In millions of won) | |
|
Beginning balance | | W | — | |
Purchases | | | 102,531 | |
Accretion of accretable yield | | | (11,050 | ) |
Increase to expected cash flows | | | 21,875 | |
| | | | |
Balance at December 31, 2007 | | W | 113,356 | |
| | | | |
These loans acquiredconnection with LG Card acquisition for which it was probable at acquisition that all contractually required payments would not be collected are as follows:
| | | | | |
| | | 2007 | |
| | | (In millions of won) | Won) |
| |
Contractually required payments receivable at acquisition:acquisition | | W | 619,928 | |
| Cash flows expected to be collected at acquisition | | | 323,069 | |
| Fair value of acquired receivables at acquisition | | | 220,538 | |
F-45
Shinhan Financial Group Co., Ltd. and Subsidiaries
During 2006Notes to Consolidated Financial Statements — (Continued)
The changes in the accretable yield for 2008 and 2007, the Group received equity securities with a fair market value of W2,365 million and W2,783 million, respectively, through the restructuring of 4 loans in 2006 and 3 loans in 2007, with an aggregate book value of W3,640 million in 2006 and W17,210 million in 2007. The Group recognized total charge-offs of W1,275 million and W14,427 million related to these transactions during the years ended December 31, 2006 and 2007, respectively.2009 are as follows:
| | | | | | | | | |
| | | 2008 | | | 2009 | |
| | | (In millions of Won) | |
| |
| Balance at beginning of year | | W | 113,356 | | | W | 71,210 | |
| Purchases | | | — | | | | — | |
| Accretion of accretable yield | | | (45,169 | ) | | | (52,424 | ) |
| Increase to expected cash flows | | | 3,023 | | | | 27,336 | |
| | | | | | | | | |
| Balance at end of year | | W | 71,210 | | | W | 46,122 | |
| | | | | | | | | |
Impaired loans are those on which the Group believes it is probable that it will not be able to collect all amounts due according to the contractual terms of the loans. The following table sets forth information about the Group’s impaired loans at December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2006 | | 2007 | | | 2007 | | 2008 | | 2009 | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
| Impaired loans with an allowance | | W | 1,794,283 | | | W | 1,219,816 | | | W | 1,256,180 | | | W | 1,256,180 | | | W | 1,953,024 | | | W | 2,111,904 | |
| Impaired loans without an allowance | | | 490,913 | | | | 155,093 | | | | 231,067 | | | | 231,067 | | | | 224,570 | | | | 213,763 | |
| | | | | | | | | | | | | | | |
| | | W | 2,285,196 | | | W | 1,374,909 | | | W | 1,487,247 | | |
| Total impaired loans | | | W | 1,487,247 | | | W | 2,177,594 | | | W | 2,325,667 | |
| | | | | | | | | | | | | | | |
| Allowance for impaired loans | | W | 703,529 | | | W | 864,802 | | | W | 908,630 | | | W | 908,630 | | | W | 1,181,446 | | | W | 1,350,209 | |
| Average balance of impaired loans during the year | | | 2,039,445 | | | | 1,402,510 | | | | 1,523,274 | | | | 1,523,274 | | | | 1,910,041 | | | | 2,117,768 | |
| Interest income recognized on impaired loans | | | 70,116 | | | | 56,106 | | | | 59,537 | | | | 59,537 | | | | 79,251 | | | | 48,223 | |
Included in the above table were smaller balance commercial loans managed on a portfolio basis which were collectively identified as impaired amounting to W784,945511,568 million, W511,723780,232 million and W511,568715,412 million at December 31, 2005, 20062007, 2008 and 2007,2009, respectively.
LoansCommercial loans that are 14 days or less past due in case of commercialand consumer loans andthat are 30 days or less past due in case of consumer loans are regarded as nonaccrual loans in a repayment grace period and the Group does not generally request borrowers with such past due loans to make immediate repayment of the outstanding principal balances and related accrued interest. At December 31, 2005, 20062007, 2008 and 2007,2009, nonaccrual loans, excluding the past due loans within the repayment grace period, totaled W2,052,4731,764,114 million, W1,654,3652,021,452 million and W1,764,1141,641,654 million,
F-38
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
respectively. Nonaccrual loans including the past due loans within the repayment grace period at December 31, 2005, 2006,2007, 2008, and 2007,2009, totaled W2,052,4733,057,262 million, W2,099,3053,308,792 million and W3,057,2622,464,908 million, respectively.
The following table presents loans and debt securities whose terms have been modified in troubled debt restructuring at December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2006 | | 2007 | | | 2007 | | 2008 | | 2009 | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
| Loans | | W | 989,998 | | | W | 343,086 | | | W | 385,547 | | | W | 385,547 | | | W | 747,183 | | | W | 1,097,275 | |
| Debt Securities | | | 44,248 | | | | 47,361 | | | | 42,295 | | |
| Debt securities | | | | 42,295 | | | | 34,710 | | | | 28,552 | |
| | | | | | | | | | | | | | | |
| | | W | 1,034,246 | | | W | 390,447 | | | W | 427,842 | | | W | 427,842 | | | W | 781,893 | | | W | 1,125,827 | |
| | | | | | | | | | | | | | | |
During 2007, 2008 and 2009, the Group received equity securities with fair market value of W2,783 million, nil and W6,519 million, respectly, through the restructuring of three loans in 2007, one loan in 2008 and three loans in 2009 with aggregate book value of W17,210 million, W278 million and W8,581 million, respectively. The Group recognized total charge-offs of W14,427 million, W278 million and W2,062 million related to these transactions during the years ended December 31, 2007, 2008, and 2009, respectively.
F-46
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table sets forth the movements in the allowance for credit losses for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Allowance for Loan Losses | | | Allowance for Off-Balance Sheet Credit(1) | |
| | | 2005 | | | 2006 | | | 2007 | | | 2005 | | | 2006 | | | 2007 | |
| | | (In millions of won) | |
| |
| Balance at beginning of the year | | W | 2,310,555 | | | W | 1,511,503 | | | W | 1,575,013 | | | W | 115,616 | | | W | 187,274 | | | W | 160,774 | |
| Provision (reversal) for loan losses | | | (255,146 | ) | | | 252,346 | | | | 40,174 | | | | — | | | | — | | | | — | |
| Provision (reversal) for off-balance sheet credit | | | — | | | | — | | | | — | | | | 71,658 | | | | (26,500 | ) | | | 40,385 | |
| Allowance relating to: | | | | | | | | | | | | | | | | | | | | | | | | |
| Acquisition of Shinhan Life Insurance | | | 2,792 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Acquisition of LG Card | | | | | | | | | | | 541,337 | | | | | | | | | | | | 20,399 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2,792 | | | | — | | | | 541,337 | | | | — | | | | — | | | | 20,399 | |
| Charge-offs | | | (946,022 | ) | | | (512,625 | ) | | | (700,912 | ) | | | — | | | | — | | | | — | |
| Recoveries | | | 399,324 | | | | 323,789 | | | | 643,510 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at end of the year | | W | 1,511,503 | | | W | 1,575,013 | | | W | 2,099,122 | | | W | 187,274 | | | W | 160,774 | | | W | 221,558 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Allowance for Off-Balance
| |
| | | Allowance for Loan Losses | | | Sheet Credit(1) | |
| | | 2007 | | | 2008 | | | 2009 | | | 2007 | | | 2008 | | | 2009 | |
| | | (In millions of Won) | |
| |
| Balance at beginning of year | | W | 1,575,013 | | | W | 2,099,122 | | | W | 3,200,633 | | | W | 160,774 | | | W | 221,558 | | | W | 339,384 | |
| Provision for loan losses | | | 40,174 | | | | 1,318,772 | | | | 1,750,738 | | | | — | | | | — | | | | — | |
| Provision for off-balance sheet credit | | | — | | | | — | | | | — | | | | 40,385 | | | | 117,826 | | | | 450,426 | |
| Allowance relating to: | | | | | | | | | | | | | | | | | | | | | | | | |
| Acquisition of LG Card | | | 541,337 | | | | — | | | | — | | | | 20,399 | | | | — | | | | — | |
| Charge-offs | | | (700,912 | ) | | | (916,644 | ) | | | (1,891,127 | ) | | | — | | | | — | | | | — | |
| Recoveries | | | 643,510 | | | | 699,383 | | | | 577,750 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at end of year | | W | 2,099,122 | | | W | 3,200,633 | | | W | 3,637,994 | | | W | 221,558 | | | W | 339,384 | | | W | 789,810 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Note:
| | |
| (1) | | The allowance for off-balance sheet credit is included in other liabilities. |
The Group originates direct financing leases on certain machinery, computers and various other equipment,equipments, automobiles and ships for customers in a variety of industries. Income attributable to these leases is initially recorded as unearned income and subsequently recognized as interest income, using the effective interest method, over the termterms of the leases. The terms of the leases are generally from 3 to 10 years. The following table sets forth the details of the net investment in direct financing leases at December 31, as included in the respective loan balances:
| | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | | 2008 | | 2009 | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
| Gross lease payments receivable | | W | 632,397 | | | W | 1,527,671 | | | W | 1,767,911 | | | W | 1,734,996 | |
| Estimated unguaranteed residual values | | | 19,583 | | | | 28,175 | | | | 11,524 | | | | 8,522 | |
| Unearned income | | | (67,339 | ) | | | (185,754 | ) | | | (187,998 | ) | | | (183,866 | ) |
| | | | | | | | | | | |
| | | W | 584,641 | | | W | 1,370,092 | | | | 1,591,437 | | | | 1,559,652 | |
| | | | | | | | | | | |
| Less: Deferred loan origination fee | | | | (1,385 | ) | | | (523 | ) |
| Allowance for loan losses | | | | (10,661 | ) | | | (12,866 | ) |
| | | | | | | |
| | | | W | 1,579,391 | | | W | 1,546,263 | |
| | | | | | | |
The following table sets forth the scheduled maturities of gross lease payments receivable at December 31, 2009:
| | | | | |
| Years Ending | | (In millions of Won) | |
| |
| 2010 | | W | 627,493 | |
| 2011 | | | 545,734 | |
| 2012 | | | 382,800 | |
| 2013 | | | 93,618 | |
| 2014 | | | 18,873 | |
| Thereafter | | | 66,478 | |
| | | | | |
| | | W | 1,734,996 | |
| | | | | |
F-39F-47
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table sets forth the scheduled maturities of net lease payments receivable at December 31, 2007:
| | | | | |
Years Ending | | | |
| | | (In millions of won) | |
| |
| 2008 | | W | 417,439 | |
| 2009 | | | 420,910 | |
| 2010 | | | 299,890 | |
| 2011 | | | 107,477 | |
| 2012 | | | 77,251 | |
| Thereafter | | | 47,125 | |
| | | | | |
| | | W | 1,370,092 | |
| | | | | |
| |
| 9. | Premises and Equipment |
The following table summarizes the details of premises and equipment at December 31:
| | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | | 2008 | | 2009 | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
| Land | | W | 990,029 | | | W | 1,072,869 | | | W | 1,083,043 | | | W | 1,087,321 | |
| Buildings | | | 776,108 | | | | 841,096 | | | | 966,927 | | | | 1,019,383 | |
| Equipment and furniture | | | 701,168 | | | | 1,066,339 | | | | 1,121,283 | | | | 1,120,108 | |
| Capitalized software costs | | | 312,938 | | | | 412,889 | | | | 506,697 | | | | 618,835 | |
| Leasehold improvements | | | 122,801 | | | | 184,463 | | | | 222,448 | | | | 246,265 | |
| Construction in progress | | | 19,667 | | | | 92,675 | | | | 6,779 | | | | 2,380 | |
| Operating lease assets | | | 76,614 | | | | 228,498 | | | | 93,750 | | | | 75,197 | |
| | | | | | | | | | | |
| Total premises and equipment, gross | | | 2,999,325 | | | | 3,898,829 | | | | 4,000,927 | | | | 4,169,489 | |
| Less: Accumulated depreciation and amortization | | | (902,219 | ) | | | (1,443,859 | ) | | | (1,588,463 | ) | | | (1,732,475 | ) |
| | | | | | | | | | | |
| Total premises and equipment, net | | W | 2,097,106 | | | W | 2,454,970 | | | W | 2,412,464 | | | W | 2,437,014 | |
| | | | | | | | | | | |
Depreciation expense on buildings, equipment and furniture, leasehold improvements and operating lease assets amounted to W187,748271,985 million, W192,340245,184 million and W271,985211,465 million, and amortization expense on capitalized software costs amounted to W2,19667,663 million, W33,824122,922 million and W67,66390,382 million for the years ended December 31, 2005, 20062007, 2008 and 2007,2009, respectively. Accumulated depreciation on operating lease assets at December 31, 20062008 and 20072009 were W48,87663,007 million and W173,51932,717 million, respectively
F-40
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)respectively.
| |
| 10. | Goodwill and Intangible Assets |
The following table sets forth the movements in goodwill:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Shinhan Bank
| | Good Morning
| | | | Shinhan Card
| | | | | | | | | Shinhan
| | | | | | | | | |
| | | (Formerly
| | Shinhan
| | Shinhan
| | (Formerly
| | Shinhan
| | | | | | | Investment Corp
| | | | | | | | | |
| | | Chohung Bank) | | Securities | | Capital | | LG Card) | | Life Insurance | | Total | | | | | (formerly
| | | | | | | | | |
| | | (In millions of won) | | | Shinhan Bank
| | Goodmorning
| | | | Shinhan Card
| | | | | |
| | | (formerly
| | Shinhan
| | Shinhan
| | (formerly
| | Shinhan
| | | |
Balance at January 1, 2006 | | W | 685,825 | | | W | 145,364 | | | W | 1,616 | | | W | — | | | W | 289,800 | | | W | 1,122,605 | | |
| | | | Chohung Bank) | | Securities) | | Capital | | LG Card) | | Life Insurance | | Total | |
| | | | (In millions of won) | |
| | |
Balance at January 1, 2008 | | | W | 632,791 | | | W | 16,079 | | | W | 1,616 | | | W | 3,037,808 | | | W | 289,800 | | | W | 3,978,094 | |
| Acquisition | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 42,693 | | | | — | | | | — | | | | — | | | | — | | | | 42,693 | |
| Disposition | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Impairment loss | | | — | | | | (129,285 | ) | | | — | | | | — | | | | — | | | | (129,285 | ) | | | (112,315 | ) | | | (16,079 | ) | | | — | | | | — | | | | — | | | | (128,394 | ) |
| Other(1) | | | (99,378 | ) | | | — | | | | — | | | | 99,378 | | | | — | | | | — | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2006 | | W | 586,447 | | | W | 16,079 | | | W | 1,616 | | | W | 99,378 | | | W | 289,800 | | | W | 993,320 | | |
Balance at December 31, 2008 | | | W | 563,169 | | | W | — | | | W | 1,616 | | | W | 3,037,808 | | | W | 289,800 | | | W | 3,892,393 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Acquisition | | | 46,344 | | | | — | | | | — | | | | 2,938,430 | | | | — | | | | 2,984,774 | | | | 2,824 | | | | — | | | | — | | | | 479 | | | | — | | | | 3,303 | |
| Disposition | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (30,757 | ) | | | — | | | | — | | | | — | | | | — | | | | (30,757 | ) |
| Impairment loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (59,517 | ) | | | — | | | | — | | | | — | | | | — | | | | (59,517 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2007 | | W | 632,791 | | | W | 16,079 | | | W | 1,616 | | | W | 3,037,808 | | | W | 289,800 | | | W | 3,978,094 | | |
Balance at December 31, 2009 | | | W | 475,719 | | | W | — | | | W | 1,616 | | | W | 3,038,287 | | | W | 289,800 | | | W | 3,805,422 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Note:
| | |
(1) | | Relates to allocated goodwill to credit card business of Chohung Bank. On April 3, 2006, Chohung Bank’s credit card business was spun-off and merged into Shinhan Card. |
As discussed in Note 3 to the consolidated financial statements, the Group recorded goodwill and intangible assets of W2,938,430 million and W1,064,046 million, respectively, in connection with the acquisition of LG Card in 2007.
The following table sets forth the movements in goodwill by reporting unit:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Treasury &
| | | | | | Other
| | | Securities
| | | Shinhan
| | | | | | | |
| | | Retail
| | | Institutional
| | | Private
| | | Corporate
| | | International
| | | Credit
| | | Banking
| | | Brokerage
| | | Life
| | | | | | | |
| | | Banking | | | Banking | | | Banking | | | Banking | | | Business | | | Card | | | Services | | | Services | | | Insurance | | | Other | | | Total | |
| | | (In millions of won) | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at January 1, 2006 | | W | 430,704 | | | W | — | | | W | — | | | W | 48,873 | | | W | 39,537 | | | W | 99,378 | | | W | 10,495 | | | W | 129,285 | | | W | 289,800 | | | W | 74,533 | | | W | 1,122,605 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Acquisition | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Disposition | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impairment loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (129,285 | ) | | | — | | | | — | | | | (129,285 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other(1) | | | (95,726 | ) | | | 81,716 | | | | 14,010 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2006 | | W | 334,978 | | | W | 81,716 | | | W | 14,010 | | | W | 48,873 | | | W | 39,537 | | | W | 99,378 | | | W | 10,495 | | | W | — | | | W | 289,800 | | | W | 74,533 | | | W | 993,320 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Acquisition | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,938,430 | | | | — | | | | — | | | | — | | | | 46,344 | | | | 2,984,774 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Disposition | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impairment loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2007 | | W | 334,978 | | | W | 81,716 | | | W | 14,010 | | | W | 48,873 | | | W | 39,537 | | | W | 3,037,808 | | | W | 10,495 | | | W | — | | | W | 289,800 | | | W | 120,877 | | | W | 3,978,094 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Note:
| | |
(1) | | In accordance with SFAS 142, the former retail banking reporting unit has been reorganized. |
F-41F-48
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table sets forth the movements in goodwill by reporting unit:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Treasury &
| | | Other
| | | | | | Shinhan
| | | Shinhan
| | | | | | | |
| | | Retail
| | | Institutional
| | | Private
| | | Corporate
| | | International
| | | Banking
| | | Credit
| | | Investment
| | | Life
| | | | | | | |
| | | Banking | | | Banking | | | Banking | | | Banking | | | Business | | | Services | | | Card | | | Corp. | | | Insurance | | | Other(1) | | | Total | |
| | | | | | | | | | | | | | | | | | (In millions of won) | | | | | | | | | | | | | |
| |
Balance at January 1, 2008 | | W | 334,978 | | | W | 81,716 | | | W | 14,010 | | | W | 48,873 | | | W | 39,537 | | | W | 10,495 | | | W | 3,037,808 | | | W | 16,079 | | | W | 289,800 | | | W | 104,798 | | | W | 3,978,094 | |
| Acquisition | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 42,693 | | | | 42,693 | |
| Disposition | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Impairment loss | | | — | | | | — | | | | — | | | | (48,873 | ) | | | (39,537 | ) | | | — | | | | — | | | | (16,079 | ) | | | — | | | | (23,905 | ) | | | (128,394 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2008 | | W | 334,978 | | | W | 81,716 | | | W | 14,010 | | | W | — | | | W | — | | | W | 10,495 | | | W | 3,037,808 | | | W | — | | | W | 289,800 | | | W | 123,586 | | | W | 3,892,393 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Acquisition | | | 1,614 | | | | 393 | | | | 67 | | | | 235 | | | | 191 | | | | 51 | | | | 479 | | | | — | | | | — | | | | 273 | | | | 3,303 | |
| Disposition | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (30,757 | ) | | | (30,757 | ) |
| Impairment loss | | | — | | | | — | | | | — | | | | (235 | ) | | | (191 | ) | | | — | | | | — | | | | — | | | | — | | | | (59,091 | ) | | | (59,517 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2009 | | W | 336,592 | | | W | 82,109 | | | W | 14,077 | | | W | — | | | W | — | | | W | 10,546 | | | W | 3,038,287 | | | W | — | | | W | 289,800 | | | W | 34,011 | | | W | 3,805,422 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Note:
| | |
| (1) | | Relates to reporting units of merchant banking, foreign subsidiaries of Shinhan Bank, Shinhan AITAS, SH Asset Management and Shinhan Capital. |
Goodwill impairment loss arises when the net book value of a reporting unit exceeds its estimated fair value. TheGoodwill impairment testing is performed at the Group’s reporting units areunit level, which is generally consistent with the Group’s business segment level,segments or one level below. The Group performs impairment tests annually.below, on an annual basis or more frequently if it is deemed that triggering events might have occurred.
In 2006,The Group measured the fair value of reporting units by both the income approach, using the present value of free cash flow to equity (FCFE) discounted at a market driven discount rate for the computation of the equity value, and the market approach, using thePrice-to-Book ratios(PBR)/Price-to-Earnings (PER) as market multiple for the measure of the Group’s fair value.
As of December 31, 2009, there was an indication of impairment in the other reporting unit, accordingly, the second step of testing was performed. Based on the results of the second step of testing, the Group recorded W59,091 million of goodwill impairment loss for the portion of goodwill allocated to other reporting unit for the year ended December 31, 2009.
Increased goodwill in the amount of W129,2853,303 million was recordedis due to the earn-out payment made to The Korea Deposit Insurance Corporation(KDIC) in relation to the brokerage unitacquisition of Good Morning Shinhan Securities. The impairment loss was mainly triggered by the decreaseChohung Bank and assigned to reporting units as of the trading volume affected by the increase of indirect investments. The fair value of the brokerage unit used for impairment test was determined based on the income approach. In 2005 and 2007, no impairment loss was recorded relating to goodwill.
The following table summarizes the details of intangible assets at December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 2006 | | | 2007 | |
| | | Weighted
| | | Gross
| | | | | | Net
| | | Gross
| | | | | | Net
| |
| | | Average
| | | Carrying
| | | Accumulated
| | | Carrying
| | | Carrying
| | | Accumulated
| | | Carrying
| |
| | | Years | | | Amount | | | Amortization | | | Amount | | | Amount | | | Amortization | | | Amount | |
| | | (In millions of won) | |
| |
| Brokerage customer relationship | | | 3.4 | | | W | 68,266 | | | W | (67,378 | ) | | W | 888 | | | W | 68,266 | | | W | (68,064 | ) | | W | 202 | |
| KSFC deposit | | | 3.4 | | | | 10,941 | | | | (10,815 | ) | | | 126 | | | | 10,941 | | | | (10,912 | ) | | | 29 | |
| Core deposit of Shinhan Bank | | | 8.7 | | | | 825,476 | | | | (397,555 | ) | | | 427,921 | | | | 825,476 | | | | (497,456 | ) | | | 328,020 | |
| Credit card relationship of Shinhan Card | | | 5.7 | | | | 198,320 | | | | (147,025 | ) | | | 51,295 | | | | 1,262,366 | | | | (402,113 | ) | | | 860,253 | |
| VOBA | | | — | | | | 978,532 | | | | (95,276 | ) | | | 883,256 | | | | 978,532 | | | | (212,201 | ) | | | 766,331 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total intangible assets subject to amortization | | | 4.7 | | | W | 2,081,535 | | | W | (718,049 | ) | | W | 1,363,486 | | | W | 3,145,581 | | | W | (1,190,746 | ) | | W | 1,954,835 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| KSFC borrowing | | | — | | | | 400 | | | | — | | | | 400 | | | | 400 | | | | — | | | | 400 | |
| Court deposit of Shinhan Bank | | | — | | | | 226,353 | | | | — | | | | 226,353 | | | | 226,353 | | | | — | | | | 226,353 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total intangible assets not subject to amortization | | | | | | | 226,753 | | | | — | | | | 226,753 | | | | 226,753 | | | | — | | | | 226,753 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | W | 2,308,288 | | | W | (718,049 | ) | | W | 1,590,239 | | | W | 3,372,334 | | | W | (1,190,746 | ) | | W | 2,181,588 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amortization expense on intangible assets wasacquisition date. W187,406 million, W244,642235 million and W472,697191 million forof goodwill assigned to corporate banking reporting unit and treasury & international business reporting unit where its goodwill was impaired fully in 2008, has been recognized as impairment loss immediately in 2009.
W30,757 million of goodwill acquired from SH Asset Management was disposed of during the yearsyear ended December 31, 2005, 2006 and 2007, respectively.
The following table sets forth the estimated aggregate amortization expense on intangible assets subject to amortization at December 31, 2007:
| | | | | |
Years Ending | | | |
| | | (In millions of won) | |
| |
| 2008 | | W | 475,698 | |
| 2009 | | | 384,457 | |
| 2010 | | | 299,556 | |
| 2011 | | | 223,758 | |
| 2012 | | | 151,958 | |
| Thereafter | | | 419,408 | |
| | | | | |
| | | W | 1,954,835 | |
| | | | | |
2009.
F-42F-49
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table summarizes the details of intangible assets at December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 2008 | | | 2009 | |
| | | Weighted
| | | Gross
| | | | | | Net
| | | Gross
| | | | | | Net
| |
| | | Average
| | | Carrying
| | | Accumulated
| | | Carrying
| | | Carrying
| | | Accumulated
| | | Carrying
| |
| | | Years | | | Amount | | | Amortization | | | Amount | | | Amount | | | Amortization | | | Amount | |
| | | | | | | | | | | | (In millions of Won) | | | | | | | |
| |
| Brokerage customer relationship | | | 3.4 | | | W | 68,266 | | | W | (68,266 | ) | | W | — | | | W | 68,266 | | | W | (68,266 | ) | | W | — | |
| KSFC deposit | | | 3.4 | | | | 10,941 | | | | (10,941 | ) | | | — | | | | 10,941 | | | | (10,941 | ) | | | — | |
| Core deposit of Shinhan Bank | | | 8.7 | | | | 825,476 | | | | (583,739 | ) | | | 241,737 | | | | 825,476 | | | | (656,427 | ) | | | 169,049 | |
| Credit card relationship of Shinhan Card | | | 5.7 | | | | 1,262,366 | | | | (682,487 | ) | | | 579,879 | | | | 1,262,366 | | | | (901,879 | ) | | | 360,487 | |
| VOBA | | | — | | | | 978,532 | | | | (348,623 | ) | | | 629,909 | | | | 978,532 | | | | (468,217 | ) | | | 510,315 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total intangible assets subject to amortization | | | 4.7 | | | W | 3,145,581 | | | W | (1,694,056 | ) | | W | 1,451,525 | | | W | 3,145,581 | | | W | (2,105,730 | ) | | W | 1,039,851 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| KSFC borrowing | | | — | | | | 400 | | | | — | | | | 400 | | | | 400 | | | | — | | | | 400 | |
| Court deposit of Shinhan Bank | | | — | | | | 226,353 | | | | — | | | | 226,353 | | | | 226,353 | | | | — | | | | 226,353 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total intangible assets not subject to amortization | | | | | | | 226,753 | | | | — | | | | 226,753 | | | | 226,753 | | | | — | | | | 226,753 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total intangible assets | | | | | | W | 3,372,334 | | | W | (1,694,056 | ) | | W | 1,678,278 | | | W | 3,372,334 | | | W | (2,105,730 | ) | | W | 1,266,604 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amortization expense on intangible assets was W472,697 million, W503,310 million and W411,674 million for the years ended December 31, 2007, 2008 and 2009, respectively.
The following table sets forth the estimated aggregate amortization expense on intangible assets subject to amortization at December 31, 2009:
| | | | | |
| Years Ending | | (In millions of Won) | |
| |
| 2010 | | W | 296,516 | |
| 2011 | | | 209,801 | |
| 2012 | | | 157,922 | |
| 2013 | | | 87,534 | |
| 2014 | | | 53,365 | |
| Thereafter | | | 234,713 | |
| | | | | |
| | | W | 1,039,851 | |
| | | | | |
In 2007, 20062008 and 2005,2009, no impairment losses wereloss was recorded relating to other intangible assets.
F-50
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table summarizes the details of other assets at December 31:
| | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | | 2008 | | 2009 | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
| Accrued interest and dividends receivable | | W | 672,928 | | | W | 977,842 | | | W | 1,262,567 | | | W | 1,205,682 | |
| Receivables for foreign exchange spot contracts | | | 1,985,106 | | | | 2,291,215 | | | | 5,148,358 | | | | 1,491,898 | |
| Accounts receivable | | | 1,396,564 | | | | 2,000,892 | | |
| Account receivables | | | | 933,920 | | | | 1,648,887 | |
| Accrued income | | | 173,305 | | | | 46,434 | | | | 2,851 | | | | 6,499 | |
| Deferred tax assets | | | 258,615 | | | | 493,683 | | | | 568,875 | | | | 689,660 | |
| Other investments(1) | | | 1,329,804 | | | | 1,502,282 | | | | 2,416,258 | | | | 2,568,663 | |
| Prepaid expenses | | | 93,926 | | | | 160,744 | | | | 186,019 | | | | 167,562 | |
| Separate account assets | | | 282,995 | | | | 560,163 | | | | 716,737 | | | | 1,090,887 | |
| Contract deposits for LG card acquisition | | | 517,778 | | | | — | | |
| Advances to suppliers | | | 27,502 | | | | 154,624 | | | | 291,672 | | | | 199,602 | |
| Deferred acquisition costs | | | 336,028 | | | | 530,331 | | | | 723,411 | | | | 829,056 | |
| Hedging derivatives assets | | | 5,391 | | | | 3 | | |
| Gold assets | | | | 54,360 | | | | 56,767 | |
| Other | | | 37,698 | | | | 95,171 | | | | 90,099 | | | | 198,332 | |
| | | | | | | | | | | |
| | | W | 7,117,640 | | | W | 8,813,384 | | | W | 12,395,127 | | | W | 10,153,495 | |
| | | | | | | | | | | |
Note:
| | |
| (1) | | Other investments include unlisted equity securities, securities with sales restriction, fund investments and investments accounted for by the equity method. |
In October 2007, Visa U.S.A. Inc., Visa Europe, Visa International Association (Visa International) and Visa Canada Inc. were merged into Visa Inc. (Visa). As a result of thatthe reorganization, Visa Internationalallocated its shares were allocated to its member companies.companies and the Group, as one of the member companies, received 6,767,836 Class AP shares. The regional share allocationnumber of allocated shares was subsequently adjusted forto 8,020,348 shares and they were converted to Class C shares through atrue-up process prior to Visa’s initial public offering of Class A shares in March 2008. In connection with Visa’s reorganization and IPO,
The Visa shares received by the Group were fair value of the shares of Visavalued at the balance sheet date was W279,881 million (pre-tax). as of December 31, 2007. As the shares are unlisted and somecertain portion of the shares(43.82%) areshares (43.82% or 3,514,074 shares) were restricted for sales for three years from the acquisition date, the Group classified it as other investments and recorded a W279,881 million (pre-tax) as other under non-interest income.investments.
In March 2008, the unrestricted 4,506,274 shares (56.18% of allocated shares) were redeemed at $42.77 per share by Visa in connection with its IPO and the remaining restricted shares, which would be restricted until March 25, 2011, in the amounts of W103,787 million (pre-tax) are classified as other investments and carried at initial fair value at December 31, 2009.
The following table summarizes the Group’s alternative investments in funds which are classified as other investments. The Group uses the funds’ NAVs per share as a practical expedient to measure fair value on recurring and nonrecurring basis. The fair values presented in the table are based upon the funds’ NAVs or an equivalent measure.
| | | | |
| | 2009 |
| | (In millions of Won) |
|
| Private equity funds(1) | | W | 523,116 | |
Note:
| | |
| (1) | | Include private equity funds that invest in equity and debt securities issued by private and publicly held companies. Substantially all of these investments do not allow early redemptions. Alternatively, the Group receives distributions in accordance with the fund agreement. There are no unfunded commitments. |
F-43F-51
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table summarizes the details of deposits at December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | | 2008 | | 2009 | |
| | | | | Weighted-
| | | | Weighted-
| | | | | Weighted-
| | | | Weighted-
| |
| | | | | Average
| | | | Average
| | | | | Average
| | | | Average
| |
| | | Balance | | Interest Rate | | Balance | | Interest Rate | | | Balance | | Interest Rate | | Balance | | Interest Rate | |
| | | (In millions of won, except percentages) | | | (In millions of Won, except percentages) | |
| |
Interest-bearing deposits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Demand deposits | | W | 7,379,300 | | | | 0.46 | % | | W | 7,360,010 | | | | 0.41 | % | | W | 6,673,839 | | | | 0.78 | % | | W | 7,529,357 | | | | 0.45 | % |
| Savings deposits | | | 29,057,275 | | | | 2.12 | % | | | 30,053,133 | | | | 2.05 | % | | | 31,392,168 | | | | 2.32 | % | | | 37,502,198 | | | | 1.22 | % |
| Certificate of deposits | | | 13,198,346 | | | | 4.67 | % | | | 15,842,958 | | | | 5.22 | % | | | 13,846,645 | | | | 5.94 | % | | | 7,800,821 | | | | 5.48 | % |
| Other time deposits | | | 41,100,714 | | | | 3.84 | % | | | 49,631,648 | | | | 4.55 | % | | | 67,614,521 | | | | 4.94 | % | | | 87,822,670 | | | | 3.91 | % |
| Mutual installment deposits | | | 842,666 | | | | 3.80 | % | | | 353,588 | | | | 3.88 | % | | | 235,288 | | | | 3.78 | % | | | 153,856 | | | | 3.70 | % |
| | | | | | | | | | | |
| | | | 91,578,301 | | | | 3.08 | % | | | 103,241,337 | | | | 3.53 | % | | | 119,762,461 | | | | 4.15 | % | | | 140,808,902 | | | | 3.12 | % |
Non-interest-bearing deposits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Demand deposits | | | 3,918,153 | | | | — | | | | 3,162,310 | | | | — | | | | 2,942,034 | | | | — | | | | 2,889,587 | | | | — | |
| | | | | | | | | | | |
| | | W | 95,496,454 | | | | 3.00 | % | | W | 106,403,647 | | | | 3.43 | % | | W | 122,704,495 | | | | 4.06 | % | | W | 143,698,489 | | | | 3.06 | % |
| | | | | | | | | | | |
Interest-bearing demand deposits on December 31, 2007 primarily represented court related deposits held at Shinhan Bank. Other time deposits include premium accounts for loyal customers, tax savings accounts for high net worth customers, savings accounts for household financing and foreign currency deposits. Mutual installment deposits enable customers to become eligible for mortgage and other consumer loans as well as corporate loans while maintaining an account with the Group.
The aggregate amountbalance of time deposit accounts (including CDs)certificate of deposits, other time deposits, mutual installment deposits) in denominations of W100 million or more at December 31, 20062008 and 20072009 were W37,070,42459,825,352 million and W47,151,16874,387,872 million, respectively.
The following table sets forth the contractual maturities of certificate of deposits, other time deposits and mutual installment deposits at December 31, 2007:2009:
| | | | | | | | | |
Years Ending | | (In millions of won) | | | (In millions of Won) | |
| |
| 2008 | | W | 56,823,412 | | |
| 2009 | | | 4,841,501 | | |
| 2010 | | | 3,128,597 | | | W | 87,793,427 | |
| 2011 | | | 380,167 | | | | 4,400,542 | |
| 2012 | | | 147,384 | | | | 1,961,868 | |
| 2013 | | | | 250,044 | |
| 2014 | | | | 881,185 | |
| Thereafter | | | 507,133 | | | | 490,281 | |
| | | | | | | |
| | | W | 65,828,194 | | | W | 95,777,347 | |
| | | | | | | |
The KDICKorea Deposit Insurance Corporation (KDIC) provides deposit insurance up to a total of W50 million per depositor in each bank pursuant to the Depositor Protection Act, for deposits due after January 1, 2001, regardless of the deposit date.placement date of the deposit.
F-44F-52
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| |
| 13. | Short-Term Borrowings |
The following table summarizes the details of short-term borrowings at December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | | 2008 | | 2009 | |
| | | | | Weighted-
| | | | Weighted-
| | | | | Weighted-
| | | | Weighted-
| |
| | | | | Average
| | | | Average
| | | | | Average
| | | | Average
| |
| | | Balance | | Interest Rate | | Balance | | Interest Rate | | | Balance | | Interest Rate | | Balance | | Interest Rate | |
| | | (In millions of won, except percentages) | | | (In millions of Won, except percentages) | |
| |
| Borrowings from BOK | | W | 1,173,254 | | | | 2.21 | % | | W | 882,748 | | | | 2.97 | % | | W | 1,259,290 | | | | 2.54 | % | | W | 1,433,730 | | | | 1.11 | % |
| Borrowings in foreign currencies | | | 3,211,017 | | | | 2.79 | % | | | 5,122,333 | | | | 3.86 | % | | | 5,798,825 | | | | 2.70 | % | | | 1,771,522 | | | | 3.18 | % |
| Borrowings from trust accounts | | | 1,122,533 | | | | 4.09 | % | | | 1,218,622 | | | | 4.63 | % | | | 3,357,531 | | | | 4.37 | % | | | 1,475,802 | | | | 1.90 | % |
| Call money | | | 1,686,036 | | | | 4.77 | % | | | 1,673,449 | | | | 5.49 | % | | | 4,877,940 | | | | 5.41 | % | | | 2,398,062 | | | | 2.42 | % |
| Debentures in won | | | | 3,867,141 | | | | 5.84 | % | | | 708,748 | | | | 6.03 | % |
| Other borrowings(1) | | | 3,802,186 | | | | 3.87 | % | | | 6,904,274 | | | | 3.24 | % | | | 4,064,264 | | | | 4.10 | % | | | 1,926,993 | | | | 6.01 | % |
| | | | | | | | | | | |
| | | W | 10,995,026 | | | | | | | W | 15,801,426 | | | | | | | W | 23,224,991 | | | | | | | W | 9,714,857 | | | | | |
| | | | | | | | | | | |
Note:
| | |
| (1) | | The majority of other borrowingsMostly relate to borrowings from other financial institutions. |
Short termShort-term borrowings consist of borrowed funds with original maturities of less than one year. Total interest expense on short-term borrowings amounted to W339,855659,836 million, W524,776865,695 million and W659,836555,026 million of which W94,921174,267 million, W146,308155,556 million and W174,26774,816 million respectively, were related to call money during 2005, 2006the years ended December 31, 2007, 2008 and 2007,2009, respectively.
F-45F-53
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 2008 | | | 2009 | |
| | | | | | Secured
| | | Collateral | | | Secured
| | | Collateral | |
| | | Maturity | | | Borrowings | | | Loans(1) | | | Securities | | | Borrowings | | | Loans(1) | | | Securities | |
| | | (In millions of Won) | |
| |
Work and Joy2007-1 ABS Specialty Co., Ltd. | | | 2012 | | | W | 400,300 | | | W | — | | | W | 400,300 | | | W | 260,300 | | | W | — | | | W | 400,300 | |
5.39%~5.42% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
SamsungShinhan 4th ABS Specialty Co. Ltd. | | | 2009 | | | | 114,500 | | | | — | | | | 114,500 | | | | — | | | | — | | | | — | |
4.13%~7.00% ABCP and collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shinhan 7th Securitization Specialty L.L.C. | | | 2009 | | | | 9,992 | | | | 52,175 | | | | 3,916 | | | | — | | | | — | | | | — | |
5.00%~15.00% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Frontier 9th ABS Specialty Co., Ltd. | | | 2010 | | | | 110,500 | | | | — | | | | 114,500 | | | | 8,500 | | | | — | | | | 16,500 | |
4.31%~7.00% ABCP and collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Neo DWC 2nd ABS Specialty Co., Ltd. | | | 2009 | | | | 355,050 | | | | — | | | | 500,000 | | | | 400,050 | | | | — | | | | 400,000 | |
3.20%~6.30% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Han-il U&I ABS Specialty Co., Ltd. | | | 2009 | | | | 12,880 | | | | — | | | | 21,241 | | | | — | | | | — | | | | — | |
5.03%~8.00% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Costone Delta Co., Ltd. | | | 2009 | | | | 1,886 | | | | — | | | | 1,886 | | | | 1,751 | | | | — | | | | 1,751 | |
| 10.00% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| I-Clover ABS Specialty Co., Ltd. | | | 2012 | | | | 872,000 | | | | 565,470 | | | | 1,248,528 | | | | 560,000 | | | | 494,776 | | | | 932,978 | |
3.00~7.00% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shinhan 8th Securitization Specialty L.L.C. | | | 2010 | | | | 9,859 | | | | 20,815 | | | | — | | | | 4,982 | | | | 11,655 | | | | — | |
8.50%~8.90% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shinhan Mortgage 1st Securitization Specialty L.L.C. | | | 2039 | | | | 797,098 | | | | 748,712 | | | | — | | | | 566,037 | | | | 588,695 | | | | — | |
| 6.00% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Neo DWC 3rd ABS Specialty | | | 2010 | | | | 100,049 | | | | — | | | | 200,000 | | | | 60,049 | | | | — | | | | 200,000 | |
| 8% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Credipia 2005 plus 2 ABS Specialty Co., Ltd. | | | 2010 | | | | 411,144 | | | | 685,310 | | | | — | | | | 206,288 | | | | 714,604 | | | | — | |
| 5.45% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Credipia 2005 plus 3 ABS Specialty Co., Ltd. | | | 2009 | | | | 155,652 | | | | 574,674 | | | | — | | | | — | | | | — | | | | — | |
| 5.39% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Credipia 2006 plus 1 A,B ABS Specialty Co., Ltd. | | | 2010 | | | | 462,694 | | | | 646,871 | | | | — | | | | 467,247 | | | | 751,214 | | | | — | |
4.58~6.29% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shinhan Card2007-1 Securitization Specialty L.L.C. | | | 2011 | | | | 277,500 | | | | 515,958 | | | | — | | | | 277,500 | | | | 441,139 | | | | — | |
| 7.00% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shinhan Card2007-2 Securitization Specialty L.L.C. | | | 2011 | | | | 277,200 | | | | 475,293 | | | | — | | | | 277,200 | | | | 532,188 | | | | — | |
| 7.00% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shinhan Card2008-1 Securitization Specialty L.L.C. | | | 2012 | | | | 320,658 | | | | 529,964 | | | | — | | | | 320,658 | | | | 540,361 | | | | — | |
| 4.76% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shinhan Card 2008 Trust | | | 2012 | | | | 350,000 | | | | 620,761 | | | | — | | | | 350,000 | | | | 754,543 | | | | — | |
| 8.97% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Good Invest 2nd Securitization Specialty Co., Ltd. | | | 2010 | | | | 20,048 | | | | — | | | | 56,242 | | | | 61,049 | | | | — | | | | 59,876 | |
3.62%~9.00% ABCP and collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shinhan Mortgate 2st Securitization Specialty L.L.C. | | | 2040 | | | | — | | | | — | | | | — | | | | 467,040 | | | | 561,185 | | | | | |
| 6.00% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| KAMCO value recreation 6th Securitization Specialty L.L.C. | | | 2012 | | | | — | | | | — | | | | — | | | | 2,181 | | | | 5,768 | | | | — | |
5.51%~6.00% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shift 1st Securitization Specialty L.L.C. | | | 2012 | | | | — | | | | — | | | | — | | | | 300,000 | | | | 300,000 | | | | — | |
| 5.04% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other secured borrowings | | | 2008 | | | | 100 | | | | — | | | | 109 | | | | — | | | | — | | | | — | |
8.00%~25.00% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities sold under repurchase agreements | | | 2010 | | | | 5,166,667 | | | | — | | | | 6,922,056 | | | | 3,353,558 | | | | — | | | | 4,340,666 | |
0.06%~11.5% | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | W | 10,225,777 | | | W | 5,436,003 | | | W | 9,583,278 | | | W | 7,944,390 | | | W | 5,696,128 | | | W | 6,352,071 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following table sets forth the details of the secured borrowings and relevant collateral at carrying values at December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 2006 | | | 2007 | |
| | | | | Secured
| | | Collateral | | | Secured
| | | Collateral | |
| | | Maturity | | Borrowings | | | Loans(1) | | | Securities | | | Borrowings | | | Loans(1) | | | Securities | |
| | | (In millions of won) | |
| |
| Shinhan 2nd Securitization Specialty L.L.C. | | 2008 ~2011 | | W | 502 | | | W | 7,047 | | | W | 8,191 | | | W | — | | | W | — | | | W | — | |
| 10.00% ~25.00% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shinhan 4th Securitization Specialty L.L.C. | | 2011 | | | 250 | | | | 4,443 | | | | 2,683 | | | | 250 | | | | 9,572 | | | | 12,136 | |
| 20.00% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sprout I ABS Specialty Co., Ltd. | | 2013 | | | 231,685 | | | | 572,778 | | | | — | | | | — | | | | — | | | | — | |
| 1M Libor+0.60% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Goldwing Co., Ltd. | | 2022 | | | 84,273 | | | | 294,005 | | | | 252,314 | | | | 299,050 | | | | 275,396 | | | | 963,569 | |
| 4.30%-~5.47% Asset-Backed Commercial Papers | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shinhan Card2003-1 Securitization Specialty L.L.C. | | 2009 | | | 406,086 | | | | 707,915 | | | | — | | | | 338,405 | | | | 830,436 | | | | — | |
| 4.65% Type 1 beneficiary certificate | | | | | | | | | | | | | | | | | | | | | | | | | | |
CHB NPL2004-1 ABS Specialty Co., Ltd. | | 2007 | | | 39,981 | | | | 81,827 | | | | — | | | | — | | | | — | | | | — | |
| 9.00% ~10.00% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
CHB NPL2004-2 ABS Specialty Co., Ltd. | | 2007 | | | 39,969 | | | | 96,932 | | | | 2,515 | | | | — | | | | — | | | | — | |
| 9.00% ~10.00% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Enclean 3rd ABS Specialty Co., Ltd. | | 2007 | | | 150,500 | | | | — | | | | 100,017 | | | | — | | | | — | | | | — | |
| 4.05% ~30% ABCP and collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Miraedon Co., Ltd. | | 2008 | | | 561,249 | | | | — | | | | 645,945 | | | | 472,000 | | | | — | | | | 501,764 | |
| 4.22% ~4.68% Asset-Backed Commercial Papers | | | | | | | | | | | | | | | | | | | | | | | | | | |
Work and Joy2004-1 ABS Specialty Co., Ltd. | | 2008 | | | 149,945 | | | | — | | | | 150,000 | | | | 319,883 | | | | — | | | | 400,300 | |
| 5.39% ~5.42% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shinhan 6th Securitization Specialty L.L.C. | | 2008 | | | 70,085 | | | | 52,314 | | | | — | | | | 111,831 | | | | 34,877 | | | | — | |
| 10.00% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
| HiBrand ABCP Ltd. | | 2008 | | | 41,050 | | | | 42,879 | | | | — | | | | — | | | | — | | | | — | |
| 3.95% ~7.00% ABCP and collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
| SamsungShinhan 4th ABS Specialty Co.Ltd | | 2009 | | | 250,499 | | | | — | | | | 250,500 | | | | 214,999 | | | | — | | | | 239,500 | |
| 4.13% ~7.00% ABCP and collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Dongbu Steel 2nd ABS Specialty Co.Ltd | | 2008 | | | 74,804 | | | | — | | | | 85,000 | | | | 74,918 | | | | — | | | | 85,000 | |
| 4.07% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
CHB NPL2005-1 ABS Specialty Co., Ltd | | 2008 ~2009 | | | 40,962 | | | | 49,731 | | | | 63 | | | | — | | | | — | | | | — | |
| 10.00% ~15.00% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
CHB NPL2005-2ABS Specialty Co., Ltd | | 2008 ~2009 | | | 30,939 | | | | 50,935 | | | | 55 | | | | — | | | | — | | | | — | |
| 10.00% ~15.00% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cheongge ABS Specialty Co., Ltd | | 2008 ~2009 | | | 97,600 | | | | — | | | | 97,486 | | | | 87,600 | | | | — | | | | 110,169 | |
| 5.90% ~6.10% Asset-Backed Commercial Papers | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shinhan 7th Securitization Specialty L.L.C. | | 2008 ~2009 | | | 94,716 | | | | 198,538 | | | | — | | | | 74,909 | | | | 90,252 | | | | — | |
| 5.00% ~15.00% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Frontier 9th ABS Specialty Co., Ltd | | 2010 | | | 200,500 | | | | — | | | | 200,500 | | | | 143,000 | | | | — | | | | 200,500 | |
| 4.31% ~7.00% ABCP and collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Neo DWC ABS Specialty Co., Ltd | | 2009 | | | 402,050 | | | | — | | | | 402,000 | | | | 150,050 | | | | — | | | | 500,000 | |
| 5.04% ~6.26% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Han-il U&I ABS Specialty Co., Ltd | | 2009 | | | 47,525 | | | | — | | | | 47,900 | | | | 22,336 | | | | — | | | | 22,988 | |
| 5.03% ~8.00% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Costone Delta Co., Ltd. | | 2008 | | | — | | | | — | | | | — | | | | 1,390 | | | | — | | | | — | |
| 10.00% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
| I-Clover ABS Specialty Co., Ltd. | | 2008 | | | — | | | | — | | | | — | | | | 390,000 | | | | 300,000 | | | | 297,719 | |
| 5.93 ~7.29% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Good Invest Co., Ltd. | | 2008 | | | — | | | | — | | | | — | | | | 102,049 | | | | — | | | | 98,680 | |
| 6.33 ~6.50% ABCP and collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
Credipia2004-1 ABS Specialty Co., Ltd. | | 2008 | | | — | | | | — | | | | — | | | | 299,834 | | | | 1,419,239 | | | | — | |
| 4.47% ~5.10% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Credipia 2005 plus 1 ABS Specialty Co., Ltd. | | 2008 | | | — | | | | — | | | | — | | | | 406,256 | | | | 608,983 | | | | — | |
| 4.81% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Credipia 2005 plus 2 ABS Specialty Co., Ltd. | | 2010 | | | — | | | | — | | | | — | | | | 407,678 | | | | 647,867 | | | | — | |
| 5.45% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Credipia 2005 plus 3 ABS Specialty Co., Ltd. | | 2009 | | | — | | | | — | | | | — | | | | 311,117 | | | | 444,890 | | | | — | |
| 5.39% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Credipia 2006 plus 1 A,B ABS Specialty Co., Ltd. | | 2010 | | | — | | | | — | | | | — | | | | 458,127 | | | | 892,598 | | | | — | |
| 4.58 ~6.29% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shinhan Card2007-1 Securitization Specialty L.L.C. | | 2011 | | | — | | | | — | | | | — | | | | 277,500 | | | | 448,250 | | | | — | |
| 7.00% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shinhan Card2007-2 Securitization Specialty L.L.C. | | 2011 | | | — | | | | — | | | | — | | | | 277,200 | | | | 467,465 | | | | — | |
| 7.00% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other secured borrowings | | 2008 | | | 19,323 | | | | — | | | | — | | | | 501 | | | | — | | | | — | |
| 8.00% ~25.00% collateralized bond obligation | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities sold under repurchase agreements | | 2008 | | | 5,068,221 | | | | — | | | | 4,703,629 | | | | 6,210,782 | | | | — | | | | 6,621,774 | |
| 0.06% ~11.5% | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | W | 8,102,714 | | | W | 2,159,344 | | | W | 6,948,798 | | | W | | | | W | 6,469,825 | | | W | 10,054,099 | |
Note:
| | |
| (1) | | Represents the carrying amounts, exclusive of the related specific allowance for loan losses of 303,679W70,237 million and 242,023W19,207 million as of December 31, 20062008 and 20072009, respectively. |
F-46F-54
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table summarizes the details of long-term debt at December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Interest
| | | | | | | | | Interest
| | | | | | | |
| | | Rates (%) | | Maturity | | 2006 | | 2007 | | | Rates (%) | | Maturity | | 2008 | | 2009 | |
| | | | | | | (In millions of won) | | | | | | | (In millions of Won) | |
| |
Senior | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Won-denominated | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Notes payable to the Small Business Corporation | | 2.00 ~ 5.20 | | 2008 2017 | | W | 564,842 | | | W | 627,682 | | | | 2.00~ 4.75 | | | | 2010~ 2019 | | | W | 600,106 | | | W | 765,594 | |
| Notes payable to the Industrial Bank of Korea | | 2.00 ~ 5.20 | | 2008 ~ 2013 | | | 48,003 | | | | 5,783 | | | | 2.00~ 3.44 | | | | 2010~ 2013 | | | | 87,161 | | | | 12,631 | |
| Notes payable to the Institute of Information Technology Assessment | | 2.26 ~ 4.38 | | 2008 ~ 2009 | | | 70,670 | | | | 43,870 | | | | — | | | | — | | | | 11,944 | | | | — | |
| Notes payable to the Korea Energy Management Corporation | | 1.50 ~ 5.00 | | 2008 ~ 2022 | | | 298,389 | | | | 371,184 | | | | 0.25~ 4.75 | | | | 2010~ 2024 | | | | 421,584 | | | | 490,151 | |
| Notes payable to other Korean Government Funds | | 1.00 ~ 5.30 | | 2008 ~ 2017 | | | 274,951 | | | | 381,710 | | | | 1.00~ 5.10 | | | | 2010~ 2024 | | | | 363,825 | | | | 384,001 | |
| Fixed and floating rate debentures(1)(2) | | 3.99 ~ 11.50 | | 2008 ~ 2035 | | | 20,473,431 | | | | 33,708,805 | | | | 0.56~ 11.95 | | | | 2010~ 2038 | | | | 36,795,036 | | | | 31,190,093 | |
| Other notes payable(3) | | 0.20 ~ 6.38 | | 2008 ~ 2015 | | | 1,679,100 | | | | 1,895,464 | | | | 0.20~ 10.00 | | | | 2010~ 2023 | | | | 1,613,960 | | | | 2,123,433 | |
| | | | | | | | | | | |
| Subtotal | | | | | | | 23,409,386 | | | | 37,034,498 | | | | | | | | | | | | 39,893,616 | | | | 34,965,903 | |
Foreign currency-denominated | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Floating rate debentures(1) | | 1.03 ~ 8.49 | | 2008 ~ 2012 | | | 1,433,290 | | | | 2,123,000 | | | | 0.47~ 8.13 | | | | 2010~ 2012 | | | | 2,809,765 | | | | 3,124,662 | |
| Other floating rate notes payable | | 1.05 ~ 5.20 | | 2008 ~ 2015 | | | 848,832 | | | | 1,395,847 | | |
| Other fixed and floating rate notes payable | | | | 0.95~ 6.00 | | | | 2010~ 2013 | | | | 1,665,043 | | | | 1,777,590 | |
| | | | | | | | | | | |
| Subtotal | | | | | | | 2,282,122 | | | | 3,518,847 | | | | | | | | | | | | 4,474,808 | | | | 4,902,252 | |
| | | | | | | | | | | |
| Total senior debt | | | | | | | 25,691,508 | | | | 40,553,345 | | | | | | | | | | | | 44,368,424 | | | | 39,868,155 | |
Subordinated | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Won-denominated | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Hybrid bonds(4) | | 5.70 ~ 7.80 | | 2033 | | | 550,293 | | | | 495,033 | | | | 5.70~ 7.02 | | | | 2034~ 2038 | | | | 922,469 | | | | 1,512,572 | |
| Fixed and floating rate debentures(5) | | 5.10 ~ 14.45 | | 2008 ~ 2009 | | | 3,978,909 | | | | 2,042,607 | | |
| Fixed and floating rate debentures(1)(5) | | | | 5.10~ 14.45 | | | | 2010~ 2016 | | | | 1,113,291 | | | | 1,771,792 | |
Convertible debt(6) | | 3.00 | | 2009 | | | — | | | | 299,670 | | | | — | | | | — | | | | 299,670 | | | | — | |
Bond with warrants(6) | | 3.00 | | 2009 | | | — | | | | 282,665 | | | | — | | | | — | | | | 282,665 | | | | — | |
| Other fixed rate notes payable | | | | 12.00 | | | | 2010 | | | | — | | | | 2,000 | |
| | | | | | | | | | | |
| Subtotal | | | | | | | 4,529,202 | | | | 3,119,975 | | | | | | | | | | | | 2,618,095 | | | | 3,286,364 | |
Foreign currency-denominated | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Hybrid bonds(7) | | 5.66 ~ 6.82 | | 2035 ~ 2036 | | | 604,240 | | | | 609,830 | | |
| Hybrid bonds(6) | | | | 5.66~ 6.82 | | | | 2035~ 2036 | | | | 817,375 | | | | 758,940 | |
| Fixed and floating rate debentures(1) | | 4.50 ~ 6.82 | | 2009 ~ 2016 | | | 790,424 | | | | 1,266,570 | | | | 5.13~ 5.75 | | | | 2015~ 2016 | | | | 1,383,250 | | | | 758,940 | |
| | | | | | | | | | | |
| Subtotal | | | | | | | 1,394,664 | | | | 1,876,400 | | | | | | | | | | | | 2,200,625 | | | | 1,517,880 | |
| | | | | | | |
| Total subordinated debt | | | | | | | 5,923,866 | | | | 4,996,375 | | | | | | | | | | | | 4,818,720 | | | | 4,804,244 | |
Redeemable preferred stock(8) | | | | | | | | | | | | | |
| Series 2 Redeemable preferred stock | | 4.04 | | 2007 | | | 168,504 | | | | — | | |
| Series 3 Redeemable preferred stock | | 4.04 | | 2008 | | | 168,504 | | | | 168,504 | | |
Redeemable preferred stock(7) | | | | | | | | | | | | | | | | | |
| Series 4 Redeemable preferred stock | | 4.04 | | 2009 | | | 168,504 | | | | 168,504 | | | | — | | | | — | | | | 168,504 | | | | — | |
| Series 5 Redeemable preferred stock | | 4.04 | | 2010 | | | 168,504 | | | | 168,504 | | | | 4.04 | | | | 2010 | | | | 168,504 | | | | 168,504 | |
| Series 7 Redeemable preferred stock | | 7.46 | | 2008 | | | 365,000 | | | | 365,000 | | |
| Series 8 Redeemable preferred stock | | 7.86 | | 2010 | | | 10,000 | | | | 10,000 | | | | 7.86 | | | | 2010 | | | | 10,000 | | | | 10,000 | |
| | | | | | | | | | | |
| Total redeemable preferred stock | | | | | | | 1,049,016 | | | | 880,512 | | | | | | | | | | | | 347,008 | | | | 178,504 | |
| | | | | | | | | | | |
| Long-term debt, gross | | | | | | | 32,664,390 | | | | 46,430,232 | | | | | | | | | | | | 49,534,152 | | | | 44,850,903 | |
| Less: Unamortized discounts | | | | | | | (90,252 | ) | | | (64,461 | ) | | | | | | | | | | | (51,013 | ) | | | (55,922 | ) |
| Add: Guaranteed interest | | | | | | | | | | | 130,536 | | | | | | | | | | | | 168,567 | | | | — | |
| | | | | | | | | | | |
| Long-term debt, net | | | | | | W | 32,574,138 | | | W | 46,496,307 | | | | | | | | | | | W | 49,651,706 | | | W | 44,794,981 | |
| | | | | | | | | | | |
F-55
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Notes:Note:
| | |
| (1) | | Interest rates on floating rate debt were those rates in effect at December 31, 2007.2008 and 2009, respectively. |
| |
| (2) | | Majority of these debentures relate to miscellaneous bank borrowings from individual lenders. |
F-47
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| | |
| (3) | | As the groupThe Group adopted fair value election underASC 851-15 (formerly SFAS No. 155155) on certain hybrid financial instruments, theinstrument. The fair valuesvalue of those instruments were W738,469610,971 million and W1,067,457 million as of December 31, 2008 and 2009, respectively, and related valuation lossesgains (losses) (net) amounting to W24,199204,512 million and W(18,960) million were recorded in current earnings.net trading profits (losses). |
| |
| (4) | | Shinhan Bank has a call option that can be exercised five years after the issuance date, or earlier with the approval of the Financial Supervisory Service. The call options mature in 30 years from the issuance date, but may be extended by Shinhan Bank at any time. |
| |
| (5) | | Majority of these debentures relate to miscellaneous bank borrowings from corporate lenders and Korean governmental entities. |
| |
| (6) | | Shinhan Card (Former LG Card) issued convertible bond at July 21 2003. As of December 31, 2007, 18,575 shares have been converted and 147,207 shares could be issued upon exercise of conversion right. Details of the convertible bond are as follows: |
| | | | |
| Conversion period : | | | From three months after issue date (2003.7.21) to one month before redemption date (2009.1.21) |
| Stock to be issued : | | | Common stock with par value of W5,000 per share |
| Adjustment of conversion price : | | | The conversion price is adjusted for stock issuances without consideration, stock dividends, or stock issuances at a price lower than the market price |
| Special arrangement : | | | In case of bankruptcy, claims to the principal of the convertible bond have a lower priority than all non-guaranteed, non-subordinated claim, but have a higher priority over claims of common and preferred stock shareholders and bondholders where special agreements inferior to convertible bonds apply. |
| Conversion price : | | | W2,035,704 per share as of December 31, 2007 |
Shihan Card (Former LG Card) issued bond with warrants at 2003.8.12. As of December 31, 2007, 1,179,249 shares have been issued and 142,157 shares could be issued upon exercise of the warrants. Details of the bond with warrants are as follows:
| | | | |
| Exercise period of the warrants : | | | From three months after issue date (2003.8.12) to one month before redemption date (2009.2.12) |
| Stock to be issued : | | | Common stock with par value of W 5,000 per share |
| Adjustment of exercise price : | | | The exercise price is adjusted in case of stock issuances without consideration, stock dividends, or stock issuances at a price lower than the market price |
| Special arrangement : | | | In case of bankruptcy, claims to the principal of the convertible bond have a lower priority than all non-guaranteed, non-subordinated claim, but have a higher priority over claims of common and preferred stock shareholders and bondholders where special agreements inferior to convertible bonds apply. |
| Payment method for stock : | | | Cash or bond redemption |
| Exercise price : | | | W1,988,393 per share as of December 31, 2007 |
| | |
(7) | | Shinhan Bank has a call option that can be exercised ten years after the issuance date. The call options mature in 30 years from the issuance date. |
| |
(8)(7) | | See Note 21 for the terms of the RPS.redeemable preferred stock. |
Long-term debt is denominated predominately in Korean Won, US dollars, or Japanese Yen with both fixed and floating interest rates. Floating rates are generally determined periodically by formulas based on certain money market rates tied to the six-month London Interbank Offered Rate (LIBOR) or the monthly Public Fund Prime Rate published by the Korean government, and are reset on a monthly, quarterly or semi-annual basis. The
F-48
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
weighted-average interest rate for long-term debt was 4.83%5.54% and 5.33%4.88% at December 31, 20062008 and 2007,2009, respectively. Certain long-term debt agreements contain cross-default provisions and accelerating clauses for early termination in the event of default.
The following table sets forth the aggregate amount of long-term debt by contractual maturities at December 31:31, 2009:
| | | | | | | | | |
Years Ending | | | | | (In millions of Won) | |
| | | (In millions of won) | |
| | |
| 2008 | | W | 12,677,842 | | |
| 2009 | | | 9,739,232 | | |
| 2010 | | | 7,319,788 | | | W | 12,718,093 | |
| 2011 | | | 2,494,236 | | | | 10,870,475 | |
| 2012 | | | 2,586,282 | | | | 6,650,095 | |
| 2013 | | | | 3,464,365 | |
| 2014 | | | | 3,217,567 | |
| Thereafter | | | 11,612,852 | | | | 7,930,308 | |
| | | | | | | |
| Long-term debt, gross | | | 46,430,232 | | | | 44,850,903 | |
| Less: Unamortized discount | | | (64,461 | ) | | | (55,922 | ) |
| Add: Guaranteed interest | | | 130,536 | | |
| | | | | | | |
| Long-term debt, net | | W | 46,496,307 | | | W | 44,794,981 | |
| | | | | | | |
| |
| 16. | Future Policy Benefits |
The following table summarizes future policy benefits at December 31:
| | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | | 2008 | | 2009 | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
| Life insurance | | W | 3,100,462 | | | W | 3,833,904 | | | W | 4,013,630 | | | W | 4,523,282 | |
| Annuity contracts | | | 1,656,293 | | | | 1,767,625 | | | | 1,914,616 | | | | 1,605,018 | |
| Other contracts | | | 709,812 | | | | 907,180 | | | | 996,061 | | | | 1,770,803 | |
| Unpaid claims and claim adjustment expenses | | | 216,267 | | | | 260,313 | | | | 336,026 | | | | 411,135 | |
| | | | | | | | | | | |
| | | W | 5,682,834 | | | W | 6,769,022 | | | W | 7,260,333 | | | W | 8,310,238 | |
| | | | | | | | | | | |
F-56
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Life insurance liabilities include reserves for death and endowment policy benefits, and certain health benefits. Annuity contract liabilities include reserves for individual life contingent immediate annuities. Other contract liabilities include unearned revenue and certain other reserves for group and individual life and health products.
Future policy benefits are calculated using net level premium method based upon mortality, morbidity, persistency, and interest rate assumptions including provision for adverse deviation. Assumptions as to morality, morbidity and persistency are based on the Group’s experience, or in certain instances, industry experience, when the basis of the reserve is established. For post-purchase, the best-estimated net investment rate used as the interest rate assumptions has been set equal to equal 6.25%5.95%, which is based on Shinhan Life Insurance’s 20082010 planned asset allocation and investment return. For pre-purchase, the best-estimated net investment rate is 5.5% in lock-in method.
On January 1, 2007, the Group adopted Statement of PositionNo. 05-1,Accounting by Insurance Enterprises for Deferred Acquisition Cost in Connection with Modifications or Exchanges of Insurance Contracts(SOP 05-1).SOP 05-1 generally affects the accounting for internal replacements occurring after that date.SOP 05-1 requires reinstatements to be treated as substantial changes and DAC, URL and DPR are written off in proportion to the amount of reinstatements. The effect of adopting this standard was a loss of W9,667 million(W7,009 million after tax). The impact on estimated gross profits of changes in accounting policy due solely to the adoption of this SOP, as
F-49
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
applied to previously anticipated future internal replacements, and any related income tax effects, could not practicably be disaggregated from other factors. Therefore, no amount was recorded to retained earnings as of the date of adoption.
| |
| 17. | Accrued Expenses and Other Liabilities |
The following table summarizes accrued expenses and other liabilities at December 31:
| | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | | 2008 | | 2009 | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
| Accrued interest and dividend payables | | W | 2,141,053 | | | W | 2,524,609 | | | W | 3,181,871 | | | W | 2,472,424 | |
| Payables for foreign exchange spot contracts | | | 2,195,795 | | | | 1,847,192 | | | | 5,103,005 | | | | 1,492,407 | |
| Accrued severance benefits | | | 244,218 | | | | 283,624 | | | | 323,226 | | | | 174,525 | |
| Accrued expenses | | | 352,099 | | | | 512,214 | | | | 499,117 | | | | 630,050 | |
| Accounts payable | | | 1,261,545 | | | | 3,300,150 | | |
| Account payables | | | | 1,800,354 | | | | 1,814,719 | |
| Advances from customers | | | | 135,234 | | | | 144,492 | |
| Unearned income | | | 196,737 | | | | 196,968 | | | | 241,936 | | | | 159,802 | |
| Other withholdings (except withholding taxes) | | | | 131,384 | | | | 89,565 | |
| Income tax payable | | | 362,414 | | | | 621,106 | | | | 605,560 | | | | 503,698 | |
| Withholding value-added tax and other taxes | | | 109,921 | | | | 113,230 | | | | 112,118 | | | | 91,055 | |
| Deferred tax liabilities | | | 408,723 | | | | 476,707 | | | | 168,327 | | | | 108,748 | |
| Security deposits received | | | 257,368 | | | | 511,427 | | | | 505,269 | | | | 600,894 | |
| Due to agencies | | | 802,094 | | | | 1,071,153 | | | | 702,238 | | | | 1,264,559 | |
| Allowance for losses on off-balance sheet credit instruments | | | 160,774 | | | | 221,558 | | |
| Allowance for losses on off-balance credit instruments | | | | 339,384 | | | | 789,810 | |
| Utility bill payments received on behalf of government | | | 94,089 | | | | 197,792 | | | | 396,709 | | | | 398,445 | |
| Separate account liabilities | | | 282,995 | | | | 560,163 | | | | 716,737 | | | | 1,090,887 | |
| Hedging derivative liabilities | | | 6,628 | | | | 6,457 | | |
| Other allowances | | | 292,617 | | | | 539,246 | | |
| Other allowances(1) | | | | 489,723 | | | | 364,412 | |
| Other | | | 74,696 | | | | 385,419 | | | | 225,734 | | | | 361,755 | |
| | | | | | | | | | | |
| | | W | 9,243,766 | | | W | 13,369,015 | | | W | 15,677,926 | | | W | 12,552,247 | |
| | | | | | | | | | | |
Note:
| | |
| (1) | | Other allowances include assets retirement obligation, legal provision and allowance for reward on credit card use. |
F-50F-57
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table sets forth the details of commissions and fees from non-trust management activities for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2006 | | 2007 | | | 2007 | | 2008 | | 2009 | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
| Brokerage fees and commissions | | W | 345,265 | | | W | 479,327 | | | W | 857,551 | | | W | 857,551 | | | W | 626,033 | | | W | 568,897 | |
| Other fees and commissions: | | | | | | | | | | | | | | | | | | | | | | | | |
| Credit card fees | | | 421,249 | | | | 455,980 | | | | 1,205,708 | | | | 1,205,708 | | | | 1,315,117 | | | | 1,414,843 | |
| Commissions received on remittance | | | 72,626 | | | | 71,437 | | | | 72,915 | | | | 72,915 | | | | 69,204 | | | | 66,735 | |
| Commissions received on import and export letters of credit | | | 70,625 | | | | 57,411 | | | | 56,344 | | | | 56,344 | | | | 70,043 | | | | 66,582 | |
| Financial guarantee fees | | | 21,358 | | | | 21,745 | | | | 27,249 | | | | 27,249 | | | | 40,356 | | | | 49,691 | |
| Commissions received in foreign exchange activities | | | 70,325 | | | | 64,110 | | | | 61,088 | | | | 61,088 | | | | 69,132 | | | | 68,404 | |
| Commission received as agency | | | 71,032 | | | | 28,302 | | | | 30,776 | | | | 30,776 | | | | 44,866 | | | | 68,264 | |
| Commission received as electronic charge receipt | | | 69,962 | | | | 65,301 | | | | 68,544 | | | | 68,544 | | | | 73,182 | | | | 76,236 | |
| Other fees | | | 363,261 | | | | 267,771 | | | | 231,466 | | | | 231,466 | | | | 287,282 | | | | 320,762 | |
| | | | | | | | | | | | | | | |
| Total other fees and commissions | | | 1,160,438 | | | | 1,032,057 | | | | 1,754,090 | | | | 1,754,090 | | | | 1,969,182 | | | | 2,131,517 | |
| | | | | | | | | | | | | | | |
| | | W | 1,505,703 | | | W | 1,511,384 | | | W | 2,611,641 | | | W | 2,611,641 | | | W | 2,595,215 | | | W | 2,700,414 | |
| | | | | | | | | | | | | | | |
| |
| 19. | Other Non-Interest Income and Other Non-Interest Expense |
The following table sets forth the details of other non-interest income for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2006 | | 2007 | | | 2007 | | 2008 | | 2009 | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
| Gain on sale of premises and equipment | | W | 74,868 | | | W | 8,757 | | | W | 17,971 | | | W | 17,971 | | | W | 6,524 | | | W | 31,404 | |
| Gain on sales of loans | | | | 10,288 | | | | 12,333 | | | | 63,729 | |
| Income from operating leases | | | 42,227 | | | | 32,085 | | | | 68,362 | | | | 68,362 | | | | 48,750 | | | | 22,329 | |
| Rental income | | | 15,870 | | | | 16,718 | | | | 19,120 | | | | 19,120 | | | | 19,049 | | | | 3,232 | |
| Extinguished escheatment of deposits | | | 1,383 | | | | 28,513 | | | | 28,299 | | | | 28,299 | | | | 20,224 | | | | 8,817 | |
| Reversal of expense of suspense payments related to credit and accident | | | | — | | | | — | | | | 53,856 | |
| Gain on redemption of debentures | | | | — | | | | — | | | | 15,967 | |
| Gain from exchange of membership interest to VISA shares | | | — | | | | — | | | | 279,881 | | | | 279,881 | | | | — | | | | — | |
| Gain on hedge activity | | | | 17,047 | | | | 11,726 | | | | 2,734 | |
| Other lease income | | | | 10,854 | | | | 29,934 | | | | 10,646 | |
| Income from partnering with foreign credit card companies | | | | 14,536 | | | | 30,879 | | | | 29,588 | |
| Income from brokering insurance | | | | 29,860 | | | | 49,640 | | | | 44,418 | |
| Income from collection of legal fees | | | | 17,774 | | | | 17,017 | | | | 15,809 | |
| Gain on deconsolidation | | | | — | | | | — | | | | 31,933 | |
| Other | | | 199,549 | | | | 249,174 | | | | 233,940 | | | | 133,581 | | | | 132,701 | | | | 336,466 | |
| | | | | | | | | | | | | | | |
| | | W | 333,897 | | | W | 335,247 | | | W | 647,573 | | | W | 647,573 | | | W | 378,777 | | | W | 670,928 | |
| | | | | | | | | | | | | | | |
F-58
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table sets forth the details of other non-interest expense for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2006 | | 2007 | | | 2007 | | 2008 | | 2009 | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
| Loss on sale of premises and equipment | | | W | 10,840 | | | W | 4,920 | | | W | 17,264 | |
| Loss on loans | | | | 6,034 | | | | 11,530 | | | | 38,318 | |
| Impairment loss on goodwill | | W | — | | | W | 129,285 | | | W | — | | | | — | | | | 128,394 | | | | 59,517 | |
| Impairment loss on other investments | | | 20,958 | | | | 31,351 | | | | 11,741 | | |
| Loss on sale of premises and equipment | | | 54,550 | | | | 11,089 | | | | 10,840 | | |
| Loss on sale of other real estate | | | 6,758 | | | | 303 | | | | 100 | | |
| Impairment loss on other investment | | | | 11,741 | | | | 33,206 | | | | 14,802 | |
| Loss on hedge activity | | | | 4,063 | | | | 10,845 | | | | 2,734 | |
| Expense of suspense payments related to credit and accident | | | | 2,157 | | | | 15,593 | | | | — | |
| Donations | | | | 44,326 | | | | 178,258 | | | | 130,331 | |
| Loss on disposal of other investment | | | | 6,640 | | | | 5,810 | | | | 3,620 | |
| Loss on equity method | | | | 6,594 | | | | 10,462 | | | | 13,403 | |
| Other | | | 233,371 | | | | 293,144 | | | | 182,567 | | | | 112,853 | | | | 303,225 | | | | 151,827 | |
| | | | | | | | | | | | | | | |
| | | W | 315,637 | | | W | 465,172 | | | W | 205,248 | | | W | 205,248 | | | W | 702,243 | | | W | 431,816 | |
| | | | | | | | | | | | | | | |
F-51
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Issuances of common stock
As of December 31, 2007, the Group had 396,199,587 shares of common stock issued and 396,199,058 shares of common stock outstanding. On September 16, 2003, the Group listed its shares on the New York Stock Exchange (NYSE) and transferred its global depository shares listed on the Luxembourg Stock Exchange to NYSE as American depository shares. As of December 31, 2009, the Group had 474,199,587 shares of common stock.
Treasury stock
The Korean Commercial Law requires companies involved in business combination transactions to obtain the approval of the acquiring company’s stockholders and to provide an opportunity for dissenting stockholders to exercise appraisal rights. Upon exercise of the appraisal rights, these companies would be required to purchase stocks from those stockholders at a predetermined price.
In 2005, as discussed in Note 3, shares of Shinhan Life Insurance held by Shinhan Bank and Good Morning Shinhan Securities were subsequently exchanged to common stock of Shinhan Financial Group and became the treasury stocks of the Group. The treasury stocks held by Chohung Bank, Shinhan Bank and Good Morning Shinhan Securities were 8,985,567, 2,420,955 and 203,675 shares, respectively, as of December 31, 2005.
In 2006, Shinhan Bank and Good Morning Shinhan Securities sold 4,480,230 shares of the Group’s treasury stocks in the Korean stock market at various prices resulting in a credit to AdditionalPaid-in-Capital of W82,773 million (net of tax effect of W31,397 million). The treasury stock held by Shinhan Bank was 7,129,967 shares as of December 31, 2006.
In 2007, Shinhan Bank sold 7,129,967 shares of the Group’s treasury stocks in the Korean Stock Market at various prices resulting in a credit to AdditionalPaid-in-Capitaladditional paid-in capital of W177,572 million (net of tax effect of W67,373 million). The treasury stock held by Shinhan Card (formerly LG Card) washeld 529 shares of treasury stock as of December 31, 2007.2007 and 2008.
In 2009, Shinhan Card (formerly LG Card) sold 529 shares of the Group’s treasury stocks in the Korean Stock Market at various prices resulting in a debit to additional paid-in capital of W2 million (net of tax effect of W0.6 million).
| |
| 21. | Redeemable Preferred Stock and Redeemable Convertible Preferred Stock |
In August 2003, in connection with the acquisition of Chohung Bank, the Group issued 46,583,961 shares of redeemable preferred stock (“RPS”)(RPS), par value of W5,000 per share, with an aggregate estimated fair value of W710,258 million and 44,720,603 shares of redeemable convertible preferred stock (“RCPS”)(RCPS), par value of W5,000 per share, with an aggregate estimated fair value of W714,780 million to KDIC, as well as 6,000,000 shares of RPS, par value of W5,000 per share, with an aggregate estimated fair value of W900,000 million to Strider ABS Specialty Co., Ltd. (Strider), a SPE established by the Group.
The RPS was issued in five series (Series 1 to 5) to KDIC and in three series (Series 6 to 8) to Strider on August 19, 2003, redeemable over seven years after the issue date. If there is any RPS outstanding on the last day of the redemption period (RPS Final Redemption Date), the Group will be obligated to redeem all outstanding RPS to the extent that distributable profits are available for such purchase. In the event that the Group does not have sufficient distributable profits to redeem all outstanding RPS on the RPS Final Redemption Date, the RPS will remain outstanding until sufficient distributable profits are available. The Group may, at its option, elect to redeem
F-59
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
all or part of the outstanding RPS at any time during the redemption period. The holder of RPS will not have any voting rights, unless dividends on the RPS are not distributed in any given year, in which case each share of RPS will be given one voting right. The Group may redeem the RPS from KDIC and Strider at W18,086 and W150,000 per share, respectively.
F-52
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The dividends on the RPS issued to KDIC and Strider are cumulative and non-participating on dividends on the common stock of the Group, and the stated dividend rates are as follows:
| | | | | |
| RPS issued to KDIC (Series 1 to 5) | | | 4.04 | % |
| RPS issued to Strider: | | | | |
| Series 6 | | | 7.00 | % |
| Series 7 | | | 7.46 | % |
| Series 8 | | | 7.86 | % |
The RPS was initially measured at fair value and discounts are amortized over the period from the date of issuance to the redemption date using the effective interest method. The RPS is classified as long-term debt on the Group’s consolidated balance sheet as of December 31, 2007.2009. In 2007,2009, 9,316,792 shares amounting to W172,812168,504 million were redeemed.
The Series 9 RCPS was issued to KDIC on August 19, 2003, redeemable at any time after the 3rd anniversary date of the issue date and from time to time until the 5th anniversary date of the issue date During 2005, 22,360,302 shares outdate. As of 44,720,603 sharesDecember 31, 2009, all the Series 9 RCPS were converted to common stock and during 2006, all remaining shares were converted to common stocks.stock.
In connection with the acquisition of Shinhan Card (formerly LG card), the Group issued to the public 28,990,000 shares of RPS (Series 10), par value of W5,000 per share, with an aggregate estimated fair value of W2,899,000 million and 14,721,000 shares of RCPS (Series 11), par value of W5,000 per share, with an aggregate estimated fair value of W850,962 million.
The Series 10 RPS was issued to the public on January 25, 2007, redeemable from the 5th anniversary of the issue date to the 20th anniversary (Redemption Period). Redemption price is the aggregate of (1) the issue price, (2) the issue price × [number of days that have elapsed from the first day of the fiscal year during which redemption is made to the redemption date / 365] × applicable interest rate as stated below (a and b), and (3) any accrued but unpaid dividends. The Group can elect to redeem, at its discretion, and is not obligated to redeem, the RPS in whole or in part. If the Group does not exercise its redemption rights during the Redemption Period, such redemption right will subsequently terminate and the RPS will remain as preferred shares without redemption rights. The holder of RPS will not have any voting rights, unless dividends on the RPS are not distributed in any given year, in which case each share of RPS will be given one voting right. The Group may redeem the RPS at W100,000 per share.
The dividends on the RPS issued to the public are cumulative and non-participating on dividends on the common stock of the Group, and the stated dividend rates are as follows:
(a) From the issue date until the 5th anniversary of the issue date: 7.00% per annum.
(b) From the 5
th anniversary of the issue date: interest rate payable on five-year treasury bonds issued by the Korean government on the day immediately preceding the 5
th anniversary of the issue date + Spread
+
100bp100 bp
o Spread: 7% — the interest rate payable on five-year
treasuryTreasury bonds issued by the Korean government on the day immediately preceding the issue date
Considering the RPS is redeemable at the option of the issuer, the Group, and is not mandatorily redeemable, the Series 10 RPS to the public is classified as stockholders’ equity on the Group’s consolidated balance sheet as of December 31, 2007.2009.
The Series 11 RCPS was issued to the public on January 25, 2007, convertible from the 1st1st anniversary of the issue date to the 5th anniversary and redeemable from the 5th anniversary of the issue date to the 20th anniversary.
F-60
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The holdersholder can elect to convert, at its discretion, the RCPS in whole or in part into newly issued common stock of the Group at a conversion ratio of 1:1 at any time during the conversion period. If the holder does not exercise its conversion rights during the conversion period, such conversion right will subsequently terminate and the RCPS
F-53
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
will remain as redeemable preferred shares without conversion rights. Redemption price is decided by the aggregate of (1) the issue price, (2) the issue price × [number of days that have elapsed from the first day of the fiscal year during which redemption is made to the redemption date / 365] × applicable interest rate as stated below (a and b), and (3) any accrued but unpaid dividends. The Group can elect to redeem, at its discretion, and is not obligated to redeem, the RCPS in whole or in part. If the Group does not exercise its redemption rights during the redemption period, such redemption right will subsequently terminate and the RCPS will remain as preferred shares without redemption rights. The Group may redeem the RCPS from holder at W57,806 per share.
The dividends on the RCPS issued to public are cumulative and non-participating on dividends on the common stock of the Group, and the stated dividend rates are as follows:
(a) From the issue date until the 5th anniversary of the issue date: 3.25% per annum.
(b) From the 5
th anniversary of the issue date: interest rate payable on five-year treasury bonds issued by the Korean government on the day immediately preceding the 5
th anniversary of the issue date + Spread
+
100bp100 bp
o Spread: 7% — the interest rate payable on five-year
treasuryTreasury bonds issued by the Korean government on the day immediately preceding the issue date
By the same reason as the Series 10 RPS, the seriesSeries 11 RCPS issued to the public is classified as stockholders’ equity on the Group’s consolidated balance sheet as of December 31, 2007.2009.
The following table summarizes the details of retained earnings at December 31:
| | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | | 2008 | | 2009 | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
| Appropriated retained earnings for legal reserves under Korean GAAP | | W | 396,928 | | | W | 580,200 | | | W | 819,838 | | | W | 1,021,878 | |
| Unappropriated retained earnings under US GAAP | | | 4,808,115 | | | | 6,221,002 | | | | 6,890,059 | | | | 7,600,037 | |
| | | | | | | | | | | |
| | | W | 5,205,043 | | | W | 6,801,202 | | | W | 7,709,897 | | | W | 8,621,915 | |
| | | | | | | | | | | |
The Financial Holding Company Act requires the Group to appropriate as a legal reserve under accounting principles generally accepted in Korea (Korean GAAP), an amount equal to a minimum of 10% of annual net income of Shinhan Financial Group until such reserve equals 100% of its paid-in capital. This reserve is not available for payment of cash dividends, but may be transferred to capital stock or used to reduce an accumulated deficit, if any, by an appropriate resolution of the Group’s board of directors.
| |
| 23. | Regulatory Requirements |
The Group and its subsidiaries, including Shinhan Bank and Jeju Bank, are subject to various regulatory capital requirements administered by the Financial SupervisoryServices Commission (FSC), which are based on the Basel Committee on Banking Regulations and Supervisory Practices. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Group’s consolidated financial statements.
Until December 31, 2006, all financial holding companies were required to meet the minimum Requisite Capital Ratio of 100%, as regulated by the Financial Services Commission. In conformity with the FSC regulations on financial holding companies, the Group applied the net equity to requisite capital ratio calculated under the FSC guidelines to evaluate its capital adequacy. All Korean financial holding companies must meet the minimum requisite capital ratio of 100%, as regulated by the FSC. Requisite capital, as required and defined by FSC, represents the sum of (a) the minimum equity capital amount necessary to meet the FSC guidelines for Shinhan Bank, and Jeju Bank, (b) 8% of its total assets on its balance sheet (including off-balance assets, if any) for other
F-54
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
subsidiaries, and (c) 8% of its total assets on its balance sheet (including off-balance assets, if any, but excluding the book value of investments in and financial supports to its direct and indirect subsidiaries) for the Group.
From January 1, 2007, a bank holding company, which is a financial holding company controlling banks or other financial institutions conducting banking business as prescribed in the Financial Holding Company Act, is required to maintain a minimum consolidated equity capital ratio of 8.0%8%. “Consolidated equity capital ratio” is
F-61
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
defined as the ratio of equity capital as a percentage of risk-weighted assets on a consolidated basis, determined in accordance with the Financial Services CommissionFSC requirements that have been formulated based on Bank of International Settlements standards. “Equity capital,” as applicable to bank holding companies, is defined as the sum of Tier I capital, Tier II capital and Tier III Capital less any deductible items, each as defined under the Regulation on the Supervision of Financial Holding Companies. “Risk-weighted assets” is defined as the sum of credit risk-weighted assets and market risk-weighted assets.
The FSC regulations also require that the computation be based on the Group’s consolidated financial statements under Korean GAAP and regulatory guidelines, which vary in certain significant respects from US GAAP.
The following table sets forth consolidated equity capital ratio of the Group’s requisite capital adequacy ratioGroup mandated by the FSC at December 31:
| | | | |
| | 2006 | |
| | (In millions of won,
| |
| | except equity capital ratio) | |
|
Equity Capital | | W | 14,184,052 | |
Requisite Capital | | | 10,183,478 | |
Requisite Capital Ratio (%) | | | 139.28 | % |
Also, the following table sets forth consolidated equity capital ratio mandated by the FSC at December 31:
| | | | |
| | 2007 | |
| | (In millions of won,
| |
| | except equity capital ratio) | |
|
Equity Capital | | | 15,945,940 | |
Risk-weighted assets | | | 161,849,385 | |
Consolidated equity capital ratio | | | 9.85 | % |
| | | | | | | | | |
| | | 2008 | | | 2009 | |
| | | (In millions of Won, except equity capital ratio) | |
| |
| Equity Capital | | W | 18,723,461 | | | W | 22,572,130 | |
| Risk-weighted assets | | | 183,741,412 | | | | 179,083,070 | |
| Consolidated equity capital ratio | | | 10.19 | % | | | 12.60 | % |
In conformity with the FSC regulations, Shinhan Bank and Jeju Bank apply the FSC’s risk-adjusted capital ratios to evaluate their capital adequacies.adequacy. Korean banking organizations engaged in international banking are required to maintain a minimum 8% total risk-based capital ratio calculated by dividing total risk-adjusted capital by total risk-weighted assets, including a Tier 1 capital ratio of at least 4%. All Korean banking organizations subject to the FSC regulations on minimum total risk-based capital adequacy ratio are also subject to periodic inspection by the Financial Supervisory Service (FSS). In the event that Shinhan Bank or Jeju Bank does not maintain a consolidated capital ratio of 8%, it is subject to corrective actions to be imposed by the FSS, as recommended by the FSC, based on the actual financial position and capital ratio of the respective banking subsidiaries.
In conformity with the FSC regulations, Shinhan Card also applies the FSC’s risk-adjusted capital ratios to evaluate their capital adequacies.adequacy. Credit card organizations are required to maintain a minimum 8% total risk-based capital ratio calculated by dividing total risk-adjusted capital by total risk-weighted assets.
F-55
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
As required by the FSC regulations, the following table sets forth the details of capital adequacy ratios of Shinhan Bank and Shinhan Card, subsidiaries considered material to the consolidated financial statements of the Group, under Korean GAAP and regulatory guidelines which vary in certain significant respects from US GAAP at December 31:
| | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | | 2008 | | 2009 | |
| | | (In millions of won,
| | | (In millions of Won,
| |
| | | except capital ratio) | | | except capital ratio) | |
| |
| Tier 1 capital | | | 8,869,555 | | | | 10,346,985 | | | W | 12,388,534 | | | W | 14,058,510 | |
| Tier 2 capital | | | 4,770,133 | | | | 6,027,899 | | | | 5,500,601 | | | | 4,264,192 | |
| | | | | | | | | | | |
| Total risk-adjusted capital | | | 13,639,688 | | | | 16,374,884 | | | W | 17,889,135 | | | W | 18,322,702 | |
| | | | | | | | | | | |
| Total risk-weighted assets | | | 113,557,486 | | | | 135,495,682 | | | W | 133,140,142 | | | W | 121,132,041 | |
| | | | | | | | | | | |
| Capital adequacy ratio (%) | | | 12.01 | % | | | 12.09 | % | |
| Total risk-based capital ratio (%) | | | | 13.43 | % | | | 15.13 | % |
| Tier 1 capital ratio (%) | | | 7.81 | % | | | 7.64 | % | | | 9.30 | % | | | 11.61 | % |
| Tier 2 capital ratio (%) | | | 4.20 | % | | | 4.45 | % | | | 4.13 | % | | | 3.52 | % |
F-62
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| | | | | | | | | |
| | | 2006(*) | | | 2007 | |
| | | (In millions of won,
| |
| | | except capital ratio) | |
| |
| Adjusted Equity Capital | | | 4,484,490 | | | | 3,662,472 | |
| Adjusted Total Asset | | | 17,720,131 | | | | 10,693,905 | |
| Adjusted Equity Capital Ratio | | | 25.31 | % | | | 34.25 | % |
| | | | | | | | | |
| | | 2008 | | | 2009 | |
| | | (In millions of Won,
| |
| | | except capital ratio) | |
| |
| Total risk-adjusted capital | | W | 3,906,057 | | | W | 5,043,293 | |
| Total risk-weighted assets | | | 19,222,236 | | | | 18,867,283 | |
| Total risk-based capital ratio (%) | | | 20.32 | % | | | 26.73 | % |
| |
• | (*)figures are those of former LG Card. |
The Group’s other subsidiaries, including Jeju Bank, Shinhan Card, Shinhan Life Insurance, Shinhan Capital and Good Morning Shinhan SecuritiesInvestment Corp. are also subject to the capital ratio pursuant to other regulatory capital requirements of the FSC. At December 31, 20062008 and 2007,2009, the Group’s other subsidiaries met the regulatory capital requirements of the FSC.
All but an insignificant portion of income before income tax expense and income tax expense is from Korean sources. The following table sets forth allocation of national and local income taxes between current and deferred portions for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2006 | | 2007 | | | 2007 | | 2008 | | 2009 | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
Current tax expense | | | | | | | | | | | | | | | | | | | | | | | | |
| National | | W | 414,073 | | | W | 640,365 | | | W | 828,557 | | | W | 828,557 | | | W | 888,389 | | | W | 544,529 | |
| Local | | | 41,408 | | | | 64,036 | | | | 82,885 | | | | 82,855 | | | | 88,839 | | | | 54,453 | |
| | | | | | | | | | | | | | | |
| Total current tax expense | | | 455,481 | | | | 704,401 | | | | 911,412 | | | | 911,412 | | | | 977,228 | | | | 598,982 | |
Deferred tax expense | | | | | | | | | | | | | | | | | | | | | | | | |
| National | | | 508,533 | | | | (49,632 | ) | | | 133,665 | | | | 133,665 | | | | (256,634 | ) | | | (159,051 | ) |
| Local | | | 50,853 | | | | (4,963 | ) | | | 13,367 | | | | 13,367 | | | | (25,663 | ) | | | (15,905 | ) |
| | | | | | | | | | | | | | | |
| Total deferred tax expense | | | 559,386 | | | | (54,595 | ) | | | 147,032 | | |
| Total deferred tax expense (benefit) | | | | 147,032 | | | | (282,297 | ) | | | (174,956 | ) |
| | | | | | | | | | | | | | | |
| Total tax expense | | W | 1,014,867 | | | W | 649,806 | | | W | 1,058,444 | | | W | 1,058,444 | | | W | 694,931 | | | W | 424,026 | |
| | | | | | | | | | | | | | | |
The preceding table does not reflect the tax effects of unrealized gains and losses onavailable-for-sale securities. The tax effects of these items are recorded directly as other comprehensive income within equity. See Note 37 for further information.
F-56F-63
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The preceding table does not reflect the tax effects of unrealized gains and losses on available-for-sale securities. The tax effects of these items are recorded directly as other comprehensive income within stockholders’ equity. See Note 36 for further information.
The following table sets forth a reconciliation of income tax expense at the Korean statutory income tax rate to actual income tax expense for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2006 | | 2007 | | | 2007 | | 2008 | | 2009 | |
| | | (In millions of won, except tax rates) | | | (In millions of Won, except tax rates) | |
| |
| Statutory tax rate | | | 27.5 | % | | | 27.5 | % | | | 27.5 | % | | | 27.5 | % | | | 27.5 | % | | | 24.2 | % |
| Income before income tax expense, minority interest, and cumulative effect of a change in accounting principle | | W | 2,960,799 | | | W | 2,233,334 | | | W | 3,083,012 | | |
| Income before income tax expense | | | W | 3,083,012 | | | W | 2,187,331 | | | W | 1,567,551 | |
| Income tax calculated at the statutory tax rate | | | 814,220 | | | | 614,167 | | | | 847,828 | | | | 847,828 | | | | 601,516 | | | | 379,347 | |
| Income not assessable for tax purposes | | | (25,519 | ) | | | (223,044 | ) | | | (328,315 | ) | | | (328,315 | ) | | | (104,862 | ) | | | (62,090 | ) |
| Expenses not deductible for tax purposes | | | 205,402 | | | | 329,395 | | | | 468,802 | | | | 468,802 | | | | 96,434 | | | | 69,835 | |
| Foreign tax rate differentials | | | (429 | ) | | | (1,010 | ) | | | 39 | | | | 39 | | | | (5,573 | ) | | | (1,544 | ) |
| Adjustment of deferred tax liability on investment in subsidiaries and associates | | | (7,670 | ) | | | (16,387 | ) | | | 20,990 | | | | 20,990 | | | | 12,195 | | | | 540 | |
| Change in statutory tax rate(1) | | | | — | | | | 100,756 | | | | 582 | |
| Change in valuation allowance | | | 27,374 | | | | (54,222 | ) | | | 48,675 | | | | 48,675 | | | | (5,683 | ) | | | 37,035 | |
| Other | | | 1,489 | | | | 907 | | | | 425 | | | | 425 | | | | 148 | | | | 321 | |
| | | | | | | | | | | | | | | |
| Income tax expense | | W | 1,014,867 | | | W | 649,806 | | | W | 1,058,444 | | | W | 1,058,444 | | | W | 694,931 | | | W | 424,026 | |
| | | | | | | | | | | | | | | |
Note:
| | |
| (1) | | Pursuant to amendments to the Corporation Income Tax Law that was enacted in December 2008, the statutory tax rates changed from 27.5% to 24.2% in 2009 and 22% in 2010 and thereafter; however, pursuant to the amendment to the Corporation Income Tax Law enacted in December 2009, the statutory tax rates changed from 22% to 24.2% in 2010 and 2011, and 22.0% will be applied from 2012 and thereafter. |
F-57F-64
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The components of net deferred income tax assets and liabilities included in other assets and accrued expenses and other liabilities, respectively, at December 31, are as follows:
| | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | | 2008 | | 2009 | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
Deferred income tax assets | | | | | | | | | | | | | | | | |
| Allowance for loan losses | | W | 216,895 | | | W | 342,678 | | | W | 208,781 | | | W | 241,942 | |
| Other allowances | | | 104,606 | | | | 229,809 | | | | 267,724 | | | | 286,127 | |
| Valuation of trading assets | | | 7,662 | | | | 17,424 | | | | 25,105 | | | | 22,983 | |
| Premises and equipment | | | 107,218 | | | | 108,055 | | | | 188,426 | | | | 216,201 | |
| Available-for-sale securities | | | 571,450 | | | | 450,898 | | | | 749,379 | | | | 757,625 | |
| Other assets | | | 28,811 | | | | 97,524 | | | | 180,739 | | | | 274,047 | |
| Future policy benefits | | | 158,872 | | | | 218,772 | | | | 104,442 | | | | 150,495 | |
| Long-term debt | | | 38,216 | | | | 162,687 | | | | 40,724 | | | | 4,534 | |
| Other temporary differences | | | 21,497 | | | | 98,926 | | | | 80,759 | | | | 18,870 | |
| Net operating loss carry forwards | | | 20,817 | | | | 219,966 | | |
| Net operating loss carryforwards | | | | 66,181 | | | | 100,005 | |
| | | | | | | | | | | |
| | | | 1,276,044 | | | | 1,946,739 | | | | 1,912,260 | | | | 2,072,829 | |
| Less: Valuation allowance | | | (24,951 | ) | | | (73,626 | ) | | | (67,879 | ) | | | (104,914 | ) |
| | | | | | | | | | | |
| Deferred income tax assets | | | 1,251,093 | | | | 1,873,113 | | | | 1,844,381 | | | | 1,967,915 | |
| | | | | | | | | | | |
Deferred income tax liabilities | | | | | | | | | | | | | | | | |
| Valuation of trading assets | | | (4,257 | ) | | | — | | | | (15,235 | ) | | | — | |
| Foreign exchange contracts and derivative instruments | | | (4,316 | ) | | | (78 | ) | | | (40,675 | ) | | | (11,647 | ) |
| Allowance for loan losses | | | (490,117 | ) | | | (709,386 | ) | | | (228,981 | ) | | | (388,523 | ) |
| Accrued interest and dividend receivable | | | (90,216 | ) | | | (91,785 | ) | | | (78,458 | ) | | | (13,046 | ) |
| Other assets | | | (767,920 | ) | | | (968,811 | ) | | | (1,012,208 | ) | | | (868,990 | ) |
| Long-term debt | | | | — | | | | (28,463 | ) |
| Other temporary differences | | | (44,375 | ) | | | (86,077 | ) | | | (68,276 | ) | | | (76,334 | ) |
| | | | | | | | | | | |
| Deferred income tax liabilities | | | (1,401,201 | ) | | | (1,856,137 | ) | | | (1,443,833 | ) | | | (1,387,003 | ) |
| | | | | | | | | | | |
| Net deferred income tax assets(liabilities) | | W | (150,108 | ) | | | 16,976 | | |
Net deferred income tax assets | | | W | 400,548 | | | W | 580,912 | |
| | | | | | | | | | | |
Deferred income taxes at December 31, 20062008 and 20072009 are reflected in the consolidated balance sheets under the following captions:
| | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | | 2008 | | 2009 | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
| Other assets | | W | 258,615 | | | | 493,683 | | | W | 568,875 | | | W | 689,660 | |
| Accrued expenses and other liabilities | | | (408,723 | ) | | | (476,707 | ) | | | (168,327 | ) | | | (108,748 | ) |
| | | | | | | | | | | |
| Total net deferred tax liabilities | | W | (150,108 | ) | | | 16,976 | | |
| Net deferred income tax assets | | | W | 400,548 | | | W | 580,912 | |
| | | | | | | | | | | |
In assessing the realizability of deferred tax assets, management consideredconsiders whether it wasis more likely than not that some portion or all of the deferred tax assets wouldwill not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences becamebecome deductible. Management consideredconsiders the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets wereare deductible, management believed it was more likely than not that the Group would realize the benefits of these
F-58F-65
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
management believes it is more likely than not that the Group will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 2007.2009. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period wereare reduced.
The valuation allowance was W55,62424,951 million and W73,626 million as of January 1, 2005.2007 and 2008, respectively. During the years ended December 31, 2005, 20062007, 2008 and 2007,2009, the valuation allowance increased (decreased) by W23,54948,675 million, W(54,222)(5,747) million and W48,67537,035 million, respectively.
The changes in the valuation allowance forin 2009 are primarily due to the increase in deferred tax assets inon the amountnet operating loss carryforwards of W3,824 million was credited to goodwill during the year endedparent company and one of its subsidiaries. As of December 31, 2005. At December 31, 2007,2009, the Group had tax net operating lossesloss carryforwards totaling W799,877422,656 million.
The following table sets forth these net operating losses expiring in periods ranging from 2008December 31, 2010 to 2012:2013 and thereafter:
| | | | | | | | | |
Years Ending | | | | |
| Years ending | | | (In millions of Won) | |
| | | (In millions of won) | |
| | |
| 2008 | | W | 201,492 | | |
| 2009 | | | 359,039 | | |
| 2010 | | | 18,666 | | | W | 65,132 | |
| 2011 | | | 55,913 | | | | 55,913 | |
| 2012 | | | 164,767 | | | | 164,913 | |
| 2013 and thereafter | | | | 136,698 | |
| | | | | | | |
| | | W | 799,877 | | | W | 422,656 | |
| | | | | | | |
As discussed in Note 1 to the consolidated financial statements, the Group adopted the provisions ofASC 740-10 (formerly FIN 4848) on January 1, 2007, resulting in a W3,815 million cumulative effect of increase to retained earnings.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | |
| | (In millions of won) | |
|
Balance at January 1, 2007 | | W | 231,117 | |
Additions for tax positions related to current year | | | 12,241 | |
Additions for tax positions of prior years | | | — | |
Expiration of statue of limitations | | | (3,950 | ) |
Settlements | | | (21,772 | ) |
| | | | |
Balance at December 31, 2007 | | W | 217,636 | |
| | | | |
| | | | | | | | | | | | | |
| | | 2007 | | | 2008 | | | 2009 | |
| | | (In millions of Won) | |
| |
| Beginning balance | | W | 231,117 | | | W | 217,636 | | | W | 153,754 | |
| Increases for tax positions of current year | | | 12,241 | | | | 12,740 | | | | 681 | |
| Increases for tax positions of prior years | | | — | | | | — | | | | 719 | |
| Decreases for tax positions of prior years | | | (3,950 | ) | | | (38,353 | ) | | | (17,659 | ) |
| Amounts of decreases in the unrecognized tax benefits relating to settlements | | | (21,772 | ) | | | (38,269 | ) | | | (3,817 | ) |
| Amounts of decreases in the unrecognized tax benefits relating to a lapse of the statute of limitations | | | — | | | | — | | | | (80,767 | ) |
| | | | | | | | | | | | | |
| Ending balance | | W | 217,636 | | | W | 153,754 | | | W | 52,911 | |
| | | | | | | | | | | | | |
Any changes in the amounts of unrecognized tax benefits related to temporary differences would result in a reclassification to deferred tax liability, and any changes in the amounts of unrecognized tax benefits related to permanent differences would result in an adjustment to income tax expense and therefore, the Group’s effective tax rate. As of December 31, 2007, 2008 and January 1, 2007,2009, the unrecognized tax benefits included above which would, if recognized, affect the effective tax rate isare W24,586 million, W53,071 million and W24,76426,447 million, respectively.
The Group does not expect significant changes inDue to the total amountexpiration of statutes of limitation, unrecognized tax benefits that may occurwill decrease by W30,479 million within the next 12 months. In addition, the Group’s major tax jurisdiction is the Republic of Korea,twelve months, and as of December 31, 2007, legally all2009, the Korean income tax returns of the Group for the tax years subsequent to 20012003 remain open to examination.
Interest expense and penalties related to unrecognized tax benefits recorded in income tax expense was W6,901123 million, in 2007. Included in accrued expenses and other liabilities at January 1, 2007, in addition to the Group’s liability for unrecognized tax benefits, was W23,15916,778 million and W13,571(43,559) million for income tax-related interestthe years ended December 31, 2007, 2008 and penalties,2009, respectively. Accrued income tax-related interest and penalties increased towere W23,92741,679 million and W12,92712,857 million respectively, at December 31, 2007, due to the continuing outstanding status of the liability for unrecognized tax benefits.2008 and W6,564 million and W4,413 million at December 31, 2009, respectively.
F-59F-66
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following is a reconciliation of the income and share data used in the basic and diluted earnings per share computation for the years ended December 31:
The following table sets forth the details of the calculation of earnings per share (EPS) for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2006 | | 2007 | | | 2007 | | 2008 | | 2009 | |
| | | (In millions of won, except per share data) | | | (In millions of Won, except per share data) | |
| |
Basic EPS | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income before cumulative effect of a change in accounting principle | | W | 1,929,853 | | | W | 1,565,668 | | | W | 1,929,612 | | |
| Cumulative effect of a change in accounting principle, net of taxes | | | — | | | | (10,184 | ) | | | — | | |
| Net income | | | W | 1,929,612 | | | W | 1,480,699 | | | W | 1,133,852 | |
| Accretion and dividends on redeemable preferred stock and redeemable convertible preferred stock | | | (8,169 | ) | | | — | | | | (214,793 | ) | | | (214,793 | ) | | | (230,586 | ) | | | (230,586 | ) |
| | | | | | | | | | | | | | | |
| Net income attributable to common stock shareholders | | W | 1,921,684 | | | W | 1,555,484 | | | W | 1,714,819 | | | W | 1,714,819 | | | W | 1,250,113 | | | W | 903,266 | |
| Weighted-average number of common stocks outstanding (in thousands) | | | 333,424 | | | | 372,173 | | | | 382,731 | | | | 403,475 | | | | 417,673 | | | | 461,500 | |
| Net income per share | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income before cumulative effect of a change in accounting principle | | W | 5,763 | | | W | 4,207 | | | W | 4,480 | | |
| Cumulative effect of a change in accounting principle | | | — | | | | (27 | ) | | | — | | |
| | | | | | | | | | | | | | | |
| Basic net earnings per share | | W | 5,763 | | | W | 4,180 | | | W | 4,480 | | | W | 4,250 | | | W | 2,993 | | | W | 1,957 | |
| | | | | | | | | | | | | | | |
Diluted EPS | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income before cumulative effect of a change in accounting principle for purposes of computing diluted net income per share | | W | 1,929,853 | | | W | 1,565,668 | | | W | 1,929,612 | | |
| Cumulative effect of a change in accounting principle, net of taxes | | | — | | | | (10,184 | ) | | | — | | |
| Net income | | | W | 1,929,612 | | | W | 1,480,699 | | | W | 1,133,852 | |
| Dividends on redeemable preferred stock | | | — | | | | — | | | | (189,031 | ) | | | (189,031 | ) | | | (202,930 | ) | | | (202,930 | ) |
| | | | | | | | | | | | | | | |
| Net income attributable to common stock shareholders | | W | 1,929,853 | | | W | 1,555,484 | | | W | 1,740,581 | | | W | 1,740,581 | | | W | 1,277,769 | | | W | 930,922 | |
| Weighted-average number of common stocks outstanding (in thousands) | | | 333,424 | | | | 372,173 | | | | 382,731 | | | | 403,475 | | | | 417,673 | | | | 461,500 | |
| Diluted effect of redeemable convertible preferred stock (in thousands) | | | 22,360 | | | | — | | | | 13,753 | | | | 13,753 | | | | 14,721 | | | | 14,721 | |
| Diluted effect of stock options (in thousands) | | | 356 | | | | — | | | | — | | |
| | | | | | | | | | | | | | | |
| Weighted-average number of common stock outstanding, assuming dilution (in thousands) | | | 356,140 | | | | 372,173 | | | | 396,484 | | | | 417,228 | | | | 432,394 | | | | 476,221 | |
| Net income per share | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income before cumulative effect of a change in accounting principle | | W | 5,419 | | | W | 4,207 | | | W | 4,390 | | |
| | | | | | | | | | | | | | | |
| Cumulative effect of a change in accounting principle | | | — | | | | (27 | ) | | | — | | |
| Diluted net earnings per share | | W | 5,419 | | | W | 4,180 | | | W | 4,390 | | | W | 4,172 | | | W | 2,955 | | | W | 1,955 | |
| | | | | | | | | | | | | | | |
F-60
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| |
| 26. | Employee Severance Plans |
Employees with one or more years of service are entitled to receive a lump-sum payment upon termination of their employment with the Group or receive benefits after legal retirement age in installments, based on their length of service and rates of pay at the time of termination (the severance plan).termination. Under the Korean National Pension Fund Law, the Group was required to pay a certain percentage of employee severance benefits to the National Pension Fund prior to April 1999. Additionally, theThe Group contributes voluntarily a certain percentage of employee severance benefits to a severance insurance deposit account (Severance Insurance Deposit)(“Severance Plan Assets”) maintained for the benefit of employees at an insurance company.companies, banks and securities. Severance Plan Assets consist of time deposits and other guaranteed principal and guaranteed interest investments. The Group has no additional liability once the amount has been contributed, thus the Group deducts contributions made to the National Pension Fund and the Severance Insurance DepositPlan Assets from its accrued employee severance plan obligations. The compensation cost of employees’ severance benefit is recognized based on the vested benefits to which the employees are entitled if they separate immediately.immediately leave the Group.
F-67
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Under limited circumstances, employees can withdraw their accumulated unpaid severance amounts before their termination of employment (interim severance payment). Such withdrawals were included in the amount of plan payments for the years ended December 31, 20062008 and 2007.2009. Total interim severance payments made by the Group in 20062008 and 20072009 were W14,81743,846 million and W40,425148,228 million, respectively. The Group paid severance benefits, excluding interim severance payments, of W95,234181,691 million and W166,863135,270 million and W181,691252,284 million for the years ended December 31, 2005, 20062007, 2008 and 2007,2009, respectively.
The following table sets forth the movements of accrued employee severance plan obligations included in accrued expenses and other liabilities at December 31:
| | | | | | | | | |
| | | 2006 | | | 2007 | |
| | | (In millions of Korean won) | |
| |
Balance at beginning of the year | | W | 254,718 | | | W | 336,386 | |
| Severance benefits | | | 263,348 | | | | 278,747 | |
| Balance from acquisition of subsidiaries (including LG Card) | | | — | | | | 87,279 | |
| Plan payments | | | (181,680 | ) | | | (222,116 | ) |
| | | | | | | | | |
| | | | 336,386 | | | | 480,296 | |
| Less: Balance of payments remaining with National Pension Fund and severance insurance deposit | | | (92,168 | ) | | | (196,672 | ) |
| | | | | | | | | |
Balance at end of the year | | W | 244,218 | | | W | 283,624 | |
| | | | | | | | | |
| | | | | | | | | |
| | | 2008 | | | 2009 | |
| | | (In millions of Won) | |
| |
| Balance at beginning of year | | W | 480,296 | | | W | 528,590 | |
| Accruals | | | 224,758 | | | | 276,438 | |
| Increase from acquisition of subsidiaries | | | 2,652 | | | | — | |
| Decrease from sale of subsidiaries | | | — | | | | (94 | ) |
| Payments | | | (179,116 | ) | | | (400,512 | ) |
| | | | | | | | | |
| | | | 528,590 | | | | 404,422 | |
| Less: Contributions to National Pension Fund and | | | | | | | | |
| Severance Plan Assets | | | (205,364 | ) | | | (229,897 | ) |
| | | | | | | | | |
| Balance at end of year | | W | 323,226 | | | W | 174,525 | |
| | | | | | | | | |
The Group expects to pay the following future benefits to its employees upon their normal retirement age:
| | | | | | |
| | | (In millions of
| | | | | |
Years Ending | | Korean won) | | | (In millions of Won) | |
| |
| 2008 | | W | 31,214 | | |
| 2009 | | | 15,142 | | |
| 2010 | | | 12,931 | | | W | 1,612 | |
| 2011 | | | 19,302 | | | | 2,319 | |
| 2012 | | | 22,372 | | | | 1,152 | |
| 2013 ~2017 | | | 177,732 | | |
| 2013 | | | | 3,552 | |
| 2014 | | | | 7,156 | |
2015~2019 | | | | 94,959 | |
| | | | | | | |
| | | W | 278,693 | | | W | 110,750 | |
| | | | | | | |
The above amounts were determined based on the employees’ current salary rates and the number of service years that will be accumulated upon their retirement date. These amounts do not include amounts that might be paid to employees that will cease working with the Group before their normal retirement age.
F-61
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| |
| 27. | Employee Share-based Compensation and Other Benefits |
Adoption of SFAS No. 123(R)
On January 1, 2006, the Group adopted SFAS No. 123(R),Share-Based Payment (SFAS No. 123(R)), and Staff Accounting Bulletin No. 107,Share-Based Payment, using the modified prospective application method, which requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions. In connection with the adoption of SFAS No. 123(R), the combined net earning impact was W14,047 million pretax in cumulative effect of an accounting change, which recognizes the effect of initially measuring awards that will be settled at their fair values. The Group’s cash-settled share appreciation rights (SARs) are classified as a liability using the fair-value-based method under SAFS No. 123(R).
Employee stock-based compensation plan
The Group has various share-based compensation plans to reward its employees and key executives of the Group. All the Group’s compensation plans are classified as liabilities using the fair-value-based method under ASC 718 (formerly SFAS 123R).
Share-based compensation expense was W45,459104,042 million, W60,280(114,058) million and W104,04252,077 million in 2005, 20062007, 2008 and 2007,2009, respectively. The per share weighted fair value of the stock options granted to key employees, executives and directors of the Group was W11,20116,259 for 20052007 and W5,79712,275 for 20062008 and W16,259nil for 2007.2009. These fair value amounts waswere calculated using the Partial Differential Equation (PDE) Solution model. Effective January 1, 2007, the Group changed its valuation model from the Black-SholesBlack-Scholes model to the PDE Solution model for a more representative measurement of fair value of performance-based stock options.
F-68
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table illustrates the significant assumptions used to estimate the fair value of share options at the grant date:date (the group did not grant any stock options during 2009):
| | | | | | | | | | | |
| | | Shinhan Financial Group | | Shinhan Financial Group |
| | | 2005 | | 2006 | | 2007 | | 2007 | | 2008 |
| |
| Risk-free interest rate | | 4.07% | | 5.02% | | 4.69% | | 4.69% | | 5.16% |
Expected lives | | 5.00 years | | 5.00 years | | 5.00 years | | 5.00 years | | 5.00 years |
| Expected volatility(*) | | 42.31% | | 11.19% | | 32.12% | |
| Expected volatility(2) | | | 32.12% | | 30.60% |
| Expected dividend rate | | 2.79% | | 3.26% | | 3.06% | | 3.06% | | 2.62% |
Note:
| | |
(*)(1) | | Expected lives are calculated based on a simplified method since the Group does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. |
|
| (2) | | Expected volatility is based on implied volatility derived from historical volatility of the Group’s stock price. |
Shinhan Financial Group Plan
Shinhan Financial Group has authorized 70,554,14479,094,106 shares of options to be granted to purchase its common stock. Shinhan Financial Group granted to its key employees, managements and directors of the Group 1,004,200 options, 1,156,300 options, 1,301,600 options, 2,695,200 options, 3,296,200 options, 1,301,050 options and 1,301,050808,700 options at an exercise price of W18,910, W11,800, W21,595, W28,006, W38,829, W54,560 and W54,56049,053 per share with vesting period of two years from the grant date in 2002, 2003, 2004, 2005, 2006, 2007 and 2007,2008, respectively. Upon vesting, the 1st, 2nd and 3rd options may be exercised between twowithin three to sevenfour years while the 4th, 5th, 6th and 7th options may be exercised within four years after one year from the grant date.vesting. Options granted to management and directors are performance-based and market-based linked to average market price of the Group’s three main domestic competitors’ shares. With regard to options granted on May 22, 2002, May 15, 2003, March 25, 2004, and March 30, 2005 and March 21, 2006, Shinhan Financial Group decided to pay the difference between the exercise price and average market price in cash at the date of exercise. With regard to options granted on March 21, 2006,20, 2007 and March 20, 2007,19, 2008, the Group may issue shares (new shares of common stock or treasury shares) upon settlement or pay in cash the difference between the exercise and average market price at the date of exercise.
F-62
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Shinhan Bank and Shinhan Investment Corp. (formerly Good Morning Shinhan SecuritiesSecurities) Plan
Shinhan Bank and Shinhan Investment Corp. (formerly Good Morning Shinhan SecuritiesSecurities) granted share options to certain executives with a vesting period of two years from the grant date in 1999, 2000, 2001, 2002, 2003, and 2004. During 2004 and 2005, both companies decided to settle all outstanding stock options for cash based on price calculated in reference to the market price of the common stock of Shinhan Financial Group, multiplied by an exchange ratio.
A summary of the status of the Group’s unvested options as of December 31, 2007, and changes during the twelve months ended December 31, 2007, is presented below:
| | | | | | | | | |
| | | Shinhan Financial Group | |
| | | | | | Weighted-
| |
| | | | | | Average
| |
| | | | | | Grant Date
| |
| | | Number
| | | Fair Value
| |
| | | of Options | | | per Option | |
| | | | | | (In won) | |
| |
| Unvested at January 1, 2007 | | | 5,479,159 | | | W | 8,145 | |
| Granted | | | 1,301,050 | | | | 16,259 | |
| Vested | | | (2,369,031 | ) | | | 11,201 | |
| Forfeited | | | (455,180 | ) | | | 9,014 | |
| | | | | | | | | |
| Unvested at December 31, 2007 | | | 3,955,998 | | | W | 8,884 | |
| | | | | | | | | |
Total fair value of shares vested during 2005, 2006 and 2007 were W24,011 million, W28,955 million and W63,821 million. As of December 31, 2007, there was W14,286 million of total unrecognized compensation cost related to unvested stock awards net of the forfeiture provision. That cost is expected to be recognized over a weighted-average period of 0.5 years.
The following table presents the share option activities during the period indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Shinhan Financial Group | | | Shinhan Bank | |
| | | | | | Weighted-
| | | | | | | | | Weighted-
| | | | |
| | | | | | Average
| | | | | | | | | Average
| | | | |
| | | | | | Exercise
| | | Aggregate
| | | | | | Exercise
| | | Aggregate
| |
| | | Number
| | | Price
| | | Intrinsic
| | | Number
| | | Price
| | | Intrinsic
| |
| | | of Options | | | per Option | | | Value | | | of Options | | | per Option | | | Value | |
| | | | | | (In won) | | | (In million won) | | | | | | (In won) | | | (In million won) | |
| |
| Outstanding at January 1, 2005 | | | 3,096,942 | | | W | 17,698 | | | | | | | | 906,890 | | | W | 5,118 | | | | | |
| Granted | | | 2,695,200 | | | | 28,006 | | | | | | | | — | | | | — | | | | | |
| Exercised | | | (363,665 | ) | | | 15,054 | | | | | | | | (1,750 | ) | | | 11,700 | | | | | |
| Forfeited | | | (101,684 | ) | | | 26,360 | | | | | | | | (19,739 | ) | | | 5,000 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding at December 31, 2005 | | | 5,326,793 | | | | 22,848 | | | | | | | | 885,401 | | | | 5,106 | | | | | |
| Granted | | | 3,296,200 | | | | 38,829 | | | | | | | | — | | | | — | | | | | |
| Exercised | | | (277,849 | ) | | | 17,647 | | | | | | | | (216,379 | ) | | | 5,054 | | | | | |
| Forfeited | | | (393,884 | ) | | | 33,371 | | | | | | | | (280,000 | ) | | | 5,000 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding at December 31, 2006 | | | 7,951,260 | | | W | 29,133 | | | | | | | | 389,022 | | | W | 5,395 | | | | | |
| Granted | | | 1,301,050 | | | | 54,560 | | | | | | | | — | | | | — | | | | | |
| Exercised | | | (1,036,956 | ) | | | 17,973 | | | | | | | | (231,499 | ) | | | 5,562 | | | | | |
| Forfeited | | | (455,180 | ) | | | 43,165 | | | | | | | | — | | | | — | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding at December 31, 2007 | | | 7,760,174 | | | W | 34,065 | | | W | 151,986 | | | | 157,523 | | | W | 5,150 | | | W | 330 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercisable at December 31, 2007 | | | 1,435,145 | | | W | 18,138 | | | W | 50,734 | | | | 157,523 | | | W | 5,150 | | | W | 330 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
F-63F-69
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| | | | | | | | | | | | | |
| | | Good Morning Shinhan Securities | |
| | | | | | Weighted-Average
| | | Aggregate
| |
| | | Number
| | | Exercise Price
| | | Intrinsic
| |
| | | of Options | | | per Option | | | Value | |
| | | | | | (In won) | | | (In million won) | |
| |
| Outstanding at January 1, 2005 | | | 9,838,025 | | | W | 6,743 | | | | | |
| Granted | | | — | | | | — | | | | | |
| Exercised | | | — | | | | — | | | | | |
| Forfeited | | | (63,734 | ) | | | 5,000 | | | | | |
| | | | | | | | | | | | | |
| Outstanding at December 31, 2005 | | | 9,774,291 | | | | 6,754 | | | | | |
| Granted | | | — | | | | — | | | | | |
| Exercised | | | (445,777 | ) | | | 5,076 | | | | | |
| Forfeited | | | (223,789 | ) | | | 5,000 | | | | | |
| | | | | | | | | | | | | |
| Outstanding at December 31, 2006 | | | 9,104,725 | | | W | 6,879 | | | | | |
| | | | — | | | | — | | | | | |
| Granted | | | — | | | | — | | | | | |
| Exercised | | | (3,408,956 | ) | | | 6,751 | | | | | |
| Forfeited | | | — | | | | — | | | | | |
| | | | | | | | | | | | | |
| Outstanding at December 31, 2007 | | | 5,695,769 | | | W | 6,956 | | | W | 14,404 | |
| | | | | | | | | | | | | |
| Exercisable at December 31, 2007 | | | 5,695,769 | | | W | 6,956 | | | W | 14,404 | |
| | | | | | | | | | | | | |
The total intrinsic valueA summary of the status of the Group’s unvested options exercisedas of December 31, 2008 and 2009 and changes during the years ended December 31, 2005, 2006,2008 and 2009 is presented below:
| | | | | | | | | |
| | | Shinhan Financial Group | |
| | | | | | Weighted-
| |
| | | | | | Average
| |
| | | | | | Grant Date
| |
| | | Number of
| | | Fair Value
| |
| | | Options | | | per Option | |
| | | | | | (In Won) | |
| |
| Unvested at January 1, 2008 | | | 3,955,998 | | | W | 8,884 | |
| Granted | | | 808,700 | | | | 12,275 | |
| Vested | | | (2,765,738 | ) | | | 5,797 | |
| Forfeited | | | (138,202 | ) | | | 11,469 | |
| | | | | | | | | |
| Unvested at December 31, 2008 | | | 1,860,758 | | | W | 14,754 | |
| | | | | | | | | |
| Unvested at January 1, 2009 | | | 1,860,758 | | | W | 14,754 | |
| Granted | | | — | | | | — | |
| Vested | | | (1,110,427 | ) | | | 16,259 | |
| Forfeited | | | (76,093 | ) | | | 14,760 | |
| | | | | | | | | |
| Unvested at December 31, 2009 | | | 674,238 | | | W | 12,275 | |
| | | | | | | | | |
Total fair value of shares vested during 2007, was2008 and 2009 were W5,61363,821 million, W7,97712,168 million and W50,9989,204 million, respectively, and the amounts have been paid in cash during the year.
Share options outstanding atrespectively. As of December 31, 2007 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Shinhan Financial Group | |
| | | Options Outstanding | | | Options Exercisable | |
| | | | | | Weighted-
| | | | | | | | | | | | | |
| | | | | | Average
| | | Weighted-
| | | | | | Weighted-
| | | Weighted-
| |
| | | | | | Remaining
| | | Average
| | | | | | Average
| | | Remaining
| |
| | | Number
| | | Contractual
| | | Exercise
| | | Number
| | | Exercise
| | | Contractual
| |
Exercise Price | | Outstanding | | | Life(1) | | | Price | | | Exercisable | | | Price | | | Life(1) | |
| | | | | | | | | (In won) | | | | | | (In won) | | | (In won) | |
| |
W18,910
| | | 292,851 | | | | 0.39 | | | W | 18,910 | | | | 292,851 | | | W | 18,910 | | | | 0.39 | |
| 11,800 | | | 426,255 | | | | 1.37 | | | | 11,800 | | | | 426,255 | | | | 11,800 | | | | 1.37 | |
| 21,595 | | | 716,039 | | | | 1.23 | | | | 21,595 | | | | 716,039 | | | | 21,595 | | | | 1.23 | |
| 28,006 | | | 2,369,031 | | | | 4.25 | | | | 28,006 | | | | | | | | | | | | | |
| 38,829 | | | 2,788,698 | | | | 5.22 | | | | 38,829 | | | | — | | | | — | | | | — | |
| 54,560 | | | 1,167,300 | | | | 6.22 | | | | 54,560 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 7,760,174 | | | | 4.31 | | | W | 34,065 | | | | 1,435,145 | | | W | 18,138 | | | | 1.10 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
2009, there was W509 million of total unrecognized compensation cost related to unvested stock awards, net of the forfeiture provision. Such cost is expected to be recognized over a weighted-average period of 0.2 years.
F-64
F-70
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Shinhan Bank | |
| | | Options Outstanding | | | Options Exercisable | |
| | | | | | Weighted-
| | | | | | | | | | | | | |
| | | | | | Average
| | | Weighted-
| | | | | | Weighted-
| | | Weighted-
| |
| | | | | | Remaining
| | | Average
| | | | | | Average
| | | Remaining
| |
| | | Number
| | | Contractual
| | | Exercise
| | | Number
| | | Exercise
| | | Contractual
| |
Exercise Price | | Outstanding | | | Life(1) | | | Price | | | Exercisable | | | Price | | | Life(1) | |
| | | | | | | | | (In won) | | | | | | (In won) | | | (In won) | |
| |
W5,260
| | | 90,822 | | | | 0.24 | | | W | 5,260 | | | | 90,822 | | | W | 5,260 | | | | 0.24 | |
| 5,000 | | | 66,701 | | | | 0.57 | | | | 5,000 | | | | 66,701 | | | | 5,000 | | | | 0.57 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 157,523 | | | | 0.38 | | | | 5,150 | | | | 157,523 | | | | 5,150 | | | | 0.38 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
The following table presents the share option activities during the period indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Shinhan Financial Group | | | Shinhan Bank | |
| | | | | | Weighted-
| | | | | | | | | Weighted-
| | | | |
| | | | | | Average
| | | | | | | | | Average
| | | | |
| | | | | | Exercise
| | | Aggregate
| | | | | | Exercise
| | | Aggregate
| |
| | | Number
| | | Price
| | | Intrinsic
| | | Number
| | | Price
| | | Intrinsic
| |
| | | of Options | | | per Option | | | Value | | | of Options | | | per Option | | | Value | |
| | | | | | (In Won) | | | (In millions of Won) | | | | | | (In Won) | | | (In millions of Won) | |
| |
| Outstanding at January 1, 2007 | | | 7,951,260 | | | W | 29,133 | | | | | | | | 389,022 | | | W | 5,395 | | | | | |
| Granted | | | 1,301,050 | | | | 54,560 | | | | | | | | — | | | | — | | | | | |
| Exercised | | | (1,036,956 | ) | | | 17,973 | | | | | | | | (231,499 | ) | | | 5,562 | | | | | |
| Forfeited | | | (455,180 | ) | | | 43,165 | | | | | | | | — | | | | — | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding at December 31, 2007 | | | 7,760,174 | | | W | 34,065 | | | W | 151,986 | | | | 157,523 | | | W | 5,150 | | | W | 330 | |
| Granted | | | 808,700 | | | | 49,053 | | | | | | | | — | | | | — | | | | | |
| Exercised | | | (1,379,042 | ) | | | 20,964 | | | | | | | | (135,173 | ) | | | 5,175 | | | | | |
| Forfeited | | | (138,202 | ) | | | 47,729 | | | | | | | | — | | | | — | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding at December 31, 2008 | | | 7,051,630 | | | W | 38,078 | | | W | 12,457 | | | | 22,350 | | | W | 5,000 | | | W | — | |
| Granted | | | — | | | | — | | | | | | | | — | | | | — | | | | | |
| Exercised | | | (777,175 | ) | | | 23,942 | | | | | | | | — | | | | — | | | | | |
| Forfeited | | | (76,093 | ) | | | 52,489 | | | | | | | | (22,350 | ) | | | 5,000 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding at December 31, 2009 | | | 6,198,362 | | | W | 39,673 | | | W | 47,594 | | | | — | | | W | — | | | W | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercisable at December 31, 2009 | | | 4,413,697 | | | W | 34,495 | | | W | 47,594 | | | | — | | | W | — | | | W | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Good Morning Shinhan Securities | |
| | | Options Outstanding | | | Options Exercisable | |
| | | | | | Weighted-
| | | | | | | | | | | | | |
| | | | | | Average
| | | Weighted-
| | | | | | Weighted-
| | | Weighted-
| |
| | | | | | Remaining
| | | Average
| | | | | | Average
| | | Remaining
| |
| | | Number
| | | Contractual
| | | Exercise
| | | Number
| | | Exercise
| | | Contractual
| |
Exercise Price | | Outstanding | | | Life(1) | | | Price | | | Exercisable | | | Price | | | Life (1) | |
| | | | | | | | | (In won) | | | | | | (In won) | | | (In won) | |
| |
W7,640
| | | 2,588,355 | | | | 1.10 | | | W | 7,640 | | | | 2,588,355 | | | W | 7,640 | | | | 1.10 | |
| 7,085 | | | 1,434,510 | | | | 1.10 | | | | 7,085 | | | | 1,434,510 | | | | 7,085 | | | | 1.10 | |
| 5,850 | | | 715,000 | | | | 1.40 | | | | 5,850 | | | | 715,000 | | | | 5,850 | | | | 1.40 | |
| 6,040 | | | 90,000 | | | | 2.08 | | | | 6,040 | | | | 90,000 | | | | 6,040 | | | | 2.08 | |
| 6,370 | | | 450,000 | | | | 4.40 | | | | 6,370 | | | | 450,000 | | | | 6,370 | | | | 4.40 | |
| 5,000 | | | 417,904 | | | | 1.08 | | | | 5,000 | | | | 417,904 | | | | 5,000 | | | | 1.08 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 5,695,769 | | | | 1.41 | | | W | 6,956 | | | W | 5,695,769 | | | W | 6,956 | | | | 1.41 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Shinhan Investment Corp. (formerly Good Morning Shinhan Securities) | |
| | | | | | Weighted-Average
| | | Aggregate
| |
| | | Number
| | | Exercise Price
| | | Intrinsic
| |
| | | of Options | | | per Option | | | Value | |
| | | | | | (In Won) | | | (In million Won) | |
| |
| Outstanding at January 1, 2007 | | | 9,104,725 | | | W | 6,879 | | | | | |
| Granted | | | — | | | | — | | | | | |
| Exercised | | | (3,408,956 | ) | | | 6,751 | | | | | |
| Forfeited | | | — | | | | — | | | | | |
| | | | | | | | | | | | | |
| Outstanding at December 31, 2007 | | | 5,695,769 | | | W | 6,956 | | | W | 14,404 | |
| Granted | | | — | | | | — | | | | | |
| Exercised | | | (342,857 | ) | | | 5,273 | | | | | |
| Forfeited | | | — | | | | — | | | | | |
| | | | | | | | | | | | | |
| Outstanding at December 31, 2008 | | | 5,352,912 | | | W | 7,064 | | | W | — | |
| Granted | | | — | | | | — | | | | | |
| Exercised | | | (90,000 | ) | | | 6,040 | | | | | |
| Forfeited | | | (4,812,912 | ) | | | 7,148 | | | | | |
| | | | | | | | | | | | | |
| Outstanding at December 31, 2009 | | | 450,000 | | | W | 6,370 | | | W | 327 | |
| | | | | | | | | | | | | |
| Exercisable at December 31, 2009 | | | 450,000 | | | W | 6,370 | | | W | 327 | |
| | | | | | | | | | | | | |
F-71
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The total intrinsic value of options exercised during the years ended December 31, 2007, 2008, and 2009 was W50,998 million, W36,747 million, and W9,132 million, respectively, and the amounts have been paid in cash during the year.
Share options outstanding at December 31, 2009 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Shinhan Financial Group | |
| | | | Options Outstanding | | | Options Exercisable | |
| | | | | | | Weighted-
| | | | | | | | | | | | | |
| | | | | | | Average
| | | Weighted-
| | | | | | Weighted-
| | | Weighted-
| |
| | | | | | | Remaining
| | | Average
| | | | | | Average
| | | Remaining
| |
Exercise
| | | Number
| | | Contractual
| | | Exercise
| | | Number
| | | Exercise
| | | Contractual
| |
| Price | | | Outstanding | | | Life(1) | | | Price | | | Exercisable | | | Price | | | Life(1) | |
| | | | | | | | | | (In Won) | | | | | | (In Won) | | | | |
| |
W | 28,006 | | | | 1,767,408 | | | | 2.24 | | | W | 28,006 | | | | 1,767,408 | | | W | 28,006 | | | | 2.24 | |
| | 38,829 | | | | 2,646,289 | | | | 3.22 | | | | 38,829 | | | | 2,646,289 | | | | 38,829 | | | | 3.22 | |
| | 54,560 | | | | 1,110,427 | | | | 4.22 | | | | 54,560 | | | | — | | | | — | | | | — | |
| | 49,053 | | | | 674,238 | | | | 5.21 | | | | 49,053 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 6,198,362 | | | | 3.34 | | | W | 39,673 | | | | 4,413,697 | | | W | 34,495 | | | | 2.83 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Shinhan Investment Corp. (formerly Good Morning Shinhan Securities) | |
| | | | Options Outstanding | | | Options Exercisable | |
| | | | | | | Weighted-
| | | | | | | | | | | | | |
| | | | | | | Average
| | | Weighted-
| | | | | | Weighted-
| | | Weighted-
| |
| | | | | | | Remaining
| | | Average
| | | | | | Average
| | | Remaining
| |
Exercise
| | | Number
| | | Contractual
| | | Exercise
| | | Number
| | | Exercise
| | | Contractual
| |
| Price | | | Outstanding | | | Life(1) | | | Price | | | Exercisable | | | Price | | | Life(1) | |
| | | | | | | | | | (In Won) | | | | | | (In Won) | | | | |
| |
W | 6,370 | | | | 450,000 | | | | 2.40 | | | W | 6,370 | | | | 450,000 | | | W | 6,370 | | | | 2.40 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 450,000 | | | | 2.40 | | | W | 6,370 | | | | 450,000 | | | W | 6,370 | | | | 2.40 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Note:
| | |
| (1) | | Contractual life indicates the sum of service (vesting) period and exercisable period. |
Employee Stock Ownership Association
In 2002, theShinhan Financial Group and Shinhan Bank established an employee stock ownership association (the ESOA) covering most of their employees. The Group makes discretionary cash contributions to the ESOA on a periodic basis as determined by the Group’s Board of Directors. Shinhan Bank makes cash contributions to the ESOA on a periodic basis based on Shinhan Bank’sthe Group’s actual performance relative to pre-specified net income. The Group and Shinhan Bank’sGroup’s cash contributions are used to purchase shares of the common stock of the Group on the Korean StockKorea Exchange. All shares acquired by the ESOA are unallocated, and are restricted for a period of four years pursuant to the plan agreements and regulations governing the ESOA. In addition, under the Securities and Exchange Act of Korea, employees participating in the ESOA have a right of first refusal, subject to certain exceptions, to subscribe for up to 20% of the shares publicly offered by the Group pursuant to the Securities and Exchange Act of Korea. Furthermore, this right is exercisable only to the extent that the total number of shares so acquired and held by such employees does not exceed 20% of the Group’s total number of shares then outstanding. For the years ended December 31, 2005, 20062007, 2008 and 2007,2009, the Group recorded in aggregate W7,74434,266 million, W32,32834,112 million and W34,26635,060 million in expenses related to the ESOA contributions, respectively.
| |
| 28. | Fair Value of Financial InstrumentsMeasurements |
TheEffective January 1, 2008, the Group adoptedASC 820-10 (formerly SFAS 157). This guidance defines fair value, ofexpands disclosure requirements around fair value and specifies a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced sale or liquidation. Fairthree-level fair value is best determined based on quoted market prices. However, inhierarchy of
F-65
F-72
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
many instances, therevaluation techniques based on whether the inputs to those valuation techniques are observable or unobservable. The Group determines the fair value of its financial instruments that are recognized or disclosed at fair value in the financial statements in accordance withASC 820-10.
ASC820-10 requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is an exit price, defined as a price received in exchange of assets disposed or paid in transferring liabilities between market participants, at the measurement date. As such, the Group’s own assumptions reflect those market participants used in pricing the asset or liability at the measurement date. The following in the description of fair value hierarchy based on pricing inputs.
| | |
| • | Level 1 — Quoted prices for identical instruments in active markets. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain securities that are highly liquid and are actively traded inover-the-counter markets. |
|
| • | Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations in which all significant inputs and significant value drivers are observable in active markets. |
|
| • | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value measurements. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques based on significant unobservable inputs, as well as management judgements or estimates that are significant to valuation. |
The Group establishes and documents its policy and process for determining fair values. Fair value is based upon quoted market prices, where available. If quoted prices are not available, fair value is based upon internally developed models that primarily use, as inputs, market-based or independently sourced market parameters, including but not limited to yield curves, interest rates, volatilities, equity or debt prices, foreign exchange rates and credit curves as well as other relevant factors.
The price transparency of financial instruments is a key determinant of the degree of judgment involved in measuring fair value of the Group’s financial instruments. Financial instruments for which actively quoted prices or pricing parameters are available will generally have a higher degree of price transparency than those that are thinly traded or not quoted. In accordance withASC 820-10, the criteria used to determine whether the market for a financial instrument is active or inactive is based on the particular asset or liability.
As a result of the adoption ofASC 820-10, the Group has made some amendments to the techniques used in measuring the fair value of derivatives and other positions. These amendments change the way that the probability of default of a counterparty is factored into the valuation of derivative positions and include the impact of the Group’s own credit risk on derivatives and other liabilities measured at fair value.
| | |
| • | Credit valuation adjustments (“CVA”) are necessary when the market price (or parameter) is not indicative of the changes in credit quality of the counterparty. As few classes of derivative contracts are listed on an exchange, the majority of derivative positions are valued using internally developed models and the Group makes an adjustment necessary to reflect the credit quality of each derivative counterparty to arrive at fair value. The adjustment also takes into account contractual factors designed to reduce the Group’s credit exposure to each counterparty, such as collateral and legal rights of offset. |
|
| • | Debit valuation adjustments (“DVA”) are necessary to reflect the credit quality of the Group in the valuation of liabilities measured at fair value. This adjustment is incorporated into the Group’s valuations in accordance withASC 820-10. The methodology to determine the adjustment is consistent with CVA and incorporates the Group’s credit spread as observed through the credit default swap market. |
F-73
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The followings are descriptions of valuation methodologies used by the Group to measure various financial instruments at fair value.
Trading andavailable-for-sale securities and securities sold short, not yet purchased: The fair values of the securities included in trading assets andavailable-for-sale securities included in securities and securities in short position included in short-term borrowings are recognized in the consolidated balance sheets based on quoted market prices, where available. For the securities traded in theover-the-counter market, the Group generally determines fair value utilizing internal valuation techniques or based on prices obtained from independent pricing services or brokers. Trading securities and derivatives recorded by using valuation methods and prices obtained from pricing services or brokers are generally classified as Level 2 except in the cases where such quoted prices include unobservable inputs to the models, then such financial instruments are classified as Level 3. The Group validates prices received from pricing services or brokers using a variety of methods, including, but not limited to, comparison to secondary pricing services, corroboration of pricing by reference to other independent market data such as secondary broker quotes and relevant benchmark indices, and review of pricing by the Group’s personnel familiar with market liquidity and other market-related conditions. The Group has internal price verification procedures and reviews fair value methodology documentation provided by independent pricing services.
Derivatives assets and liabilities: The majority of derivatives entered into by the Group are traded inover-the-counter markets and no quoted market prices are available approximating their fair values. The valuation of those derivatives are determined using internal models that require the use of multiple market inputs such as interest rate, prices and indices to generate continuous yield or pricing curves and volatility factors. Theover-the-counter derivatives are placed in either Level 2 or Level 3 depending on the observability of the significant inputs to the model.
Collateral dependent loans: For collateral dependent loans, impairment is measured based on the fair value of the collateral underlying the subject loan. When the carrying amount of the subject impaired loan is higher than the fair value of the collateral, the carrying amount is written down to the fair value of the collateral in accordance with the fair value requirements ofASC 820-10. The fair value of the collateral is determined as the present value of the estimated realizable value of the collateral at the expected time of the sale of such collateral. Once the valuation report of the court-appointed appraiser becomes publicly available as part of a foreclosure proceeding, we use the appraisal value for the collateral indicated in such report as the estimated realizable value of the collateral. However, until such publication, we use the valuation amount for the collateral as determined by outside independent appraisers at the time that the subject loan was initially approved, with adjustments made for the change in value from the effect of time passage and current market circumstances that may impact the value of the collateral. Since there is no secondary market where collateral dependent loans are actively traded, they are measured for impairment based on the fair value of the underlying collateral. While outside appraisers (whether court-appointed or in connection with the initial approval of the subject loan) consider observable inputs such as the sale prices of assets similar to such collateral, additional adjustments based on unobservable inputs are warranted in the valuation of collateral subject to a court-supervised foreclosure proceeding since the auction from such proceeding tends to result in a sale price less than that obtainable from a sale transaction conducted in the ordinary course of business. This use of unobservable inputs makes it necessary to classify collateral dependent loans as Level 3.
F-74
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Assets and liabilities measured at fair value on a recurring basis
As of December 31, 2008 and 2009, instruments measured at fair value on a recurring basis comprised 18.48% and 15.47% of the Group’s various financial instruments. total assets and 5.12% and 2.42% of the Group’s total liabilities, respectively. The following table presents assets and liabilities measured at fair value on a recurring basis by fair-value hierarchy levels as of December 31, 2008 and 2009.
| | | | | | | | | | | | | | | | | |
| | | 2008 | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | | | | | (In millions of Won) | | | | |
| |
Assets measured at fair value | | | | | | | | | | | | | | | | |
| Trading assets | | | | | | | | | | | | | | | | |
| Trading securities | | W | 2,156,756 | | | W | 4,281,378 | | | W | 227,277 | | | W | 6,665,411 | |
| Derivative instruments | | | 1,549 | | | | 11,554,585 | | | | 420,660 | | | | 11,976,794 | |
| Other trading assets — commodity indexed deposits | | | — | | | | 58,737 | | | | — | | | | 58,737 | |
| Securities | | | | | | | | | | | | | | | | |
Available-for-sale securities | | | 11,196,242 | | | | 17,719,405 | | | | 100,364 | | | | 29,016,011 | |
| Other assets | | | | | | | | | | | | | | | | |
| Hedging derivative instruments | | | — | | | | 3,801 | | | | — | | | | 3,801 | |
| Fund investments | | | — | | | | 730,093 | | | | — | | | | 730,093 | |
| | | | | | | | | | | | | | | | | |
| Total assets | | W | 13,354,547 | | | W | 34,347,999 | | | W | 748,301 | | | W | 48,450,847 | |
| | | | | | | | | | | | | | | | | |
Liabilities measured at fair value | | | | | | | | | | | | | | | | |
| Trading liabilities | | | | | | | | | | | | | | | | |
| Derivative instruments | | W | 274 | | | W | 11,179,770 | | | W | 430,605 | | | W | 11,610,649 | |
| Other trading liabilities — commodity indexed deposits | | | — | | | | 220,016 | | | | — | | | | 220,016 | |
| Short-term borrowings | | | | | | | | | | | | | | | | |
| Securities sold short, not yet purchased | | | 9,417 | | | | — | | | | — | | | | 9,417 | |
| Long-term debt | | | | | | | | | | | | | | | | |
| Equity linked securities sold | | | — | | | | — | | | | 610,971 | | | | 610,971 | |
| Other liabilities | | | | | | | | | | | | | | | | |
| Hedging derivatives instruments | | | — | | | | 12 | | | | — | | | | 12 | |
| | | | | | | | | | | | | | | | | |
| Total liabilities | | W | 9,691 | | | W | 11,399,798 | | | W | 1,041,576 | | | W | 12,451,065 | |
| | | | | | | | | | | | | | | | | |
F-75
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| | | | | | | | | | | | | | | | | |
| | | 2009 | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | | | | | (In millions of Won) | | | | |
| |
Assets measured at fair value | | | | | | | | | | | | | | | | |
| Trading assets | | | | | | | | | | | | | | | | |
| Trading securities | | | | | | | | | | | | | | | | |
| Debt securities | | | | | | | | | | | | | | | | |
| Korean treasury and governmental agencies | | W | 901,481 | | | W | 622,214 | | | W | - | | | W | 1,523,695 | |
| Corporations | | | — | | | | 920,794 | | | | 255,768 | | | | 1,176,562 | |
| Financial institutions | | | 662,121 | | | | 1,441,973 | | | | — | | | | 2,104,094 | |
| Mortgage-backed securities and asset-backed securities | | | — | | | | 872,987 | | | | — | | | | 872,987 | |
| Equity securities | | | 534,190 | | | | 212,772 | | | | — | | | | 746,962 | |
| Derivative instruments | | | 5,492 | | | | 4,359,732 | | | | 251,306 | | | | 4,616,530 | |
| Other trading assets — commodity indexed deposits | | | — | | | | 256,246 | | | | — | | | | 256,246 | |
| | | | | | | | | | | | | | | | | |
| | | W | 2,103,284 | | | W | 8,686,718 | | | W | 507,074 | | | W | 11,297,076 | |
| | | | | | | | | | | | | | | | | |
Available-for-sale securities | | | | | | | | | | | | | | | | |
| Korean treasury and governmental agencies | | | 4,081,086 | | | | 4,640,913 | | | | — | | | | 8,721,999 | |
| Corporations | | | — | | | | 2,307,792 | | | | — | | | | 2,307,792 | |
| Financial institutions | | | 3,531,061 | | | | 7,633,203 | | | | — | | | | 11,164,264 | |
| Mortgage-backed securities and asset-backed securities | | | — | | | | 2,186,982 | | | | 97,202 | | | | 2,284,184 | |
| Other | | | — | | | | 170,168 | | | | — | | | | 170,168 | |
| | | | | | | | | | | | | | | | | |
| | | W | 7,612,147 | | | W | 16,939,058 | | | W | 97,202 | | | W | 24,648,407 | |
| | | | | | | | | | | | | | | | | |
| Equity securities | | W | 2,961,285 | | | W | 2,203 | | | W | - | | | W | 2,963,488 | |
| | | | | | | | | | | | | | | | | |
| Other assets | | | | | | | | | | | | | | | | |
| Hedging derivative instruments | | | — | | | | 1,817 | | | | — | | | | 1,817 | |
| Fund investments | | | — | | | | 523,116 | | | | — | | | | 523,116 | |
| | | | | | | | | | | | | | | | | |
| | | W | - | | | W | 524,933 | | | W | - | | | W | 524,933 | |
| | | | | | | | | | | | | | | | | |
| Total assets | | W | 12,676,716 | | | W | 26,152,912 | | | W | 604,276 | | | W | 39,433,904 | |
| | | | | | | | | | | | | | | | | |
Liabilities measured at fair value | | | | | | | | | | | | | | | | |
| Trading liabilities | | | | | | | | | | | | | | | | |
| Derivative instruments | | W | 609 | | | W | 4,145,634 | | | W | 99,822 | | | W | 4,246,065 | |
| Other trading liabilities — commodity indexed deposits | | | — | | | | 318,969 | | | | — | | | | 318,969 | |
| Short-term borrowings | | | | | | | | | | | | | | | | |
| Securities sold short, not yet purchased | | | 27,966 | | | | — | | | | — | | | | 27,966 | |
| Long-term debt | | | | | | | | | | | | | | | | |
| Equity linked securities sold | | | — | | | | — | | | | 1,067,457 | | | | 1,067,457 | |
| Other liabilities | | | | | | | | | | | | | | | | |
| Hedging derivatives instruments | | | — | | | | 167 | | | | — | | | | 167 | |
| | | | | | | | | | | | | | | | | |
| Total liabilities | | W | 28,575 | | | W | 4,464,770 | | | W | 1,167,279 | | | W | 5,660,624 | |
| | | | | | | | | | | | | | | | | |
F-76
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Changes in Level 3 items measured at fair value on a recurring basis
In casescircumstances where quotedobservable market pricesdata are not available, significant unobservable inputs are utilized to determine fair value. In such cases, the assets and liabilities are classified as Level 3. As of December 31, 2008, assets and liabilities categorized as Level 3 represented 1.54% and 8.37% of the Group’s total assets and liabilities measured at fair value on a recurring basis, respectively. As of December 31, 2009, assets and liabilities categorized as Level 3 represented 1.53% and 20.62% of the Group’s total assets and liabilities measured at fair value on a recurring basis, respectively. Both observable and unobservable inputs may be used to determine the fair values are estimated using present value or other valuation techniques.of positions that the Group has classified within the Level 3 category. As a result, the realized and unrealized gains and losses for assets and liabilities within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable and unobservable inputs.
Those techniquesThe following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the years ended December 31, 2008 and 2009:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Total Realized/Unrealized
| | | | | | | | | | | | Unrealized
| |
| | | | | | Gains (Losses) Recorded in | | | Transfers in
| | | Purchases,
| | | | | | Gains
| |
| | | January 1,
| | | Trading
| | | | | | and/or out
| | | Issuances and
| | | December 31,
| | | (Losses) Still
| |
| | | 2008 | | | Revenues | | | Others(1) | | | of Level 3(2) | | | Settlements | | | 2008 | | | Held(3) | |
| | | (In millions of Won) | |
| |
| Trading assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Trading securities | | W | 482,354 | | | W | (75,948 | ) | | W | — | | | W | — | | | W | (179,129 | ) | | W | 227,277 | | | W | (75,626 | ) |
| Derivatives instruments | | | 164,648 | | | | 296,635 | | | | — | | | | 52,074 | | | | (92,697 | ) | | | 420,660 | | | | 386,652 | |
| Investments | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Available-for-sale securities | | | 164,949 | | | | (6,542 | ) | | | (48,202 | ) | | | — | | | | (9,841 | ) | | | 100,364 | | | | 5,803 | |
| Trading liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivatives instruments | | | 491,425 | | | | 47,642 | | | | — | | | | 33,310 | | | | (46,488 | ) | | | 430,605 | | | | (98,072 | ) |
| Long-term debt | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity linked securities sold | | | 738,469 | | | | 137,871 | | | | — | | | | — | | | | 10,373 | | | | 610,971 | | | | 204,512 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Total Realized/Unrealized
| | | | | | | | | | | | | |
| | | | | | Gains (Losses) Recorded in | | | Transfers in
| | | Purchases,
| | | | | | Unrealized
| |
| | | January 1,
| | | Trading
| | | | | | and/or out
| | | Issuances and
| | | December 31,
| | | Losses Still
| |
| | | 2009 | | | Revenues | | | Others(1) | | | of Level 3(2) | | | Settlements | | | 2009 | | | Held(3) | |
| | | (In millions of Won) | |
| |
| Trading assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Trading securities | | | 227,277 | | | | 54,842 | | | | | | | | | | | | (26,351 | ) | | | 255,768 | | | | (5,117 | ) |
| Derivatives instruments | | | 420,660 | | | | (157,835 | ) | | | — | | | | 252,720 | | | | (264,239 | ) | | | 251,306 | | | | (176,980 | ) |
| Investments | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Available-for-sale securities | | | 100,364 | | | | — | | | | (7,879 | ) | | | — | | | | 4,717 | | | | 97,202 | | | | (3,424 | ) |
| Trading liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivatives instruments | | | 430,605 | | | | (554 | ) | | | — | | | | (132,169 | ) | | | (199,168 | ) | | | 99,822 | | | | (34,031 | ) |
| Long-term debt | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity linked securities sold | | | 610,971 | | | | 217,301 | | | | — | | | | — | | | | 673,787 | | | | 1,067,457 | | | | (18,960 | ) |
Note:
| | |
| (1) | | Includes the change in fair value ofavailable-for-sale securities and other investments, change in accumulated other comprehensive income (loss), gains (losses) from sales and impairment losses. |
|
| (2) | | Transfers into or out of Level 3 are made if the inputs used in the financial models measuring the fair values of the assets and liabilities became unobservable or observable, respectively. These transfers are effective as of the beginning of the year, and any gains or losses occurring on these assets and liabilities during the year are presented as Level 3. |
F-77
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| | |
| (3) | | Represents the amount of total gains or losses for the years ended December 31, 2008 and 2009, included in earnings (and accumulated other comprehensive income (loss) for changes in fair value ofavailable-for-sale investments and other investment) attributable to the change in fair value relating to assets and liabilities classified as Level 3 that are still held at December 31, 2008 and 2009. |
The significant changes in Level 3 assets and liabilities for the year ended December 31, 2008 are significantlyas follows:
A net decrease inavailable-for-sale securities of W48,202 million was mainly driven by recognition ofother-than-temporary impairment of CDOs which are included in earnings.
The changes in the Level 3 derivative assets and liabilities of W256,012 million and W(60,820) million were mainly due to:
(i) The Group transferred W52,074 million and W33,310 million of derivatives assets and liabilities from the Level 2 into the Level 3 category in the fair-value hierarchy during the year ended December 31, 2008. The valuation of these derivatives is affected by the assumptions used,credit valuation and debt valuation adjustments, which is based on an internal valuation technique, and the extent of such adjustment was significant enough to render the fair-value hierarchy of the respective instruments into the lower level.
(ii) The changes in the Level 3 realized/unrealized gains (losses) from trading derivatives were due to gain of W296,635 million and W47,642 million relating to derivative assets and liabilities, respectively, and these gains include expected future cash flowsboth realized and discount rates. Accordingly,unrealized gains during the year ended December 31, 2008.
The significant changes in Level 3 assets and liabilities for the year ended December 31, 2009 are as follows:
A net decrease inavailable-for-sale securities of W7,879 million was mainly driven by recognition ofother-than-temporary impairment of CDOs which are included in earnings.
The changes in the Level 3 derivative assets and liabilities of W(169,354) million and W(330,783) million were mainly due to:
(i) The Group transferred W357,219 million of derivatives assets from the Level 2 into the Level 3 category in the fair-value hierarchy during the year ended December 31, 2009. The valuation of these derivatives is affected by the credit valuation and debt valuation adjustments, which is based on an internal valuation technique, and the extent of such adjustment was significant enough to render the fair-value hierarchy of the respective instruments into the lower level. And the Group transferred W104,499 million of derivatives assets and W132,167 million of derivatives liabilities to the Level 2 from the Level 3 category in the fair-value hierarchy during the year ended December 31, 2009 as the availability of observable pricing inputs relevant to the asset or liability that is significant to the fair value estimates maymeasurement in its entirety has been increased as of December 31, 2009.
(ii) The changes in the Level 3 realized/unrealized gains (losses) from trading derivatives were due to loss of W157,835 million and W554 million relating to derivative assets and liabilities, respectively, and these losses include both realized and unrealized losses during the year ended December 31, 2009.
Assets and liabilities measured at fair value on a non-recurring basis
Certain assets and liabilities are measured at fair value on a non-recurring basis and are not be realizedincluded in the tables above. These assets and liabilities primarily include assets measured at cost that have been written down to fair value during the period as a result of an immediate settlementimpairment.
F-78
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table presents collateral dependent loans and lease receivables, goodwill and other assets of the instruments. Certain financial instrumentswhich balances at December 31, 2008 and all nonfinancial instruments2009 are excluded frommeasured at fair value on a non-recurring basis based on the scopeASC 820-10 valuation hierarchy.
| | | | | | | | | | | | | |
| | | 2008 | |
| | | Level 1 | | | Level 2 | | | Level 3 | |
| | | (In millions of Won) | |
| |
| Loans and lease receivables(1) | | W | — | | | W | — | | | W | 438,011 | |
| Goodwill(2) | | | | | | | 18,788 | | | | | |
| Other assets — other investments(3) | | | 67,201 | | | | — | | | | 17,755 | |
| | | | | | | | | | | | |
| | 2009 | |
| | Level 1 | | | Level 2 | | | Level 3 | |
| | (In millions of Won) | |
|
| Loans and lease receivables(1) | | W | — | | | W | — | | | W | 432,765 | |
| Goodwill(2) | | | — | | | | — | | | | — | |
| Other assets — other investments(3) | | | — | | | | — | | | | 9,591 | |
Note:
| | |
| (1) | | Represents carrying values net of allowances and cumulative impairment charges of related impaired loans and lease receivables which are collateral dependent and are evaluated based on the fair value of the underlying collateral. The fair value of the collateral for such impaired loans and lease receivables is based on the appraisal value of external valuation experts, as adjusted for significant inputs related to the foreclosure proceeding for such collateral, which inputs are deemed to be unobservable. We accordingly classify collateral dependent loans and lease receivables as Level 3. |
|
| (2) | | The Group recorded goodwill impairment charges of W128,394 million and W59,517 million at December 31, 2008 and 2009, respectively, as determined based on Level 3 inputs. See Note 10 for additional information on goodwill impairment |
|
| (3) | | The Group recorded impairment charges of W33,206 million and W12,038 million at December 21, 2008 and 2009, respectively. |
| |
| 29. | Fair Value of Financial Instruments |
Fair value measurements and Disclosure (formerly SFAS No. 107,Disclosure aboutDisclosures About Fair Value of Financial Instruments. Accordingly,(SFAS 107) (ASC820-10)) requires the aggregate fair value amountdisclosure of the items presented under SFAS 107 may not necessarily represent the total underlyingestimated fair value of financial instruments including those financial instruments for which the Group sincedid not elect the fair value option. The fair values of such instruments have been derived, in part, by management’s assumptions, the estimated amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimated fair values. Accordingly, the net realizable values could be materially different from the estimates presented below. In addition, the estimates are only indicative of the value of individual financial instruments and should not be considered an indication of the fair value of the excluded items are not obtained.Group.
The following methods and assumptions are used by the Group in estimating fair value disclosures for its financial instruments:
Assets and liabilities for which fair value approximates carrying value: The carrying values of certain financial assets and liabilities are reported at cost, including cash and cash equivalents, restricted cash, call loans, accrued interest and dividends receivable, customers’ liability on acceptances, accrued interest and dividend payable, security deposits, and acceptances outstanding. The carrying values of these financial assets and liabilities are considered to approximate their fair values due to their short-term nature and negligible losses due to credit risks.
F-79
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Interest-bearing deposits in banks: The carrying amounts of short-term interest-bearing deposits approximate their fair value because they are short-term in nature or carry variable interest rates. Fair value of other interest-bearing deposits is estimated using discounted cash flow analysis on current rates for similar types of deposits.
Trading assets and liabilities:Held-to-maturity securities: FairThe fair values for trading assets, including derivative financial instruments so classified are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments except for certain options and swaps for which pricing models are used.
Securities: Fair values for available-for-sale and held-to-maturity securities are based on quoted market prices, or quoted market prices of comparable instruments if the quoted market prices are not available.
Nonmarketable equity investments: Nonmarketable equity investments, which are recorded in other assets, consist primarily of private equity investments. The fair values of these investments are based on the latest obtainable net asset value of the investees and adjusted forother-than-temporary impairment losses.
Loans: Loans and advances are net of allowance for loan losses. The fair valuevalues of fixed rate loans is estimatedare generally determined by discounting contractualboth principal and interest cash flows based onexpected to be collected using an observable discount rate for similar instruments with adjustments that management believes a market participant would consider in determining fair value. The Group estimates the cash flows expected to be collected using interest rate and prepayment risk models that incorporate management’s best estimate of current key assumptions, such as default rates, at which similar loans would be made to borrowersloss severity and prepayment speeds for the same maturities. The fair valueslife of variable rate loans that re-price frequently with no significant changes in credit risk are considered to approximate their carrying values in the consolidated balance sheets.loan.
Deposits: The carrying amounts of variable-rate interest and non-interest-bearing deposits approximate their fair values at the balance sheet date. Fair values for fixed rate interest-bearing deposits are estimated using discounted cash flow analysis using market interest rates currently offered for deposits with similar maturities.
Short-term borrowings: The carrying amounts of call money, securities sold under repurchase agreements and short-term borrowings approximate their fair values due to their short-term nature and negligible losses due to credit risks.
Long-term debt: The fair values of the Group’s long-term borrowings are estimated based on quoted market prices, where available. For those notes where quoted market prices are not obtainable, a discounted cash flow analysis is used based on the Group’s current incremental borrowing rates for similar types of borrowing arrangements.
Secured borrowings: The fair values for securities sold under agreements to repurchase are estimated using discounted cash flow analysis that applies current market interests offered for arrangements with similar maturities as no quoted market price is available. The fair values for beneficial interests issued by the VIEs are based on market quotes where available, or discounted cash flow analysis using market interest rates.
F-66F-80
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Secured borrowings:The following disclosures represent financial instruments in which the ending balance is not carried at fair values for securities sold under agreements to repurchase are estimated using discounted cash flow calculation that applies interests currently being offered for securities sold under agreements to repurchase with similar maturities. The fair values for beneficial interests issued by the SPEs estimated using quoted market price.
Derivative financial instruments: All derivatives are recognizedvalue in its entirety on the Group’s consolidated balance sheets at fair value based on quoted market prices, dealer or counterparty quotes, where available. If quoted market prices are not available, pricing or valuation models are applied to current market information to estimate fair value.
The following table sets forth the estimated fair values, and related carrying or notional amounts of the Group’s financial instruments at December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | | 2008 | | 2009 | |
| | | Carrying
| | | | Carrying
| | | | | Carrying
| | | | Carrying
| | | |
| | | Amount | | Fair Value | | Amount | | Fair Value | | | Amount | | Fair Value | | Amount | | Fair Value | |
| | | (In millions of won) | | | | | (In millions of Won) | | | |
| |
| Financial assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial assets for which carrying value approximates fair value | | W | 12,890,321 | | | W | 12,890,321 | | | W | 12,238,681 | | | W | 12,238,681 | | | W | 12,842,990 | | | W | 12,842,990 | | | W | 17,225,681 | | | W | 17,225,681 | |
| Interest-bearing deposits in banks | | | 725,191 | | | | 725,191 | | | | 1,093,830 | | | | 1,093,830 | | | | 1,626,880 | | | | 1,626,880 | | | | 2,164,004 | | | | 2,164,004 | |
| Trading assets | | | 4,836,892 | | | | 4,836,892 | | | | 10,182,525 | | | | 10,182,525 | | |
| Securities | | | 24,520,556 | | | | 24,630,144 | | | | 31,072,898 | | | | 31,014,636 | | |
Held-to-maturity securities | | | | 8,696,144 | | | | 8,872,951 | | | | 12,793,618 | | | | 12,840,594 | |
| Loans | | | 120,989,101 | | | | 121,328,781 | | | | 149,722,605 | | | | 149,858,106 | | | | 167,308,055 | | | | 169,075,453 | | | | 165,593,546 | | | | 167,393,995 | |
| Non-marketable equity investments included in other assets | | | 1,054,994 | | | | 2,584,126 | | | | 1,502,282 | | | | 3,045,605 | | | | 1,900,546 | | | | 2,587,363 | | | | 2,045,547 | | | | 3,437,571 | |
| | | | | | | | | | | | | | | | | | | |
| Total Financial assets | | | 165,017,055 | | | | 166,995,455 | | | | 205,812,821 | | | | 207,433,383 | | | W | 192,374,615 | | | W | 195,005,637 | | | W | 199,822,396 | | | W | 203,061,845 | |
| | | | | | | | | | | | | | | | | | | |
| Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial liabilities for which carrying value approximates fair value | | | 3,476,941 | | | | 3,476,941 | | | | 4,341,918 | | | | 4,341,918 | | | W | 6,120,236 | | | W | 6,120,236 | | | W | 5,853,609 | | | W | 5,853,609 | |
| Deposits | | | 95,496,454 | | | | 96,416,101 | | | | 106,403,647 | | | | 105,198,346 | | | | 122,704,495 | | | | 123,416,833 | | | | 143,698,489 | | | | 144,364,290 | |
| Trading liabilities | | | 1,610,840 | | | | 1,610,840 | | | | 2,508,643 | | | | 2,508,643 | | |
| Short-term borrowings | | | 10,995,026 | | | | 10,995,026 | | | | 15,801,426 | | | | 15,801,426 | | | | 23,215,574 | | | | 23,215,574 | | | | 9,686,890 | | | | 9,686,890 | |
| Secured borrowings | | | 8,102,714 | | | | 8,111,843 | | | | 11,451,665 | | | | 11,464,648 | | | | 10,225,777 | | | | 10,288,417 | | | | 7,944,390 | | | | 8,078,573 | |
| Long-term debt | | | 32,574,138 | | | | 31,926,214 | | | | 46,496,307 | | | | 45,202,299 | | | | 49,040,735 | | | | 48,609,805 | | | | 43,727,523 | | | | 42,319,203 | |
| | | | | | | | | | | | | | | | | | | |
| Total Financial liabilities | | | 152,256,113 | | | | 152,536,965 | | | | 187,003,606 | | | | 184,517,280 | | | W | 211,306,817 | | | W | 211,650,865 | | | W | 210,910,901 | | | W | 210,302,565 | |
| | | | | | | | | | | | | | | | | | | |
The differences between the carrying amounts and the fair values of guarantees, commercial letters of credit, standby letters of credit, and other lending commitments are immaterial to the consolidated financial statements.
F-67
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| |
29.30. | Derivative Instruments, and Hedging Activities and Credit Derivatives |
The Group enters into derivative and foreign exchange futures, forwards, options and swaps, to enable customers to transfer, modify or reduce their interest rate, foreign exchange and other market risks; it also trades these products for its own account. In addition, the Group uses derivatives as an end-user in connection with its risk management activities. Derivatives are used to manage interest rate risk relating to specific groups of on-balance sheet assets and liabilities, including investments, loans, and long-term debt. In addition, foreign exchange contracts are used to hedge the foreign currency denominated debt, net capital exposures and foreign exchange transactions.
The Group had applied fair value hedge accounting exclusively to interest rate swap transactions with the hedged items of fixed rate debts that qualified for the short-cut method for hedge relationships commencing prior to December 31, 2005. Since the Group assumed no ineffectiveness for those transactions, no ineffective portion was recognized in the consolidated statements of income for the years presented. However, the Group has not applied hedge accounting for new hedging relationships entered into since January 1, 2006.
The fair values of derivatives not qualifying for hedge accounting are included in trading assets(or trading liabilities) and any changes in fair values are included in net trading profits (losses). The fair values of derivatives qualifying for hedge accounting are included in other assets(or accrued expenses and other liabilities) and the earning impact of these fair value hedges and the changes in fair values attributable to the risk being hedged for the hedged item are included in non-interest income(or non-interest expense).Derivative Instruments
The Group enters into various types of derivative transactions in the course of its trading and non-trading activities. These derivatives include futures and forward contracts, swap contracts and option contracts. Futures and forward contracts are commitments to buy or sell at a future date a financial instrument, commodity or currency at a contracted price and may be settled in cash or through delivery. Swap contracts are commitments to settle in cash at a future date or dates which may range from a few days to a number of years, based on differentials between specified financial indices, as applied to a notional principal amount. Option contracts give the purchaser, for a fee, the right, but not the obligation, to buy or sell within a limited time, a financial instrument or currency at a contracted price that may also be settled in cash, based on differentials between specified indices.
The Group enters into these derivative transactions relating to interest rate, foreign currency, market/credit, commodity and other risks to enable customers to transfer, modify or reduce their interest rate, foreign exchange and other market risks. As part of this process, the Group considers the customers’ suitability for the risk involved, and the business purpose for the transaction. The Group also manages its derivative-risk positions through offsetting trade activities, controls focused on price verification, and daily reporting of positions to senior managers. In addition the Group trades these products for its own account. Trading limits and price verification controls are key aspects of this activity. The Group uses derivatives in connections with its risk-management activities to hedge
F-81
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
certain risks or reposition the risk profile of the Group. For example, the Group may issue fixed-rate long-term debt and then enter into a receive-fixed, pay-variable-rate interest rate swap with the same tenor to a net variable-rate basis. This strategy is the most common form of an interest rate hedge, as it minimizes interest cost in certain yield curve environments. Derivatives are also used to manage interest rate risk relating to specific groups of on-balance sheet assets and liabilities, including investments, loans, and long-term debt. In addition, foreign exchange contracts are used to hedge the foreign currency denominated debt, net capital exposures and foreign exchange transactions. The fair values of derivatives not qualifying for hedge accounting are included in trading assets(or trading liabilities) and any changes in fair values are included in net trading profits(losses). The fair values of derivatives qualifying for hedge accounting are included in other assets (or other liabilities) and the earning impact of these fair value hedges and the changes in fair values attributable to the risk being hedged for the hedged item are included in non-interest income (or non-interest expense).
Derivatives may expose the Group to market risk, credit risk or liquidity risk in excess of the amounts recorded on the consolidated balance sheet.statements of financial position. Market risk on a derivative or foreign exchange product is the exposure created by potential fluctuations in interest rates, foreign exchange rates and other values, and is a function of the type of product, the volume of transactions, the tenor and terms of the agreement, and the underlying volatility. Credit risk is the exposure to loss in the event of nonperformance by the other party to the transaction where the value of any collateral held is not adequate to cover such losses. The recognition in earnings of unrealized gains on these transactions is subject to management’s assessment as to collectibility. Liquidity risk is the potential exposure that arises when the size of the derivative position may not be able to be rapidly adjusted in periods of high volatility and financial stress at a reasonable cost.
The total notional amounts for both long and short derivative positions, representing the volume of derivative activity, at December 31, 2009 are as follows:
| | | | | | | | | | | | | |
| | | 2009 | |
| | | Underlying Notional
| | | Estimated
| | | Estimated
| |
| | | Amount(1) | | | Fair Value Assets(2) | | | Fair Value Liabilities(2) | |
| | | (In millions of Won) | |
| |
Trading: | | | | | | | | | | | | |
| Foreign exchange derivatives: | | | | | | | | | | | | |
| Swaps | | W | 23,142,798 | | | W | 1,284,635 | | | W | 1,990,860 | |
| Future and forward contracts | | | 59,473,021 | | | | 1,706,012 | | | | 713,785 | |
| Options purchased | | | 3,378,289 | | | | 316,301 | | | | 7,557 | |
| Options written | | | 713,053 | | | | 4,247 | | | | 67,728 | |
| | | | | | | | | | | | | |
| Sub-total | | | 86,707,161 | | | | 3,311,195 | | | | 2,779,930 | |
| | | | | | | | | | | | | |
| Interest rate derivatives: | | | | | | | | | | | | |
| Swaps | | | 129,612,909 | | | | 625,178 | | | | 936,572 | |
| Future and forward contracts | | | 43,448 | | | | — | | | | — | |
| Options purchased | | | 5,371,200 | | | | 54,257 | | | | — | |
| Options written | | | 5,975,144 | | | | — | | | | 52,061 | |
| | | | | | | | | | | | | |
| Sub-total | | | 141,002,701 | | | | 679,435 | | | | 988,633 | |
| | | | | | | | | | | | | |
| Equity derivatives: | | | | | | | | | | | | |
| Swaps | | | 1,737,542 | | | | 119,954 | | | | 149,391 | |
| Future and forward contracts | | | 47,726 | | | | — | | | | — | |
| Options purchased | | | 2,741,914 | | | | 161,412 | | | | 5,246 | |
| Options written | | | 2,631,994 | | | | 5,553 | | | | 130,665 | |
| | | | | | | | | | | | | |
| Sub-total | | | 7,159,176 | | | | 286,919 | | | | 285,302 | |
| | | | | | | | | | | | | |
F-82
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| | | | | | | | | | | | | |
| | | 2009 | |
| | | Underlying Notional
| | | Estimated
| | | Estimated
| |
| | | Amount(1) | | | Fair Value Assets(2) | | | Fair Value Liabilities(2) | |
| | | (In millions of Won) | |
| |
| Credit derivatives: | | | | | | | | | | | | |
| Protection sell | | | 174,918 | | | | 2,546 | | | | 23,076 | |
| | | | | | | | | | | | | |
| Sub-total | | | 174,918 | | | | 2,546 | | | | 23,076 | |
| | | | | | | | | | | | | |
| Other derivatives: | | | | | | | | | | | | |
| Commodity swaps | | | 22,523 | | | | — | | | | 1,320 | |
| Options purchased | | | 56,648 | | | | 1,896 | | | | — | |
| Options written | | | 24,278 | | | | — | | | | 1,173 | |
| | | | | | | | | | | | | |
| Sub-total | | | 103,449 | | | | 1,896 | | | | 2,493 | |
| | | | | | | | | | | | | |
Total | | W | 235,147,405 | | | W | 4,281,991 | | | W | 4,079,434 | |
| | | | | | | | | | | | | |
Nontrading: | | | | | | | | | | | | |
| Hedge accounting: | | | | | | | | | | | | |
| Interest rate swaps | | | 90,000 | | | | 1,817 | | | | 167 | |
| | | | | | | | | | | | | |
| Nontrading that do not qualify for hedge accounting(3): | | | | | | | | | | | | |
| Foreign exchange derivatives: | | | | | | | | | | | | |
| Swaps | | | 914,287 | | | | 115,326 | | | | 15,541 | |
| Future and forward contracts | | | 23,819 | | | | 94 | | | | 5,209 | |
| Sub-total | | | 938,106 | | | | 115,420 | | | | 20,750 | |
| | | | | | | | | | | | | |
| Interest rate derivatives: | | | | | | | | | | | | |
| Swaps | | | 10,453,051 | | | | 219,119 | | | | 145,881 | |
| | | | | | | | | | | | | |
Total | | W | 11,481,157 | | | W | 336,356 | | | W | 166,798 | |
| | | | | | | | | | | | | |
Note:
| | |
| (1) | | Notional amounts in foreign currencies were converted into Won at prevailing exchange rates as of December 31, 2009. |
|
| (2) | | The fair values of the trading derivative assets/liabilities and nontrading that do not qualify for hedge accounting are presented in Note 6. The fair values of the hedging derivative assets/liabilities that qualify for hedge accounting are presented in Note 11 and Note 17. |
|
| (3) | | While the Group engages in derivatives trading activities to hedge the interest rate risk and foreign exchange risk exposure that arise from its own assets and liabilities, as these nontrading derivative contracts do not qualify for hedge accounting under U.S. GAAP, they are accounted for as trading derivatives in the financial statements. These contracts include interest rate swaps, forward contracts and cross-currency swaps held for nontrading that do not qualify for hedge accounting treatment. |
The Group present the fair value of derivative instruments on a gross basis even when the derivative instruments are subject to master netting arrangement and qualify for net presentation in the consolidated balance sheet in accordance withASC 210-20 (formerly FIN 39). Therefore, cash collateral payables and receivables associated with the derivative instruments are not added to or netted against the fair value amounts.
F-83
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Trading profits (losses) related to derivative instruments not designated or qualifying as hedging instruments under ASC 815 (formerly SFAS 133) at December 31, 2009 are as follows:
| | | | | | | | | |
| | | 2009 | |
| | | Nontrading that do not
| | | | |
| | | Qualify for Hedge Accounting | | | Trading | |
| | | (In millions of Won) | |
| |
| Foreign exchange derivatives | | W | (18,417 | ) | | W | (293,162 | ) |
| Interest rate derivatives | | | (338,409 | ) | | | 73,195 | |
| Equity derivatives | | | — | | | | 20,601 | |
| Credit derivatives | | | — | | | | 17,404 | |
| Commodity and other derivatives | | | — | | | | 25,375 | |
| | | | | | | | | |
| | | W | (356,826 | ) | | W | (156,587 | ) |
| | | | | | | | | |
Hedging Activities
The Group accounts for its hedging activities in accordance with ASC 815. As a general rule, hedge accounting is permitted for those situations where the Group is exposed to a particular risk, such as interest rate or foreign exchange risk, that causes changes in the fair value of an asset or liability, or variability in the expected future cash flows of an existing asset, liability or a forecasted transaction that may affect earnings.
Derivative contracts hedging the risks associated with the changes in fair value are referred to as fair value hedges, while contracts hedging the risks affecting the expected future cash flow hedges. Hedges that utilize derivatives or debt instruments to manage the foreign exchange risk associated with equity investments in non-Korean Won functional currency foreign subsidiaries (net investment in a foreign operation) are called net investment hedges.
If certain hedging criteria specified in ASC 815 are met, in including testing for hedge effectiveness, special hedge accounting may be applied. The hedge effectiveness assessment methodologies for similar hedges are performed in a similar manner and are used consistently throughout the hedging relationships. For fair value hedges, the changes in value of the hedging derivative, as well as the changes in value due to the risk being hedged, are reflected in current earnings. The Group does not apply hedge accounting for cash flow hedge and net investment hedge.
For asset and liability management hedging, the fixed-rate long-term debt may be recorded at amortized cost under current U.S. GAAP. However, by electing to use ASC 815 hedge accounting, the carrying value of the debt is adjusted for changes in the benchmark interest rate, with any such changes in value recorded in current earnings. The related interest-rate swap is also recorded on the balance sheet at fair value, with any changes in fair value reflected in earnings. Thus, any ineffectiveness resulting from the hedging relationship is recorded in current earnings. Alternatively, an economic hedge, which does not meet the ASC 815 hedging criteria, would involve only recording the derivative at fair value on the balance sheet, with its associated changes in fair value recorded in earnings. The debt would continue to be carried at amortized cost and, therefore, current earnings would be impacted only by the interest rate shifts and other factors that cause the change in the swap’s value and the underlying yield of the debt.
Key aspects of achieving hedge accounting are documentation of hedging strategy and hedge effectiveness at the hedge inception and substantiating hedge effectiveness on an ongoing basis. A derivative must be highly effective in accomplishing the hedge objective of offsetting changes in the fair value for the risk recognized in current earnings. Any ineffectiveness in the hedge relationship is recognized in current earnings. The assessment of effectiveness excludes changes in the value of the hedged item that are not related to the risks being hedged.
F-84
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The Group hedges exposure to changes in the fair value of outstanding fixed-rate issued debt. The fixed cash flows from those financing transactions are converted to benchmark floating-rate cash flows by entering into receive-fixed, pay-floating interest rate swaps. The Group had applied fair value hedge accounting exclusively to interest rate swap transactions with the hedged items of fixed rate debts that qualified for the short-cut method for hedge relationships commencing prior to December 31, 2005. Since the Group assumed no ineffectiveness for those transactions, no ineffective portion was recognized in the consolidated statements of income for the years presented. However, the Group has not applied hedge accounting for new hedging relationships entered into since January 1, 2006.
The gain and loss on designated and qualifying fair value hedges recognized in other non-interest income and other non-interest expense for the year ended December 31 are as follow:
| | | | | | | | | | | | | |
| | | 2009 |
| | | Derivatives | | Hedged Items | | Total |
| | | (In millions of Won) |
| |
| Gain (loss) on designated and qualifying fair value hedges: | | | | | | | | | | | | |
| Interest rate derivatives | | W | (2,734 | ) | | W | 2,734 | | | W | — | |
Credit Derivatives
The Group enters into credit derivatives primarily to facilitate client transactions and to manage credit risk exposures. Credit derivatives derive value based on an underlying third party-referenced obligation or a portfolio of referenced obligations and generally require the Group as the seller of credit protection to make payments to a buyer upon the occurrence of a predefined credit event. Such credit events generally include bankruptcy of the referenced credit entity and failure to pay under the obligation, as well as acceleration of indebtedness and payment repudiation or moratorium. For credit derivatives based on a portfolio of referenced credits or credit indices, the Group may not be required to make payment until a specified amount of loss has occurredand/or may only be required to make payment up to a specified amount.
For most credit derivatives, the notional value represents the maximum amount payable by the Group. However, the Group does not exclusively monitor its exposure to credit derivatives based on notional value because this measure does not take into consideration the probability of occurrence. As such, the notional value is not a reliable indicator of the Group’s exposure to these contracts. Instead, a risk framework is used to define risk tolerances and establish limits to help to ensure that certain credit risk-related losses occur within acceptable, predefined limits.
The following disclosures represent a summary of the notional amounts of credit derivatives and credit linked notes the Group sold and purchased at December 31, 2008 and 2009:
| | | | | | | | | | | | | |
| | | 2008 | |
| | | | | | Protection Purchased
| | | | |
| | | Protection
| | | with Identical
| | | Net Protection
| |
| | | Sold | | | Underlyings(1) | | | Sold | |
| | | (In millions of Won) | |
| |
| Credit derivatives: | | | | | | | | | | | | |
| Credit default swaps | | W | 108,025 | | | W | — | | | W | 108,025 | |
| Credit linked notes | | | 37,725 | | | | — | | | | 37,725 | |
| | | | | | | | | | | | | |
| | | W | 145,750 | | | W | — | | | W | 145,750 | |
| | | | | | | | | | | | | |
F-85
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| | | | | | | | | | | | | |
| | | 2009 | |
| | | | | | Protection Purchased
| | | | |
| | | Protection
| | | with Identical
| | | Net Protection
| |
| | | Sold | | | Underlyings(1) | | | Sold | |
| | | (In millions of Won) | |
| |
| Credit derivatives: | | | | | | | | | | | | |
| Credit default swaps | | W | 174,918 | | | W | — | | | W | 174,918 | |
| Credit linked notes | | | 23,352 | | | | — | | | | 23,352 | |
| | | | | | | | | | | | | |
| | | W | 198,270 | | | W | — | | | W | 198,270 | |
| | | | | | | | | | | | | |
Note:
| | |
| (1) | | Represents the notional amount of purchased credit derivatives where the Group is the protection seller on the identical underlying reference instrument. |
The following table represents the maturity and credit rating of reference entities at December 31, 2008 and 2009:
| | | | | | | | | | | | | | | | | | | | | |
| | | 2008 |
| | | Less than
| | One to
| | Over
| | Total
| | Fair Value
|
| | | One Year | | Five Years | | Five Years | | Notional Amount | | Asset (Liability)(2) |
| | | (In millions of Won) |
| |
| Risk rating of reference entity: | | | | | | | | | | | | | | | | | | | | |
| AAA to BBB-(1) | | W | — | | | W | 133,175 | | | W | 12,575 | | | W | 145,750 | | | W | (15,148 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| | | 2009 |
| | | Less than
| | One to
| | Over
| | Total
| | Fair Value
|
| | | One Year | | Five Years | | Five Years | | Notional Amount | | Asset (Liability)(2) |
| | | (In millions of Won) |
| |
| Risk rating of reference entity: | | | | | | | | | | | | | | | | | | | | |
| AA to CCC-(1) | | W | 137,628 | | | W | 60,642 | | | W | — | | | W | 198,270 | | | W | 2,656 | |
Note:
| | |
| (1) | | The Group considers ratings of BBB- or higher to meet the definition of investment grade. |
|
| (2) | | Represents the netted amount of credit default swaps included in protection sell contracts amounting to W20,530 million and credit linked notes included inavailable-for-sale securities amounting to W23,186 million. |
Credit Risk-Related Contingent Features
Certain derivative instruments contain provisions that require the Group to either post additional collateral or immediately settle any outstanding liability balances upon the occurrence of a specified credit risk-related event. These events, which are defined by the existing derivative contracts, are primarily downgrades in the credit ratings of the Group and its subsidiaries. The fair value of all derivative instruments with credit risk-related contingent features that are in a liability position on December 31, 2009 is W1,878,791 million. The Group has posted W476,903 million as collateral for this exposure in the normal course of business as of December 31, 2009. The Group’s credit rating as of December 31, 2009, assigned by Moody’s and S&P are A2 and A-, respectively. The Group would be required to post an additional W312,162 million of collateral to its counterparties if Moody’s or S&P’s rating falls to Baa3 and BBB-, respectively, or below.
F-86
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| |
30.31. | Commitments and Contingencies |
Legal and Tax Contingencies
In the ordinary course of business, the Group is involved in tax and legal proceedings, claims and litigation. As of December 31, 2007,2009, the Group has 254302 pending lawsuits as a defendant (total amount: W302,956412,575 million). In the opinion of management, based on current knowledge and after consultation with external counsel, the outcome of such matters will not have a material adverse effect on the Group’s consolidated financial statements.
F-68
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Lease Commitments
At December 31, 2007,2009, the Group is obliged under a number of non-cancelable operating leases for premises and equipment used primarily for banking purposes. Total rent expense for the years ended December 31, 2005, 20062007, 2008 and 20072009 was W115,920232,901 million, W151,808220,839 million and W232,901228,291 million, respectively. Pursuant to the terms of non-cancelable lease agreements pertaining to premises and equipment in effect at December 31, 2007,2009, future minimum rental commitments under various non-cancelable operating leases are as follows:
| | | | | | | | | |
Years Ending | | | | | (In millions of Won) | |
| | | (In millions of won) | |
| | |
| 2008 | | W | 45,286 | | |
| 2009 | | | 28,728 | | |
| 2010 | | | 22,224 | | | W | 79,593 | |
| 2011 | | | 12,012 | | | | 48,971 | |
| 2012 | | | 4,805 | | | | 29,585 | |
| 2013 | | | | 14,276 | |
| 2014 | | | | 4,931 | |
| Thereafter | | | 14,056 | | | | 14,581 | |
| | | | | | | |
| | | W | 127,111 | | | W | 191,937 | |
| | | | | | | |
In lieu of rent, certain lease agreements require the Group to advance a non-interest-bearing refundable security deposit to the landlord for the Group’s use during the lease term. The amount of the advance is determined by the prevailing market rate. The Group has recorded rent expense and interest income related to these leases of W28,82275,090 million, W33,87243,286 million and W75,09042,365 million on deposit balances of W1,019,0301,194,775 million, W1,053,3461,222,172 million and W1,194,7751,225,577 million for the years ended December 31, 2005, 20062007, 2008 and 2007,2009, respectively. Such amounts were calculated based on the fixed interest rate for time deposits with similar maturities.
Credit Commitments and Guarantees
The following table summarizes the contractual amounts relating to unused credit commitments at December 31:
| | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | | 2008 | | 2009 | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
| Commitments to extend credit: | | | | | | | | | | | | | | | | |
| Corporate | | W | 55,580,067 | | | W | 65,611,150 | | | W | 49,872,646 | | | W | 49,590,230 | |
| Credit card lines | | | 13,938,452 | | | | 46,078,856 | | |
| Credit card | | | | 52,577,454 | | | | 64,904,222 | |
| Consumer(1) | | | 6,127,061 | | | | 6,967,675 | | | | 8,350,144 | | | | 8,794,536 | |
| Commercial letters of credit | | | 2,963,341 | | | | 3,517,684 | | | | 3,005,711 | | | | 3,319,107 | |
| | | | | | | | | | | |
| | | W | 78,608,921 | | | W | 122,175,365 | | | W | 113,805,955 | | | W | 126,608,095 | |
| | | | | | | | | | | |
Note:
| | |
| (1) | | excludingExcludes credit cardcard. |
F-87
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Commitments to extend credit represent unfunded portions of authorizations to extend credit in the form of loans. The commitments expire on fixed dates and a customer has to comply with predetermined conditions to draw funds under the commitments. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. The majority of the Group’s unfunded commitments are not guarantees under ASC 460 (formerly FIN 45.45).
Commercial letters of credit are undertakings by the Group on behalf of customers authorizing third parties to draw drafts on the Group up to a stipulated amount under specific terms and conditions. They are generally short-
F-69
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
termshort-term and collateralized by the underlying shipments of goods to which they relate and therefore have significantly less risk.
The Group provides a variety of guarantees to its customers to enhance their credit standing and enable them to complete a variety of business transactions. The maximum potential amount of future payments represents the notional amounts that could be lost under the guarantees if there were a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or from collateral held or pledged. Certain guarantees issued or modified after December 31, 2002 that are not derivative contracts have been recorded on the Group’s consolidated balance sheetsheets at their fair value at inception. The Group has recorded this amount in other liabilities with an offsetting entry in other assets. As cash is received under such arrangements and applied to other assets, the liability recorded at inception is amortized into income as commissions and fees over the life of the contract. The majority of these guarantees expire without being drawn upon. As a result, total contractual amounts are not representative of the Group’s expected future cash outlay.
The table below summarizes all of the Group’s guarantees under FIN 45 at December 31, 2007:2009:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Maximum
| | | | | | | | | | | | | Maximum
| |
| | | | | | | Total
| | Current
| | Amount of
| | Potential
| | | | | | | Total
| | Current
| | Amount of
| | Potential
| |
| | | | | | | Notional
| | Carrying
| | Recourse or
| | Amount of
| | | | | | | Notional
| | Carrying
| | Recourse or
| | Amount of
| |
| | | Expire within
| | Expire after
| | Amount
| | Liability
| | Collateral
| | Future
| | | Expire Within
| | Expire After
| | Amount
| | Liability
| | Collateral
| | Future
| |
| | | One Year | | One Year | | Outstanding | | Amount(1) | | Held | | Payments | | | One Year | | One Year | | Outstanding | | Amount(1) | | Held | | Payments | |
| | | | | | | (In millions of won) | | | | | | | | | | | (In millions of Won) | | | | | |
| |
| Financial stand-by letters of credit | | W | 187,253 | | | W | — | | | W | 187,253 | | | W | 3,066 | | | W | 38,842 | | | W | 187,253 | | | W | 430,754 | | | W | 44,622 | | | W | 475,376 | | | W | 18,718 | | | W | 393,575 | | | W | 475,376 | |
| Other financial guarantees | | | 1,046,398 | | | | 2,317 | | | | 1,048,715 | | | | 3,236 | | | | 116,480 | | | | 1,048,715 | | | | 880,384 | | | | 36,894 | | | | 917,278 | | | | 6,742 | | | | 839,552 | | | | 917,278 | |
| Performance letters of credit and guarantees | | | 8,002,789 | | | | 14,986 | | | | 8,017,775 | | | | 45,743 | | | | 828,203 | | | | 8,017,775 | | | | 6,434,272 | | | | 3,896,876 | | | | 10,331,148 | | | | 282,241 | | | | 9,358,181 | | | | 10,331,148 | |
| Liquidity facilities to SPEs | | | 469,119 | | | | 2,849,921 | | | | 3,319,040 | | | | 13,204 | | | | — | | | | 3,319,040 | | | | 259,682 | | | | 1,408,900 | | | | 1,668,582 | | | | 31,024 | | | | — | | | | 1,668,582 | |
| Loans sold with recourse | | | — | | | | 225 | | | | 225 | | | | 136 | | | | 354 | | | | 225 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Guarantees on trust accounts | | | 453,531 | | | | 3,106,849 | | | | 3,560,380 | | | | — | | | | — | | | | 3,560,380 | | | | 437,172 | | | | 3,058,360 | | | | 3,495,532 | | | | — | | | | — | | | | 3,495,532 | |
| Credit derivatives | | | — | | | | 65,674 | | | | 65,674 | | | | 1,981 | | | | — | | | | 65,674 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | W | 10,159,090 | | | W | 6,039,972 | | | W | 16,199,062 | | | W | 67,366 | | | W | 983,879 | | | W | 16,199,062 | | | W | 8,442,264 | | | W | 8,445,652 | | | W | 16,887,916 | | | W | 338,725 | | | W | 10,591,308 | | | W | 16,887,916 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Note:
| | |
| (1) | | Includes allowance for guarantees and acceptances, allowance for unfunded loan commitment and liabilities recorded under FIN. 45.ASC 460 (formerly FIN 45). |
Financial stand-by letters of credit represent irrevocable obligations to pay third party beneficiaries when its customers fail to repay loans or debt instruments, which are generally in foreign currencies.
Other financial guarantees are used in various transactions to enhance the credit standing of the Group’s customers. They represent irrevocable assurance, subject to satisfaction of certain conditions, that the Group will make payment in the event that the customers fail to fulfill their obligations to third parties. Such financial obligations include a return of security deposits and the payment of service fees.
F-88
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Performance letters of credit and guarantees are issued to guarantee customers’ tender bids on construction or similar projects or to guarantee completion of such projects in accordance with contractual terms. They are also issued to support a customer’s obligation to supply specified products, commodities, maintenance or other services to third parties.
Liquidity facilities to SPEs represent irrevocable commitments to provide contingent liquidity credit lines including commercial paper purchase commitments to SPEs for which the Group serves as the administrator. The SPEs are established by clients to obtain funding from the commercial paper market or the corporate debt market by
F-70
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
transferring assets to the SPEs. The Group has commitments to provide liquidity to the SPEs in amounts up to W3,319,0401,668,582 million at December 31, 2007.2009. Although the Group does not sell assets to these SPEs, it would be required to provide funding under the liquidity facilities in the event that the SPEs do not hold enough funds to make scheduled payments on their outstanding senior debt securities. Under the commercial paper purchase commitments, the Group is required to purchase commercial paper issued by the SPEs when enough funding is not available in the commercial paper market. The Group has limited credit exposure to these SPEs because the risk of first loss is borne by the clients or other third parties, or the SPEs are over-collateralized with the assets sold to them.
Loans sold with recourse represent certain nonperforming loans the Group sold to Korea Asset Management Corporation (KAMCO) prior to 1999. These are accounted for as sales and derecognized from the consolidated balance sheets since control over these loans has been surrendered. The sales agreements contain a recourse liability under which KAMCO can obligate the Group to repurchase certain of these related loans if the related debtors fail to perform in accordance with specific restructuring plans. The recourse liability has no expiration date. Outstanding loans for which the Group has a recourse obligation amounted to W8,055 million and W1,228 million at December 31, 2006 and 2007, respectively. At December 31, 2006 and 2007, the Group has recorded in accrued expenses and other liabilities, W1,676 million and W136 million, respectively, representing its estimated obligation to repurchase the loans with recourse.
Guarantees on trust accounts represent guarantee on the Guaranteed Principal Money Trusts which require the Group to guarantee the return of the principal amount invested at the termination of a fixed term deposit. The Group manages and administers trust assets in the capacity as a fiduciary on behalf of its customers. Trust assets and liabilities are excluded from the consolidated financial statements of the Group, and are recorded in separate accounts from those of the Group’s business. The guarantees on trusts funds qualify as derivatives under SFAS 133, and are included in trading liabilities at fair value in the Group’s consolidated balance sheets with corresponding changes included in earnings. See NoteNotes 32 and 34 for further discussion related to trust accounts.
The Group enters into certain guarantee contracts that meet the characteristics of a derivative under SFAS No. 133. Such derivatives effectively guarantee the return on counterparty’s referenced portfolio of assets. These credit derivatives will expire on various dates up to March 20, 2011 and March 20, 2014 at December 31, 2006 and 2007, have an aggregate notional amount of W812,235 million and W65,674 million, respectively, which represents the maximum potential amount of future payments on the contracts. At December 31, 2006 and 2007, these derivatives were recorded on the consolidated balance sheet at fair value of W250 million and W3,431 million, respectively, in trading assets and W343 million and W5,412 million, respectively, in trading liabilities, respectively.
Pledged Assets
The following table sets forth the primary components of assets pledged as collateral for borrowings and other purposes at December 31:
| | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | | 2008 | | 2009 | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
| Short-term and long-term deposits | | W | 55 | | | W | 640 | | |
| Restricted cash | | | W | 42,479 | | | W | 72,806 | |
| Trading securities | | | 193,688 | | | | 2,374,484 | | | | 2,938,989 | | | | 3,031,946 | |
| Available-for-sale securities | | | 3,776,585 | | | | 7,423,344 | | | | 7,342,153 | | | | 1,933,160 | |
| Held-to-maturity securities | | | 4,983,153 | | | | 4,674,240 | | | | 5,278,368 | | | | 5,087,576 | |
| Loans | | | 2,372,809 | | | | 7,317,202 | | | | 7,687,576 | | | | 5,862,846 | |
| Real estate | | | 27,480 | | | | 31,252 | | | | 25,298 | | | | 16,227 | |
| Other assets | | | 4,672 | | | | 7,485 | | | | 7,161 | | | | 5,455 | |
| | | | | | | | | | | |
| | | W | 11,358,442 | | | W | 21,828,647 | | | W | 23,322,024 | | | W | 16,010,016 | |
| | | | | | | | | | | |
F-71
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| |
31.32. | Concentrations of Geographic and Credit Risks |
Geographic Risk
Loans to borrowers based in Korea represented approximately 98%96% and 97% of the Group’s loan portfolio at December 31, 20062008 and 2007.2009, respectively. Investments in debt and equity securities of Korean entities represented approximately 98%97% and 97%98% of the Group’s investment portfolio at December 31, 20062008 and 2007,2009, respectively.
Credit Risk
Concentrations of credit risk arise when a number of customers are engaged in similar business activities, or activities in the same geographic region, or have similar economic characteristics that would cause their ability to meet their contractual obligations to be similarly affected by changes in economic conditions. Note 6 and Note 7
F-89
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
discuss the types of securities in which the Group invests. Note 8 discusses the type of loans in which the Group engages.
The Group regularly monitors various segments of its credit risk portfolio to assess potential concentration of risks and to obtain collateral when deemed necessary. Except for securities issued by KDIC, BOK and other governmental entities, no entity was responsible for 10% or more of the Group’s total loans outstanding, trading assets and liabilities,available-for-sale securities,held-to-maturity debt securities or total interest and dividend income at December 31, 20062008 and 20072009 and for each of the three years ended on December 31, 2007.2009.
The following table presents major products including both on-balance sheet (100% loans) and off-balance sheet (principally commitments to extend credit) exposures at December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | | 2008 | | 2009 | |
| | | Credit
| | On-Balance
| | Off-Balance
| | Credit
| | On-Balance
| | Off-Balance
| | | Credit
| | On-Balance
| | Off-Balance
| | Credit
| | On-Balance
| | Off-Balance
| |
| | | Exposure | | Sheet | | Sheet | | Exposure | | Sheet | | Sheet | | | Exposure | | Sheet | | Sheet | | Exposure | | Sheet | | Sheet | |
| | | (In millions of won) | | | | | | | (In millions of Won) | | | | | |
| |
| Commercial and industrial | | W | 80,162,745 | | | W | 40,062,760 | | | W | 40,099,985 | | | W | 102,010,404 | | | W | 48,485,436 | | | W | 53,524,968 | | | W | 107,999,663 | | | W | 55,466,168 | | | W | 52,533,495 | | | W | 101,768,977 | | | W | 54,479,473 | | | W | 47,289,504 | |
| Other commercial | | | 51,116,005 | | | | 27,319,293 | | | | 23,796,712 | | | | 58,488,146 | | | | 30,311,497 | | | | 28,176,649 | | | | 52,840,975 | | | | 37,637,026 | | | | 15,203,949 | | | | 53,782,606 | | | | 34,770,389 | | | | 19,012,217 | |
| Lease financing | | | 584,641 | | | | 584,641 | | | | — | | | | 1,370,092 | | | | 1,370,092 | | | | — | | | | 1,591,437 | | | | 1,591,437 | | | | — | | | | 1,559,652 | | | | 1,559,652 | | | | — | |
| Mortgage and home equity | | | 30,525,917 | | | | 30,097,346 | | | | 428,571 | | | | 31,895,982 | | | | 31,495,258 | | | | 400,724 | | | | 36,605,643 | | | | 36,182,970 | | | | 422,673 | | | | 40,525,281 | | | | 40,022,157 | | | | 503,124 | |
| Credit cards | | | 17,862,756 | | | | 3,924,304 | | | | 13,938,452 | | | | 60,759,658 | | | | 14,680,802 | | | | 46,078,856 | | | | 67,214,538 | | | | 14,637,084 | | | | 52,577,454 | | | | 80,020,979 | | | | 15,116,757 | | | | 64,904,222 | |
| Other consumer | | | 26,156,408 | | | | 20,457,918 | | | | 5,698,490 | | | | 32,041,738 | | | | 25,474,788 | | | | 6,566,950 | | | | 32,954,245 | | | | 25,026,774 | | | | 7,927,471 | | | | 31,598,021 | | | | 23,306,609 | | | | 8,291,412 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | W | 206,408,472 | | | W | 122,446,262 | | | W | 83,962,210 | | | W | 286,566,020 | | | W | 151,817,873 | | | W | 134,748,147 | | | W | 299,206,501 | | | W | 170,541,459 | | | W | 128,665,042 | | | W | 309,255,516 | | | W | 169,255,037 | | | W | 140,000,479 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
32.33. | Related Party Transactions |
A number of banking transactions are entered into with related parties in the normal course of business. These include trust accounts managed by the Group and loans to executives, directors and affiliated parties.
Trust Accounts
Under the Korean Trust Law and the Korean Trust Business Act,FSCMA, the Group serves as trustee to the trust accounts in a trust management capacity in the normal course of business. See Note 3435 for more information on trust accounts.
F-72
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Loans to Executives, Directors and Affiliated Parties
The following table summarizes the movements in the amount of loans to executive officers, directors, director nominees, their immediate families and companies affiliated with the directors at December 31:
| | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | | 2008 | | 2009 | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
| Loans at beginning of the year | | W | 180,697 | | | | 171,763 | | | W | 109,557 | | | W | 254,463 | |
| New loans | | | 53,473 | | | | 87,068 | | | | 180,232 | | | | 33,594 | |
| Repayments | | | (62,407 | ) | | | (149,274 | ) | | | (35,326 | ) | | | (280,370 | ) |
| | | | | | | | | | | |
| Loans at end of the year | | W | 171,763 | | | | 109,557 | | | W | 254,463 | | | W | 7,687 | |
| | | | | | | | | | | |
F-90
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table sets forth the outstanding balances at December 31, and the related income and expense for the years ended December 31 for related party transactions:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2006 | | 2007 | | | 2007 | | 2008 | | 2009 | |
| | | | | Executives,
| | | | Executives,
| | | | Executives,
| | | | | Executives,
| | | | Executives,
| | | | Executives,
| |
| | | | | Directors and
| | | | Directors and
| | | | Directors and
| | | | | Directors and
| | | | Directors and
| | | | Directors and
| |
| | | Trust
| | Affiliated
| | Trust
| | Affiliated
| | Trust
| | Affiliated
| | | Trust
| | Affiliated
| | Trust
| | Affiliated
| | Trust
| | Affiliated
| |
| | | Accounts | | Parties | | Accounts | | Parties | | Accounts | | Parties | | | Accounts | | Parties | | Accounts | | Parties | | Accounts | | Parties | |
| | | (In millions of won) | | | | | | | (In millions of Won) | | | | | |
| |
| Loans | | W | — | | | W | 180,697 | | | W | — | | | W | 171,763 | | | W | — | | | W | 109,557 | | | W | — | | | W | 109,557 | | | W | — | | | W | 254,463 | | | W | — | | | W | 7,687 | |
| Accrued expenses and other assets | | | 7,098 | | | | — | | | | 8,846 | | | | — | | | | 5,836 | | | | — | | |
| Trust fees payable | | | | 5,836 | | | | — | | | | 9,514 | | | | — | | | | 10,299 | | | | — | |
| Short-term borrowings | | | 660,385 | | | | — | | | | 957,812 | | | | — | | | | 1,044,059 | | | | — | | | | 1,044,059 | | | | — | | | | 929,175 | | | | — | | | | 772,373 | | | | — | |
| Other liabilities | | | 354 | | | | — | | | | 602 | | | | — | | | | 41,479 | | | | — | | | | 41,479 | | | | — | | | | 39,365 | | | | — | | | | 16,489 | | | | — | |
| Other interest income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | |
| Net trust management fees | | | 73,995 | | | | — | | | | 70,093 | | | | — | | | | 62,641 | | | | — | | | | 62,641 | | | | — | | | | 33,567 | | | | — | | | | 28,960 | | | | — | |
| Interest expense on short-term borrowings | | | 17,052 | | | | — | | | | 28,267 | | | | — | | | | 44,675 | | | | — | | | | 44,675 | | | | — | | | | 42,929 | | | | — | | | | 24,449 | | | | — | |
| Interest on loans | | | — | | | | 3,538 | | | | — | | | | 3,863 | | | | — | | | | 3,668 | | | | — | | | | 3,668 | | | | — | | | | 5,844 | | | | — | | | | 329 | |
| | | | | | | | | | | | | | | |
It is the Group’s policy to make loans available to employees and officers on terms equivalent to those at which it extends credit to unrelated parties. The Group does not customarily track or aggregate the total earnings on such loans as outstanding amounts are not material.
For management reporting purposes, the Group’s business segment results are reported to management under Korean GAAP. The Group is organized into seven major business segments: retail banking, corporate banking, treasury and international business, other banking services, securities brokerage services, credit card and life insurance. The Group’s reportable segments are based on the nature of the products and services provided, the type or class of customers, and the Group’s management organization, and provide the basis on which the Group reports its primary segment information:
| | |
| | • | Retail banking— Activities within this segment include savings and demand deposits, consumer loans and mortgages of individual customers and sole proprietors with lending limits of W1,000 million or less. |
| |
| | • | Corporate banking— Activities within this segment include loans, overdrafts, other credit facilities, deposits in foreign currencies and other foreign currency activities. The corporate banking segment’s assets and liabilities are mainly from transactions with customers including small and medium sized private companies, publicly traded enterprises and sole proprietors with lending limits greater than W1 billion. |
F-73
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| | |
| | • | Treasury and international business— Activities within this segment include Shinhan Bank’s internal asset and liability management, proprietary trading in securities and derivatives, proprietary investment in security portfolios using Shinhan Bank’s capital, and international business. |
| |
| | • | Other banking services— Activities within this segment include Shinhan Bank’s impaired loan management, administration of Shinhan Bank, and trust account management services. |
| |
| | • | Securities brokerage services— Activities within this segment include a full range of brokerage services, investment advice and financial planning to retail customers, and various investment banking services to corporate customers conducted through Shinhan Investment Corp. (formerly Good Morning Shinhan Securities.Securities). |
F-91
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| | |
| | • | Credit card— Activities within this segment include processing domestic as well as overseas credit and debit card operations conducted through Shinhan Card. The credit card segment’s assets and liabilities are mainly from transactions with individual or corporate cardholders and card merchants. |
| |
| | • | Life insurance— Activities within this segment include Shinhan Life Insurance’s providing life-insurance products and financial consulting services, by various sales distributions such as FC, TM, CM and Bancasurance (bank alliances including Shinhan Bank), which meet the needs of individual and group customers who want health insurance, whole life insurance and pension plan, etc. |
Other services of the Group are comprised of activities of the holding company and other subsidiaries such as Jeju Bank and Shinhan Capital, none of which constitutes a separately reportable segment.
Operating revenue and expense and interest incomerevenue and expense, related to both third party and intersegment transactions, are included in determining the operating earnings of each respective segment. The provision for income tax is comprised of corporate income tax and resident tax surcharges. Income tax expenses are allocated to the respective segment based upon performance.
Transactions between the business segments are reflected on terms established by management.
The Group continuously assesses its assumptions, methodologies and reporting classifications to better reflect the nature and activities of the Group’s business segments. The Group’s business segments for the year ended December 31, 2006 have been changed reflecting the merger between Shinhan Bank and Chohung Bank, spit-merger of Chohung Bank’s credit card business with Shinhan Card, and life insurance being reportable segment in 2006. The corresponding information for 2005 has been restated.
Geographic segment disclosures have been excluded as assets and revenues attributable to external customers in foreign countries are not significant.
F-74F-92
Shinhan Financial Group Co.,Co, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table sets forth information about reporting segments atas of and for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | | 2007 | |
| | | Shinhan Bank | | | | | | | | | | | | | | | | | | | Shinhan Bank | | | | | | | | | | | | | | | | | |
| | | | | | | Treasury &
| | Other
| | Securities
| | | | | | | | Subtotal
| | US
| | Inter-
| | | | | | | | | Treasury &
| | Other
| | Securities
| | | | | | | | Subtotal
| | US
| | Inter-
| | | |
| | | Retail
| | Corporate
| | International
| | Banking
| | Brokerage
| | Credit
| | Life
| | | | Before
| | GAAP
| | Segment
| | | | | Retail
| | Corporate
| | International
| | Banking
| | Brokerage
| | Credit
| | Life
| | | | before
| | GAAP
| | Segment
| | | |
| | | Banking | | Banking | | Business | | Services | | Services(1) | | Card(2) | | Insurance | | Other | | Elimination | | Adjustments | | Transactions(3) | | Total | | | Banking | | Banking | | Business | | Services | | Services(1) | | Card(2) | | Insurance | | Other | | Elimination | | Adjustments | | Transactions(3) | | Total | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
| Net interest income | | W | 2,039,376 | | | W | 872,620 | | | W | (226,809 | ) | | W | 204,052 | | | W | 63,580 | | | W | 953,909 | | | W | 13,813 | | | W | 258,069 | | | W | 4,178,610 | | | W | (706,977 | ) | | W | 2,005 | | | W | 3,473,638 | | | W | 2,328,020 | | | W | 863,827 | | | W | (265,242 | ) | | W | 815,499 | | | W | 137,274 | | | W | 2,804,150 | | | W | 292,659 | | | W | 92,810 | | | W | 7,068,997 | | | W | (1,581,689 | ) | | W | (316,952 | ) | | W | 5,170,356 | |
| Non-interest income | | | 695,234 | | | | 510,988 | | | | 5,351,148 | | | | 615,273 | | | | 816,703 | | | | 102,030 | | | | 244,939 | | | | 1,890,659 | | | | 10,226,974 | | | | (6,948,260 | ) | | | (333,636 | ) | | | 2,945,078 | | | | 967,520 | | | | 265,988 | | | | 5,463,967 | | | | 1,766,806 | | | | 1,803,377 | | | | 197,496 | | | | 2,401,362 | | | | 3,414,529 | | | | 16,281,045 | | | | (11,102,429 | ) | | | (440,410 | ) | | | 4,738,206 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total revenues | | | 2,734,610 | | | | 1,383,608 | | | | 5,124,339 | | | | 819,325 | | | | 880,283 | | | | 1,055,939 | | | | 258,752 | | | | 2,148,728 | | | | 14,405,584 | | | | (7,655,237 | ) | | | (331,631 | ) | | | 6,418,716 | | | | 3,295,540 | | | | 1,129,815 | | | | 5,198,725 | | | | 2,582,305 | | | | 1,940,651 | | | | 3,001,646 | | | | 2,694,021 | | | | 3,507,339 | | | | 23,350,042 | | | | (12,684,118 | ) | | | (757,362 | ) | | | 9,908,562 | |
| Provision(reversal) for credit losses | | | 257,456 | | | | 123,617 | | | | (40,352 | ) | | | 76,509 | | | | (3,550 | ) | | | 478,324 | | | | 582 | | | | 23,132 | | | | 915,718 | | | | (1,094,656 | ) | | | (4,550 | ) | | | (183,488 | ) | | | 222,432 | | | | 136,542 | | | | 37,535 | | | | 63,112 | | | | 6,960 | | | | 301,406 | | | | 1,234 | | | | (26,475 | ) | | | 742,746 | | | | (726,059 | ) | | | 63,872 | | | | 80,559 | |
| Non-interest expense | | | 1,308,457 | | | | 458,555 | | | | 5,255,279 | | | | 847,805 | | | | 747,699 | | | | 362,895 | | | | 249,049 | | | | 94,727 | | | | 9,324,466 | | | | (5,643,609 | ) | | | (400,723 | ) | | | 3,280,134 | | | | 1,280,449 | | | | 463,689 | | | | 5,855,173 | | | | 1,042,168 | | | | 1,666,125 | | | | 1,539,765 | | | | 2,501,624 | | | | 626,413 | | | | 14,975,406 | | | | (8,726,318 | ) | | | (316,442 | ) | | | 5,932,646 | |
| Depreciation and amortization | | | 83,741 | | | | 5,976 | | | | 1,500 | | | | 71,052 | | | | 15,082 | | | | 6,551 | | | | 534 | | | | 40,335 | | | | 224,771 | | | | 152,579 | | | | — | | | | 377,350 | | | | 112,157 | | | | 4,331 | | | | 1,404 | | | | 132,482 | | | | 14,869 | | | | 77,981 | | | | 7,795 | | | | 29,729 | | | | 380,748 | | | | 442,888 | | | | (11,291 | ) | | | 812,345 | |
| | | | | | | | | | | | | | | | | | | | �� | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) before tax | | | 1,084,956 | | | | 795,460 | | | | (92,088 | ) | | | (176,041 | ) | | | 121,052 | | | | 208,169 | | | | 8,587 | | | | 1,990,534 | | | | 3,940,629 | | | | (1,069,551 | ) | | | 73,642 | | | | 2,944,720 | | | | 1,680,502 | | | | 525,253 | | | | (695,387 | ) | | | 1,344,543 | | | | 252,697 | | | | 1,082,494 | | | | 183,368 | | | | 2,877,672 | | | | 7,251,142 | | | | (3,674,629 | ) | | | (493,501 | ) | | | 3,083,012 | |
| Income tax expense (benefit) | | | 193,567 | | | | 185,729 | | | | (33,602 | ) | | | (105,182 | ) | | | 33,812 | | | | (5,224 | ) | | | 2,540 | | | | 27,405 | | | | 299,045 | | | | 615,563 | | | | 100,259 | | | | 1,014,867 | | | | 473,033 | | | | 147,850 | | | | (195,740 | ) | | | 378,466 | | | | 75,920 | | | | 194,420 | | | | 51,335 | | | | (545,223 | ) | | | 580,061 | | | | 517,298 | | | | (38,915 | ) | | | 1,058,444 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | | 891,389 | | | | 609,731 | | | | (58,486 | ) | | | (70,859 | ) | | | 87,240 | | | | 213,393 | | | | 6,047 | | | | 1,963,129 | | | | 3,641,584 | | | | (1,685,114 | ) | | | (26,617 | ) | | | 1,929,853 | | |
| Net income attributable to noncontrolling interest | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 94,956 | | | | 94,956 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) attributable to the Group | | | | 1,207,469 | | | | 377,403 | | | | (499,647 | ) | | | 966,077 | | | | 176,777 | | | | 888,074 | | | | 132,033 | | | | 3,422,895 | | | | 6,671,081 | | | | (4,191,927 | ) | | | (549,542 | ) | | | 1,929,612 | |
| US GAAP adjustments | | | (28,165 | ) | | | (5,793 | ) | | | (11,320 | ) | | | (89,089 | ) | | | (11,575 | ) | | | 276,554 | | | | (5,428 | ) | | | (1,810,298 | ) | | | (1,685,114 | ) | | | — | | | | — | | | | — | | | | 114,637 | | | | 227,325 | | | | (1,059,718 | ) | | | (36,445 | ) | | | (30,913 | ) | | | 55,501 | | | | (138,793 | ) | | | (3,323,521 | ) | | | (4,191,927 | ) | | | — | | | | — | | | | — | |
| Intersegment transactions | | | (54,583 | ) | | | (6,341 | ) | | | (24,479 | ) | | | (17,345 | ) | | | 6,572 | | | | 81,678 | | | | 2,121 | | | | (14,240 | ) | | | (26,617 | ) | | | — | | | | — | | | | — | | | | (1,671 | ) | | | (359,599 | ) | | | 5,144 | | | | (644 | ) | | | 14,860 | | | | (204,560 | ) | | | 50,391 | | | | (53,463 | ) | | | (549,542 | ) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated net income (loss) | | W | 808,641 | | | W | 597,597 | | | W | (94,285 | ) | | W | (177,293 | ) | | W | 82,237 | | | W | 571,625 | | | W | 2,740 | | | W | 138,591 | | | W | 1,929,853 | | | | — | | | | — | | | W | 1,929,853 | | |
| Net income (loss) attributable to the Group | | | W | 1,320,435 | | | W | 245,129 | | | W | (1,554,221 | ) | | W | 928,988 | | | W | 160,724 | | | W | 739,015 | | | W | 43,631 | | | W | 45,911 | | | W | 1,929,612 | | | W | — | | | W | — | | | W | 1,929,612 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segments’ total assets | | W | 58,950,357 | | | W | 35,556,820 | | | W | 30,689,729 | | | W | 14,898,400 | | | W | 3,882,713 | | | W | 3,688,479 | | | W | 5,129,302 | | | W | 22,152,606 | | | W | 174,948,406 | | | W | (10,236,361 | ) | | W | (9,632,732 | ) | | W | 155,079,313 | | | W | 76,218,864 | | | W | 38,958,864 | | | W | 30,535,586 | | | W | 29,392,573 | | | W | 6,685,978 | | | W | 16,880,921 | | | W | 7,410,857 | | | W | 45,991,211 | | | W | 252,074,854 | | | W | (11,470,798 | ) | | W | (18,982,152 | ) | | W | 221,621,904 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Notes:Note:
| | |
| (1) | | Securities brokerage business is conducted through Shinhan Investment Corp. (formerly Good Morning Shinhan Securities.Securities). |
| |
| (2) | | Credit card business is conducted through Shinhan Card and the credit card segment in Shinhan Bank(formallyBank (formerly Chohung bank)Bank). |
| |
| (3) | | Includes eliminations for consolidation, intersegment transactions and certain differences in classification under management reporting system. |
F-75F-93
Shinhan Financial Group Co.,Co, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | | 2008 | |
| | | Shinhan Bank | | | | | | | | | | | | | | | | | | | Shinhan Bank | | | | | | | | | | | | | | | | | |
| | | | | | | Treasury &
| | Other
| | Securities
| | | | | | | | Subtotal
| | US
| | Inter-
| | | | | | | | | Treasury &
| | Other
| | Securities
| | | | | | | | Subtotal
| | US
| | Inter-
| | | |
| | | Retail
| | Corporate
| | International
| | Banking
| | Brokerage
| | Credit
| | Life
| | | | Before
| | GAAP
| | Segment
| | | | | Retail
| | Corporate
| | International
| | Banking
| | Brokerage
| | Credit
| | Life
| | | | before
| | GAAP
| | Segment
| | | |
| | | Banking | | Banking | | Business | | Services | | Services(1) | | Card(2) | | Insurance | | Other | | Elimination | | Adjustments | | Transactions(3) | | Total | | | Banking | | Banking | | Business | | Services | | Services(1) | | Card(2) | | Insurance | | Other | | Elimination | | Adjustments | | Transactions(3) | | Total | |
| | | (In millions of won) | | | | | | | | | | | | | (In millions of Won) | | | | | | | | | | | |
| |
| Net interest income | | W | 2,231,772 | | | W | 842,971 | | | W | (179,077 | ) | | W | 608,577 | | | W | 66,779 | | | W | 717,696 | | | W | 227,637 | | | W | 58,664 | | | W | 4,575,019 | | | W | (555,515 | ) | | W | (38,706 | ) | | W | 3,980,798 | | | W | 2,309,914 | | | W | 2,476,414 | | | W | (578,185 | ) | | W | 134,540 | | | W | 184,408 | | | W | 2,958,371 | | | W | 357,085 | | | W | (500,365 | ) | | W | 7,342,182 | | | W | (1,528,543 | ) | | W | (34,267 | ) | | W | 5,779,372 | |
| Non-interest income | | | 628,249 | | | | 213,138 | | | | 6,136,650 | | | | 1,035,394 | | | | 1,258,781 | | | | 1,296 | | | | 2,134,346 | | | | 2,436,079 | | | | 13,843,933 | | | | (9,807,178 | ) | | | (250,102 | ) | | | 3,786,653 | | | | 1,999,084 | | | | 5,339,037 | | | | 27,961,314 | | | | 2,773,492 | | | | 1,531,926 | | | | 631,799 | | | | 2,505,032 | | | | 5,028,456 | | | | 47,770,140 | | | | (42,109,891 | ) | | | (1,088,832 | ) | | | 4,571,417 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total revenues | | | 2,860,021 | | | | 1,056,109 | | | | 5,957,573 | | | | 1,643,971 | | | | 1,325,560 | | | | 718,992 | | | | 2,361,983 | | | | 2,494,743 | | | | 18,418,952 | | | | (10,362,693 | ) | | | (288,808 | ) | | | 7,767,451 | | | | 4,308,998 | | | | 7,815,451 | | | | 27,383,129 | | | | 2,908,032 | | | | 1,716,334 | | | | 3,590,170 | | | | 2,862,117 | | | | 4,528,091 | | | | 55,112,322 | | | | (43,638,434 | ) | | | (1,123,099 | ) | | | 10,350,789 | |
| Provision(reversal) for credit losses | | | 283,214 | | | | 135,887 | | | | (13,099 | ) | | | (36,830 | ) | | | 2,578 | | | | 92,021 | | | | 2,314 | | | | 49,291 | | | | 515,376 | | | | (289,273 | ) | | | (257 | ) | | | 225,846 | | | | 361,749 | | | | 326,219 | | | | (3,660 | ) | | | 244,541 | | | | 29,009 | | | | 43,110 | | | | 9,189 | | | | 33,407 | | | | 1,043,564 | | | | 457,233 | | | | (64,199 | ) | | | 1,436,598 | |
Non-interest expense(4) | | | 1,323,078 | | | | 441,850 | | | | 5,596,254 | | | | 1,274,417 | | | | 1,173,243 | | | | 430,395 | | | | 2,187,251 | | | | 418,108 | | | | 12,844,596 | | | | (7,769,608 | ) | | | (209,480 | ) | | | 4,865,508 | | | | 2,718,954 | | | | 5,426,404 | | | | 27,940,895 | | | | 3,261,292 | | | | 1,463,084 | | | | 2,159,435 | | | | 2,657,719 | | | | 1,071,084 | | | | 46,698,867 | | | | (40,193,949 | ) | | | (649,474 | ) | | | 5,855,444 | |
| Depreciation and amortization | | | 104,468 | | | | 5,671 | | | | 3,638 | | | | 89,217 | | | | 15,637 | | | | 12,318 | | | | 6,619 | | | | 28,560 | | | | 266,128 | | | | 204,679 | | | | — | | | | 470,807 | | | | 105,439 | | | | 4,650 | | | | 1,607 | | | | 124,384 | | | | 14,832 | | | | 63,250 | | | | 8,816 | | | | 19,322 | | | | 342,300 | | | | 529,116 | | | | — | | | | 871,416 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) before tax | | | 1,149,261 | | | | 472,701 | | | | 370,780 | | | | 317,167 | | | | 134,102 | | | | 184,258 | | | | 165,799 | | | | 1,998,784 | | | | 4,792,852 | | | | (2,508,491 | ) | | | (79,071 | ) | | | 2,205,290 | | | | 1,122,856 | | | | 2,058,178 | | | | (555,713 | ) | | | (722,185 | ) | | | 209,409 | | | | 1,324,375 | | | | 186,393 | | | | 3,404,278 | | | | 7,027,591 | | | | (4,430,834 | ) | | | (409,426 | ) | | | 2,187,331 | |
| Income tax expense (benefit) | | | 323,726 | | | | 133,151 | | | | 104,442 | | | | 89,340 | | | | 37,912 | | | | (47,834 | ) | | | 44,265 | | | | 29,230 | | | | 714,232 | | | | (66,134 | ) | | | 1,708 | | | | 649,806 | | | | 309,441 | | | | 74,099 | | | | (51,527 | ) | | | 124,396 | | | | 53,108 | | | | 383,800 | | | | 47,160 | | | | 44,888 | | | | 985,365 | | | | (191,269 | ) | | | (99,165 | ) | | | 694,931 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | | 825,535 | | | | 339,550 | | | | 266,338 | | | | 227,827 | | | | 96,190 | | | | 232,092 | | | | 121,534 | | | | 1,969,554 | | | | 4,078,620 | | | | (2,442,357 | ) | | | (80,779 | ) | | | 1,555,484 | | |
| Net income attributable to noncontrolling interest | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 11,701 | | | | 11,701 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) attributable to the Group | | | | 813,415 | | | | 1,984,079 | | | | (504,186 | ) | | | (846,581 | ) | | | 156,301 | | | | 940,575 | | | | 139,233 | | | | 3,359,390 | | | | 6,042,226 | | | | (4,239,565 | ) | | | (321,962 | ) | | | 1,480,699 | |
| US GAAP adjustments | | | 735,044 | | | | (624,388 | ) | | | (549,431 | ) | | | 23,600 | | | | 4,698 | | | | 25,761 | | | | (25,608 | ) | | | (2,032,033 | ) | | | (2,442,357 | ) | | | — | | | | — | | | | — | | | | (53,561 | ) | | | (480,122 | ) | | | 149,673 | | | | (8,694 | ) | | | (15,169 | ) | | | (503,266 | ) | | | 256,082 | | | | (3,584,508 | ) | | | (4,239,565 | ) | | | — | | | | — | | | | — | |
| Intersegment transactions | | | (13,536 | ) | | | (21,975 | ) | | | (165,196 | ) | | | (4,516 | ) | | | 9,848 | | | | 120,492 | | | | 16,645 | | | | (22,541 | ) | | | (80,779 | ) | | | — | | | | — | | | | — | | | | 24,855 | | | | (416,592 | ) | | | (2,033 | ) | | | 9,177 | | | | (9,375 | ) | | | 248,781 | | | | 6,717 | | | | (183,492 | ) | | | (321,962 | ) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated net income (loss) | | W | 1,547,043 | | | W | (306,813 | ) | | W | (448,289 | ) | | W | 246,911 | | | W | 110,736 | | | W | 378,345 | | | W | 112,571 | | | W | (85,020 | ) | | W | 1,555,484 | | | | — | | | | — | | | W | 1,555,484 | | |
| Net income (loss) attributable to the Group | | | W | 784,709 | | | W | 1,087,365 | | | W | (356,546 | ) | | W | (846,098 | ) | | W | 131,757 | | | W | 686,090 | | | W | 402,032 | | | W | (408,610 | ) | | W | 1,480,699 | | | | — | | | | — | | | W | 1,480,699 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segments’ total assets | | W | 70,533,863 | | | W | 33,462,110 | | | W | 26,653,700 | | | W | 23,557,387 | | | W | 4,126,940 | | | W | 3,558,415 | | | W | 6,225,865 | | | W | 25,583,922 | | | W | 193,702,202 | | | W | (9,569,507 | ) | | W | (9,045,257 | ) | | W | 175,087,438 | | | W | 84,746,067 | | | W | 46,860,042 | | | W | 50,672,104 | | | W | 31,290,886 | | | W | 7,315,710 | | | W | 17,051,579 | | | W | 8,517,262 | | | W | 48,041,984 | | | W | 294,495,634 | | | W | (15,492,069 | ) | | W | (18,030,432 | ) | | W | 260,973,133 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Notes:Note:
| | |
| (1) | | Securities brokerage business is conducted through Shinhan Investment Corp. (formerly Good Morning Shinhan Securities.Securities). |
| |
| (2) | | Credit card business is conducted through Shinhan Card and the credit card segment in Shinhan Bank(formally Chohung Bank).Card. |
| |
| (3) | | Includes eliminations for consolidation, intersegment transactions and certain differences in classification under management reporting system. |
|
(4) | | Includes cumulative effect of change in accounting principle of W10,184 million.. |
F-76F-94
Shinhan Financial Group Co.,Co, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2007 | | | 2009 | |
| | | Shinhan Bank | | | | | | | | | | | | | | | | | | | Shinhan Bank | | | | | | | | | | | | | | | | | |
| | | | | | | Treasury &
| | Other
| | Securities
| | | | | | | | Subtotal
| | US
| | Inter-
| | | | | | | | | Treasury &
| | Other
| | Securities
| | | | | | | | Subtotal
| | US
| | Inter-
| | | |
| | | Retail
| | Corporate
| | International
| | Banking
| | Brokerage
| | Credit
| | Life
| | | | Before
| | GAAP
| | Segment
| | | | | Retail
| | Corporate
| | International
| | Banking
| | Brokerage
| | Credit
| | Life
| | | | before
| | GAAP
| | Segment
| | | |
| | | Banking | | Banking | | Business | | Services | | Services(1) | | Card(2) | | Insurance | | Other | | Elimination | | Adjustments | | Transactions(3) | | Total | | | Banking | | Banking | | Business | | Services | | Services(1) | | Card(2) | | Insurance | | Other | | Elimination | | Adjustments | | Transactions(3) | | Total | |
| | | (In millions of won) | | | | | | | | | | | | | (In millions of Won) | | | | | | | | | | | |
| |
| Net interest income | | | 2,325,347 | | | | 863,141 | | | | (305,376 | ) | | | 783,127 | | | | 137,274 | | | | 2,804,150 | | | | 292,659 | | | | 92,810 | | | | 6,993,132 | | | | (1,505,824 | ) | | | (316,952 | ) | | | 5,170,356 | | | W | 2,245,178 | | | W | 876,033 | | | W | 336,678 | | | W | 242,709 | | | W | 147,002 | | | W | 2,853,957 | | | W | 419,116 | | | W | (663,136 | ) | | W | 6,457,537 | | | W | (1,217,995 | ) | | W | (18,213 | ) | | W | 5,221,329 | |
| Non-interest income | | | 970,193 | | | | 266,674 | | | | 5,516,567 | | | | 1,799,998 | | | | 1,803,377 | | | | 197,496 | | | | 2,401,362 | | | | 3,414,529 | | | | 16,370,196 | | | | (11,191,580 | ) | | | (440,410 | ) | | | 4,738,206 | | | | 669,676 | | | | 968,840 | | | | 27,913,513 | | | | 2,465,668 | | | | 1,323,276 | | | | 280,041 | | | | 2,997,633 | | | | 3,957,527 | | | | 40,576,174 | | | | (34,322,618 | ) | | | (568,815 | ) | | | 5,684,741 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total revenues | | | 3,295,540 | | | | 1,129,815 | | | | 5,211,191 | | | | 2,583,125 | | | | 1,940,651 | | | | 3,001,646 | | | | 2,694,021 | | | | 3,507,339 | | | | 23,363,328 | | | | (12,697,404 | ) | | | (757,362 | ) | | | 9,908,562 | | | | 2,914,854 | | | | 1,844,873 | | | | 28,250,191 | | | | 2,708,377 | | | | 1,470,278 | | | | 3,133,998 | | | | 3,416,749 | | | | 3,294,391 | | | | 47,033,711 | | | | (35,540,613 | ) | | | (587,028 | ) | | | 10,906,070 | |
| Provision(reversal) for credit losses | | | 223,403 | | | | 136,542 | | | | 37,535 | | | | 32,641 | | | | 6,960 | | | | 301,406 | | | | 1,234 | | | | (26,475 | ) | | | 713,246 | | | | (696,559 | ) | | | 63,872 | | | | 80,559 | | | | 558,072 | | | | 465,414 | | | | 50,960 | | | | 132,530 | | | | 135,192 | | | | 104,910 | | | | 12,453 | | | | 131,996 | | | | 1,591,527 | | | | 635,409 | | | | (25,772 | ) | | | 2,201,164 | |
| Non-interest expense | | | 1,279,478 | | | | 463,689 | | | | 5,867,639 | | | | 1,061,054 | | | | 1,666,125 | | | | 1,539,765 | | | | 2,501,624 | | | | 626,413 | | | | 15,005,787 | | | | (8,756,699 | ) | | | (221,486 | ) | | | 6,027,602 | | | | 1,750,268 | | | | 1,216,338 | | | | 28,057,444 | | | | 2,225,703 | | | | 1,256,340 | | | | 1,887,058 | | | | 3,166,479 | | | | 759,233 | | | | 40,318,863 | | | | (33,403,844 | ) | | | (491,185 | ) | | | 6,423,834 | |
| Depreciation and amortization | | | 112,157 | | | | 4,331 | | | | 1,404 | | | | 144,887 | | | | 14,869 | | | | 77,981 | | | | 7,795 | | | | 29,729 | | | | 393,153 | | | | 430,483 | | | | (11,291 | ) | | | 812,345 | | | | 79,463 | | | | 7,010 | | | | 1,270 | | | | 107,614 | | | | 21,718 | | | | 41,476 | | | | 13,442 | | | | 46,906 | | | | 318,899 | | | | 394,622 | | | | — | | | | 713,521 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) before tax | | | 1,680,502 | | | | 525,253 | | | | (695,387 | ) | | | 1,344,543 | | | | 252,697 | | | | 1,082,494 | | | | 183,368 | | | | 2,877,672 | | | | 7,251,142 | | | | (3,674,629 | ) | | | 588,457 | | | | 2,988,056 | | | | 527,051 | | | | 156,111 | | | | 140,517 | | | | 242,530 | | | | 57,028 | | | | 1,100,554 | | | | 224,375 | | | | 2,356,256 | | | | 4,804,422 | | | | (3,166,800 | ) | | | (70,071 | ) | | | 1,567,551 | |
| Income tax expense (benefit) | | | 473,033 | | | | 147,850 | | | | (195,740 | ) | | | 378,466 | | | | 75,920 | | | | 194,420 | | | | 51,335 | | | | (545,223 | ) | | | 580,061 | | | | 517,298 | | | | (38,915 | ) | | | 1,058,444 | | | | 156,969 | | | | 46,494 | | | | 41,850 | | | | 72,232 | | | | 12,844 | | | | 243,799 | | | | 50,402 | | | | 26,264 | | | | 650,854 | | | | (181,802 | ) | | | (45,026 | ) | | | 424,026 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | | 1,207,469 | | | | 377,403 | | | | (499,647 | ) | | | 966,077 | | | | 176,777 | | | | 888,074 | | | | 132,033 | | | | 3,422,895 | | | | 6,671,081 | | | | (4,191,927 | ) | | | (549,542 | ) | | | 1,929,612 | | |
| Net income attributable to noncontrolling interest | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 9,673 | | | | 9,673 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) attributable to the Group | | | | 370,082 | | | | 109,617 | | | | 98,667 | | | | 170,298 | | | | 44,184 | | | | 856,755 | | | | 173,973 | | | | 2,329,992 | | | | 4,153,568 | | | | (2,984,998 | ) | | | (34,718 | ) | | | 1,133,852 | |
| US GAAP adjustments | | | 114,637 | | | | 227,325 | | | | (1,059,718 | ) | | | (36,445 | ) | | | (30,913 | ) | | | 55,501 | | | | (138,793 | ) | | | (3,323,521 | ) | | | (4,191,927 | ) | | | — | | | | — | | | | — | | | | (90,671 | ) | | | (250,439 | ) | | | 247,069 | | | | 11,610 | | | | 39,585 | | | | (216,509 | ) | | | (90,485 | ) | | | (2,635,158 | ) | | | (2,984,998 | ) | | | — | | | | — | | | | — | |
| Intersegment transactions | | | (1,671 | ) | | | (359,599 | ) | | | 5,144 | | | | (644 | ) | | | 14,860 | | | | (204,560 | ) | | | 50,391 | | | | (53,463 | ) | | | (549,542 | ) | | | — | | | | — | | | | — | | | | 15,684 | | | | (327,712 | ) | | | 59,836 | | | | (39,297 | ) | | | 14,447 | | | | 284,414 | | | | 33,881 | | | | (75,971 | ) | | | (34,718 | ) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated net income (loss) | | | 1,320,435 | | | | 245,129 | | | | (1,554,221 | ) | | | 928,988 | | | | 160,724 | | | | 739,015 | | | | 43,631 | | | | 45,911 | | | | 1,929,612 | | | | — | | | | — | | | | 1,929,612 | | |
| Net income (loss) attributable to the Group | | | W | 295,095 | | | W | (468,534 | ) | | W | 405,572 | | | W | 142,611 | | | W | 98,216 | | | W | 924,660 | | | W | 117,369 | | | W | (381,137 | ) | | W | 1,133,852 | | | W | — | | | W | — | | | W | 1,133,852 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segments’ total assets | | | 76,218,864 | | | | 38,958,864 | | | | 30,535,586 | | | | 29,392,573 | | | | 6,685,978 | | | | 16,880,921 | | | | 7,410,857 | | | | 45,991,211 | | | | 252,074,854 | | | | (11,470,798 | ) | | | (18,982,152 | ) | | | 221,621,904 | | | W | 93,012,758 | | | W | 37,373,660 | | | W | 40,836,217 | | | W | 31,014,717 | | | W | 7,551,810 | | | W | 17,556,352 | | | W | 10,054,742 | | | W | 50,983,388 | | | W | 288,383,644 | | | W | (16,355,259 | ) | | W | (17,118,469 | ) | | W | 254,909,916 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Notes:Note:
| | |
| (1) | | Securities brokerage business is conducted through Shinhan Investment Corp. (formerly Good Morning Shinhan Securities.Securities). |
| |
| (2) | | Credit card business is conducted through Shinhan Card. |
| |
| (3) | | Includes eliminations for consolidation, intersegment transactions and certain differences in classification under management reporting system. |
F-77F-95
Shinhan Financial Group Co.,Co, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The Group offers a variety of asset management and administrative services under trust arrangements in accordance with the Korean Trust Law and the Korean Trust Business Act.FSCMA. In a trust management capacity, the Group is required to exercise due care in managing and preserving the trust assets. The trust accounts managed by the Group are classified into performance-based trusts and guaranteed trusts in terms of the nature of the trusts, and the guaranteed trusts consist of Guaranteed Principal Money Trusts and Guaranteed Fixed Rate Money Trusts.
The Guaranteed Principal Money Trusts require the Group to guarantee the return of the principal amount invested at the termination of a fixed term deposit. Additionally, the Group guarantees a specified rate of return on the principal amount invested in Guaranteed Fixed Rate Money Trusts. Based on the Group’s analysis of potential risk and reward generated from the guaranteed trusts, the Guaranteed Fixed Rate Money Trusts were consolidated in the Group’s consolidated financial statements in accordance withASC 810-10 (formerly FIN 46R.46(R)). See Note 3536 for further discussion on the consolidation scope of the trust accounts.
With respect to managing the trust accounts, the Group charges investment management fees on the Guaranteed Principal Money Trusts and other performance based trusts, and receives commission income, including penalty charges for early withdrawal of fixed term deposits.
| |
35.36. | Securitizations and Variable Interest Entities |
The Group primarily securitizes sells and services corporate loans, credit card receivables, mortgage and student loans. In certain situations, the Group also provides liquidity guarantees to investors in the form of beneficial interests and standby letters of credit as discussed in Note 30.31.
The Group recognized net gain(loss)gain (loss) of W94,4118,099 million, W(5,018)1,196 million, and W8,09942,878 million in 2005, 2006,2007, 2008, and 2007,2009, respectively, related to securitizations and sale of loans in which the Group has surrendered control.
The Group may, in the normal course of its business, provide various products and services to various entities which may be deemed to be variable interest entities such as asset-backed securitization of performingand/or non-performing loans, various investment funds, guaranteed trusts and SPEs created for structured financing. The Group may provide liquidity facilities, may be a party to derivative contracts with VIEs, may provide loss enhancement in the form of credit and other guarantees to the VIEs, may be the investment manager and may also have an ownership interest or other investment in certain VIEs. In general, the investors in the obligations of consolidated VIEs have recourse only to the assets of those VIEs and do not have recourse to the Group, except where the Group has provided a guarantee to the investors or is the counterparty to a derivative transaction involving the VIE.
The following table presentsOn December 31, 2008, the carrying amountsGroup adoptedASC 810-10 and classificationASC 860-10 (formerly FSPFAS 140-4 and FIN 46(R)-8) which requires additional disclosures about its involvement with consolidated and unconsolidated VIEs and expanded the population of consolidated assetsVIEs to be disclosed. For example, an unconsolidated vehicle that are pledged as collateral for VIE obligations, including VIEs wherewas sponsored by the Group is now included in the primary beneficiary:
| | | | | | | | | |
| | | 2006 | | | 2007 | |
| | | (In millions of won) | |
| |
| Loans | | W | 1,922,217 | | | W | 6,929,982 | |
| Securities | | | 4,715,195 | | | | 5,238,272 | |
| Other assets | | | 470,747 | | | | 671,654 | |
| | | | | | | | | |
| | | W | 7,108,159 | | | W | 12,839,908 | |
| | | | | | | | | |
disclosures because the Group has a variable interest in the vehicle, even though that interest is not a significant variable interest. The following disclosures incorporate these requirements.
OfThe Group determined that it was the W7,108,159 million and W12,839,908 millionprimary beneficiary of total assets of VIEs consolidated bya VIE if the Group at December 31, 2006 and 2007, respectively, W4,499,357 million and W10,952,446 million represent structured transactions where the Group packages and securitizes assets or the Group provides credit enhancement or liquidity guarantees; W2,550,573 million and W1,873,723 million represent investment trusts that holds investments on
F-78
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
behalfabsorbs a majority of the Group; W58,229 millionexpected losses of the VIE, receives a majority of the expected residual returns of the VIE, or both. The Group used qualitative and W13,739 million representquantitative assessment to determine whether it was the Guaranteed Fixed Rate Money Trusts constructed by the Group.primary beneficiary of a VIE.
The Group consolidated its Guaranteed Fixed Rate Money Trusts because the Group was deemed to be the primary beneficiary. These trusts were constructed by the Group and the Groupit would absorb the majority of the expected losses of the trusts by providing a guarantee of the principal and a fixed rate of return on the principal amount in trust. The Group did not consolidate its Guaranteed Principal Money Trusts or performance basedperformance-based trusts because the Group was not the primary beneficiary.
F-96
Shinhan Financial Group Co, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
There was no change in consolidation scope for VIEs during the period presented except for the following cases: VIEs included for the first time due to a transaction occurred during the period, and VIEs excluded from the consolidation scope due to disposals or lapse of contracts. Also, the Group has not provided any financial or other support during the periods presented to the variable interest entity that it was not previously contractually required to provide.
The following table presents the carrying amounts and classification of assets and liabilities of VIEs which have been consolidated by the Group at December 31:
| | | | | | | | | | | | | | | | | |
| | | Asset-Backed
| | | Investment
| | | Guaranteed Fixed
| | | | |
| | | Securitizations | | | Trusts | | | Rate Money Trusts | | | Total | |
| | | (In millions of Won) | |
| |
December 31, 2008 | | | | | | | | | | | | | | | | |
| Consolidated Assets | | | | | | | | | | | | | | | | |
| Loans | | W | 7,359,077 | | | W | 43,720 | | | W | 599 | | | W | 7,403,396 | |
| Securities | | | 2,627,863 | | | | 1,680,910 | | | | 1,787 | | | | 4,310,560 | |
| Other assets | | | 500,497 | | | | 191,689 | | | | 3,483 | | | | 695,669 | |
| | | | | | | | | | | | | | | | | |
| Total Assets(1) | | W | 10,487,437 | | | W | 1,916,319 | | | W | 5,869 | | | W | 12,409,625 | |
| | | | | | | | | | | | | | | | | |
| Consolidated Liabilities | | | | | | | | | | | | | | | | |
| Total Liabilities(1) | | W | 5,155,354 | | | W | 6,035 | | | W | 6,991 | | | W | 5,168,380 | |
| | | | | | | | | | | | | | | | | |
December 31, 2009 | | | | | | | | | | | | | | | | |
| Consolidated Assets | | | | | | | | | | | | | | | | |
| Loans | | W | 5,857,865 | | | W | 99,124 | | | W | 141 | | | W | 5,957,130 | |
| Securities | | | 1,939,535 | | | | 1,606,396 | | | | 1,368 | | | | 3,547,299 | |
| Other assets | | | 422,529 | | | | 371,661 | | | | 1,656 | | | | 795,846 | |
| | | | | | | | | | | | | | | | | |
| Total Assets(1) | | W | 8,219,929 | | | W | 2,077,181 | | | W | 3,165 | | | W | 10,300,275 | |
| | | | | | | | | | | | | | | | | |
| Consolidated Liabilities | | | | | | | | | | | | | | | | |
| Total Liabilities(1) | | W | 4,746,732 | | | W | 359,076 | | | W | 5,527 | | | W | 5,111,335 | |
| | | | | | | | | | | | | | | | | |
Note:
| | |
| (1) | | Total assets and total liabilities of consolidated VIEs are reported net of intercompany balances that have been eliminated in consolidation. |
In addition to the VIEs that are consolidated in accordance withASC 810-10 (formerly FIN 46R,46(R)), the Group has significant variable interests in certain other VIEs that are not consolidated because the Group is not the primary beneficiary. These VIEs are structured by other third parties. In all cases, the Group does not absorb the majority of the VIEs’ expected losses nor does it receive a majority of the VIEs’ expected residual returns, or both. These VIEs facilitate client transactions, and the Group provides the VIEs with administration services and liquidity. The transactions with these VIEs are conducted at an arm’s length, and individual credit decisions are based upon the analysis of the specific VIE, taking into consideration the quality of the underlying assets. The Group records and reports these transactions with the VIEs similar to any other third party transactions.
F-97
Shinhan Financial Group Co, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table presents the aggregated total assets of significant variable interest entitiesVIEs where the Group holds a significant variable interest or is a sponsor that holds a variable interest in a VIE, but doesis not consolidate,the VIE’s primary beneficiary, and the Group’s maximum exposure to loss as a result of its involvement with these entitiesthe VIEs, and the carrying amount and classification of the assets and liabilities in the Group’s balance sheets that relate to the Group’s variable interest in the VIEs at December 31:
| | | | | | | | | | | | | | | | | |
| | | 2006 | | | 2007 | |
| | | Total
| | | Maximum
| | | Total
| | | Maximum
| |
| | | Assets | | | Exposure | | | Assets | | | Exposure | |
| | | (In millions of won) | |
| |
| SPEs created for structured financing | | W | 26,810,740 | | | W | 8,784,815 | | | W | 21,193,107 | | | W | 5,494,596 | |
| Credit enhancement provided to SPEs | | | 12,959,520 | | | | 4,402,508 | | | | 39,683,891 | | | | 13,176,548 | |
| Collateralized loan obligation | | | 1,837 | | | | — | | | | — | | | | — | |
| Guaranteed Principal Money Trusts & Performance Based Trusts | | | 2,603,772 | | | | 2,505,600 | | | | 3,672,727 | | | | 3,543,665 | |
| | | | | | | | | | | | | | | | | |
| Total | | W | 42,375,869 | | | W | 15,692,923 | | | W | 64,549,725 | | | W | 22,214,809 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Guaranteed
| | | | | | | |
| | | | | | | | | | | | Principal Money
| | | | | | | |
| | | | | | SPEs Created for
| | | | | | Trusts &
| | | | | | | |
| | | Asset-Backed
| | | Structured
| | | Investment
| | | Performance
| | | Other
| | | | |
| | | Securitizations | | | Financing | | | Trusts | | | Based Trusts | | | Vehicles | | | Total | |
| | | | | | | | | (In millions of Won) | | | | | | | |
| |
December 31, 2008 | | | | | | | | | | | | | | | | | | | | | | | | |
| Maximum exposure to loss(1) | | W | 4,757,476 | | | W | 12,014,374 | | | W | 1,495,887 | | | W | 3,510,352 | | | W | 1,609,127 | | | W | 23,387,216 | |
| Total assets of VIEs | | | 16,611,636 | | | | 27,685,011 | | | | 7,744,614 | | | | 3,687,839 | | | | 12,522,675 | | | | 68,251,775 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| On-Balance Sheet Assets | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans | | W | 1,821,505 | | | W | 6,536,367 | | | W | — | | | W | — | | | W | 141,078 | | | W | 8,498,950 | |
| Securities | | | 1,218,770 | | | | 160,582 | | | | 833,148 | | | | — | | | | 200,680 | | | | 2,413,180 | |
| Other assets | | | 27,907 | | | | 4,230 | | | | 53 | | | | — | | | | 663 | | | | 32,853 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | W | 3,068,182 | | | W | 6,701,179 | | | W | 833,201 | | | W | — | | | W | 342,421 | | | W | 10,944,983 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| On-Balance Sheet Liabilities | | W | 17,525 | | | W | 4,998 | | | W | 32 | | | W | — | | | W | 2,241 | | | W | 24,796 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2009 | | | | | | | | | | | | | | | | | | | | | | | | |
| Maximum exposure to loss(1) | | W | 5,684,514 | | | W | 9,179,376 | | | W | 803,815 | | | W | 3,480,492 | | | W | 443,435 | | | W | 19,591,632 | |
| Total assets of VIEs | | | 16,629,900 | | | | 33,698,441 | | | | 8,796,449 | | | | 3,700,384 | | | | 11,750,970 | | | | 74,576,144 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| On-Balance Sheet Assets | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans | | W | 1,597,388 | | | W | 7,084,670 | | | W | — | | | W | — | | | W | 254,618 | | | W | 8,936,676 | |
| Securities | | | 601,086 | | | | 185,236 | | | | 724,527 | | | | — | | | | 72,006 | | | | 1,582,855 | |
| Other assets | | | 75,501 | | | | 1,490 | | | | — | | | | — | | | | 1,447 | | | | 78,438 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | W | 2,273,975 | | | W | 7,271,396 | | | W | 724,527 | | | W | — | | | W | 328,071 | | | W | 10,597,969 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| On-Balance Sheet Liabilities | | W | 3,883 | | | W | 516 | | | W | — | | | W | — | | | W | 873 | | | W | 5,272 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
As most of these
Note:
| | |
| (1) | | The Group’s maximum exposure to loss often differs from the carrying amount of assets and liabilities in Group’s balance sheet that relate to the Group’s variable interest in the VIEs. The maximum exposure to loss is dependent on the nature of the Group’s variable interest in the VIEs and is limited to the notional amounts of certain liquidity facilities, other credit support, derivatives and investments the Group has made in the VIEs. |
As these maximum exposures to loss expire without being drawn, the total variable interest in these VIEs is not, in the Group’s view, representative of the Group’s actual future funding requirement.
F-79F-98
Shinhan Financial Group Co.,Co, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| |
36.37. | Other Comprehensive Income |
The following table sets forth the movements of other comprehensive income, net of tax:tax benefit (expense):
| | | | | | | | | | | | | |
| | | Foreign
| | | Net Unrealized
| | | Accumulated
| |
| | | Currency
| | | Gain on
| | | Other
| |
| | | Translation
| | | Available-for-
| | | Comprehensive
| |
| | | Adjustments | | | Sale Securities | | | Income | |
| | | (In millions of won) | |
| |
Balance at January 1, 2005 | | W | (12,423 | ) | | W | 170,296 | | | W | 157,873 | |
| Foreign currency translation adjustment, net of tax | | | | | | | | | | | | |
effect of W4,561 | | | (12,024 | ) | | | — | | | | (12,024 | ) |
Unrealized net losses on available-for-sale securities, net of tax effect of W81,975 | | | — | | | | (220,975 | ) | | | (220,975 | ) |
Reclassifications from other comprehensive income to net income, net of tax effect W9,510 | | | — | | | | (25,071 | ) | | | (25,071 | ) |
| | | | | | | | | | | | | |
Balance at December 31, 2005 | | | (24,447 | ) | | | (75,750 | ) | | | (100,197 | ) |
Foreign currency translation adjustment, net of tax effect of W5,050 | | | (13,315 | ) | | | — | | | | (13,315 | ) |
Unrealized net gains on available-for-sale securities, net of tax effect of W32,147 | | | — | | | | 86,961 | | | | 86,961 | |
Reclassifications from other comprehensive income to net income, net of tax effect W63,510 | | | — | | | | 167,434 | | | | 167,434 | |
| | | | | | | | | | | | | |
Balance at December 31, 2006 | | | (37,762 | ) | | | 178,645 | | | | 140,883 | |
Cumulative adjustment for accounting change, net of tax effect of W104 | | | — | | | | 274 | | | | 274 | |
Foreign currency translation adjustment, net of tax effect of W3,018 | | | 7,958 | | | | — | | | | 7,958 | |
Unrealized net gains on available-for-sale securities, net of tax effect of W263,852 | | | — | | | | 696,471 | | | | 696,471 | |
Reclassifications from other comprehensive income to net income, net of tax effect W31,629 | | | — | | | | (83,386 | ) | | | (83,386 | ) |
| | | | | | | | | | | | | |
Balance at December 31, 2007 | | W | (29,804 | ) | | W | 792,004 | | | W | 762,200 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Foreign
| | | Net Unrealized
| | | Accumulated
| |
| | | Currency
| | | Gain on
| | | Other
| |
| | | Translation
| | | Available-for-
| | | Comprehensive
| |
| | | Adjustments | | | Sale Securities | | | Income | |
| | | (In millions of Won) | |
| |
Balance at January 1, 2007 | | W | (37,762 | ) | | W | 178,645 | | | W | 140,883 | |
Cumulative adjustment for accounting change, net of tax effect of W(104) | | | — | | | | 274 | | | | 274 | |
Foreign currency translation adjustment, net of tax effect of W(3,018) | | | 7,958 | | | | — | | | | 7,958 | |
Unrealized net gains onavailable-for-sale securities, net of tax effect of W(263,852) | | | — | | | | 696,471 | | | | 696,471 | |
Reclassifications from other comprehensive income to net income, net of tax effect W31,629 | | | — | | | | (83,386 | ) | | | (83,386 | ) |
| | | | | | | | | | | | | |
Balance at December 31, 2007 | | | (29,804 | ) | | | 792,004 | | | | 762,200 | |
Foreign currency translation adjustment, net of tax effect of W(52,607) | | | 142,257 | | | | — | | | | 142,257 | |
Unrealized net gains onavailable-for-sale securities, net of tax effect of W79,924 | | | — | | | | (214,571 | ) | | | (214,571 | ) |
Reclassifications from other comprehensive income to net income, net of tax effect W33,781 | | | — | | | | (94,405 | ) | | | (94,405 | ) |
| | | | | | | | | | | | | |
Balance at December 31, 2008 | | | 112,453 | | | | 483,028 | | | | 595,481 | |
Cumulative adjustment for accounting change, net of tax effect of W2,469 | | | — | | | | (8,752 | ) | | | (8,752 | ) |
Foreign currency translation adjustment, net of tax effect of W44,997 | | | (67,906 | ) | | | — | | | | (67,906 | ) |
Unrealized net gains onavailable-for-sale securities, net of tax effect of W(63,486) | | | — | | | | 580,596 | | | | 580,596 | |
Changes in the Group’s ownership interest in subsidiary, net of tax effect of W(56) | | | — | | | | 200 | | | | 200 | |
Reclassifications from other comprehensive income to net income, net of tax effect of W49,540 | | | — | | | | (130,606 | ) | | | (130,606 | ) |
| | | | | | | | | | | | | |
Balance at December 31, 2009 | | W | 44,547 | | | W | 924,466 | | | W | 969,013 | |
| | | | | | | | | | | | | |
| |
37.38. | Shinhan Financial Group Co., Ltd. |
Shinhan Financial Group Co., Ltd. (the Parent Company) was incorporated on September 1, 2001 as the holding company for Shinhan Bank and other subsidiaries. The Parent Company coordinates the activities of its various subsidiaries to offer a comprehensive line of financial services to its customers, and serves as the primary source of funding for its non-banking subsidiaries including Shinhan Card, Shinhan Investment Corp. (formerly Good Morning Shinhan Securities,Securities), Shinhan Capital and Shinhan Card.Capital.
Distributions of retained earnings of Shinhan Bank and Jeju Bank are restricted in order to meet the minimum capital ratio requirements under the FSC regulations. Also, retained earnings of Shinhan Bank and other subsidiaries of the Parent Company are restricted in accordance with the Bank Act of Korea, the Korean Commercial Law and other laws.
F-99
Shinhan Financial Group Co, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
In certain instances, the Parent Company provided guarantees to other financial institutions that provided funding to its subsidiaries. Guarantees to such other financial institutions are W57,000 million and W3,500 million at December 31, 2005 and 2006 respectively.
F-80
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table presents the cash dividends paid to the Parent Company by its subsidiaries and affiliates for the three years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2006 | | 2007 | | | 2007 | | 2008 | | 2009 | |
| | | (In millions of won) | | | (In millions of Won) | |
| |
| Cash dividends paid by: | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated subsidiaries | | W | 379,210 | | | W | 465,525 | | | W | 489,990 | | | W | 489,990 | | | W | 1,931,865 | | | W | 136,241 | |
| Equity method investees | | | 4,846 | | | | 5,616 | | | | 4,915 | | | | 4,915 | | | | 12,010 | | | | 25,210 | |
| | | | | | | | | | | | | | | |
| | | W | 384,056 | | | W | 471,141 | | | W | 494,905 | | | W | 494,905 | | | W | 1,943,875 | | | W | 161,451 | |
| | | | | | | | | | | | | | | |
The Parent Company’s condensed balance sheets as of December 31, 20062008 and 2007,2009, and the related condensed statements of income and cash flows for each of three-year period ended December 31, 2005, 20062007, 2008 and 20072009 are as follows:
CONDENSED BALANCE SHEETS
| | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | | 2008 | | 2009 | |
| | | (In millions of Korean won) | | | (In millions of Korean Won) | |
| |
Assets | | | | | | | | | | | | | | | | |
| Deposits with banking subsidiary | | W | 468,561 | | | W | 131,994 | | | W | 670,815 | | | W | 429,825 | |
| Advances to, and receivables from, subsidiaries: | | | | | | | | | |
| Banking subsidiaries | | | — | | | | — | | |
| Receivables from subsidiaries: | | | | | | | | | |
| Non-banking subsidiaries | | | 1,185,072 | | | | 1,415,000 | | | | 2,410,000 | | | | 1,575,000 | |
| Investment (at equity) in subsidiaries: | | | | | | | | | | | | | | | | |
| Banking subsidiaries | | | 9,857,681 | | | | 11,799,398 | | | | 12,693,260 | | | | 13,674,187 | |
| Non-banking subsidiaries | | | 2,294,576 | | | | 11,654,325 | | | | 10,353,528 | | | | 10,971,879 | |
| Premises and equipment | | | 1,688 | | | | 1,545 | | | | 2,237 | | | | 3,685 | |
| Other assets | | | 684,864 | | | | 173,997 | | | | 206,928 | | | | 160,843 | |
| | | | | | | | | | | |
| Total assets | | W | 14,492,442 | | | W | 25,176,259 | | | W | 26,336,768 | | | W | 26,815,419 | |
| | | | | | | |
| | | | | | | |
Liabilities and stockholders’ equity | | | | | | | | | | | | | | | | |
| Short-term debt | | W | 120,000 | | | W | 1,255,000 | | | W | 1,155,300 | | | W | 674,000 | |
| Long-term debt | | | 4,483,724 | | | | 6,888,270 | | | | 7,411,010 | | | | 5,767,797 | |
| Accrued expenses and other liabilities | | | 86,372 | | | | 122,897 | | | | 118,390 | | | | 155,423 | |
| | | | | | | | | | | |
| Total liabilities | | W | 4,690,096 | | | W | 8,266,167 | | | W | 8,684,700 | | | W | 6,597,220 | |
| | | | | | | | | | | |
| Stockholders’ equity | | | 9,802,346 | | | | 16,910,092 | | | | 17,652,068 | | | | 20,218,199 | |
| | | | | | | | | | | |
| Total liabilities and stockholders’ equity | | W | 14,492,442 | | | W | 25,176,259 | | | W | 26,336,768 | | | W | 26,815,419 | |
| | | | | | | | | | | |
F-81F-100
Shinhan Financial Group Co.,Co, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
CONDENSED STATEMENTS OF INCOME
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2006 | | 2007 | | | 2007 | | 2008 | | 2009 | |
| | | (In millions of Korean won) | | | (In millions of Korean Won) | |
| |
Income | | | | | | | | | | | | | | | | | | | | | | | | |
| Dividends from banking subsidiaries | | W | 367,210 | | | W | 428,412 | | | W | 301,123 | | | W | 301,123 | | | W | 406,516 | | | W | 11,099 | |
| Dividends from non banking subsidiaries | | | 16,846 | | | | 42,729 | | | | 193,782 | | | | 193,782 | | | | 1,537,359 | | | | 150,352 | |
| Interest income from banking subsidiaries | | | 7,189 | | | | 3,977 | | | | — | | | | — | | | | 7,329 | | | | 3,725 | |
| Interest income from non banking subsidiaries | | | 88,622 | | | | 75,173 | | | | 63,762 | | | | 63,762 | | | | 116,914 | | | | 119,666 | |
| Other income | | | 5,153 | | | | 19,189 | | | | 54,408 | | | | 54,408 | | | | 148,008 | | | | 203,230 | |
| | | | | | | | | | | | | | | |
| Total income | | | 485,020 | | | | 569,480 | | | | 613,075 | | | | 613,075 | | | | 2,216,126 | | | | 488,072 | |
Expenses | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense | | | 240,609 | | | | 239,115 | | | | 401,342 | | | | 401,342 | | | | 442,683 | | | | 443,816 | |
| Salaries and employee benefits | | | 23,163 | | | | 15,641 | | | | 33,720 | | | | 33,720 | | | | 4,813 | | | | 26,975 | |
| Other expense | | | 14,804 | | | | 36,154 | | | | 23,042 | | | | 23,042 | | | | 44,445 | | | | 57,996 | |
| | | | | | | | | | | | | | | |
| Total expenses | | | 278,576 | | | | 290,910 | | | | 458,104 | | | | 458,104 | | | | 491,941 | | | | 528,787 | |
| | | | | | | | | | | | | | | |
Income before income tax expense (benefit) and undistributed net income of subsidiaries | | | 206,444 | | | | 278,570 | | | | 154,971 | | |
| Income tax expense (benefit) | | | (2,879 | ) | | | (12,610 | ) | | | 33,235 | | |
Income (Loss) before income tax expense and undistributed net income (loss) of subsidiaries | | | | 154,971 | | | | 1,724,185 | | | | (40,715 | ) |
| Income tax expense | | | | 33,235 | | | | 14,560 | | | | 26,756 | |
| | | | | | | | | | | | | | | |
Income before undistributed net income of subsidiaries | | | 209,323 | | | | 291,180 | | | | 121,736 | | |
| Equity in undistributed net income of subsidiaries: | | | | | | | | | | | | | |
Income (loss) before undistributed net income (loss) of subsidiaries | | | | 121,736 | | | | 1,709,625 | | | | (67,471 | ) |
| Equity in undistributed net income (loss) of subsidiaries: | | | | | | | | | | | | | |
| Banking subsidiaries | | | 1,511,808 | | | | 925,639 | | | | 967,433 | | | | 967,433 | | | | 261,237 | | | | 470,423 | |
| Non-banking subsidiaries | | | 208,722 | | | | 338,665 | | | | 840,443 | | | | 840,443 | | | | (490,163 | ) | | | 730,900 | |
| | | | | | | | | | | | | | | |
Net income | | W | 1,929,853 | | | W | 1,555,484 | | | W | 1,929,612 | | | W | 1,929,612 | | | W | 1,480,699 | | | W | 1,133,852 | |
| | | | | | | | | | | | | | | |
F-82F-101
Shinhan Financial Group Co.,Co, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | |
| | | 2005 | | | 2006 | | | 2007 | |
| | | (In millions of Korean won) | |
| |
Cash flows from operating activities | | | | | | | | | | | | |
| Net income | | W | 1,929,853 | | | W | 1,555,484 | | | W | 1,929,612 | |
| Less : Net income of subsidiaries | | | (2,104,586 | ) | | | (1,735,446 | ) | | | (2,302,781 | ) |
| | | | | | | | | | | | | |
| Parent Company net loss | | | (174,733 | ) | | | (179,962 | ) | | | (373,169 | ) |
| Depreciation on premises and equipment | | | 767 | | | | 857 | | | | 714 | |
| Grant of stock options | | | 7,087 | | | | (1,872 | ) | | | — | |
| Cash dividends from subsidiaries and equity method investees | | | 384,056 | | | | 471,141 | | | | 494,905 | |
| Interest expense | | | 29,487 | | | | 28,675 | | | | 29,088 | |
| Unrealized foreign exchange gain | | | (2,156 | ) | | | (5,838 | ) | | | — | |
| Unrealized foreign exchange loss | | | 2,156 | | | | 5,838 | | | | — | |
| Other assets, net (excluding assets for LG Card acquisition) | | | (34,905 | ) | | | (6,463 | ) | | | 27,131 | |
| Accrued expense and other liabilities, net | | | (24,613 | ) | | | (38,498 | ) | | | 35,480 | |
| | | | | | | | | | | | | |
| Net cash provided by used in operating activities | | | 187,146 | | | | 273,878 | | | | 214,149 | |
| | | | | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | | | |
| Repayments from subsidiaries | | | 272,543 | | | | 293,140 | | | | (229,928 | ) |
| Purchases of subsidiaries | | | (368,104 | ) | | | — | | | | (7,215,876 | ) |
| Disposition of investment in subsidiaries | | | 2,912 | | | | — | | | | — | |
| Net change in premises and equipment | | | — | | | | (87 | ) | | | (556 | ) |
| Increase in other assets (relating to LG Card acquisition) | | | — | | | | (519,318 | ) | | | (16,190 | ) |
| | | | | | | | | | | | | |
| Net cash used in investing activities | | | (92,649 | ) | | | (226,265 | ) | | | (7,462,550 | ) |
| | | | | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | | | |
| Net change in short-term debt | | | 35,188 | | | | 34,812 | | | | 1,135,000 | |
| Proceeds from issuance of long-term debt | | | 780,000 | | | | 2,300,000 | | | | 3,350,000 | |
| Repayments of long-term debt | | | (635,600 | ) | | | (1,700,131 | ) | | | (972,362 | ) |
| Proceed from the issuance of stock | | | — | | | | — | | | | 3,736,238 | |
| Net change in treasury stock | | | 62 | | | | (29 | ) | | | (48 | ) |
| Cash dividends paid | | | (240,918 | ) | | | (278,078 | ) | | | (336,994 | ) |
| | | | | | | | | | | | | |
| Net cash provided by (used in) financing activities | | | (61,268 | ) | | | 356,574 | | | | 6,911,834 | |
| | | | | | | | | | | | | |
Net increase(decrease) in cash and due from banks | | | 33,229 | | | | 404,187 | | | | (336,567 | ) |
Cash and due from banks, beginning of the year | | | 31,145 | | | | 64,374 | | | | 468,561 | |
| | | | | | | | | | | | | |
Cash and due from banks, end of the year | | W | 64,374 | | | W | 468,561 | | | W | 131,994 | |
| | | | | | | | | | | | | |
Cash paid for interest | | W | 211,122 | | | W | 210,441 | | | W | 375,573 | |
F-83
Shinhan Financial Group Co., Ltd. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Acquisition and Incorporation of Subsidiaries in 2008
| | | | | | | | | | | | | |
| | | 2007 | | | 2008 | | | 2009 | |
| | | (In millions of Won) | |
| |
Cash flows from operating activities | | | | | | | | | | | | |
| Net income | | W | 1,929,612 | | | W | 1,480,699 | | | W | 1,133,852 | |
| Less: Net income of subsidiaries | | | (2,302,781 | ) | | | (1,714,949 | ) | | | (1,362,774 | ) |
| | | | | | | | | | | | | |
| Parent Company net loss | | | (373,169 | ) | | | (234,250 | ) | | | (228,922 | ) |
| Depreciation on premises and equipment | | | 714 | | | | 811 | | | | 893 | |
| Cash dividends from subsidiaries and equity method investees | | | 494,905 | | | | 1,943,875 | | | | 161,451 | |
| Other expense (income) | | | 29,088 | | | | 27,208 | | | | (27,002 | ) |
| Unrealized foreign exchange gain | | | — | | | | — | | | | (10,818 | ) |
| Loss on valuation of trading derivatives | | | — | | | | — | | | | 14,224 | |
| Other assets, net | | | 27,131 | | | | 8,427 | | | | 57,923 | |
| Accrued expense and other liabilities, net | | | 35,480 | | | | (5,062 | ) | | | 21,343 | |
| | | | | | | | | | | | | |
| Net cash provided by (used in) operating activities | | | 214,149 | | | | 1,741,009 | | | | (10,908 | ) |
| | | | | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | | | |
| Net change in receivables from subsidiaries | | | (229,928 | ) | | | (995,000 | ) | | | 835,000 | |
| Increase in investment in subsidiaries | | | (7,215,876 | ) | | | (967,011 | ) | | | (31,048 | ) |
| Decrease in investment in subsidiaries | | | — | | | | 977,471 | | | | 52,631 | |
| Net change in premises and equipment | | | (556 | ) | | | (1,503 | ) | | | (2,302 | ) |
| Net change in other assets (including assets relating to LG Card acquisition in 2007) | | | (16,190 | ) | | | (45,678 | ) | | | 1,008 | |
| | | | | | | | | | | | | |
| Net cash provided by (used in) investing activities | | | (7,462,550 | ) | | | (1,031,721 | ) | | | 855,289 | |
| | | | | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | | | |
| Net change in short-term debt | | | 1,135,000 | | | | (99,700 | ) | | | (481,300 | ) |
| Proceeds from issuance of long-term debt | | | 3,350,000 | | | | 1,480,000 | | | | 712,160 | |
| Repayments of long-term debt | | | (972,362 | ) | | | (978,763 | ) | | | (2,360,905 | ) |
| Proceed from the issuance of stock | | | 3,736,238 | | | | — | | | | 1,275,260 | |
| Net change in treasury stock | | | (48 | ) | | | — | | | | — | |
| Cash dividends paid | | | (336,994 | ) | | | (572,004 | ) | | | (230,586 | ) |
| | | | | | | | | | | | | |
| Net cash provided by (used in) financing activities | | | 6,911,834 | | | | (170,467 | ) | | | (1,085,371 | ) |
| | | | | | | | | | | | | |
Net increase (decrease) in cash and due from banks | | | (336,567 | ) | | | 538,821 | | | | (240,990 | ) |
Cash and due from banks, beginning of year | | | 468,561 | | | | 131,994 | | | | 670,815 | |
| | | | | | | | | | | | | |
Cash and due from banks, end of year | | W | 131,994 | | | W | 670,815 | | | W | 429,825 | |
| | | | | | | | | | | | | |
Cash paid for interest | | W | 375,573 | | | W | 421,180 | | | W | 438,978 | |
On April 18, 2008, the Group incorporated Shinhan Kazakhstan Bank as a wholly owned subsidiary of the Group.
On April 30, 2008, the Group incorporated Shinhan Bank China Limited as a wholly owned subsidiary of the Group.
On May 29, 2008, the Group acquired 55.92% of total outstanding shares of AITAS Co., Ltd.
On June 2, 2008, the Group incorporated Shinhan KTF Mobile Card jointly with KT Freetel, and as a result, the Group owns 50% and 1 share of the corporation.
Dividends Declared
At the general shareholders’ meeting on March 19, 2008, the shareholders approved the payment of cash dividend to shareholders of record as of December 31, 2007. The cash dividend for common stocks and preferred stocks was W356,580 million and W215,425 million, respectively, for a total distribution of W572,005 million.
F-84F-102
INDEX OF EXHIBITS
| | | | | |
| | 1 | .1 | | Articles of Incorporation, amended as of March 19, 2008 (in English)† |
| | 2 | .1 | | Form of Common Stock Certificate (in English)†* |
| | 2 | .2 | | Form of Deposit Agreement to be entered into among Shinhan Financial Group, Citibank, N.A., as depositary, and all owners and holders from time to time of American depositary shares issued thereunder, including the form of American depositary receipt* |
| | 2 | .3 | | Long-term debt instruments of Shinhan Financial Group, Shinhan Bank and other consolidated subsidiaries for which financial statements are required to be filed are omitted pursuant to Item 601(b)(4)(iii) ofRegulation S-K. Shinhan Financial Group agrees to furnish the Commission on request a copy of any instrument defining the rights of holders of its long-term debt and that of any subsidiary for which consolidated or unconsolidated financial statements are required to be filed.* |
| | 4 | .1 | | Stock Purchase Agreement by and between Korea Deposit Insurance Corporation and Shinhan Financial Group dated July 9, 2003** |
| | 4 | .2 | | Investment Agreement by and between Shinhan Financial Group and Korea Deposit Insurance Corporation dated July 9, 2003* |
| | 4 | .3 | | Agreed Terms, dated June 22, 2004, by and among the President of Korea Deposit Insurance Corporation, CEO of Shinhan Financial Group, CEO of Chohung Bank, Chairman of the National Financial Industry Labor Union of Korea and the Head of the Chohung Bank Chapter of the National Financial Industry Labor Union* |
| | 4 | .4 | | Merger Agreement between Shinhan Bank and Chohung Bank (in English)†*** |
| | 4 | .5 | | Split-Merger Agreement between Shinhan Card and Chohung Bank (in English)†*** |
| | 4 | .6 | | Form of Share Purchase Agreement, dated January 17, 2006, by and between Shinhan Financial Group and the holders of the redeemable preferred shares and the redeemable convertible shares issued by Shinhan Financial Group as part of the funding for the acquisition of LG Card Co., Ltd. (in English)† |
| | 4 | .7 | | LG Card Acquisition Agreement, dated 2006, between Korea Development Bank and 13 other financial institutions, on the one hand, and Shinhan Financial Group |
| | 8 | .1 | | List of all subsidiaries of Shinhan Financial Group |
| | 12 | .1 | | Certifications of our Chief Executive Officer required byRule 13a-14(a) of the Exchange Act |
| | 12 | .2 | | Certifications of our Chief Financial Officer required byRule 13a-14(a) of the Exchange Act |
| | 13 | .1 | | Certifications of our Chief Executive Officer required byRule 13a-14(b) and Section 1350 of Chapter 63 of the United States Code (18 U.S.C. 1350) |
| | 13 | .2 | | Certifications of our Chief Financial Officer required byRule 13a-14(b) and Section 1350 of Chapter 63 of the United States Code (18 U.S.C. 1350) |
| | | | | |
| | 1 | .1 | | Articles of Incorporation, last amended as of March 24, 2010 (in English)† |
| | 2 | .1 | | Form of Common Stock Certificate (in English)†* |
| | 2 | .2 | | Form of Deposit Agreement to be entered into among Shinhan Financial Group, Citibank, N.A., as depositary, and all owners and holders from time to time of American depositary shares issued thereunder, including the form of American depositary receipt* |
| | 2 | .3 | | Long-term debt instruments of Shinhan Financial Group, Shinhan Bank and other consolidated subsidiaries for which financial statements are required to be filed are omitted pursuant to Item 601(b)(4)(iii) ofRegulation S-K. Shinhan Financial Group agrees to furnish the Commission on request a copy of any instrument defining the rights of holders of its long-term debt and that of any subsidiary for which consolidated or unconsolidated financial statements are required to be filed.* |
| | 4 | .1 | | Stock Purchase Agreement by and between Korea Deposit Insurance Corporation and Shinhan Financial Group dated July 9, 2003** |
| | 4 | .2 | | Investment Agreement by and between Shinhan Financial Group and Korea Deposit Insurance Corporation dated July 9, 2003* |
| | 4 | .3 | | Agreed Terms, dated June 22, 2004, by and among the President of Korea Deposit Insurance Corporation, CEO of Shinhan Financial Group, CEO of Chohung Bank, Chairman of the National Financial Industry Labor Union of Korea and the Head of the Chohung Bank Chapter of the National Financial Industry Labor Union* |
| | 4 | .4 | | Merger Agreement between Shinhan Bank and Chohung Bank (in English)†*** |
| | 4 | .5 | | Split-Merger Agreement between Shinhan Card and Chohung Bank (in English)†*** |
| | 4 | .6 | | Form of Share Purchase Agreement, dated January 17, 2006, by and between Shinhan Financial Group and the holders of the redeemable preferred shares and the redeemable convertible shares issued by Shinhan Financial Group as part of the funding for the acquisition of LG Card Co., Ltd. (in English)†*** |
| | 4 | .7 | | LG Card Acquisition Agreement, dated 2006, between Korea Development Bank and 13 other financial institutions, on the one hand, and Shinhan Financial Group†**** |
| | 8 | .1 | | List of all subsidiaries of Shinhan Financial Group |
| | 12 | .1 | | Certifications of our Chief Executive Officer required byRule 13a-14(a) of the Exchange Act |
| | 12 | .2 | | Certifications of our Chief Financial Officer required byRule 13a-14(a) of the Exchange Act |
| | 13 | .1 | | Certifications of our Chief Executive Officer required byRule 13a-14(b) and Section 1350 of Chapter 63 of the United States Code (18 U.S.C. 1350) |
| | 13 | .2 | | Certifications of our Chief Financial Officer required byRule 13a-14(b) and Section 1350 of Chapter 63 of the United States Code (18 U.S.C. 1350) |
| | |
| † | | A fair and accurate translation from Korean into English. |
| |
| * | | Incorporated by reference to the registrant’s previous filing onForm 20-F(20-F(No. 001-31798), filed on September 15, 2003. |
| |
| ** | | Incorporated by reference to the registrant’s previous filing onForm 20-F(20-F(No. 001-31798), filed on September 15, 2003. Confidential treatment has been requested for certain portions of the Stock Purchase Agreement. |
| |
| *** | | Incorporated by reference to the registrant’s previous filing onForm 20-F(20-F(No. 001-31798), filed on June 30, 2006. |
|
| **** | | Incorporated by reference to registrant’s previous filing onForm 20-F(No. 001-31798), filed on June 30, 2008. |
E-1
